W. R. Berkley Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are primarily with fiscal 2018. Berkley is a property-and-casualty insurance holding company with Insurance and Reinsurance & Monoline Excess segments.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $7.90 billion | $7.69 billion | +3% |
| Net premiums written | $6.86 billion | $6.43 billion | +7% |
| Net premiums earned | $6.63 billion | $6.37 billion | +4% |
| Net income to common stockholders | $681.9 million | $640.7 million | +6% |
| Diluted earnings per share | $3.52 | $3.33 | +6% |
| Operating cash flow | $1.14 billion | $620.2 million | +84% |
| Net investment income | $645.6 million | $674.2 million | -4% |
| Combined ratio | 93.8% | 95.3% | Improved 1.5 points |
- Net income margin was approximately 8.6% of revenue. Underwriting remained profitable: the Insurance segment combined ratio was 93.5% (95.1% in 2018), and Reinsurance & Monoline Excess was 96.5% (96.8%).
- Insurance segment pre-tax income rose to $814.9 million from $717.2 million. Reinsurance & Monoline Excess pre-tax income declined to $189.2 million from $201.0 million.
- Total assets were $26.64 billion; investments were $18.47 billion and cash and cash equivalents were $1.02 billion. Approximately 78% of the investment portfolio was in cash, cash equivalents and marketable fixed-maturity securities.
- Gross loss reserves were $12.58 billion, including $10.70 billion net of reinsurance; net reserves increased from $10.25 billion in 2018. Due from reinsurers was $2.13 billion.
- Debt carrying value was $2.63 billion, versus $2.79 billion in 2018; debt was 30% of total capitalization, down from 34%. The company repaid $489 million of senior notes and other debt at maturity and issued $300 million of 5.10% subordinated debentures due 2059.
Material changes and notable items
- Gross premiums written increased 7%. Insurance gross premiums rose 6%; Reinsurance & Monoline Excess rose 20%. Workers’ compensation premiums declined 9%, while professional liability increased 17%.
- Average renewal premium rates for insurance and facultative reinsurance increased 4.8%, or 6.9% excluding workers’ compensation, compared with 2.5% and 4.0%, respectively, in 2018. Approximately 79% of expiring policies renewed, compared with 78% the prior year.
- Net investment income fell mainly because investment-fund income decreased by $40 million; fixed-maturity yield declined to 3.4% from 3.6%. Net realized and unrealized investment gains were $120.7 million versus $154.5 million.
- Net catastrophe losses declined to $90 million from $105 million. Favorable prior-year development, net of premium offsets, narrowed to $19 million from $39 million. Workers’ compensation favorable development was partly offset by adverse professional-liability and general-liability development, including large losses and social-inflation pressures.
- Cash from operations increased substantially, primarily due to higher net premium receipts and the timing of claims and tax payments. Dividends paid to common stockholders totaled $308 million; share repurchases cost $18 million.
- The company completed a 3-for-2 stock split in April 2019 and reclassified monoline excess operations from Insurance to the renamed Reinsurance & Monoline Excess segment. Prior periods were recast.
Outlook, risks and contingencies
- The filing provides no specific numerical earnings or premium guidance for 2020. Management describes rate increases across many lines, but notes that workers’ compensation pricing has weakened, loss costs are rising, and the duration and magnitude of the improving pricing environment are uncertain.
- Key underwriting risks include reserve-estimation uncertainty, long-tail claims, social and economic inflation, emerging coverage issues, catastrophe frequency and severity, and potential climate-related effects. Management noted higher large-loss activity in lawyers’ professional liability, D&O and construction-related general liability.
- Investment risks include low interest rates and reinvestment yields, credit and market volatility, and valuation and liquidity risks in alternative investments. Investment funds are generally reported on a one-quarter lag.
- Other material risks include reinsurer nonpayment, competition and alternative capital, regulatory and capital requirements, foreign currency and Brexit-related uncertainty, cyber and technology disruption, and reliance on regulatory approval for certain subsidiary dividends.
- Legal disputes arise in the ordinary course of insurance and reinsurance operations. Management does not expect their ultimate outcome to materially affect financial condition, although adverse outcomes could affect results in an individual period. The company also had commitments of up to $232 million to investment funds and $114 million for real-estate construction.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Reserve estimation was identified as a critical audit matter due to significant measurement uncertainty and complex actuarial judgments.
Important facts for investors to verify
- Track reserve development by line and accident year, particularly adverse professional-liability and general-liability trends versus workers’ compensation releases; assess reserve sensitivity to frequency and severity changes.
- Evaluate whether premium-rate increases are keeping pace with loss-cost inflation, and monitor workers’ compensation pricing and renewal retention.
- Review investment-fund performance, portfolio credit quality, alternative-asset liquidity, and the sustainability of investment income amid lower fixed-maturity yields.
- Assess the quality and collectability of $2.13 billion in reinsurance recoverables and the company’s exposure to catastrophe losses net of reinsurance.
- Monitor upcoming debt maturities, subsidiary dividend capacity, and the difference between cash flow affected by timing and recurring cash generation.
- Reconcile the dividend disclosures: the stated 2019 quarterly regular and special per-share amounts sum to $1.68, while selected financial data reports $1.73 per share; aggregate dividends paid were $308 million.