Business context and reporting period
W. R. Berkley Corporation is a commercial property-and-casualty insurance holding company, with Insurance-Domestic, Insurance-International and Reinsurance-Global segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless otherwise noted. Amounts below are rounded to millions except per-share data and ratios.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net premiums written | $1,571 | $1,525 | $4,690 | $4,541 |
| Net premiums earned | $1,532 | $1,461 | $4,497 | $4,242 |
| Total revenues | $1,861 | $1,841 | $5,395 | $5,345 |
| Income before taxes | $229 | $278 | $576 | $789 |
| Net income to common stockholders | $153 | $189 | $394 | $538 |
| Diluted earnings per share | $1.18 | $1.42 | $3.02 | $4.02 |
Underwriting: Consolidated GAAP combined ratio was 93.7% in Q3 (93.5% prior year) and 94.0% year to date (93.9% prior year), indicating underwriting profit before investment income. The Q3 loss ratio was 60.5% and expense ratio 33.2%; year-to-date ratios were 60.8% and 33.2%, respectively. Year-to-date segment combined ratios were 92.7% Domestic, 99.6% International and 96.7% Reinsurance-Global.
Cash flow and balance sheet: Operating cash flow for the first nine months was $620 million versus $575 million. Investing activities provided $171 million versus using $219 million; financing activities used $548 million versus providing $153 million. Cash and cash equivalents were $880 million at September 30, 2015, up from $674 million at year-end 2014. Total assets were $21.7 billion, total liabilities $17.1 billion and total equity $4.6 billion. Management reported that about 80% of the investment portfolio was in cash, cash equivalents and marketable fixed maturities.
Senior notes and other debt plus subordinated debentures had a carrying value of $2.179 billion and face amount of $2.203 billion. Total capitalization was $6.8 billion; debt and subordinated debentures represented 32%, compared with 35% at year-end 2014. Common stockholders’ equity was $4.6 billion, or $37.18 per outstanding share. The company repurchased 4.5 million shares for $224 million during the nine months.
Material changes versus prior comparable periods
- Net income declined 19% in Q3 and 27% year to date. Management attributed the year-to-date decrease mainly to lower after-tax investment gains (down $87 million) and investment income (down $72 million). Net investment income fell 26% in Q3 and 21% year to date, reflecting weaker investment-fund results and lower fixed-maturity yields.
- Net realized investment gains were $66 million in Q3 and $113 million year to date, versus $72 million and $234 million, respectively. The 2014 year-to-date comparison included an $86 million gain from selling an investment in a commercial real estate fund.
- Net premiums earned increased 5% in Q3 and 6% year to date. Year-to-date gross premiums written rose 2%; Domestic grew 5%, while International and Reinsurance-Global declined 5% and 7%, respectively. International premiums increased 7% in local currency terms.
- Year-to-date catastrophe losses were $46 million, down from $69 million. Favorable prior-year reserve development was $49 million, versus $62 million; excluding catastrophe losses and prior-year development, the consolidated loss ratio rose to 60.9% from 60.6%.
- Other-than-temporary investment impairments were $12.5 million in 2015, with no such impairments in 2014; $9.0 million related to fixed maturities and $3.5 million to common stocks.
Outlook, commentary, risks and contingencies
- Management said insurance pricing remained highly competitive and some lines were priced below levels needed to meet long-term return objectives. Average renewal rates, adjusted for exposure changes, rose 1.5% year to date and 0.8% in Q3; management also noted that loss costs were increasing.
- Low fixed-maturity yields are weighing on investment income. Management expected greater fluctuation in alternative-investment income and, based on energy-fund manager information, expected an approximately $9 million after-tax energy-fund loss in Q4 2015. This is an expectation, not formal earnings guidance.
- Management considers unrealized fixed-maturity losses primarily temporary and market- or sector-related, and said the affected securities were not delinquent or in default. The filing reports $103 million of gross unrealized losses across fixed-maturity and equity securities at September 30; management did not consider these positions other-than-temporarily impaired except for impairments already recognized.
- Reserve adequacy is inherently uncertain, particularly for long-tail claims and assumed reinsurance. Net loss reserves were $9.2 billion. The filing estimates that a 1% change in both frequency and severity for 2014 claims would change the loss estimate by about $70 million; larger sensitivities are also disclosed. Favorable development may not recur, and commercial-auto liability had adverse development related to higher large-loss activity.
- Other stated risks include catastrophe losses, competition and pricing, investment and interest-rate exposure, foreign-currency and political risks, reinsurer collectability, reserve-estimation uncertainty, and regulatory, technology and data-security risks. The company reported no material change from risk factors in its 2014 Form 10-K.
- Ordinary-course insurance and reinsurance disputes, litigation and arbitration are considered in loss reserves. Management expects ultimate liability not to be material to financial condition, while acknowledging adverse outcomes could materially affect a particular period’s results. No material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether investment-fund performance, especially energy and alternative investments, and the expected Q4 energy-fund loss develop as described.
- Whether premium pricing keeps pace with loss-cost inflation, and how the segment-level growth and combined ratios evolve.
- Whether loss reserves remain adequate, including long-tail and assumed reinsurance reserves, and whether favorable prior-year development continues.
- The quality, valuation and liquidity of investment holdings, including unrealized-loss positions and recognized impairments.
- Debt maturities, capital allocation and share repurchases, alongside operating cash generation and liquidity needs.
- Any material developments in litigation, reinsurance recoverables or other disclosed risks in subsequent filings.