WRB

Business Context and Reporting Period

Company: W. R. Berkley Corporation (BERKLEY W R CORP)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: A Delaware insurance holding company and one of the largest commercial lines writers in the United States. Operations are conducted through five segments: Specialty, Regional, Alternative Markets, Reinsurance, and International. The company utilizes a decentralized structure to pursue specialty business niches while centralizing capital, investment, and reinsurance management.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 8.0% to $5.4 billion, driven by a 4.7% increase in net premiums written and a significant 45.1% increase in net investment income.
• Profitability: Net income rose 28.4% to $699.5 million. Income before taxes increased 28.3% to $988.6 million.
• Underwriting Performance: The consolidated combined ratio improved to 88.0% from 89.3% in 2005.
  • Specialty Segment: Combined ratio improved to 84.1% (from 87.5%).
  • Alternative Markets: Combined ratio improved significantly to 75.6% (from 79.5%).
  • Reinsurance: Combined ratio improved to 99.8% (from 104.2%), moving from an underwriting loss to near break-even.
  • Regional: Combined ratio worsened slightly to 90.3% (from 86.4%) due to a higher loss ratio (59.7% vs 55.8%).
• Reserve Development: The company increased estimates for claims occurring in prior years by $26.7 million in 2006, a significant decrease from the $186.7 million increase recorded in 2005.
• Investment Portfolio: Average investments at cost grew to $11.1 billion from $9.2 billion. The yield on average investments increased to 5.3% from 4.4%.

Outlook, Risks, and Contingencies

• Forward-Looking Statements: Management notes that future results depend on historical performance and current plans but are subject to risks including the cyclical nature of the industry, catastrophic losses, and investment risks.
• Catastrophe Exposure: Weather-related losses were $39 million in 2006. The company notes that catastrophes are inherently unpredictable and could materially affect results.
• Terrorism Risk (TRIA): The company is subject to the Terrorism Risk Insurance Act. Based on 2006 earned premiums, the deductible for 2007 is approximately $618 million. The federal program is scheduled to terminate on December 31, 2007, unless extended.
• Regulatory Scrutiny: The company is subject to investigations regarding broker compensation and sales practices. An internal review uncovered limited instances of inappropriate solicitation at a single operating unit, which was resolved with the regulator without penalty.
• Reinsurance Credit Risk: As of December 31, 2006, amounts due from reinsurers were $928 million. The company bears credit risk if reinsurers fail to pay.
• Dividend Restrictions: As a holding company, the parent relies on dividends from subsidiaries. In 2007, the maximum dividends payable without regulatory approval are approximately $603 million.

Investor Verification Checklist

• Reserve Adequacy: Verify the stability of loss reserves, noting the $26.7 million adverse development in 2006 compared to $186.7 million in 2005.
• Investment Yield Sustainability: Assess whether the 5.3% yield on average investments is sustainable given interest rate environments and credit quality.
• Reinsurance Counterparty Risk: Review the financial strength of reinsurers covering the $928 million in recoverables.
• TRIA Exposure: Evaluate the impact of the $618 million terrorism deductible and the potential expiration of federal coverage in 2007.
• Segment Mix: Monitor the shift in premium mix, particularly the growth in Reinsurance (18.5% of premiums) and Specialty (37.7%) segments.