W. R. Berkley Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are against December 31, 2012. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
W. R. Berkley is a commercial property-and-casualty insurance holding company. Its reporting segments are Insurance-Domestic, Insurance-International and Reinsurance-Global. The company changed its segment aggregation in Q1; prior-period segment data was revised for comparability.
Financial performance and position
- Revenue and premiums: Total revenue was $1,506.8 million, up 9% from $1,378.7 million. Net premiums written rose 14% to $1,377.0 million; net premiums earned increased 12% to $1,232.1 million. Gross premiums written rose 16% to $1,631.6 million.
- Profit: Net income to common stockholders was $116.6 million, down 14% from $135.3 million. Diluted EPS was $0.83 versus $0.94. Management attributed the decrease primarily to lower after-tax investment gains and investment income, partly offset by higher underwriting income.
- Underwriting and margins: The consolidated GAAP combined ratio improved to 94.7% from 96.5%; below 100% indicates underwriting profit. The loss ratio declined to 60.4% from 61.8%, and the expense ratio to 34.3% from 34.7%. Favorable prior-year reserve development was $23.5 million, compared with $25.2 million.
- Investments: Net investment income fell 14% to $135.9 million, while realized net investment gains declined to $20.0 million from $43.5 million. Fixed-maturity investment income yields were 3.7%, down from 3.8%; management cited lower reinvestment yields and weaker income from energy and real-estate funds.
- Cash flow and liquidity: Operating cash flow was $115.1 million, compared with $73.8 million. Cash and cash equivalents were $945.5 million at quarter-end, up from $905.7 million at year-end. The company reported that approximately 81% of its investment portfolio was in cash, cash equivalents and marketable fixed maturities.
- Balance sheet and debt: Total assets were $20.12 billion and total equity was $4.41 billion. Loss and loss-expense reserves were $9.81 billion, including $8.47 billion net of reinsurance. Senior notes and other debt were $1.69 billion, and junior subordinated debentures were $243.3 million. Total capitalization was $6.3 billion; debt and junior subordinated debentures represented 31% of capital, down from 33% at year-end.
- Comprehensive income: Comprehensive income to common stockholders was $79.6 million, versus $173.7 million, reflecting a $46.6 million adverse currency-translation adjustment.
Material changes and notable items
- Premium growth reflected rate increases and increased exposures, including expansion into new products and geographies. Average renewal rates increased 7.3%; renewal retention was 76.4%, compared with 77.5% for policies expiring in 2012. Management said some lines remained priced below levels needed for long-term return objectives while loss costs were also rising.
- All three segments improved their combined ratios year over year: Domestic 95.5% from 96.1%; International 93.8% from 97.6%; and Reinsurance-Global 91.3% from 97.8%. Reinsurance-Global’s improvement included increased favorable reserve development.
- In January, the company acquired the remaining 51% of an aviation-parts and logistics business for $43 million, following its purchase of a 49% interest in 2012. The acquisition contributed to higher investee revenue and expenses.
- The company repaid $200 million of senior notes at maturity in February. After quarter-end, it issued $350 million of 5.625% subordinated debentures due 2053; proceeds were intended in part to redeem $250 million of 6.750% subordinated debentures due 2045.
- No shares were repurchased during the quarter. The remaining authorization was 9,068,093 shares.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management noted historically low fixed-income yields, continuing pressure from rising loss costs, and that investment-fund income may fluctuate.
- Reserve estimates are inherently uncertain, particularly for long-tail claims and assumed reinsurance. Management reported $23.5 million of favorable prior-year development, primarily from accident years 2010 and 2012, partly offset by unfavorable development in 2011. It cautioned that actual frequency or severity could differ from assumptions.
- Other stated risks include catastrophe losses, competitive pricing, investment and credit-market volatility, interest-rate and currency movements, reinsurance collectability and availability, acquisitions and new ventures, and regulatory or legal changes. Management said ordinary-course litigation and arbitration were not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
- Management considered securities with unrealized losses to be temporarily impaired rather than other-than-temporarily impaired. Total gross unrealized losses on securities were $30.2 million at March 31, 2013. This assessment depends on management’s assumptions and market conditions.
- The company stated its disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether premium-rate increases continue to outpace loss-cost inflation, and how renewal retention and growth develop.
- Whether loss reserves remain adequate as claims mature, especially long-tail and assumed-reinsurance exposures, and whether favorable reserve development persists.
- How lower reinvestment yields and volatility in investment funds affect recurring investment income and earnings.
- The acquired aviation business’s ongoing contribution to revenue, expenses and profitability.
- The completed subordinated-debt issuance and redemption, and the resulting interest expense, leverage and capital position.