W. R. Berkley Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. W. R. Berkley is a global property-and-casualty insurance holding company with Insurance and Reinsurance segments. Financial amounts below are in U.S. dollars; millions are rounded.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net premiums written | $1,624m | $1,571m | $4,914m | $4,782m |
| Net premiums earned | $1,603m | $1,582m | $4,752m | $4,720m |
| Total revenues | $1,938m | $2,031m | $5,740m | $5,750m |
| Net income to common stockholders | $162m | $162m | $508m | $395m |
| Diluted EPS | $1.26 | $1.26 | $3.96 | $3.05 |
| Net investment income | $186m | $142m | $514m | $427m |
| Net realized and unrealized investment gains | $22m | $184m | $140m | $277m |
- Q3 total revenues declined about 5%, mainly as investment gains fell sharply; net income was essentially unchanged. Underwriting income and net investment income improved, offset by lower investment gains.
- Nine-month net income rose 29%. Management attributed the increase principally to stronger underwriting income, higher investment income, foreign-currency gains, and lower income tax expense. The 2018 effective tax rate was 21.0% for the nine months versus 30.5% in 2017, primarily reflecting the federal corporate tax rate reduction.
- Consolidated GAAP combined ratio improved to 95.9% in Q3 from 101.0%; for the nine months it improved to 95.2% from 97.3%. Insurance segment combined ratios were 94.9% for Q3 and 94.3% year to date. Reinsurance remained above underwriting break-even, at 107.9% for Q3 and 105.3% year to date.
- Year-to-date net premiums written increased 3%. Insurance gross premiums grew 4%, while Reinsurance gross premiums fell 13%. Renewal retention was approximately 77.7% year to date; average renewal rates rose 2.5% adjusted for exposure changes, or 4.1% excluding workers’ compensation.
Financial position, cash flow and capital
- At September 30, total assets were $24.9bn, total investments were $17.8bn, and cash and cash equivalents were $819m. Net loss reserves were $10.2bn and unearned premiums were $3.5bn.
- Operating cash flow was $343m for the first nine months, down from $522m in 2017; management cited timing of claim payments, certain incentive-plan payments, and tax payments. Investing activities used $526m and financing activities provided $92m. Cash declined $131m from year-end to $819m.
- Management reported approximately 77% of the investment portfolio in cash, cash equivalents and marketable fixed-maturity securities. Fixed-maturity portfolio duration, including cash, was 2.9 years, compared with 3.0 years at year-end.
- Senior notes and other debt were $1.790bn and subordinated debentures were $907m, totaling $2.698bn carrying value; stated face amount was $2.735bn. Debt represented 33% of total capitalization, versus 32% at year-end. The company issued $185m of 5.70% subordinated debentures due 2058 and $20m of subsidiary debt during 2018.
- Common stockholders’ equity was $5.4bn, or $44.53 per outstanding share. The company repurchased 101,000 shares for $6.8m during the nine months and none during Q3.
Material changes and notable items
- Year-to-date catastrophe losses, net of reinsurance, were $60m versus $167m in 2017; Q3 losses were $39m versus $119m. The prior-year period included substantial hurricane and Mexican earthquake losses.
- Year-to-date favorable prior-year development, net of premium offsets, was $27m versus $31m. Insurance had $35m favorable development, primarily workers’ compensation; Reinsurance had $8m adverse development, mainly older U.S. casualty facultative business related to construction projects.
- Net investment income increased 21% year to date, supported by higher income from investment funds and fixed-maturity securities, portfolio growth, and higher interest rates. Management said it had shortened fixed-maturity duration to limit mark-to-market exposure and position for rising rates.
- Investment gains declined year over year. Under accounting guidance adopted January 1, 2018, fair-value changes on many equity securities are recognized in earnings; 2018 year-to-date gains included $420m of realized gains on sales partly offset by a $280m decrease in unrealized equity gains.
- The company recorded a $329m year-to-date other comprehensive loss, including $253m of after-tax unrealized investment losses and $76m of currency-translation losses. Accumulated other comprehensive income moved from $69m at year-end to a $475m accumulated loss at September 30.
- Effective July 1, 2018, the company treated Argentina as highly inflationary under GAAP and changed the operation’s functional currency to the U.S. dollar; related foreign-exchange gains and losses are recorded in earnings. The filing reported year-to-date net foreign-currency gains of $22m, compared with losses of $14m in 2017.
- Adoption of new accounting standards included a $291m reclassification from opening accumulated other comprehensive income to retained earnings, with no net effect on total stockholders’ equity. The company also adopted guidance permitting reclassification of stranded tax effects, likewise with no net equity impact.
Outlook, risks and contingencies
- No specific numerical earnings or premium guidance is provided. Management noted that recent rate increases are generally earned over policy terms and will flow into earned premiums in upcoming quarters; it also expects investment income from alternative investments to remain more variable.
- Key risks include reserve estimation and long-tail claims, catastrophe losses, pricing and competition, investment-market and interest-rate volatility, credit and reinsurance recoverability, foreign-currency and political risks including Brexit, regulation, and technology or data security. Management cautioned actual results may differ materially from forward-looking statements.
- Management said the ultimate liability from ordinary-course litigation and arbitration is not expected to be material to financial condition, but adverse outcomes could materially affect results in a particular reporting period. The filing reported no material changes to previously disclosed risk factors.
- Management stated that fixed-maturity securities in unrealized loss positions were considered temporarily impaired, not credit-impaired; none were delinquent or in covenant default. Fixed-maturity unrealized losses were $201m at September 30, up from $60m at year-end.
Important facts for investors to verify
- Whether favorable workers’ compensation reserve trends persist and whether older casualty exposures produce further adverse development.
- How investment returns, especially equity marks and alternative-fund results, affect earnings and accumulated other comprehensive income.
- Whether premium growth and renewal-rate increases translate into earned premium and sustained underwriting margins, particularly in Reinsurance.
- The drivers of lower operating cash flow and the company’s ability to meet claims, development costs, and debt maturities while maintaining liquidity.
- The impact of Argentina’s highly inflationary accounting treatment and other foreign-exchange exposures on future results.
- Potential outcomes of litigation, reinsurance recoverability, and other contingencies; the filing does not quantify a clear potential loss amount.