W. R. Berkley Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company is a commercial property and casualty insurer operating through Insurance and Reinsurance & Monoline Excess segments, alongside non-insurance businesses. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Key financial results
| Metric | Q1 2020 | Q1 2019 / prior period |
|---|---|---|
| Total revenues | $1,810.6 | $1,937.0 |
| Net premiums written | $1,845.8 | $1,709.6 |
| Net premiums earned | $1,691.4 | $1,592.9 |
| Net investment income | $174.8 | $158.3 |
| Net investment losses | $(177.2) | $68.7 gains |
| Loss before income taxes | $(6.5) | $229.4 income |
| Net income (loss) to common stockholders | $(4.4); $(0.02) per diluted share | $180.7; $0.94 per diluted share |
| Operating cash flow | $152.6 | $78.3 |
- Consolidated gross premiums written increased 9%; net premiums written rose 8% and earned premiums rose 6%. Renewal premium rates for insurance and facultative reinsurance increased 9.4% after adjustment for exposure changes, or 11.9% excluding workers’ compensation.
- The consolidated GAAP combined ratio was 96.9%, versus 94.3% a year earlier. The Insurance segment ratio was 96.4% versus 94.0%; Reinsurance & Monoline Excess was 100.6% versus 96.8%. A ratio below 100% indicates underwriting profit.
- Q1 catastrophe losses, net of reinsurance and reinstatement premiums, were $88 million, including a preliminary $67 million COVID-19 reserve. Excluding catastrophe losses and prior-year reserve development, the consolidated loss ratio was 60.5%, compared with 61.6%.
- Prior-year reserve development was favorable by $4.0 million, versus $6.7 million favorable in Q1 2019. Favorable workers’ compensation development was partly offset by adverse professional liability and reinsurance development.
Balance sheet, liquidity and capital
- At March 31, 2020, total assets were $26.09 billion, down from $26.63 billion at December 31, 2019. Total equity was $5.54 billion, down from $6.12 billion; common stockholders’ equity was $5.49 billion.
- Cash and cash equivalents were $965 million, compared with $1.02 billion at year-end. Management reported more than $1.3 billion of cash and liquid investments at the holding company and said approximately 77% of the investment portfolio was in cash, cash equivalents and marketable fixed-maturity securities.
- Senior notes and other debt were $1.43 billion and subordinated debentures were $1.20 billion; total debt carrying value was $2.63 billion, with a $2.68 billion face amount. Debt represented 32% of total capitalization, versus 30% at year-end.
- Net loss reserves were $10.79 billion; gross loss reserves were $12.73 billion. During the quarter the company repurchased 3.65 million common shares for $203 million and paid $20.1 million in common dividends.
Material changes and unusual items
- Investment-market disruption drove $143.3 million of net realized and unrealized investment losses, including $154.5 million of unrealized equity-security losses, and a $33.9 million increase in expected-credit-loss allowances. Net investment losses totaled $177.2 million, compared with $68.7 million of gains in Q1 2019.
- Accumulated other comprehensive loss widened to $589.5 million from $257.3 million at year-end, including a $259.0 million after-tax change in unrealized investment losses and $98.2 million of currency translation losses. Comprehensive loss to common stockholders was $361.6 million.
- The company adopted the current expected credit loss standard on January 1, 2020. The adoption included a $5.7 million after-tax reduction to common stockholders’ equity for operating assets and a $24.8 million after-tax adjustment to retained earnings for certain investments, offset by a corresponding increase in AOCI.
- Net investment income rose 10%, mainly from higher reported investment-fund income. Investment-fund results are generally reported one quarter in arrears, so Q1 2020 income did not reflect the recent COVID-19 market disruption; management expected a meaningful decline in certain sector-specific fund values, including energy and transportation, in Q2.
Outlook, management commentary and risks
- Management said COVID-19 had adversely affected results, financial position and liquidity, but its full impact and duration were not yet knowable. The preliminary $67 million net reserve comprised approximately $47 million in Insurance and $20 million in Reinsurance & Monoline Excess; management cautioned that estimates could change materially.
- Potential exposures include COVID-19 claims, workers’ compensation presumptions for essential workers, attempts to expand business-interruption coverage, reduced insurance demand and premiums, disputes or delays over reinsurance recoveries, policyholder and reinsurer credit risk, further investment losses, and operational and cybersecurity disruption. Management noted that legal or regulatory actions could extend coverage beyond policy terms.
- Management described its fixed-maturity portfolio as shortened in duration to limit mark-to-market exposure and preserve flexibility. Average duration, including cash and cash equivalents, was 2.7 years at quarter-end. No specific earnings or full-year financial guidance was provided in the supplied filing text.
- Other key risks include uncertainty in long-tail claims and reserve estimates, catastrophe exposure, interest-rate and credit-market volatility, foreign-currency risk, competition, reinsurance availability, and the ability of reinsurers to pay recoverables. The filing states that ordinary-course disputes and litigation are not expected to materially affect financial condition, though adverse outcomes could be material to a particular period.
Important facts for investors to verify
- How COVID-19 claims, coverage disputes and potential regulatory changes affect the $67 million preliminary reserve and subsequent reserve development.
- Whether investment losses and expected-credit-loss allowances persist, and how lagged investment-fund valuations reflect Q1 market conditions.
- Whether premium growth and rate increases continue, and how lower economic activity could affect renewal rates, exposure, premium volume and expense ratios.
- Whether the deterioration in Reinsurance & Monoline Excess underwriting and adverse reserve development continues.
- How liquid resources, debt maturities and capital levels evolve amid claims payments, market volatility and share repurchases.