W. R. Berkley Corporation — Q2 2010 Form 10-Q
Business context and reporting period. W. R. Berkley is a property-casualty insurance holding company operating in specialty, regional, alternative markets, reinsurance and international insurance. This filing covers the quarter and six months ended June 30, 2010; comparative results are for 2009. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenues | $1,163.1 | $1,155.1 | $2,316.6 | $2,118.7 |
| Net premiums written | $961.4 | $908.9 | $1,945.3 | $1,932.4 |
| Net premiums earned | $948.1 | $951.2 | $1,878.7 | $1,930.4 |
| Net investment income | $128.2 | $132.1 | $267.0 | $270.4 |
| Net income to common stockholders | $110.2 | $97.4 | $228.8 | $77.0 |
| Diluted EPS | $0.70 | $0.59 | $1.44 | $0.46 |
| Consolidated combined ratio | 94.4% | 95.3% | 94.2% | 94.6% |
- H1 net income improved primarily as investment fund results recovered and impairment charges declined: investment funds contributed $6.3 million versus a $152.9 million loss in H1 2009; other-than-temporary impairments were $2.6 million versus $134.1 million. Net realized investment gains also declined, to $17.4 million from $62.6 million.
- H1 underwriting benefited from a lower loss ratio (59.6% versus 62.6%), including $129 million of favorable prior-year reserve development after premium offsets (versus $87 million). The expense ratio rose to 34.6% from 32.0%, tempering the improvement.
- H1 gross written premiums rose 2% and net written premiums rose 1%, while earned premiums fell 3%. Management reported approximately 79% of policies expiring in H1 were renewed, with average renewal prices down 0.5%. In Q2, gross and net written premiums increased 6%; renewal pricing declined 1% and about 77% of expiring business was renewed.
- Segment performance was mixed: H1 combined ratios were 90.8% specialty, 95.2% regional, 90.7% alternative markets, 95.5% reinsurance and 106.8% international. International therefore reported an underwriting loss on this measure.
- At June 30, total assets were $17.4 billion, total equity $3.7 billion and stockholders’ equity $3.68 billion. Cash and cash equivalents were $781.5 million, compared with $515.4 million at year-end 2009. Investments totaled $12.86 billion; management said about 87% of the portfolio was cash, cash equivalents and marketable fixed-maturity securities.
- H1 operating cash flow was $186.7 million, versus cash used of $9.2 million in H1 2009. Investing activities provided $355.5 million and financing activities used $265.9 million. The cash-flow improvement was attributed primarily to $290 million of transfers to arbitrage trading accounts in 2009.
- Debt carrying value was $1.585 billion ($1.602 billion face amount); senior notes and other debt were $1.343 billion and junior subordinated debentures $242.7 million. Debt represented 30% of total capitalization, versus 31% at year-end 2009. H1 interest expense rose 29% to $52.1 million, mainly following issuance of $300 million of 7.375% senior notes in September 2009.
Material changes, outlook and risks
- H1 favorable reserve development before premium offsets was $151 million, including a $23 million increase in estimates for accident years 2002 and prior and a $174 million decrease for accident years 2003–2009. Management attributed favorable development principally to specialty E&S experience, regional claims and reinsurance reserve reviews. The release materially supported reported underwriting results.
- Management described continued competitive pressure on pricing and said current market prices in certain lines are below levels needed to meet its return objectives. Low interest rates also pressure investment returns. Newly established operations are growing but carry relatively higher expense ratios.
- Investment and credit exposures warrant attention. The ten largest commercial real estate loans had $296 million amortized cost and $230 million fair value; the loan portfolio carried a $16.4 million valuation allowance, increased by $2.6 million during H1. Real estate projects in investment funds remained exposed to leverage and refinancing pressure. Management considered reported security unrealized losses primarily temporary and did not regard the identified securities as other-than-temporarily impaired.
- Management provided no specific quantified full-year earnings or premium guidance in the supplied filing text. It cautioned that H1 results are not necessarily indicative of full-year results and that forward-looking expectations are subject to industry cyclicality, pricing, claims and reserve-estimation uncertainty, catastrophes, investment valuation and credit risks, reinsurance collectability, regulation, competition and foreign-currency and political risks.
- Ordinary-course insurance and reinsurance litigation and arbitration were reflected in loss reserves; the company did not expect the ultimate outcome to have a material adverse effect, while acknowledging adverse outcomes are possible. The filing reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
- The company repurchased 8.91 million shares for approximately $231.7 million during H1 2010. The board increased the repurchase authorization to 10 million shares on August 3, 2010. The filing also reported issuance of 754,500 restricted stock units during H1, compared with 55,000 a year earlier.
Most important facts for investors to verify
- Whether reserve releases continue and whether long-tail, assumed reinsurance and workers’ compensation reserves prove adequate; H1 net favorable development was $129 million after premium offsets.
- Whether premium growth and renewal pricing can support target returns amid competitive conditions, especially in specialty commercial auto and products liability and in the international segment, whose H1 combined ratio exceeded 100%.
- Recoverability and valuation of commercial real estate loans and fund investments, including the large-loan fair-value gap, refinancing exposure and valuation assumptions.
- Whether investment returns can be sustained as yields remain low and investment-fund results, realized gains and impairment levels fluctuate; fund income is recorded on a one-quarter lag.
- Reinsurance recoverable collectability, catastrophe losses and the liquidity and capital effects of continued share repurchases and debt maturities.