W. R. Berkley Corporation — Q1 2018 Form 10-Q
Business context and period. W. R. Berkley is a property and casualty insurance holding company operating through Insurance and Reinsurance segments, with additional non-insurance businesses and investment activities. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Total revenues | $1.891 billion | $1.870 billion | Up about 1% |
| Net premiums written | $1.665 billion | $1.647 billion | Up 1% |
| Net premiums earned | $1.567 billion | $1.570 billion | Down less than 1% |
| Net investment income | $174.5 million | $148.9 million | Up 17% |
| Net income to common stockholders | $166.4 million | $123.4 million | Up 35% |
| Diluted earnings per share | $1.30 | $0.96 | Up 35% |
| Consolidated GAAP combined ratio | 94.6% | 95.7% | Improved 1.1 points; below 100% indicates underwriting profit |
| Operating cash flow | $(20.0) million | $75.5 million | Shifted to cash use |
The Insurance segment’s combined ratio was 93.4% versus 93.8%; Reinsurance’s was 107.4% versus 112.9%, still indicating an underwriting loss. The consolidated loss ratio was 61.4% versus 62.4%, and the expense ratio was 33.2% versus 33.3%. Catastrophe losses, net of recoveries and reinstatement premiums, were $7 million versus $15 million. Favorable prior-year development, net of premium offsets, was $12.2 million versus $2.4 million; excluding catastrophe losses and prior-year development, the consolidated loss ratio was 61.7% in both periods.
Financial position and liquidity
- At March 31, 2018, total assets were $24.588 billion, total liabilities $19.096 billion, and total equity $5.492 billion. Common stockholders’ equity was $5.452 billion.
- Cash and cash equivalents were $956.6 million. The company said approximately 77% of its investment portfolio was in cash, cash equivalents, and marketable fixed-maturity securities.
- Senior notes and other debt had a carrying value of $1.782 billion; subordinated debentures were $897.4 million. Combined carrying value was $2.680 billion, with face amount of $2.718 billion. Debt represented 33% of total capitalization, versus 32% at year-end 2017.
- Operating cash use was attributed primarily to timing of claim payments, long-term incentive payments, and tax payments. Investing activities used $131.5 million, including $336.6 million for real estate purchases. Financing activities provided $157.4 million, including $181.8 million of debt proceeds.
- Net loss reserves were $10.101 billion and gross loss reserves were $11.785 billion. Net reserves increased from $10.057 billion at year-end 2017.
Material changes and management commentary
- Management attributed higher net income mainly to a $20 million after-tax increase in investment income, a $13 million after-tax increase in underwriting income, and a $21 million reduction in tax expense. The effective tax rate declined to 20.6% from 32.4%, reflecting primarily the lower U.S. corporate tax rate following the Tax Act.
- Gross premiums written increased 2% overall: Insurance rose 4%, while Reinsurance declined 15%. Renewal retention was 78.3%, compared with 78.4%; average renewal premium rates for insurance and facultative reinsurance increased 3.5%, adjusted for exposure changes.
- Investment income growth reflected real estate funds and a larger fixed-income portfolio. Average invested assets at cost, including cash, were $18.1 billion versus $17.3 billion. Management cautioned that alternative-investment income can fluctuate more.
- Net realized and unrealized investment gains were $48.5 million versus $52.3 million. Q1 2018 included $142 million of realized gains on equity sales, partly offset by a $94 million decrease in unrealized equity gains. There were no other-than-temporary impairments in either period.
- Other comprehensive income was a loss of $113.0 million, principally reflecting a $125.8 million after-tax decline in unrealized investment gains, partly offset by currency translation gains. Accumulated other comprehensive income changed from $68.5 million at year-end to a loss of $259.0 million at quarter-end.
- In March, the company issued $175 million of 5.70% subordinated debentures due 2058 and reported $13 million of subsidiary debt issuance. It repurchased 101,000 common shares for $6.8 million during the quarter.
- Accounting changes adopted in 2018 included fair-value changes on covered equity securities flowing through net income, and reclassifications between retained earnings and accumulated other comprehensive income. The filing reports no net impact to total stockholders’ equity from the cited adoption adjustments, although presentation and period-to-period comparisons are affected.
Outlook, risks, and contingencies
The filing provides no specific numerical earnings or premium guidance. Management’s forward-looking statements refer generally to industry and company performance in 2018 and beyond and are subject to uncertainty. Key risks include pricing and competition, catastrophe losses, claims inflation and reserve estimation, long-tail insurance and reinsurance exposures, investment and interest-rate volatility, credit and reinsurance recoverability, foreign-currency and political risks including Brexit, and access to capital and financing.
Management reported favorable Insurance reserve development, mainly in workers’ compensation, and adverse Reinsurance development tied principally to older U.S. casualty facultative construction business. The filing emphasizes that reserve estimates are inherently uncertain; its sensitivity analysis indicates that changes in claim frequency and severity could materially affect estimated losses. Ordinary-course litigation and arbitration are considered in reserves; management expects ultimate liability not to be material to financial condition, while acknowledging that an adverse outcome could materially affect results in an individual period. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether favorable workers’ compensation reserve trends persist and whether Reinsurance adverse development continues.
- The drivers and sustainability of higher investment income, including the contribution and volatility of real estate and other investment funds.
- How market movements affect the substantial fixed-maturity portfolio, unrealized losses, and reported investment gains under the new equity-security accounting.
- Whether operating cash flow returns to positive levels and how real estate development spending and debt issuance affect liquidity and leverage.
- Premium growth, renewal pricing, and segment profitability, particularly Reinsurance’s combined ratio above 100%.
- Any changes in litigation outcomes, reserve adequacy, or the ability of reinsurers to pay amounts due.