Business context and reporting period
W. R. Berkley Corporation is a global property-casualty insurance holding company reporting Insurance and Reinsurance segments. This Form 10-K covers the fiscal year ended December 31, 2016; it is an annual report, not a standalone fourth-quarter filing. Prior-period segment information was recast after the company combined its domestic and international insurance reporting segments.
Financial and operating performance
- Revenue: Total revenue was $7.65 billion, up 6% from $7.21 billion in 2015. Net premiums written increased 4% to $6.42 billion; net premiums earned rose 4% to $6.29 billion.
- Profit: Net income attributable to common stockholders was $601.9 million, up 20% from $503.7 million. Diluted EPS increased to $4.68 from $3.87. Pretax income was $896.4 million versus $732.0 million.
- Underwriting: The consolidated combined ratio was 94.3%, compared with 93.7% in 2015, indicating an underwriting profit in both years. Insurance’s ratio was 93.6% (93.4% prior); Reinsurance’s worsened to 100.6% from 96.6%. Catastrophe losses, net of reinsurance, increased to $105 million from $58 million. Favorable prior-year reserve development, net of premium offsets, was $59 million versus $63 million.
- Investments: Net investment income rose 10% to $564.2 million; net investment gains were $267.0 million versus $92.3 million. Realized gains included a $134.9 million gain on the sale of Aero Precision Industries. Fixed-maturity investments were $13.2 billion, with a 3.1-year effective duration.
- Cash flow and liquidity: Operating cash flow was $848.4 million, down from $881.3 million. Cash and cash equivalents were $795.3 million; management reported approximately 80% of the investment portfolio in cash, cash equivalents and marketable fixed-maturity securities.
- Debt and capital: Debt carried at $2.49 billion ($2.52 billion face value); total capitalization was $7.5 billion, with debt representing 33%. Common stockholders’ equity was $5.05 billion. The company issued $400 million of subordinated debentures due 2056 during 2016 and repaid $87 million of debt.
- Other balance-sheet measures: Total assets were $23.36 billion; gross loss and loss expense reserves were $11.20 billion, up from $10.67 billion. The net reserve discount for workers’ compensation was $640 million.
Material changes versus 2015
- Net income improved primarily with higher investment gains and investment income; underwriting income declined by $13 million after tax, according to management.
- Gross premiums written increased 4%. Average renewal premium rates, adjusted for exposure changes, increased 0.3% in 2016, down from 1.2% in 2015; management said loss costs were also rising and rates in some lines remained below long-term return targets.
- Reinsurance underwriting weakened: its combined ratio rose four points to 100.6%, reflecting higher losses and expenses.
- Net investment income recovered from 2015, including higher investment-fund income; the fixed-maturity yield remained 3.2%. Total net investment gains also increased substantially.
- The company sold Aero Precision Industries in July 2016 for approximately $253 million, recognizing a $134.9 million gain; non-insurance business revenue declined to $390 million from $421 million.
- Operating cash flow declined, while year-end cash increased to $795 million. The company repurchased 2.40 million shares for $132 million, compared with 4.50 million shares for $224 million in 2015.
Outlook, commentary and risks
- The filing gives no specific earnings, revenue or underwriting guidance for 2017. Management described a competitive market, with slowing rate increases, rising loss costs and certain prices below target returns; it expects to reduce business selectively where returns are inadequate.
- Key risks include reserve-estimation uncertainty, long-tail claims and emerging coverage issues, catastrophe losses, pricing competition, low investment yields, investment-market volatility, reinsurer credit and availability, foreign-currency and political risks including Brexit, and regulatory, cyber-security and technology risks.
- Reserves developed favorably in 2016, chiefly in workers’ compensation, but medical professional liability had adverse development, mainly from a discontinued class of business. Management cautions that reserve estimates are inherently uncertain and may require future adjustment.
- Insurance subsidiaries’ statutory dividend capacity without regulatory approval was approximately $580 million for 2017. Ordinary-course litigation was not expected by the company to materially affect financial condition, although adverse outcomes could affect results in a particular period.
Important facts for investors to verify
- Whether premium pricing and underwriting discipline can keep pace with loss-cost inflation, especially in lines where management says rates are below target returns.
- Whether the Reinsurance segment’s combined ratio returns below 100% and how catastrophe losses develop.
- Whether favorable reserve development persists and whether long-tail, workers’ compensation and discontinued medical professional liability reserves prove adequate.
- How much 2016 earnings depended on realized investment gains, including the Aero Precision sale, versus recurring underwriting and investment income.
- Debt service and holding-company liquidity, including regulated subsidiary dividend limits and the effect of the 2016 subordinated debt issuance.
- For fourth-quarter context, reported revenue was $1.97 billion and net income was $152.8 million; confirm quarterly comparisons and any seasonal or investment-gain effects before extrapolating.