W. R. Berkley Corporation — 2010 Form 10-K
Business context and reporting period
W. R. Berkley is a property-and-casualty insurance holding company with five reporting segments: Specialty, Regional, Alternative Markets, Reinsurance and International. This annual filing covers the fiscal year ended December 31, 2010; comparisons below are with 2009 unless noted. The filing incorporates the full MD&A and consolidated financial statements by reference to the 2010 Annual Report to Stockholders.
Financial performance and position
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $4.724 billion | $4.431 billion | +6.6% |
| Net premiums written | $3.851 billion | $3.730 billion | +3.2% |
| Net premiums earned | $3.836 billion | $3.806 billion | +0.8% |
| Income before income taxes | $603.3 million | $382.2 million | +57.8% |
| Net income to common stockholders | $449.3 million | $309.1 million | +45.4% |
| Diluted earnings per share | $2.90 | $1.86 | +$1.04 |
| Net investment income | $538.7 million | $552.6 million | -2.5% |
| Net realized investment gains (losses) | $56.6 million | $(38.4) million | Improved |
Consolidated net income was approximately 9.5% of revenue, compared with 7.0% in 2009. The overall combined ratio was 94.5%, versus 94.2%; below 100% indicates an underwriting profit, before investment income. Segment combined ratios were Specialty 91.0% (93.0% in 2009), Regional 96.6% (95.6%), Alternative Markets 93.2% (89.2%), Reinsurance 93.5% (97.0%) and International 102.2% (100.1%). International therefore reported an underwriting loss on this measure.
At year-end, total assets were $17.529 billion, investments $12.995 billion, common stockholders’ equity $3.703 billion and loss and loss-adjustment reserves $9.017 billion. Senior notes and other debt were $1.500 billion, with $242.8 million of junior subordinated debentures; reported interest expense was $107.0 million. The company issued $300 million of 5.375% senior notes due 2020 in September 2010 and repaid $150 million of senior notes.
Net reserves declined to $8.000 billion from $8.148 billion; gross reserves declined to $9.017 billion from $9.072 billion. Parent-company-only cash and cash equivalents were $29.5 million at year-end, down from $117.6 million. Parent-only operating cash flow was $241.2 million. These parent-company figures are not consolidated liquidity measures; the excerpt does not provide a clear consolidated cash-flow figure. Insurance-subsidiary dividends available without regulatory approval during 2011 were estimated at approximately $490 million.
Material changes and notable items
- Net premiums written increased overall, but segment trends diverged: International grew to $511.5 million from $375.5 million, while Specialty, Regional, Alternative Markets and Reinsurance writings were lower than their 2006 levels. International represented 13.3% of 2010 net premiums written, up from 10.1% in 2009.
- All five operating segments reported higher 2010 revenue than in 2009 except Specialty and Regional, which declined modestly. Segment income before taxes improved in Specialty, Regional, Alternative Markets and Reinsurance; International income before taxes fell to $21.2 million from $22.7 million.
- Investment results benefited from $56.6 million of net realized gains, versus $38.4 million of net realized losses in 2009. Losses from investment funds improved to $8.2 million from $173.6 million. Net investment income declined, and the year-end change in unrealized investment gains was $176.6 million, below 2009’s $557.4 million.
- Prior-year loss estimates decreased by $253.2 million in 2010, compared with $234.0 million in 2009. The filing states that approximately $19 million of 2010 favorable development was offset by a reduction in earned premiums; favorable development net of premium offsets was $234 million.
- Common stockholders’ equity per share rose to $26.26 from $22.97. The company declared $0.27 per share in dividends, versus $0.24 in 2009, and repurchased common shares. Its repurchase authorization was increased to 10 million shares in November 2010.
Outlook, risks and contingencies
The filing provides no specific numerical earnings or premium guidance. Management’s forward-looking statements are based on current plans and expectations, are not assurances of future results, and caution that premium growth need not translate into underwriting or operating profit. The company describes a competitive market with pricing pressure, particularly in specialty and reinsurance lines.
- Reserving remains a central uncertainty: estimates depend on claims emergence, inflation, litigation and legal developments, and other factors. The company warns reserves may prove inadequate. Discounted reserves had an aggregate net discount of $898.2 million at year-end.
- Weather-related losses were $81 million in 2010, up from $63 million in 2009. Catastrophes, including severe storms and terrorism, can materially affect results; the company also notes substantial retained risk compared with some competitors.
- Investment risks include interest-rate and credit exposure, municipal securities, mortgage-backed securities, and less-liquid real estate-related and alternative investments. Fixed maturities represented approximately 86% of the investment portfolio at year-end; state and municipal securities were 50% of fixed maturities.
- Reinsurance recoverables due were approximately $1.070 billion, including amounts due from state funds and industry pools. Reinsurer nonpayment or delayed payment could adversely affect results.
- The company’s estimated TRIA deductible for 2011 was approximately $503 million. TRIA was scheduled to remain in effect through December 31, 2014, subject to extension or replacement.
- Regulatory, rating, foreign-currency, acquisition, capital-access and key-personnel risks are identified. The effects of the Dodd-Frank Act and forthcoming Solvency II requirements were uncertain. Domestic insurance subsidiaries were above the authorized risk-based-capital control level at year-end.
- Ordinary-course insurance and reinsurance litigation is included in reserves; management did not believe its ultimate outcome would materially adversely affect financial condition or results. Asbestos and environmental net reserves were $35.5 million at year-end, and the company cautions that estimates for these exposures are unusually uncertain.
Important facts for investors to verify
- Review the incorporated 2010 Annual Report for full consolidated cash flows, liquidity and management’s explanation of the earnings improvement, as those details are not fully included in the supplied filing text.
- Assess how much of 2010 earnings reflected favorable prior-year reserve development and realized investment gains, and whether those sources are repeatable.
- Examine reserve development by underwriting year and segment, including the long-term reserve history and assumptions behind discounting and loss inflation.
- Evaluate the persistence of pricing pressure and the International segment’s combined ratio above 100%, alongside growth in international premiums.
- Check debt maturities, parent-company liquidity and the ability of regulated insurance subsidiaries to upstream dividends, rather than treating parent-only cash as consolidated liquidity.
- Assess portfolio credit, interest-rate and catastrophe exposures, as well as the collectability and collateral supporting reinsurance recoverables.