W. R. Berkley Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Berkley is a property-and-casualty insurance holding company operating in domestic insurance, international insurance and global reinsurance. Comparisons below are with FY 2013 unless noted.
Financial performance and position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $7.129 billion | $6.409 billion | +11% |
| Net premiums written | $5.997 billion | $5.500 billion | +9% |
| Net premiums earned | $5.744 billion | $5.227 billion | +10% |
| Net investment income | $600.9 million | $544.3 million | +10% |
| Net investment gains | $254.9 million | $121.5 million | More than doubled |
| Income before income taxes | $952.2 million | $698.9 million | +36% |
| Net income to common stockholders | $648.9 million | $499.9 million | +30% |
| Diluted earnings per share | $4.86 | $3.55 | +37% |
| Cash from operating activities | $734.8 million | $819.8 million | −10% |
Underwriting improved: the consolidated combined ratio was 93.8%, versus 95.1% in 2013; below 100% indicates an underwriting profit before investment income. Segment combined ratios were 91.8% for Insurance-Domestic, 102.8% for Insurance-International and 96.0% for Reinsurance-Global. International underwriting moved from a 2013 profit to a 2014 loss on this measure.
At year-end, total assets were $21.717 billion, total investments $15.592 billion, common stockholders’ equity $4.590 billion and gross loss and loss-expense reserves $10.370 billion. Cash and cash equivalents were $674.4 million, down from $839.7 million. Debt carrying value was approximately $2.456 billion, comprising $2.116 billion of senior notes and other debt and $340.1 million of subordinated debentures. Debt represented 35% of total capitalization, versus 32% in 2013.
About 81% of the investment portfolio was in fixed-maturity securities; the fixed-maturity portfolio’s average duration was 3.2 years. Management described the portfolio as highly liquid, with approximately 81% invested in cash, cash equivalents and marketable fixed-income securities. Insurance subsidiaries could pay up to approximately $631 million in dividends during 2015 without regulatory approval, subject to statutory requirements.
Changes, drivers and notable items
- Gross premiums written increased 8%, reflecting rate increases and higher exposures; average renewal rates rose 3.4% in 2014, down from 6.5% in 2013. Renewal retention improved to approximately 79% from 76%.
- Domestic insurance net premiums written rose 13% and international rose 10%; global reinsurance fell 13%. Management noted that pricing in some lines remained below levels needed to meet long-term return objectives.
- Net income growth was attributed primarily to higher after-tax investment gains, underwriting income and investment income. Realized investment gains included an $86 million gain on the sale of a London office building and a $39 million gain related to an investee’s initial public offering.
- Favorable prior-year reserve development, net of premium offsets, was $84.9 million, compared with $97.9 million in 2013. A 2014 commutation agreement reduced prior-year workers’ compensation reserves by $30 million undiscounted ($12 million discounted).
- Net catastrophe losses were $87 million, versus $65 million in 2013. International insurance recorded $23 million of adverse prior-year reserve development, primarily related to U.K. professional indemnity losses.
- Operating cash flow declined despite higher earnings, primarily due to lower cash flow from reinsurance and other underwriting activities and higher income taxes paid.
- The company issued $350 million of 4.75% senior notes due 2044; proceeds were partly intended to repay $200 million of 5.60% notes due in May 2015. It repurchased 5.82 million shares for $239 million and declared $1.43 per share in dividends, including a $1.00 special dividend.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said competition and pricing remain challenging in certain lines, and that low fixed-income reinvestment yields pressure investment income. It expects greater fluctuations from investment funds and alternative investments.
- Based on information from fund managers, Berkley expected a $22 million pre-tax ($14 million after-tax) loss from energy funds in the first quarter of 2015, partly offset by earnings from other investment funds.
- Reserve adequacy is a key uncertainty: estimates depend on claims development, inflation, litigation and coverage interpretations, and information supplied by cedents. Management reported $10.370 billion in gross reserves and noted that actual ultimate claims may differ materially from estimates.
- Principal exposures include insurance-cycle competition and rate adequacy, natural and man-made catastrophes, investment-market and interest-rate risk, foreign-currency and political risk, reinsurance recoverability, regulatory changes, and technology or data-security failures. Reinsurance recoverables were $1.503 billion at year-end.
- Known asbestos and environmental net reserves were $36 million, unchanged from 2013; management said these claims had not materially affected operations, while emphasizing their estimation uncertainty. Ordinary-course litigation was not expected to materially affect financial condition, although an adverse outcome could affect a particular reporting period.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Whether the 2014 earnings increase is sustainable apart from realized investment gains and favorable reserve development.
- Reserve development by segment and accident year, including the commutation’s effect and the assumptions underlying discounted workers’ compensation reserves.
- Whether international underwriting returns recover after the combined ratio rose above 100%, and whether premium growth continues to exceed loss-cost trends.
- The performance, valuation and liquidity of alternative investments, including the disclosed expected 2015 energy-fund loss.
- Cash generation, upcoming debt maturities, and the availability of regulated-subsidiary dividends to support holding-company obligations and shareholder returns.