W. R. Berkley Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with 2019. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Berkley is a property-and-casualty insurance holding company operating through two segments: Insurance and Reinsurance & Monoline Excess. Its decentralized operating units focus on specialized markets in the United States and internationally. In 2020, Insurance generated 87.4% of net premiums written.
Financial performance and position
- Revenue: Total revenue rose 2.5% to $8.10 billion from $7.90 billion. Net premiums earned increased 4.5% to $6.93 billion; net premiums written increased 5.8% to $7.26 billion.
- Profit: Net income to common stockholders fell to $531 million from $682 million; diluted EPS was $2.81 versus $3.52. Pretax income declined to $705 million from $853 million. The effective tax rate increased to 24.4% from 19.8%.
- Underwriting: The consolidated combined ratio was 94.9%, compared with 93.8% in 2019, still indicating an underwriting profit before investment income. The loss ratio increased to 64.5% from 62.3%, while the expense ratio improved to 30.4% from 31.5%. Insurance’s combined ratio worsened to 95.2% from 93.5%; Reinsurance & Monoline Excess improved to 93.1% from 96.5%.
- Cash flow: Operating cash flow increased to $1.62 billion from $1.14 billion. Cash and cash equivalents were $2.37 billion at year-end, up from $1.02 billion.
- Investments: Net investment income declined 9.6% to $584 million, and average annualized yield fell to 2.9% from 3.4%. Net investment gains were $103 million versus $121 million; 2020 included a $105 million gain on the sale of a New York City office complex. The investment portfolio, including cash, was $20.85 billion.
- Reserves: Gross loss and loss expense reserves increased to $13.78 billion from $12.58 billion; net reserves were $11.62 billion versus $10.70 billion. Favorable prior-year development, net of premium adjustments, was $16 million, down from $19 million.
- Debt and equity: Debt carrying value was $2.73 billion, compared with $2.63 billion in 2019; debt represented 30% of total capitalization in both years. Common stockholders’ equity was $6.31 billion, and book value per outstanding share was $35.49. The company repurchased 6.36 million shares for $346 million and paid $84 million in common dividends.
- Liquidity and capital: Management reported that approximately 79% of the investment portfolio was held in cash, cash equivalents and marketable fixed-maturity securities. The lead insurer’s statutory capital and surplus was $6.19 billion, and its total adjusted capital was 388% of its RBC authorized control level.
Material changes versus 2019
- Gross premiums written increased 7% to $8.85 billion. Average renewal rates for insurance and facultative reinsurance rose 11.3%, or 13.6% excluding workers’ compensation, adjusted for exposure changes. Workers’ compensation gross premiums fell 15%, while professional liability rose 20%.
- Net income declined by $151 million. Management cited lower fixed-maturity investment income, COVID-19 and other catastrophe losses, higher tax expense, reduced foreign-currency gains, lower investment gains and debt-extinguishment costs. Lower corporate expenses and share count partly offset the decline.
- Net catastrophe losses increased to $340 million from $90 million, including approximately $171 million of COVID-19-related losses net of reinsurance and reinstatement premiums. The loss ratio excluding catastrophe losses and prior-year development improved to 59.8% from 61.2%.
- Operating cash flow rose substantially, while year-end cash also increased. The company issued long-dated debt and redeemed or repaid other debt during the year; it also shortened fixed-maturity portfolio duration to 2.4 years from 2.8 years.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said it expected regular quarterly cash dividends to continue, subject to availability. It noted that recent rate increases would be earned over subsequent quarters.
- Management said COVID-19’s future impact remains uncertain. COVID-19 reserves included $95 million of reported losses and $76 million of IBNR; claims, regulatory actions, premium demand, reinsurance recoveries, investment performance and operating disruption could change materially.
- Key risks include reserve-estimation uncertainty, social inflation and increasing large professional-liability claims, catastrophe and climate-related losses, low interest rates and investment volatility, reinsurer credit or coverage disputes, competitive pricing, and regulatory changes. The company also flagged Brexit-related authorization and cross-border operating issues.
- Prior-year reserve experience was mixed: Insurance developed favorably by $24 million, largely from workers’ compensation, partly offset by adverse professional-liability development; Reinsurance & Monoline Excess developed unfavorably by $8 million, mainly from assumed liability business.
- The company adopted the expected-credit-loss accounting standard (ASU 2016-13) in 2020. The adoption affected opening equity and established credit-loss allowances. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; reserve estimation was identified as a critical audit matter.
- In January 2021, the company called $110 million of 5.90% subordinated debentures for redemption, and in February 2021 issued $300 million of 4.125% subordinated debentures due 2061. Up to approximately $721 million of subsidiary dividends could be paid in 2021 without regulatory approval.
Important facts for investors to verify
- Whether COVID-19 claims, coverage disputes and reinsurance recoveries develop beyond the $171 million net loss estimate and associated IBNR.
- Whether workers’ compensation favorable development persists and professional-liability and assumed-liability adverse trends continue, including the effect of social inflation.
- How renewal pricing, premium growth and the combined ratio evolve as rate increases are earned and catastrophe losses normalize or recur.
- Whether investment income remains pressured by low yields, and how much reported investment gains depend on asset sales, including the 2020 property gain.
- Debt maturities, refinancing costs, subsidiary dividend capacity and the effects of share repurchases and dividends on capital and per-share value.
- Regulatory developments affecting pandemic coverage, Brexit permissions, climate-risk requirements and insurance capital standards.