W. R. Berkley Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. The company is a commercial property-and-casualty insurance holding company with specialty, regional, alternative markets, reinsurance and international segments. Dollar amounts below are in millions unless otherwise noted.
Financial results and key metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenues | $1,176 | $1,136 | $3,493 | $3,255 |
| Net premiums written | $987 | $969 | $2,932 | $2,902 |
| Net premiums earned | $967 | $943 | $2,846 | $2,874 |
| Net investment income | $138 | $141 | $405 | $411 |
| Net income to common stockholders | $94 | $98 | $322 | $175 |
| Diluted earnings per share | $0.61 | $0.59 | $2.05 | $1.05 |
| Consolidated GAAP combined ratio | 95.4% | 95.0% | 94.7% | 94.7% |
- Quarter: Revenue rose about 4%, while common net income declined about 4%. Management attributed the earnings decline principally to lower investment income and higher interest expense. Diluted EPS increased as weighted-average diluted shares fell following repurchases.
- Nine months: Net income rose substantially, primarily because investment-fund losses fell to $13 million from $179 million and other-than-temporary impairment charges fell to $4 million from $139 million. Net realized investment gains also declined, to $23 million from $59 million. The 2010 result included $180 million of favorable prior-year reserve development, net of premium offsets, versus $134 million in 2009.
- Underwriting: The nine-month combined ratio was unchanged at 94.7%; the quarterly ratio increased to 95.4%. A ratio below 100% indicates underwriting profit. Nine-month international underwriting was loss-making on this measure, with a 103.7% combined ratio; other segments were below 100%.
- Balance sheet at September 30: Total assets were $17.8 billion, total equity $3.8 billion, gross loss and loss-expense reserves $9.1 billion, and unearned premiums $2.0 billion. Cash and cash equivalents were $922 million, up from $515 million at year-end 2009; total investments were $13.1 billion.
- Debt and capital: Senior notes, junior subordinated debentures and other debt had a carrying value of $1.74 billion and face amount of $1.76 billion. Debt was 31% of total capitalization, unchanged from year-end. In September, the company issued $300 million of 5.375% senior notes due 2020 and repaid $150 million of 5.125% notes at maturity.
- Cash flow and capital returns: Nine-month operating cash flow was $391 million versus $165 million. Investing activities provided $221 million, while financing activities used $205 million, including $319 million for repurchases and $31 million of cash dividends. The company repurchased 12.2 million shares during the nine months.
Material changes and management commentary
- Nine-month gross premiums written increased 2% to $3.36 billion; net premiums written increased 1%. Earned premiums declined 1%, reflecting earlier written-premium trends. Renewals were approximately 77% in the first nine months, and average renewal pricing declined 0.3%.
- International gross premiums grew 36% for the nine months, reflecting newer operations, while regional and reinsurance gross premiums declined 7% and 9%, respectively. Recently started operating units’ gross premiums increased 46%.
- The company said competition and the economic downturn pressured pricing and policy terms. Pricing had stabilized in many areas, but management noted that rates in some lines remained below levels needed to achieve return objectives. Low interest rates were also weighing on investment yields.
- Nine-month net investment income declined 2% as lower average yields more than offset growth in average invested assets. The average annualized yield was 4.2%, compared with 4.4%.
- Weather-related losses were $75 million for the nine months, including $8 million associated with the Chile earthquake. Q3 weather losses were $22 million.
- At September 30, fixed-maturity securities had $59.9 million of gross unrealized losses, down from $138.4 million at year-end 2009. Management attributed losses primarily to market and sector factors and stated that it did not consider the securities to be other-than-temporarily impaired. Loans receivable carried a $16.4 million valuation allowance; the nine largest commercial-real-estate loans had $280 million amortized cost and $221 million fair value.
Outlook, risks and contingencies
- The filing provides no specific earnings, premium-growth or combined-ratio guidance. Management cautioned that nine-month results are not necessarily indicative of full-year results and that premium growth may not produce commensurate underwriting or operating profits.
- Key stated risks include insurance pricing and competition, reserve-estimation uncertainty and claims inflation, catastrophic losses, investment and credit risk, real-estate refinancing conditions, reinsurance recoverability, foreign-currency and political exposure, and regulatory or rating changes. The company highlighted low interest rates and uncertainty in estimating inflation and long-tail claims.
- Management reported ordinary-course insurance and reinsurance litigation and arbitration. Costs are included in loss reserves; the company did not expect the matters to materially adversely affect financial condition or results, while acknowledging adverse outcomes remain possible.
- The filing reported no material change in previously disclosed risk factors, no material change in internal control over financial reporting, and effective disclosure controls and procedures.
Important facts for investors to verify
- Whether favorable reserve development—$180 million net of premium offsets for the first nine months—continues, and whether the underlying reserve assumptions remain supportable.
- Exposure to commercial-real-estate loans and investment funds, including loan fair values, valuation allowances and refinancing or impairment developments.
- Pricing adequacy and segment trends, particularly the international segment’s 103.7% nine-month combined ratio and deterioration in alternative-markets’ quarterly loss ratio.
- Investment-income sensitivity to persistently low rates, and credit, valuation and liquidity risks in the investment portfolio.
- Debt maturities, interest costs, cash needs and the effect of continued share repurchases on capital and per-share results.