W. R. Berkley Corporation — Q2 2015 Form 10-Q
Business context and period. W. R. Berkley is a commercial property and casualty insurance holding company with Insurance-Domestic, Insurance-International and Reinsurance-Global segments. This unaudited report covers the quarter and six months ended June 30, 2015; comparisons are with the same 2014 periods. Dollar amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net premiums written | $1,544 | $1,490 | $3,119 | $3,016 |
| Net premiums earned | $1,493 | $1,418 | $2,965 | $2,781 |
| Total revenues | $1,790 | $1,797 | $3,534 | $3,504 |
| Income before taxes | $178 | $263 | $347 | $511 |
| Net income to common stockholders | $123 | $180 | $241 | $350 |
| Diluted EPS | $0.95 | $1.35 | $1.84 | $2.60 |
| Net investment income | $128 | $139 | $252 | $307 |
| Net realized investment gains | $28 | $109 | $47 | $162 |
Underwriting and margins. The consolidated GAAP combined ratio was 94.2% in Q2 versus 94.4% a year earlier, and 94.0% for the first half versus 94.2%. Ratios below 100% indicate underwriting profit, excluding investment income. The Q2 loss ratio was 60.7% and expense ratio 33.5%; first-half ratios were 60.9% and 33.1%, respectively. Q2 segment combined ratios were 93.1% domestic, 101.1% international and 93.6% reinsurance. First-half segment ratios were 93.0%, 99.0% and 95.9%, respectively.
Cash, investments and debt. Operating cash flow was $333 million in the first half, compared with $255 million in 2014; cash and cash equivalents were $756 million at June 30, up from $674 million at year-end. Total investments were $15.6 billion. Management reported approximately 81% of the investment portfolio in cash, cash equivalents and marketable fixed-maturity securities. Senior notes and other debt plus subordinated debentures had a carrying value of $2.184 billion, down from $2.456 billion at year-end. Total equity was $4.536 billion and total assets were $21.690 billion.
Material changes and management commentary
- First-half net income fell 31%; Q2 net income fell 32%. Management attributed the declines primarily to lower after-tax realized investment gains and lower net investment income. The first-half realized-gains comparison was affected by a $86 million gain in 2014 from selling an interest in a commercial real estate investment fund.
- First-half net premiums earned rose 7%. Gross written premiums rose 2% overall; domestic growth was partly offset by lower international and reinsurance premiums. Management cited rate increases, but said loss costs were also rising and pricing in some lines remained below levels needed for long-term return objectives. Average renewal rates increased 1.9% for the first half and 1.1% in Q2.
- Net investment income declined 18% for the first half, primarily due to lower investment-fund income, including energy-fund losses; management also cited historically low fixed-income returns. First-half net realized gains were substantially lower than in 2014.
- Catastrophe losses, net of reinsurance, were $24 million in Q2 and $39 million in the first half, versus $40 million and $54 million, respectively, in 2014. Favorable prior-year reserve development was $22 million in Q2 and $34 million in the first half, compared with $24 million and $49 million in 2014.
- During the first half the company repurchased 4.40 million shares for $218 million and paid $28 million in dividends. At June 30, 9.35 million shares remained authorized for repurchase. The board increased the authorization to 10 million shares in June.
- Interest expense rose to $68 million for the first half from $61 million. The company repaid $200 million of 5.60% notes at maturity and $71 million of debt assumed with a 2014 property purchase; it had issued $350 million of 4.75% notes due 2044 in August 2014.
Outlook, risks and unusual items
The filing gives no specific earnings or revenue guidance. Management expects alternative investments to continue producing greater income volatility and notes that low fixed-income yields could continue to weigh on investment income. It describes the insurance market as highly competitive, with some lines priced below its long-term return objectives, and says the company selectively reduces business where returns are inadequate.
Key risks include reserve estimation and claims inflation, catastrophe losses, pricing and competition, investment and interest-rate risk, credit and reinsurance collectability, foreign-currency and political exposure, and regulatory, technology and data-security risks. Management said unrealized security losses were primarily market- and sector-related, did not consider the securities other-than-temporarily impaired, and expected issuers to meet contractual payments. Gross unrealized losses on securities in loss positions were $95.5 million at June 30. Ordinary-course insurance and reinsurance litigation is considered in reserves; the company expects ultimate liability not to be material to financial condition, while noting adverse outcomes could materially affect results in a particular period. No material risk-factor changes from the 2014 Form 10-K were reported. Disclosure controls were deemed effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether premium-rate increases keep pace with loss-cost inflation and support targeted returns, especially in lines with competitive pricing.
- Reserve adequacy and the sustainability of favorable prior-year development; net loss reserves were $9.186 billion, including $1.434 billion for Reinsurance-Global.
- How investment-fund, energy, real-estate and merger-arbitrage performance affects recurring investment income and volatility.
- Portfolio valuation and market exposure, including unrealized losses, interest-rate sensitivity and the growth in the arbitrage trading account to $830 million from $451 million at year-end.
- Liquidity and capital deployment after debt repayments, share repurchases and ongoing real-estate development; verify that cash flows and investment maturities remain adequate for claims and other obligations.
- Reinsurance recoverables and litigation or arbitration developments that could affect reserves or period results.