W. R. Berkley Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. W. R. Berkley is a property-and-casualty insurance holding company operating through Insurance and Reinsurance & Monoline Excess segments, alongside non-insurance businesses. Comparisons below are with the corresponding 2018 periods unless otherwise stated. Amounts are in U.S. dollars.
Key financial results
| Metric | Q2 2019 | Six months 2019 |
|---|---|---|
| Total revenues | $2.023 billion, up 6% | $3.960 billion, up 4% |
| Net premiums written | $1.743 billion, up 7% | $3.453 billion, up 5% |
| Net premiums earned | $1.647 billion, up 4% | $3.240 billion, up 3% |
| Net income to common stockholders | $216.7 million, up 20% | $397.4 million, up 15% |
| Diluted EPS | $1.12 vs. $0.93 | $2.06 vs. $1.80 |
| Net investment income | $188.3 million, up 22% | $346.6 million, up 6% |
| Net realized and unrealized investment gains | $73.6 million vs. $69.6 million | $142.2 million vs. $118.1 million |
- Underwriting: The consolidated GAAP combined ratio was 93.9% in Q2, improving from 94.9%; for the first half it was 94.1%, compared with 94.8%. Ratios below 100% indicate underwriting profit before investment income. Q2’s consolidated loss ratio rose to 62.4% from 61.6%, while the expense ratio improved to 31.5% from 33.3%.
- Segments: Q2 Insurance combined ratio improved to 93.8% from 95.3%; Reinsurance & Monoline Excess deteriorated to 95.2% from 91.4%. First-half segment ratios were 93.9% and 96.0%, respectively.
- Cash flow: First-half operating cash flow was $402.6 million, versus $119.4 million in 2018. Investing activities provided $62.6 million, compared with $216.4 million used; financing activities used $23.9 million, versus $114.4 million provided. Cash and cash equivalents ended the period at $1.258 billion.
- Balance sheet and liquidity: Total assets were $26.488 billion at June 30, up from $24.896 billion at year-end 2018; total equity was $6.020 billion. Investments totaled $18.247 billion. Management reported that approximately 77% of the investment portfolio was in cash, cash equivalents, and marketable fixed-maturity securities.
- Debt: Senior notes, subordinated debentures, and other debt had a $2.782 billion carrying value and $2.817 billion face amount. Debt represented 32% of total capitalization, down from 34% at year-end 2018. First-half interest expense was $81.4 million, versus $76.8 million.
Material changes and drivers
- Premium growth was supported by higher Insurance and Reinsurance & Monoline Excess written premiums. Average renewal rates for insurance and facultative reinsurance, adjusted for exposure changes, increased 3.5% in Q2 and 4.1% for the first half; increases excluding workers’ compensation were 5.3% and 5.9%. About 75.5% of policies expiring in 2019 were renewed.
- Higher investment income contributed to earnings growth, particularly in Q2, when investment-fund income was $46.8 million versus $12.7 million. Management notes that alternative-investment income can fluctuate. First-half investment gains included $111.5 million of unrealized gains on equity securities.
- First-half net favorable prior-year reserve development was $13.6 million, below $19.3 million in 2018. Favorable workers’ compensation development was partly offset by adverse development in other liability, commercial auto, medical malpractice, and Reinsurance & Monoline Excess claims. Q2 catastrophe losses were $26 million, versus $14 million.
- Non-insurance business revenue increased to $181.1 million for the first half from $146.9 million, mainly reflecting growth in aviation-related businesses and a promotional merchandise business acquired in 2018. Insurance service fees declined to $47.8 million from $60.4 million, primarily following the sale of a third-party administration business in 2018.
- The company completed a 3-for-2 stock split effective April 2, 2019; reported share and per-share figures reflect the split. It also reclassified monoline excess business from Insurance to Reinsurance & Monoline Excess beginning in 2019, with prior-period segment information conformed.
Outlook, risks, and unusual items
- The filing provides no specific earnings, premium, or combined-ratio guidance. Management said recent rate increases will continue to earn through future quarters and seeks to maintain investment-portfolio duration near the duration of liabilities. It reported a 2.6-year duration for fixed maturities, including cash, at June 30.
- Key risks include uncertainty in long-tail claims and reserve estimates; catastrophe and climate-related losses; pricing and competition; investment, credit, interest-rate, currency, and alternative-investment volatility; reinsurance collectability and availability; and regulatory, litigation, cyber, and international risks. Management stated that risk factors had not materially changed from the 2018 Form 10-K.
- Net reserves for losses and loss expenses were $10.515 billion at June 30. Management cautioned that reserve estimates are inherently uncertain, particularly for long-tail excess workers’ compensation and assumed reinsurance. Legal disputes and claims are expected not to be material to financial condition, but adverse outcomes could materially affect results in a particular period.
- Adoption of the new lease standard resulted in recognition of a $185 million right-of-use asset and $215 million lease liability at adoption, with no reported impact on results or liquidity. The company said it could not yet determine the impact of the upcoming credit-loss accounting standard.
- Management attributed part of the first-half improvement in operating expenses to lower expenses and noted non-recurring performance-based compensation costs. Q2 underwriting expense ratio improvement also included a non-recurring benefit of approximately 0.5 percentage point.
Important facts for investors to verify
- Whether premium rate increases and renewal levels continue to support growth, particularly as workers’ compensation premiums declined.
- Whether adverse claims trends in other liability, commercial auto, medical malpractice, and older casualty reinsurance years develop further, and how reserve releases compare with new adverse development.
- How much earnings growth is repeatable versus attributable to investment-fund results, equity-market gains, favorable reserve development, and non-recurring expense items.
- Whether cash generation, investment liquidity, and debt maturities remain adequate relative to claims obligations and planned real-estate development spending.
- Potential effects of the credit-loss accounting standard, market and catastrophe risks, and litigation or reinsurance recoverability on future results.