W. R. Berkley Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; balance sheet compared with December 31, 2013. W. R. Berkley is a commercial property-and-casualty insurance holding company with domestic insurance, international insurance and global reinsurance segments. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net premiums written | $1,490 | $1,342 | $3,016 | $2,719 |
| Net premiums earned | $1,418 | $1,283 | $2,781 | $2,515 |
| Total revenues | $1,797 | $1,571 | $3,504 | $3,078 |
| Income before taxes | $263 | $159 | $511 | $319 |
| Net income to common stockholders | $180 | $116 | $350 | $233 |
| Diluted EPS | $1.35 | $0.82 | $2.60 | $1.65 |
| Net investment income | $139 | $144 | $307 | $280 |
| Net investment gains | $109 | $33 | $162 | $53 |
- Q2 net income rose 55%; first-half net income rose 50%. Management attributed first-half growth mainly to higher after-tax investment gains, underwriting income and investment income. Lower weighted-average diluted shares, following repurchases, also supported per-share results.
- First-half consolidated GAAP combined ratio was 94.2%, versus 95.6% a year earlier; Q2 was 94.4%, versus 96.6%. Ratios below 100% indicate underwriting profitability before investment income.
- First-half loss ratio improved to 60.8% from 61.6%; expense ratio improved to 33.4% from 34.0%. Segment first-half combined ratios were Domestic 92.8% (95.5% prior year), International 99.4% (96.9%), and Global Reinsurance 96.4% (95.1%).
Balance sheet, cash flow and capital
- At June 30, total assets were $21.17 billion, total investments $15.25 billion, cash and equivalents $843 million, and total equity $4.65 billion. Gross loss and loss expense reserves were $10.26 billion, including $8.89 billion net of ceded reserves.
- Senior notes and other debt were $1.70 billion and junior subordinated debentures $340 million, for $2.04 billion carrying value and $2.06 billion face amount. Debt and subordinated debentures represented 31% of total capitalization, compared with 32% at year-end 2013.
- First-half operating cash flow was $255 million, down from $314 million. Investing activities used $41 million; financing activities used $218 million. Cash ended the period at $843 million, little changed from year-end.
- The investment portfolio was approximately 79% fixed-maturity securities. Average fixed-maturity portfolio duration was 3.1 years, down from 3.3 years at year-end. Management said it seeks to align investment and liability durations and maintain liquid resources for claims and other obligations.
- The company repurchased 4.91 million shares for $197 million in the first half and paid $27 million in dividends. Common stockholders’ equity was $4.6 billion; equity per outstanding share was $36.20.
Material changes and unusual items
- Gross premiums written increased 10% in the first half, reflecting rate increases and greater exposures. Average renewal rates, adjusted for exposure changes, increased 4.2%, compared with 7.2% in the first half of 2013. Domestic gross written premiums grew 14%, International 10%, while Global Reinsurance declined 13% amid stronger competition.
- First-half net realized investment gains were $162 million, versus $53 million. The largest driver was an $86 million gain on the sale of a London office building. The property was sold for $67 million cash and a $270 million, 2% bridge loan, which was repaid in July.
- In June, the company also sold an aviation-related business for $16 million; its net carrying value was $15 million, including $7 million goodwill.
- First-half favorable prior-year reserve development was $49 million, versus $42 million. Domestic favorable development of $54 million was partly offset by $5 million unfavorable International development. Catastrophe losses were $54 million, versus $39 million a year earlier.
- On August 6, 2014, after quarter-end, the company issued $350 million of 4.75% senior notes due 2044. It expected to use $200 million to repay notes due in May 2015, with the balance for general corporate purposes.
Outlook, management commentary and risks
- Management said pricing remained competitive, and some business lines were still priced below levels needed for its long-term return objectives. It selectively reduces business where returns are inadequate. It also noted that overall loss costs were increasing.
- Recent premium-rate increases are expected to flow into earned premiums over coming quarters. Management said the expense ratio could improve further if insurance prices continue increasing at current levels; this is not a quantified earnings forecast.
- Low fixed-income reinvestment yields continued to weigh on fixed-maturity investment income. First-half fixed-maturity yield declined to 3.4% from 3.7%; investment-fund income rose, but management expects that income to fluctuate more.
- Reserve estimates are inherently uncertain, especially for long-tail claims and assumed reinsurance, where information from ceding companies may be delayed or inaccurate. The filing illustrates that a 1% change in both frequency and severity for 2013 claims would affect estimated losses by about $195 million; combined changes could have greater effects across multiple accident years.
- Other identified risks include catastrophe losses, competition and pricing, investment and interest-rate risk, credit and reinsurance recoverability, claims inflation and litigation trends, foreign currency and political risks, regulatory changes, and access to capital. Ordinary-course legal matters were not expected to materially affect financial condition, but adverse outcomes could materially affect a particular period’s results. No material change to the prior Form 10-K risk factors was reported.
- The company reported no material changes in internal control over financial reporting and stated that disclosure controls were effective.
Important facts for investors to verify
- How much of earnings growth is repeatable underwriting performance versus realized gains, particularly the one-time London property gain.
- Whether premium growth and renewal pricing remain adequate relative to rising loss costs, and how competition affects the Global Reinsurance segment.
- Reserve development and the assumptions behind long-tail and assumed-reinsurance reserves, including the significance of favorable prior-year development.
- Investment income sensitivity to low interest rates and volatility in investment funds, real estate, loans and merger-arbitrage positions.
- Liquidity and capital allocation after the 2044 notes issuance, the 2015 debt maturity, share repurchases and planned real-estate development spending.
- Exposure to claims, catastrophe events, reinsurance recoverables and other contingencies; the filing does not provide a clear quantified estimate of potential outcomes for these risks.