W. R. Berkley Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. The company is a commercial property-and-casualty insurance holding company with Insurance and Reinsurance segments, as well as non-insurance businesses.
Financial results and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenues | $2.031 billion | $2.020 billion | $5.750 billion | $5.683 billion |
| Net premiums earned | $1.582 billion | $1.586 billion | $4.720 billion | $4.673 billion |
| Net income to common stockholders | $162.1 million | $220.7 million | $394.5 million | $449.1 million |
| Diluted earnings per share | $1.26 | $1.72 | $3.05 | $3.50 |
| Net investment income | $142.5 million | $145.7 million | $426.6 million | $404.9 million |
| Net realized investment gains | $184.0 million | $175.7 million | $276.8 million | $207.5 million |
- Underwriting: Consolidated GAAP combined ratio was 101.0% in Q3 versus 93.9% in 2016, indicating an underwriting loss for the quarter; for the nine months it was 97.3% versus 94.1%. Insurance segment ratios were 95.6% and 94.5%, respectively. Reinsurance ratios deteriorated to 153.6% for Q3 and 123.2% for the nine months.
- Balance sheet at September 30: Total assets were $24.336 billion, total investments $17.561 billion, cash and cash equivalents $774.0 million, and total equity $5.471 billion. Net loss reserves were $10.048 billion; gross reserves were $11.654 billion.
- Debt and liquidity: Senior notes and other debt had a carrying value of $1.760 billion, and subordinated debentures $728.1 million; total debt face amount was $2.521 billion. Debt represented 31% of total capitalization, down from 33% at year-end 2016. Management reported approximately 80% of the investment portfolio in cash, cash equivalents and marketable fixed maturities.
- Cash flow, nine months: Operating cash flow was $521.9 million, down from $726.5 million. Investing activities used $434.1 million; financing activities used $127.4 million. Cash ended the period at $774.0 million.
Material changes and management commentary
- Net income declined 27% in Q3 and 12% for the nine months. Management attributed the nine-month decline principally to lower after-tax underwriting income, including higher catastrophe losses, and increased foreign-currency losses; higher investment gains and investment income partly offset the decline.
- Q3 catastrophe losses, net of reinsurance and reinstatement premiums, were $119 million, including $107 million from Hurricanes Harvey, Irma and Maria and two earthquakes in Mexico. Nine-month catastrophe losses were $167 million, versus $68 million in 2016.
- For the nine months, favorable prior-year reserve development, net of premium offsets, was $31 million versus $42 million in 2016. Insurance had $62 million favorable development, mainly workers’ compensation; Reinsurance had $31 million adverse development, associated with the U.K. Ogden discount-rate change and U.S. facultative casualty claims. In Q3, total favorable development was $7 million, with adverse development in Reinsurance.
- Net premiums written fell 3% to $4.782 billion in the nine-month period; gross premiums written fell 1%. Insurance gross written premiums rose 1%, while Reinsurance declined 20%. Average renewal rates for insurance and facultative reinsurance increased 1.0% for the nine months, adjusted for exposure changes; policy renewal retention was approximately 77.7%.
- Net investment income rose 5% for the nine months, while Q3 investment income declined 2%. Nine-month realized gains included a $124 million gain on the sale of a Washington, D.C. office-building investment. The comparison period included a $135 million gain from the 2016 sale of Aero Precision Industries and related aviation businesses.
- The company acquired an 89.5% interest in a textile-solutions business in March 2017 for $73.3 million. A Washington, D.C. office-building investment was sold during Q3. The company also repurchased 441,119 shares during September for $28.4 million.
Outlook, risks and contingencies
- The filing provides no specific numerical earnings or premium guidance. Management noted low fixed-maturity investment returns and expected continued variability in investment-fund and other alternative-investment income. It also described rate adequacy, claims frequency and severity, and reserve estimation as important drivers of results.
- Key disclosed risks include catastrophe losses; insurance pricing and competition; uncertainty in long-tail claims and reserves; investment, interest-rate, credit and currency risks; reinsurer collectability; regulatory and litigation developments; and risks related to international operations, including Brexit. Management cautioned that forward-looking statements are subject to uncertainty and actual results may differ materially.
- Management stated that ordinary-course insurance and reinsurance litigation is reflected in reserves and expected ultimate liability was not expected to be material to financial condition, while adverse outcomes could materially affect results in a particular period.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Investor verification priorities
- Track catastrophe losses and the unusually high Reinsurance combined ratio, including the development of claims from the 2017 storms and Mexico earthquakes.
- Assess reserve adequacy and future development, especially the contrasting workers’ compensation releases and Reinsurance strengthening tied to the Ogden-rate change and casualty claims.
- Separate recurring underwriting and investment earnings from realized gains, including the $124 million property-sale gain, and review the volatility of alternative-investment income.
- Monitor premium trends, renewal pricing and retention, particularly the contraction in Reinsurance written premiums and the impact of ceded reinsurance.
- Review operating cash-flow trends, investment liquidity, debt maturities and the company’s capacity to meet claims and other obligations.