Specialty insurance company W.R. Berkley (NYSE:WRB) has long been one of my favorite under-valued insurance companies. While it is still one of my favorites in terms of management quality and addressable markets, the stock has been quite strong over the past two years and no longer represents much of a bargain. While long-term investors may wish to hang on, investors considering a new position may have to wait for a better opportunity.

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The Recovery Is Real, Even if Not Magnificent
Helping W.R. Berkley, and the larger P&C insurance universe, has been an improvement in premium rates. Insurance companies like Berkley, Allstate (NYSE:ALL), Travelers (NYSE:TRV) and Chubb (NYSE:CB), have been pushing through rate increases (high single-digits in some cases) and making them stick - showing customers that they are willing to lose business rather than ease up on rates.

At the same time, premium growth hasn't been universally great at W.R. Berkley. Net written premiums did grow nearly 11% in the first quarter, but the make up was a little squishy. The company continues to see great growth in its international business (which it is actively trying to grow), but the large regional insurance business grew around 4%. Specialty insurance, another large area of operations, did grow at about a 9% clip.

Loss Rates Looking OK, but Reserve Releases Trying Up
Another issue in the broader insurance industry has been the shriveling of positive reserve releases. Certain insurance companies, including Berkley and reinsurance company Arch Capital (Nasdaq:ACGL), have long reaped some meaningful profit leverage from positive reserve releases - that is, overestimating losses at the beginning of a policy and then adding back the profits later down the line.

Recently, though, reserve releases have been harder to find. Some of this is due to higher loss rates in past years, as well as more competitive underwriting conditions that forced insurers to be less choosy and offered less "wiggle room" in terms of loss estimates.

The good news for W.R. Berkley is that the company has pretty much always had solid underwriting performance, due to its somewhat uncommon structure. Like Arch Capital (and, to some extent, Berkshire Hathaway (NYSE:BRK.B)), Berkley gives a lot of discretion to its underwriters and expects them to understand their businesses and risk environments. That, as well as the nature of the business Berkley underwrites, has limited the company's exposure to catastrophic losses and major negative surprises in the loss ratio.

SEE: Is Your Insurance Company Going Belly Up?

Higher Debt, Less Income
I'm a little concerned about the amount of debt that Berkley is taking onto its books. While Berkley's debt-to-capital ratio is really not that high at all by normal industrial company standards, it is rather high by the standards of insurance companies and comparables like Allstate and Travelers. Experienced investors know the tradeoff that comes here - taking on debt allows the company to grow its business faster, but at the risk of serious stress if the market slows substantially.

At the same time, the company continues to face a tough investment environment. W.R. Berkley's unconventional underwriting markets allows the company to consider unconventional and less-liquid investment options, but the fact remains that this low-rate environment (to say nothing of the wobbly stock market) makes it harder for the company to earn a good return on its investment portfolio.

The Bottom Line
I like Berkley's commitment to grow the international business; there's no reason to believe that taking Berkley's proven model to a larger addressable market won't produce solid growth over the long-term. That said, insurance companies are finding it challenging to get back to prior levels of profitability and that is keeping a lid on valuation.

Berkley has an excellent 10-year average return on equity (nearly 17%), but recent results have been well below this level and there's no reason to expect an immediate rebound. While management is confident in its ability to produce solid pricing this year, the forward return on equity that investors can expect may now be in the low teens.

If Berkley can somehow get back to 15% ROE in 2017, these shares are still meaningfully undervalued, but a more modest outlook (in the area of 12 to 13% ROE) suggests a more muted potential return from these shares.

SEE: How Return On Equity Can Help You Find Profitable Stocks

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.