W. R. Berkley Corporation — Q1 2015 Form 10-Q
Business context and period: Insurance holding company operating in Insurance-Domestic, Insurance-International and Reinsurance-Global. This unaudited report covers the three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Amounts are in U.S. dollars.
Financial performance and position
- Revenue: Total revenue was $1.745 billion, up 2.2%. Net premiums written rose 3% to $1.575 billion; net premiums earned rose 8% to $1.472 billion.
- Profit: Net income attributable to common stockholders was $118.3 million, down 30%; diluted EPS was $0.89 versus $1.25. Management attributed the decline primarily to lower after-tax investment income and realized investment gains.
- Underwriting and margins: The consolidated GAAP combined ratio was 93.9%, unchanged; loss ratio increased to 61.2% from 60.3%, while expense ratio improved to 32.7% from 33.6%. Segment combined ratios were Domestic 92.8% (92.2%), International 97.0% (99.3%), and Global Reinsurance 98.0% (97.4%).
- Investment income and gains: Net investment income fell 26% to $124.2 million, principally because investment fund income declined to $6.1 million from $53.8 million, including energy-fund losses. Net realized investment gains were $19.0 million versus $52.8 million; the 2014 comparison included a $45 million gain on a commercial real estate fund sale.
- Cash flow: Operating cash flow was $61.0 million, compared with $143.2 million. Investing activities provided $5.5 million versus using $134.0 million; financing activities used $109.4 million, including $91.2 million of share repurchases and $13.7 million of dividends. Cash and equivalents ended the quarter at $614.7 million, down from $674.4 million at year-end.
- Balance sheet and liquidity: Total assets were $21.85 billion and total equity $4.61 billion at March 31. The company reported approximately 81% of its investment portfolio in cash, cash equivalents and marketable fixed-maturity securities, and said available liquidity was adequate for obligations.
- Debt and capital: Debt and subordinated debentures had a carrying value of $2.453 billion and face amount of $2.477 billion. Total capitalization was approximately $7 billion; debt and subordinated debentures represented 35% of capital, up from 32% at year-end. The company reported $274 million of debt maturities in 2015.
- Capital returns: The company repurchased 1.83 million shares for $91.2 million during the quarter. Common stockholders’ equity was approximately $4.6 billion; reported equity per outstanding share was $36.65.
Material changes and management commentary
- Gross premiums written increased 3%; average renewal premium rates rose 3.1%, and policy retention was 79.2% versus 78.6%. Management said overall loss costs were also increasing and certain lines remained priced below levels needed to meet long-term return objectives.
- Domestic gross premiums rose 5%, International rose 2% (14% in local currency), while Global Reinsurance fell 14% amid greater competition.
- Favorable prior-year reserve development was $11.8 million, compared with $24.9 million in Q1 2014. Domestic favorable development was partly offset by adverse commercial-auto development, including higher-than-expected large losses in long-haul trucking.
- Management noted historically low fixed-maturity yields and said alternative investments may continue to cause greater fluctuations in investment income. The merger-arbitrage account increased to $972.6 million from $450.6 million at year-end.
- No specific earnings or revenue guidance is provided in the supplied filing text. The company’s forward-looking statements refer generally to its outlook for 2015 and beyond, subject to significant risks.
Risks, contingencies and unusual items
- Loss reserves require estimates and are inherently uncertain, particularly for long-tail and assumed reinsurance claims. Net loss reserves were $9.06 billion. Management disclosed that a 1% change in both frequency and severity for 2014 claims would affect the estimate by approximately $70.3 million; larger changes could have substantially larger effects.
- Management said unrealized security losses were primarily temporary market or sector-related, and did not consider the securities in loss positions to be other-than-temporarily impaired. This assessment is subject to market and credit risk.
- Risks cited include competition and pricing, catastrophe losses, claims inflation and reserve development, investment and interest-rate risk, alternative-investment volatility, currency and political risks, reinsurance recoverability, regulation, and access to capital. Risk factors were reported as unchanged from the 2014 Form 10-K.
- Ordinary-course insurance and reinsurance disputes, litigation and arbitration are considered in loss reserves. The company expects ultimate liability not to be material to financial condition, but adverse outcomes could materially affect results in a particular period.
- The company expected to repay $200 million of 5.60% senior notes due May 15, 2015, using part of the proceeds from its 2014 issuance of $350 million of 4.75% senior notes due 2044. Real estate development projects are expected to require further company funding and external financing.
Important facts for investors to verify
- Whether premium-rate increases keep pace with loss-cost inflation, especially in long-tail and commercial-auto lines.
- Subsequent reserve development, particularly commercial-auto, long-tail and assumed reinsurance reserves, and the assumptions behind reserve estimates.
- Investment-fund performance and the earnings impact of energy, real estate and merger-arbitrage exposures.
- Liquidity and refinancing needs around 2015 debt maturities, including repayment of the $200 million notes due in May.
- Progress, financing requirements and potential returns from real estate projects under development.