Morgan Stanley Upgrades W.R. Berkley To Equal-weight

• W. R. Berkley Corp (NYSE: WRB) shares have lost 8 percent since December 21.
• Morgan Stanley’s Kai Pan upgraded the rating for the company to Equal-weight, while reducing the price target from $53 to $52.
• Following the recent pullback, share repurchases and M&A should support the company’s stock, Pan stated.

W.R. Berkley’s shares have declined about 15 percent from their recent peaks. The company’s shares have underperformed P&C peers by 390bps and the S&P 500 by 260bps. Analyst Kai Pan said that the pressure on W.R. Berkley’s shares resulted from investor concerns related to “alternative (including energy) investment exposure and P&C pricing headwinds.”

Recent market volatility has adversely impacted the company’s investment fund returns, and Pan expects W.R. Berkley to record investment fund returns of $7m in 4Q15, versus around $23m trailing 12-quarter average. He added, “If current market conditions persist, lower alternative returns could be less of a tailwind to earnings and BV growth in future periods.”

The recent pullback in shares has almost eliminated W.R. Berkley’s valuation premium versus peers. The lower valuation provides opportunity for share buybacks, which should support the company’s stock. Pan also commented, “In addition, any value the market may price in from hypothetical M&A (either a merger deal or a tax inversion transaction) could add to valuation premium.”

While the decline in shares offers “a more balanced risk-reward” at the current levels, the price target has been revised to reflect a lower expectation for 2016-2017 ROE of around 9 percent, the analyst mentioned.