W. R. Berkley Corporation — Q2 2021 Form 10-Q
Business context and reporting period. W. R. Berkley is a global property and casualty insurance holding company operating through Insurance and Reinsurance & Monoline Excess segments, alongside non-insurance businesses. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are with the same periods in 2020. Amounts below are in U.S. dollars unless stated otherwise.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenues | $2,296 million | $1,936 million | $4,453 million | $3,747 million |
| Net premiums written | $2,212 million | $1,740 million | $4,262 million | $3,586 million |
| Net premiums earned | $1,972 million | $1,677 million | $3,822 million | $3,368 million |
| Net investment income | $168 million | $85 million | $327 million | $260 million |
| Net investment gains | $24 million | $78 million | $59 million | $(99) million |
| Income before taxes | $300 million | $105 million | $596 million | $99 million |
| Net income to common stockholders | $237 million | $71 million | $467 million | $67 million |
| Diluted earnings per share | $1.27 | $0.38 | $2.50 | $0.35 |
- Growth and profitability: Q2 revenue rose about 19% and common net income about 233% year over year; six-month revenue rose about 19% and net income about 598%. Net income as a share of revenue was approximately 10.3% in Q2 2021 versus 3.7% in Q2 2020, and 10.5% for the first half versus 1.8%.
- Underwriting: The consolidated combined ratio was 89.7% in Q2 versus 98.7% a year earlier, and 89.9% for the first half versus 97.8%. Below 100% indicates an underwriting profit, excluding investment income. First-half segment combined ratios were 90.2% for Insurance and 88.0% for Reinsurance & Monoline Excess.
- Cash flow: First-half operating cash flow was $696 million, compared with $580 million in 2020. Investing activities used $1,402 million and financing provided $124 million. Cash and cash equivalents ended the period at $1,790 million, down from $2,372 million at year-end 2020.
- Balance sheet and debt: Total assets were $30.3 billion and total equity $6.6 billion at June 30. Senior notes and other debt plus subordinated debentures had a carrying value of $2.9 billion; total capitalization was $9.5 billion, with debt representing 31%. The company reported $22.3 billion of investments, including cash and cash equivalents as defined in its investment portfolio discussion.
- Dividends and repurchases: The company declared a Q2 regular dividend of $0.13 per share and a special dividend of $0.50 per share. It repurchased 465,063 shares for $30 million during the first half, with no repurchases in Q2.
Material changes versus the prior comparable period
- Premium growth and improved underwriting were major earnings drivers. First-half gross premiums written increased 18%; average renewal rates for insurance and facultative reinsurance rose 9.8% after adjusting for exposure changes (11.2% excluding workers’ compensation).
- Lower catastrophe losses supported the loss ratio: first-half catastrophe losses, net of reinsurance, were $80 million versus $225 million. Management also cited premium-rate and exposure growth, and expenses growing more slowly than earned premiums.
- First-half investment income increased 26%, mainly from investment funds, while income from fixed maturities declined by $42 million, primarily reflecting lower yields. Net investment gains improved from a loss in 2020, partly due to real estate sales and an investment fund disposition. In Q2 alone, gains were lower than the prior-year quarter, which benefited from equity market appreciation.
- First-half net favorable prior-year development was $4 million versus $7 million in 2020. Insurance had $12 million favorable development, partly offset by $8 million adverse development in Reinsurance & Monoline Excess. Management cited large losses in certain liability and assumed reinsurance lines.
- The company issued $300 million of 4.125% subordinated debentures and $400 million of 3.55% senior notes in 2021, and redeemed $400 million of subordinated debentures due 2056. A real estate sale reduced associated debt by $102 million. Debt extinguishment costs were $12 million in the first half.
Outlook, management commentary, risks, and unusual items
- No specific earnings or premium guidance was provided. Management said recent rate increases will continue to earn into revenue over coming quarters and expects 2021 debt transactions to reduce interest expense going forward.
- COVID-19 remains a significant uncertainty for claim frequency, severity, reserves, and reinsurance recoverables. At June 30, the company had recognized approximately $241 million of COVID-19-related losses net of reinsurance, including $164 million reported and $77 million IBNR. First-half current accident-year COVID-19 losses were about $40 million. Management said the benefit of lower claim frequency was beginning to abate as economies and legal systems reopened, and noted risks from variants, inflation, and possible efforts to expand coverage beyond policy terms.
- Management emphasized the judgment involved in long-tail loss reserves and assumed reinsurance estimates. Net loss reserves were $12.2 billion; the filing notes that actual frequency or severity differing from assumptions could materially change ultimate losses. Reinsurance & Monoline Excess reserves have added uncertainty due to long reporting tails and reliance on ceding-company information.
- Other cited risks include catastrophe losses, climate change, interest rates and credit markets, investment volatility, competition and pricing, foreign currency and political risks, cyber risks, and reinsurer collectability. The filing states there were no material changes to previously disclosed risk factors.
- Unusual or potentially nonrecurring contributors included real estate sales and related gains, an investment fund disposition, equity-market valuation changes, and debt redemption costs. Management cautioned that investment gains from asset sales should not be assumed to recur.
- Ordinary-course insurance and reinsurance disputes, litigation, and arbitration are considered in reserves. Management expects ultimate liability not to be material to financial condition, but adverse outcomes could materially affect results in a particular period.
Important facts for investors to verify
- Whether premium growth and renewal rate increases persist, and how much flows through to earned premiums and underwriting profit.
- COVID-19 reserve adequacy, especially the $77 million IBNR component, evolving claim trends, and reinsurance recoveries.
- Loss development in long-tail liability and assumed reinsurance lines, including large-loss trends and the assumptions behind the $12.2 billion net reserve estimate.
- The sustainability and volatility of investment fund returns, investment gains, and the portfolio’s exposure to interest-rate, credit, foreign-currency, and alternative-investment risks.
- Debt maturities and financing needs, and the extent to which redemptions and the property-related debt reduction lower future interest expense.
- Cash-flow and liquidity movements: operating cash flow was positive, but investment purchases drove substantial investing outflows and cash balances declined from year-end.