W. R. Berkley Corporation — Q3 2014 Form 10-Q
Business context and reporting period. W. R. Berkley is an insurance holding company operating through Insurance-Domestic, Insurance-International and Reinsurance-Global, alongside investment and aviation-related businesses. This filing covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods unless noted. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenues | $1.841bn | $1.634bn | $5.345bn | $4.712bn |
| Net premiums written | $1.525bn | $1.424bn | $4.541bn | $4.142bn |
| Net premiums earned | $1.461bn | $1.329bn | $4.242bn | $3.843bn |
| Net income to common stockholders | $188.5m | $137.0m | $538.2m | $369.5m |
| Diluted earnings per share | $1.42 | $0.97 | $4.02 | $2.62 |
| Net cash from operating activities | Not separately presented for the quarter | $574.8m | $626.7m |
- Underwriting and margins: Consolidated GAAP combined ratio was 93.5% for Q3 (93.9% prior year) and 93.9% for the nine months (95.1% prior year), indicating underwriting profit before investment income. The nine-month loss ratio was 60.7% and expense ratio 33.2%. Insurance-International’s combined ratios were 103.4% for Q3 and 100.8% for nine months, indicating underwriting losses in that segment.
- Investments: Nine-month net investment income was $486.7m, up from $405.3m. Net realized investment gains were $234.2m, versus $96.9m. Investment income growth reflected investment funds; the filing notes fund results are generally reported on a one-quarter lag.
- Balance sheet and liquidity: At September 30, total assets were $22.10bn, total equity $4.74bn and cash and cash equivalents $1.34bn. Investments totaled $15.61bn. Management reported approximately 82% of the portfolio in cash, cash equivalents and marketable fixed-maturity securities.
- Debt and capital: Senior notes and other debt had a carrying value of $2.12bn and junior subordinated debentures $340.0m; total debt face amount was $2.49bn. Total capitalization was $7.2bn, with debt and subordinated debentures representing 34%, compared with 32% at year-end 2013. In August, the company issued $350m of 4.75% senior notes due 2044; part of the proceeds was intended to repay $200m of 5.60% notes due in May 2015.
Material changes versus prior periods
- Nine-month net income increased 46%, which management attributed principally to higher after-tax investment gains, investment income and underwriting income. Q3 net income increased 38%.
- Nine-month gross premiums written rose 9%; net premiums written increased 10%. Domestic and International gross premiums grew, while Reinsurance-Global gross premiums declined 14% amid more competitive conditions. Average renewal rates, adjusted for exposure changes, increased 3.8% for the nine months.
- Catastrophe losses, net of reinsurance, were $69m for the nine months, versus $52m. Favorable prior-year reserve development was $62m, down from $75m. Excluding catastrophe losses and prior-year development, the consolidated loss ratio improved to 60.6% from 61.7%.
- Operating cash flow declined to $574.8m from $626.7m. Cash nevertheless increased by $502.5m from year-end, reflecting operating, investing and financing flows.
- The company repurchased 5.65m shares for $230m during the first nine months. It reported approximately 127m common shares outstanding at September 30.
Outlook, management commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said recent rate increases would be earned over subsequent quarters, but warned that loss costs were also rising and prices in some lines remained below levels needed to meet long-term return objectives. It said it selectively reduces business where expected returns are inadequate.
- Management cited persistently low fixed-maturity investment returns as a headwind and expected investment-fund income to remain more variable. It also noted increasingly competitive conditions in reinsurance.
- Investment gains included an $86m gain on the sale of a London commercial office building and a $39m gain from an investee’s IPO. Management cautioned that realized gains from security sales should not be expected to recur at the same level.
- The company acquired a specialty insurance distribution business for approximately $83m; purchase accounting remained preliminary. It also sold an aviation-related business for $16m, with a $15m net carrying value.
- Net reserves for losses and loss expenses were $8.94bn. Management emphasized that reserve estimates are inherently uncertain. It reported favorable Domestic reserve development, partly offset by unfavorable International development, including larger-than-expected losses in European professional liability and surety business.
- Other stated risks include pricing and competition, claims inflation and reserve adequacy, catastrophe losses, investment and market risks, foreign currency and political risks, availability and collectibility of reinsurance, and access to capital. Ordinary-course litigation is not expected by management to be material to financial condition, but adverse outcomes could materially affect results in a particular period. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether favorable prior-year reserve development persists, particularly in Domestic casualty, and whether adverse International development continues.
- How much of the earnings increase depends on investment gains and volatile investment-fund results, including the one-quarter reporting lag.
- Whether International underwriting returns improve, given combined ratios above 100%, and whether premium growth continues to outpace loss-cost inflation.
- Debt maturities, refinancing plans and the effect of the 2044 notes and planned 2015 repayment on interest expense and capital leverage.
- Performance and liquidity risks in investment funds, real estate development, merger-arbitrage positions and loans; the filing identifies $15.2m of loans in non-accrual status.
- Reinsurance recoverables and reserve estimates, including the risk that information from cedents may be delayed or inaccurate.