W. R. Berkley Corporation — 2013 Form 10-K
Business and reporting period. W. R. Berkley is a commercial property-and-casualty insurance holding company operating through Insurance-Domestic, Insurance-International and Reinsurance-Global segments. This annual report covers the fiscal year ended December 31, 2013; the filing also provides unaudited fourth-quarter results. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $6.409 billion | $5.824 billion |
| Net premiums written | $5.500 billion | $4.899 billion |
| Net premiums earned | $5.227 billion | $4.674 billion |
| Net investment income | $544.3 million | $586.8 million |
| Net investment gains | $121.5 million | $210.5 million |
| Income before taxes | $698.9 million | $701.9 million |
| Net income to common stockholders | $499.9 million | $510.6 million |
| Diluted EPS | $3.55 | $3.56 |
| Operating cash flow | $819.8 million | $675.5 million |
- Underwriting: The consolidated combined ratio improved to 95.1% from 97.2% (below 100% indicates underwriting profit). The loss ratio was 61.2% versus 63.1%; the expense ratio was 33.9% versus 34.1%. Segment combined ratios were 94.0% Domestic, 98.4% International and 97.0% Reinsurance-Global.
- Balance sheet and liquidity: At year-end, total assets were $20.552 billion, total investments $14.549 billion, cash and cash equivalents $839.7 million, and common stockholders’ equity $4.336 billion. Gross loss reserves were $10.081 billion, including $8.684 billion net reserves. Management reported about 80% of the investment portfolio in cash, cash equivalents and marketable fixed-income securities.
- Debt: Senior notes and other debt had a carrying value of $1.692 billion; junior subordinated debentures were $339.8 million. Combined carrying value was approximately $2.032 billion. Debt represented 32% of total capitalization, versus 33% in 2012.
- Quarterly context: Fourth-quarter 2013 revenue was $1.697 billion and net income was $130.4 million, compared with $1.609 billion and $165.5 million, respectively, in fourth-quarter 2012. Fourth-quarter diluted EPS was $0.93 versus $1.17.
Material changes versus 2012
- Revenue grew 10%, while net premiums written rose 12% and gross premiums written rose 13%. Management attributed premium growth to rate increases, higher exposures and expansion into markets and products. Average renewal rates increased 6.5% in 2013; approximately 76% of expiring policies renewed, versus 78% in 2012.
- Net income declined about 2%. Lower after-tax investment gains and investment income were largely offset by higher after-tax underwriting income. Net investment income fell 7%, primarily reflecting lower fixed-maturity income; its average annualized yield declined from 4.0% to 3.7% overall, and fixed-maturity yield from 3.7% to 3.5%.
- Favorable prior-year reserve development was $97.9 million, down from $102.6 million. Catastrophe losses, net of recoveries and reinstatement premiums, were $65 million versus $80 million. Excluding catastrophes and prior-year development, the consolidated loss ratio improved 1.8 percentage points.
- Operating cash flow increased to $819.8 million. Cash at year-end decreased to $839.7 million from $905.7 million.
- An aircraft-equipment supplier acquired in January 2013 contributed to higher wholly-owned-investee revenue and expenses. The company issued $350 million of 5.625% subordinated debentures due 2053 and prepaid $250 million of 6.75% debentures due 2045, recording $6.7 million of debt-extinguishment costs.
- Unrealized investment losses reduced other comprehensive income: the change in unrealized investment gains and losses was negative $399.1 million before tax, versus positive $135.3 million in 2012. Total comprehensive income was $229.1 million, versus $621.5 million.
Outlook, commentary, risks and unusual items
- The filing gives no specific earnings, revenue or premium guidance. Management said pricing had generally risen since 2011, but some lines remained below levels needed to meet long-term return objectives; it would selectively reduce business where expected returns were inadequate. Management expected recent rate increases to be earned over subsequent quarters.
- Key exposures include competition and pricing pressure, uncertain claims severity and reserve adequacy, long-tail liabilities and inflation, catastrophe losses, emerging coverage issues, investment-market and interest-rate risk, and credit or collection risk involving reinsurers and counterparties.
- Gross reserves were approximately $10.1 billion. Management cautioned that reserve estimates are inherently uncertain. Favorable development in 2013 included favorable trends in several casualty and workers’ compensation lines, partly offset by adverse commercial-auto and products-liability development.
- The investment portfolio included $11.6 billion of fixed-maturity securities; management reported a 3.3-year average duration. A parallel 100-basis-point rate increase was estimated to reduce the fair value of the modeled fixed-income portfolio by approximately $445 million.
- Amounts due from reinsurers were $1.533 billion, including $468.5 million associated with residual-market pools. The company stated that reinsurance does not discharge its primary obligations to policyholders if a reinsurer fails to pay.
- TRIA was scheduled to expire December 31, 2014; the company said extension was uncertain. Its estimated 2014 TRIA deductible was approximately $698 million.
- Other watch items include $249 million of investment-fund commitments, regulatory limits on subsidiary dividends (approximately $491 million available without approval in 2014), and the risk that actual losses or investment returns differ from estimates. Ordinary-course insurance disputes were not expected to materially affect financial condition, although adverse outcomes could affect a particular period.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether premium growth and renewal pricing continue to exceed loss-cost trends, and whether the combined-ratio improvement persists without favorable reserve development.
- Reserve adequacy and the assumptions behind loss frequency, severity, inflation, payout patterns and reinsurance recoverability.
- The durability of investment income amid low reinvestment yields, and the sensitivity of portfolio value and equity to interest-rate, credit and market movements.
- Debt maturities, holding-company cash needs, subsidiary dividend capacity and the effects of share repurchases on capital.
- Exposure to catastrophe losses and the availability, cost and terms of reinsurance, including developments concerning TRIA’s expiration.