BERKLEY W R CORP quarterly report, Q2 FY2016

Business context and reporting period

W. R. Berkley Corporation is a commercial property-and-casualty insurance holding company operating through Insurance and Reinsurance segments. This Form 10-Q covers the quarter and six months ended June 30, 2016; comparative results are for 2015. The company combined its previously separate domestic and international insurance reporting units into one Insurance segment, revising prior-period segment disclosures.

Financial results and position

Second-quarter consolidated GAAP combined ratio was 94.9% versus 94.2% a year earlier, indicating underwriting profitability overall. Insurance’s ratio was 94.2% versus 94.3%; Reinsurance’s rose to 101.4% from 93.6%, indicating an underwriting loss for that segment. For the first half, the consolidated ratio was 94.2% versus 94.0%; Insurance was 93.6% versus 93.9%, and Reinsurance was 99.7% versus 95.9%.

At June 30, 2016, total assets were $23.03 billion, total investments $16.11 billion, and cash and cash equivalents $948.7 million. Total liabilities were $18.09 billion and total equity $4.94 billion. Loss and loss expense reserves were $10.90 billion gross and $9.44 billion net of reinsurance. Debt carrying value was $2.54 billion, including $1.81 billion of senior notes and other debt and $727.2 million of subordinated debentures. Debt and subordinated debentures represented 34% of total capitalization, up from 32% at year-end 2015.

Material changes versus prior comparable periods

• First-half gross premiums written increased 6.3%; Insurance growth reflected new business, while Reinsurance gross premiums rose 21.5%, primarily from structured property reinsurance. Average renewal rates for insurance and facultative reinsurance increased 0.4% for the first half; second-quarter rates decreased 0.1%.
• First-half net income declined 5%, principally because after-tax investment gains (including impairment losses) fell $21 million and after-tax insurance service income declined $2 million. Higher foreign-currency gains and investment income partly offset the decrease. Second-quarter net income declined 11%, mainly on lower investment gains, underwriting income, and service-fee income.
• First-half net realized investment gains were $31.8 million versus $46.6 million; the company also recorded $18.1 million of other-than-temporary impairments on common stocks, versus none in 2015. Investment income rose modestly, while the reported annualized yield remained 3.2%.
• First-half catastrophe losses were $56 million versus $39 million. Favorable prior-year reserve development was $28.7 million versus $34.1 million, including favorable workers’ compensation development partly offset by adverse commercial auto and medical professional liability development.
• Cash from investing activities was a $429.4 million outflow, compared with a $277.4 million inflow in 2015; financing activities provided $281.5 million, compared with a $518.7 million outflow. The company issued $400 million of subordinated debentures in 2016 and repurchased $37.4 million of shares in the first half.

Outlook, commentary, risks, and unusual items

No quantified earnings or premium guidance is provided. Management says pricing increases have moderated, loss costs have risen, and prices in some lines remain below levels needed for long-term return objectives; it intends to reduce selectively business where returns are inadequate. Low fixed-income yields weigh on investment income, and alternative investments may produce more volatile results. The company targets an investment portfolio duration within one year of liability duration; fixed-maturity portfolio duration, including cash, was 3.0 years at June 30, down from 3.3 years at year-end.

In July 2016, the company agreed to sell Aero Precision Industries and related aviation-services businesses and expects a pre-tax gain of approximately $130 million; closing was expected in the third quarter. In February 2016, it acquired an 85% interest in a promotional-merchandise distributor for $42.3 million; purchase accounting remained preliminary.

Key risks include uncertainty in long-tail insurance reserves and assumed-reinsurance estimates, catastrophe and large-loss exposure, pricing and competition, investment and credit-market volatility, low interest rates, foreign-currency and political risks, reinsurance collectability, and regulatory or legal developments. The filing identifies Brexit-related financial-market, regulatory, and economic uncertainty as a risk. Ordinary-course insurance and reinsurance litigation is not expected to be material to financial condition, though adverse outcomes could materially affect results in a particular period.

Most important facts for investors to verify

• Whether Reinsurance underwriting deterioration persists, particularly the second-quarter 101.4% combined ratio and higher loss ratio.
• Loss-reserve adequacy, including trends in commercial auto and medical professional liability and the sustainability of favorable workers’ compensation development.
• Premium growth quality, renewal retention, and whether rates keep pace with loss-cost inflation.
• Investment portfolio performance, credit exposure, and sensitivity to interest rates, market prices, and alternative-investment volatility.
• Completion and actual gain on the planned aviation-business sale, and final purchase accounting for the 2016 acquisition.
• Debt and capital changes, liquidity needs, and any material adverse developments in litigation, reinsurance recoverables, or Brexit-related risks.