W. R. Berkley Corporation — FY2022 Form 10-K
Reporting period: Year ended December 31, 2022; comparisons are primarily with FY2021. Berkley is a global property-casualty insurance holding company operating through Insurance and Reinsurance & Monoline Excess segments.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $11.17 billion | $9.46 billion |
| Net premiums written | $10.00 billion | $8.86 billion |
| Net premiums earned | $9.56 billion | $8.11 billion |
| Income before tax | $1.72 billion | $1.28 billion |
| Net income to common stockholders | $1.38 billion | $1.02 billion |
| Diluted EPS | $4.94 | $3.66 |
| Net investment income | $779 million | $672 million |
| Operating cash flow | $2.57 billion | $2.18 billion |
- Consolidated combined ratio was 89.3% versus 89.6%; a ratio below 100% indicates underwriting profit. Loss ratio increased to 61.3% from 61.1%, while expense ratio improved to 28.0% from 28.5%.
- Insurance segment pretax income was $1.46 billion; Reinsurance & Monoline Excess pretax income was $317 million. Other and corporate activities recorded a $53 million pretax loss.
- At year-end, total assets were $33.86 billion, total equity $6.77 billion, and common stockholders’ equity $6.75 billion. Gross loss reserves were $17.01 billion, including $14.25 billion net of reinsurance.
- Cash and cash equivalents were $1.45 billion. The investment portfolio, including cash and cash equivalents, was approximately $24.3 billion; about 76% was in cash, cash equivalents and marketable fixed maturities. Fixed-maturity portfolio duration was 2.4 years.
- Debt carrying value was $2.84 billion; debt was 30% of total capitalization, compared with 33% a year earlier. A $300 million revolving credit facility was undrawn at year-end.
Changes versus FY2021 and notable items
- Revenue rose 18%, net premiums written rose 13%, and net income increased $359 million. Management attributed the earnings improvement chiefly to underwriting growth and expense leverage, higher fixed-maturity investment income, and higher investment gains.
- Gross premiums written increased 11%. Average renewal rates for insurance and facultative reinsurance rose 6.4% (7.5% excluding workers’ compensation), slower than the respective 9.1% and 10.4% increases in 2021.
- Net investment income increased 16%, with fixed-maturity income benefiting from higher interest rates and a larger portfolio. Net investment gains were $202 million, including a $251 million after-expense and currency-impact gain on the London office-property sale.
- Despite higher earnings, comprehensive income to common stockholders fell to $398 million from $803 million, primarily reflecting a $984 million after-tax decline in unrealized investment values recorded in other comprehensive income. This is distinct from net income.
- Net prior-year reserve development was unfavorable by $36 million, versus favorable development of $7 million in 2021. Insurance had $40 million unfavorable development, largely COVID-related event-cancellation and film-delay claims; Reinsurance & Monoline Excess had $4 million favorable development.
- Catastrophe losses net of reinsurance were $212 million, compared with $202 million. The company reported $341 million of cumulative COVID-19-related losses net of reinsurance at year-end.
- Berkley repaid $427 million of senior notes at maturity during 2022. It repurchased $94 million of common shares and paid $235 million in dividends, including a $0.50-per-share special dividend. A 3-for-2 stock split was completed in March 2022.
Outlook, risks and contingencies
- The filing provides no specific numerical earnings or premium guidance. Management’s outlook is subject to insurance pricing, loss-cost trends and investment-market conditions; it notes that revenue growth does not necessarily translate into comparable earnings growth.
- Management reported generally higher pricing across many lines but identified workers’ compensation as an exception and cautioned that loss-cost inflation may offset rate increases. Pricing adequacy and the duration of favorable market conditions remain uncertain.
- Reserve estimation is a significant uncertainty, particularly for long-tail casualty and assumed reinsurance claims. Management cited inflation, social inflation, large-loss frequency, litigation trends and delayed claim reporting. A 1% change in both claim frequency and severity for 2022 claims was estimated to change the loss estimate by about $116 million; a 5% change in both by about $592 million.
- COVID-19 claims and potential coverage disputes remain uncertain; future losses could exceed reserves. Other key risks include catastrophe and climate-related losses, cyber events, reinsurance availability and counterparty collectability, investment-market and interest-rate volatility, competition, foreign currency exposure, and regulatory changes.
- Insurance subsidiaries’ dividends are regulated. Approximately $1.2 billion could be paid by the lead insurer without regulatory approval during 2023; parent-company liquidity depends partly on subsidiary distributions.
- Ordinary-course insurance litigation is reflected in reserves; management does not expect the matters, in aggregate, to materially affect financial condition, though adverse outcomes could materially affect an individual reporting period. The company also had $402 million of unfunded investment-fund commitments and $146 million of real-estate construction commitments.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Reserves for losses and loss expenses were identified as a critical audit matter.
Most important facts for investors to verify
- Whether premium growth and renewal pricing continue to exceed loss-cost inflation, and how the combined ratio develops.
- Whether adverse development in older casualty accident years and COVID-19 claims remains contained; monitor reserve development and the sensitivity of long-tail estimates.
- How higher rates, credit conditions and unrealized fixed-maturity losses affect investment income, capital and liquidity.
- Reinsurance recoverability and renewal terms, catastrophe exposure, and the extent of protection under the company’s reinsurance program.
- Parent-company cash needs, regulated subsidiary dividend capacity, debt maturities and capital returns, including the subsequent $0.50-per-share special dividend declared in January 2023.