W. R. Berkley Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. The company is a property-casualty insurance holding company operating in specialty, regional, alternative markets, reinsurance and international insurance. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net premiums written | $1,126 | $987 | $3,267 | $2,932 |
| Net premiums earned | $1,056 | $967 | $3,056 | $2,846 |
| Total revenues | $1,280 | $1,176 | $3,785 | $3,493 |
| Net income to common stockholders | $77 | $94 | $277 | $322 |
| Diluted EPS | $0.53 | $0.61 | $1.89 | $2.05 |
| Net investment income | $114 | $119 | $409 | $392 |
| GAAP combined ratio | 99.1% | 95.4% | 98.8% | 94.7% |
- Q3 net premiums earned rose about 9%, but net income fell about 17%; management attributed the decline principally to lower underwriting income. YTD premiums earned rose about 7%, while net income declined about 14%, also primarily from weaker underwriting results.
- YTD underwriting performance deteriorated: the loss ratio rose to 64.3% from 60.4%, and the expense ratio increased to 34.5% from 34.3%. A combined ratio below 100% indicates an underwriting profit; the company’s overall ratio remained below 100% but worsened year over year.
- YTD gross written premiums increased 14%, supported by specialty and international growth. Renewals in the first nine months were about 80%, versus 77% for full-year 2010; renewal rates increased 1.7%. Management said pricing improved in 2011, but loss costs were also rising and prices in some lines remained below levels needed to meet return objectives.
- Segment results were uneven: YTD combined ratios were 90.5% in specialty, 107.5% in regional, 98.6% in alternative markets, 101.6% in reinsurance and 101.3% in international. Regional reported a Q3 combined ratio of 109.9%.
- YTD catastrophe losses were $139 million, compared with $75 million in 2010. Favorable prior-year reserve development was $142 million, down from $180 million. Excluding catastrophes and prior-year development, the consolidated loss ratio increased to 64.4% from 64.1%.
- Net realized investment gains were $73 million YTD versus $26 million; net investment income rose 4% to $409 million. The Q3 investment-income decrease to $114 million from $119 million reflected lower arbitrage income, partly offset by smaller investment-fund losses.
Financial position, cash flow and capital
- Total assets were $18.33 billion at September 30, 2011, versus $17.53 billion at year-end 2010. Total equity was $3.87 billion; common stockholders’ equity per outstanding share was $28.18.
- Cash and cash equivalents were $866 million, up from $643 million at year-end. Operating cash flow for the nine months was $485 million, versus $391 million in 2010. Investing activities used $83 million and financing activities used $179 million; ending cash increased by $223 million.
- Investments totaled $13.29 billion. Fixed maturities were $11.23 billion, or 84% of the portfolio; management reported an average investment-portfolio duration of 3.5 years. Approximately 84% of investments were in cash, cash equivalents and marketable fixed-maturity securities.
- Loss reserves were $9.26 billion gross and $8.13 billion net of reinsurance, compared with $9.02 billion gross and $8.00 billion net at year-end 2010. Net reserves included an aggregate discount of $902 million.
- Senior notes, junior subordinated debentures and other debt had a carrying value of $1.745 billion and face amount of $1.762 billion. Total capitalization was $5.6 billion; debt represented 31% of capital, versus 32% at year-end.
- The company repurchased 3.99 million shares during Q3 for approximately $119 million, based on reported monthly share counts and average prices. The board increased the repurchase authorization to 10 million shares on November 3, 2011.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management’s industry commentary noted continuing competition, rising loss costs, historically low interest rates and market pricing below target returns in certain lines.
- Management identifies reserve estimation as a critical judgment, particularly for long-tail claims and assumed reinsurance, where outcomes depend on claim development, inflation, legal trends and information from ceding companies. It states that reserve estimates may change as new information emerges.
- YTD favorable reserve development was mainly related to accident years 2007–2009. Alternative markets had unfavorable development, principally from increased medical and pharmaceutical costs on certain excess workers’ compensation claims.
- Investment risks include interest rates, credit quality, equity and fund valuations, real estate, mortgage-backed securities, loans, arbitrage investments and foreign currency. The filing reported $99.9 million of gross unrealized losses on securities in loss positions; management considered these losses primarily temporary and did not identify the securities as other-than-temporarily impaired.
- Ordinary-course litigation and arbitration are reflected in reserves. Management did not expect these matters to materially harm financial condition or results, while acknowledging adverse outcomes remain possible. The filing reported no material change in previously disclosed risk factors.
- Management reported effective disclosure controls and no materially significant change in internal control over financial reporting during the quarter. The January 2011 acquisition of an inactive insurer cost $23 million; approximately $2 million was allocated to intangible assets.
Most important facts for investors to verify
- Whether worsening loss ratios—especially in regional, reinsurance and international—persist, and how catastrophe losses affect future underwriting results.
- Whether reserve assumptions remain adequate, including the degree to which reported favorable development is repeatable and exposure to long-tail and assumed-reinsurance claims.
- Whether premium growth and rate increases are sufficient to keep pace with loss-cost inflation and achieve management’s return objectives.
- Investment portfolio credit, interest-rate and valuation exposure, including unrealized losses, real estate and loans; also verify investment income sustainability as yields remain low.
- Debt maturities, liquidity and capital deployment, including share repurchases, and the collectability of reinsurance recoverables.