W. R. Berkley Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. W. R. Berkley is a property-and-casualty insurance holding company operating in Insurance and Reinsurance & Monoline Excess, alongside non-insurance businesses and an investment portfolio.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenues | $1.966 billion | $1.938 billion | $5.926 billion | $5.740 billion |
| Net premiums written | $1.750 billion | $1.624 billion | $5.203 billion | $4.914 billion |
| Net premiums earned | $1.677 billion | $1.603 billion | $4.917 billion | $4.752 billion |
| Income before income taxes | $203.0 million | $209.2 million | $706.2 million | $649.5 million |
| Net income to common stockholders | $165.2 million | $161.9 million | $562.6 million | $508.4 million |
| Diluted EPS | $0.85 | $0.84 | $2.91 | $2.64 |
| Net investment income | $161.7 million | $186.1 million | $508.3 million | $514.4 million |
| Net realized and unrealized investment gains | $1.5 million | $22.3 million | $143.7 million | $140.4 million |
Q3 revenue and net premiums earned rose about 1% and 5%, respectively; net income increased about 2%. For the first nine months, net income increased 11%, with management attributing the improvement mainly to higher underwriting income. Q3 investment income declined 13%, principally due to lower investment-fund income; investment gains were also much lower than in Q3 2018. YTD investment gains included $28 million of realized gains and $116 million of unrealized gains on equity securities.
Underwriting: Q3 consolidated loss ratio was 62.1%, expense ratio 31.5%, and combined ratio 93.6%, versus 63.5%, 32.4%, and 95.9% a year earlier. For the first nine months, the combined ratio improved to 93.9% from 95.2%; the loss ratio was 62.2% in both periods, while the expense ratio improved to 31.7% from 33.0%. A combined ratio below 100% indicates underwriting profit. Nine-month catastrophe losses were $70 million versus $60 million; favorable prior-year reserve development was $17 million versus $27 million.
Cash flow, balance sheet, and capital
- Operating cash flow for the first nine months was $795 million, compared with $343 million in 2018; management cited higher premium receipts and lower claim payments. Investing activities used $192 million and financing activities used $599 million. Cash and cash equivalents ended at $813 million.
- At September 30, total assets were $26.2 billion, total liabilities $20.1 billion, and total equity $6.1 billion. Total investments were $18.6 billion on the balance sheet. Management said approximately 77% of the investment portfolio was in cash, cash equivalents, and marketable fixed-maturity securities.
- Senior notes and other debt had a carrying value of $1.435 billion; subordinated debentures were $908 million. Total debt carrying value was $2.343 billion. The company repaid $441 million of senior notes at maturity during Q3. Debt represented 28% of total capitalization, down from 34% at year-end 2018.
- Net reserves for losses and loss expenses were $10.6 billion; gross reserves were $12.4 billion. Common stockholders’ equity per outstanding share was $32.97. No shares were repurchased in the first nine months.
Material changes and management commentary
- Gross premiums written increased 6% year to date. Average renewal premium rates for insurance and facultative reinsurance rose 4.3% after adjusting for exposure changes, or 6.2% excluding workers’ compensation. Q3 renewal rate increases were 5.1% and 7.3%, respectively. Management said recent rate increases will be earned over coming quarters; it provided no specific earnings or revenue guidance.
- Insurance segment’s nine-month combined ratio improved to 93.6% from 94.9%; Reinsurance & Monoline Excess improved to 96.8% from 97.1%. Reinsurance & Monoline Excess gross premiums grew 19% year to date, compared with 5% growth for Insurance.
- Prior-year reserve development was favorable overall, but included adverse development in general liability, professional liability, and commercial auto liability, driven by more large losses than expected. Favorable workers’ compensation development reflected continued benign loss-cost and claim-frequency trends. Management emphasizes that reserves are estimates and are particularly uncertain for long-tail lines and assumed reinsurance.
- Investment funds and alternative investments can cause greater fluctuations in investment income. The company maintained a shortened fixed-maturity portfolio duration of 2.8 years. Unrealized fixed-maturity losses totaled $125 million at quarter-end; management viewed them as primarily temporary market and sector effects and reported no securities delinquent or in covenant default.
- The company adopted the new lease standard in Q1 2019, recording a $185 million right-of-use asset and $215 million lease liability; management said adoption did not affect results or liquidity. It expects the new credit-loss standard’s impact on investments to depend on holdings and market conditions; expected effects on operating assets were not material.
- The Reinsurance segment was renamed Reinsurance & Monoline Excess, with monoline excess business reclassified from Insurance; 2018 segment data was recast. A 3-for-2 stock split took effect April 2, 2019, and per-share data reflects it.
Outlook, risks, and contingencies
The filing contains no quantified forward guidance. Results remain exposed to pricing and competition, catastrophe losses, claim severity and frequency, reserve-estimation uncertainty, inflation and judicial developments, interest-rate and credit-market changes, foreign exchange and political risks, reinsurance recoverability, and investment-fund volatility. The company reported no material change to previously disclosed risk factors. Ordinary-course insurance and reinsurance disputes, litigation, and arbitration are considered in loss reserves; management expects ultimate liabilities not to be material to financial condition, while noting adverse outcomes could materially affect a particular reporting period. Investment funds had $263 million of unfunded commitments at September 30, 2019.
Important facts for investors to verify
- Whether reserve development and large-loss trends in general, professional, and commercial auto liability remain adverse, and whether workers’ compensation favorable trends persist.
- Whether renewal pricing and premium growth remain adequate relative to loss-cost inflation and changing exposure mix.
- How investment-fund performance, unrealized investment marks, and credit-loss accounting affect investment income, equity, and liquidity.
- Debt maturities and the effect of continued debt repayment on capital, alongside claims and catastrophe cash needs.
- Whether reinsurance recoverables are collected as expected and whether litigation or other contingencies develop materially.