W.R. Berkley Corp., 5.10% Subordinated Debentures due 12/30/2059 (WRB PRF)

Today we will represent you a bond with 6.55% yield with potential for capital gains.

Description

WRB PRF is 5.10%  subordinated debentures issued in $25 denominations, redeemable at the issuer's option on or after 12/30/2024 at $25 per debenture plus accrued and unpaid interest, and maturing 12/30/2059.

Bonds are rated at S&P with investment grade and BBB- rating. Interest of $0.32 is paid quarterly,   $1.34 per annum. The next ex-dividend date is scheduled for 13 June 2025. 

W. R. Berkley Corporation

W. R. Berkley Corporation, an insurance holding company, operates as a commercial line writer worldwide. The company operates in two segments, Insurance, and Reinsurance.

W. R. Berkley (WRB) First Quarter 2025 Results

Key Financial Results

• Revenue: US$3.55b (up 8.9% from 1Q 2024).
• Net income: US$417.6m (down 5.6% from 1Q 2024).
• Profit margin: 12% (down from 14% in 1Q 2024). 
• EPS: US$1.05 (down from US$1.10 in 1Q 2024).

First quarter results are good, decrease in net income and profit margin are driven by higher margin expenses. Expected YoY revenue growth of 2% is much lower than Q1 results. Total assets increase from $40,5b to $41,3b. Total Debt unchanged YoY $2,84b and Total Liabilities stays unchanged QoQ.

Credit ratings of WRB PRF as a Subordinated debenture are Lower to medium Investment grade. Moody's and Fitch have slightly higher grades than S&P.

The TRADE

Our entry price is $19.65, and it is deeply under its par value. At this price, current yield is 6.51%. The bonds have not yet recovered from the April’s sell-off in corporate bonds and stay close to its bottom price from the last few years.

On the other hand, bonds, especially those with Investment grade rating, trade with spread over Us treasury bonds. In such a manner, the chart below shows that there is an extreme on average trading spread between WRB PRF and 10Y Treasury rate.

The spread now is 218BP over 10Y treasury rate, with an average value of 178BP for the last 3 years. Value for the last 52 weeks is even lower, 168BP. The difference of 40BP to be closed WRB PRF should appreciate in value with $0.85, and $1.00 to meet the 52-week average. 

Today’s values are closer to these in the spring of 2023 when there was a financial risk in the US banking system provoked by the bankruptcy of a few regional banks (Silicon Valley Bank, Signature Bank, First Republic Bank). During this period, many financial stocks and their bonds depreciated and recovered till the end of the year.

The reasons for bond price drop this time are different, and they are not financial as they were in 2023. W. R. Berkley Corporation is an Insurance company and imposed tariffs should not affect their business model. Recovery of the bond prices are slower because they are lagging financial instruments. It takes longer bonds to recover than the common stocks, in case the common stock business is not affected as it is. 

FED funds rate is unchanged with mixed signals about Jerome Powell's future decisions and stays 4.5%.  Rate hike at this point seems unlikely to occur in the near future. Probability for rate cuts in 2025 of 0.25% to 0.5% are still higher.

Market environment is more dynamic than usual in the last few months, and we expect to continue similarly until tariff talks continue. President Trump expects from the FED to cut rates as soon as possible, and expectations for such an event in September or October FED meetings are high. Rate cuts have a positive effect on bonds prices and WRB PRF’s price can benefit.

Conclusion

Our investment strategy combines yield and capital gains. WRB PRF is an investment grade bond from a premium issuer. Yields of 6.51% is lower than most of the income securities in our portfolio yields, but has high credit quality and future capital gains should not be underestimated.