W. R. Berkley Corporation — FY 2017 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2017. W. R. Berkley is a property-casualty insurance holding company operating through Insurance and Reinsurance segments, with a decentralized network focused on commercial and specialty markets. The company reclassified two businesses from Insurance to Reinsurance in 2017 and recast prior periods for comparability.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $7.685 billion | $7.654 billion | +0.4% |
| Net premiums written | $6.261 billion | $6.424 billion | -2.5% |
| Net premiums earned | $6.311 billion | $6.293 billion | +0.3% |
| Income before tax | $772.8 million | $896.4 million | -13.8% |
| Net income to common stockholders | $549.1 million | $601.9 million | -8.8% |
| Diluted earnings per share | $4.26 | $4.68 | -9.0% |
| Net investment income | $575.8 million | $564.2 million | +2.1% |
| Net investment gains | $335.9 million | $267.0 million | +25.8% |
| Cash from operating activities | $710.9 million | $848.4 million | -16.2% |
Revenue growth was modest, while lower earnings chiefly reflected higher catastrophe losses and weaker underwriting results, particularly in Reinsurance. Higher investment gains and a $20.7 million net tax-reform benefit partly offset these pressures.
Underwriting and segment results
- The consolidated GAAP combined ratio rose to 96.7% from 94.3%; below 100% indicates underwriting profit before investment income. The loss ratio increased to 63.4% from 61.1%, while the expense ratio was nearly steady at 33.3% versus 33.2%.
- Insurance segment income before tax was $756.2 million versus $799.1 million. Its combined ratio increased to 94.5% from 93.5%.
- Reinsurance recorded a $15.3 million pretax loss, compared with $98.3 million pretax income. Its combined ratio deteriorated to 117.6% from 100.6%, indicating an underwriting loss.
- Gross catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $184 million versus $105 million, mainly from Hurricanes Harvey, Irma and Maria, earthquakes in Mexico, and California wildfires.
- Net favorable prior-year development was $37 million, down from $59 million. Insurance had $68 million favorable development, primarily in workers’ compensation, partly offset by adverse professional-liability development. Reinsurance had $31 million adverse development, including U.K. motor claims affected by the Ogden discount-rate change and U.S. facultative casualty claims.
Financial position, debt and liquidity
- Total assets were $24.30 billion, up from $23.36 billion. Gross loss and loss-expense reserves increased to $11.67 billion from $11.20 billion; net reserves were $10.06 billion.
- Common stockholders’ equity was $5.41 billion, compared with $5.05 billion; equity per outstanding share was $44.53.
- Cash and cash equivalents were $950.5 million. The company reported $17.45 billion in investments excluding cash, and stated that approximately 80% of its investment portfolio was in cash, cash equivalents and marketable fixed-maturity securities.
- Operating cash flow declined to $710.9 million, primarily due to timing of claim payments and payments to tax authorities. Cash and cash equivalents nevertheless increased by $155.2 million during the year.
- Senior notes and other debt plus subordinated debentures totaled $2.50 billion carrying value ($2.53 billion face amount). Debt represented 32% of total capitalization, compared with 33% in 2016. Scheduled debt maturities include approximately $443 million in 2019 and $311 million in 2020.
- Insurance subsidiaries’ capital exceeded regulatory risk-based capital action levels. The lead insurer’s statutory capital and surplus was $5.48 billion; its total adjusted capital was 397% of its RBC authorized control level. Up to approximately $699 million of subsidiary dividends could be paid in 2018 without regulatory approval.
Material changes, outlook and risks
- Insurance gross premiums written rose 1%, while Reinsurance gross premiums written fell 19%; consolidated gross premiums written declined 1%. Average renewal premium rates increased 0.9% in 2017, but management said loss costs were also rising and prices in certain lines remained below levels needed to meet long-term return objectives. Policy renewal retention was approximately 79%, versus 77% in 2016.
- Management provided no quantified earnings or revenue guidance in the supplied filing text. It described continued pricing competition, low fixed-income returns and volatility in alternative-investment income. The 2017 average yield on investments was 3.3%, versus 3.4% in 2016.
- The Tax Cuts and Jobs Act reduced the federal corporate rate to 21% effective in 2018. The company recorded a provisional $20.7 million net tax benefit for 2017, consisting of a $30.5 million deferred-tax benefit partly offset by a $9.8 million provisional charge related to deemed repatriation and foreign losses. Management said calculations could be revised as further guidance and analysis became available.
- Reserve estimates are inherently uncertain, especially for long-tail and assumed reinsurance claims. Management’s sensitivity analysis showed that a 5% adverse change in both claim frequency and severity for 2017 claims would increase estimated losses by approximately $406 million. The filing cautions that actual outcomes may differ from current reserves.
- Other notable exposures include $1.78 billion due from reinsurers, international currency and political risks including Brexit, catastrophic events, investment-market and interest-rate risk, regulatory change, cybersecurity, and the availability and cost of reinsurance. TRIPRA coverage has significant limits and deductibles; the company estimated its 2018 aggregate deductible at approximately $948 million.
- Commitments included up to $406.2 million for investment funds and $359.7 million for real-estate construction projects. Ordinary-course litigation and arbitration are reflected in reserves; management did not expect these matters to materially affect financial condition, while acknowledging adverse outcomes could affect results in a particular period.
Important facts for investors to verify
- Whether Reinsurance underwriting deterioration and elevated catastrophe losses persist, and how renewals and pricing compare with loss-cost trends.
- Whether workers’ compensation favorable reserve trends continue, and whether adverse development in professional liability and Reinsurance expands.
- The adequacy and sensitivity of the $11.67 billion gross reserves, including the impact of inflation, long-tail claims and reinsurance recoverability.
- How the Tax Act’s provisional estimates, including reserve-discounting rules and foreign earnings calculations, are finalized.
- Liquidity and capital needs relative to debt maturities, investment commitments, subsidiary dividend restrictions and catastrophe-retention levels.
The financial statements received an unqualified audit opinion, and management and the independent auditor reported effective internal control over financial reporting as of December 31, 2017.