W. R. Berkley Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. The company is a commercial property-and-casualty insurance holding company with Insurance and Reinsurance segments. Unless otherwise noted, amounts are in U.S. dollars.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenues | $1.807 billion | $1.745 billion, up 3.6% |
| Net premiums written | $1.664 billion | $1.575 billion, up 5.6% |
| Net premiums earned | $1.527 billion | $1.472 billion, up 3.8% |
| Income before income taxes | $174.7 million | $168.7 million |
| Net income to common stockholders | $119.5 million | $118.3 million, up about 1% |
| Diluted earnings per share | $0.93 | $0.89 |
| Net cash from operating activities | $140.8 million | $61.0 million |
| Cash and cash equivalents | $837.5 million | $763.6 million at year-end 2015 |
| Total assets / total equity | $22.231 billion / $4.788 billion | $21.724 billion / $4.633 billion at year-end 2015 |
| Debt, carrying value | $2.261 billion, including $1.815 billion senior notes and other debt and $446.5 million subordinated debentures | Debt and subordinated debentures increased overall from year-end |
Underwriting, margins, and segment results
- The consolidated GAAP combined ratio improved to 93.5% from 93.9%; a ratio below 100% indicates underwriting profit. The loss ratio was 60.4% (61.2% prior year) and the expense ratio was 33.1% (32.7%).
- Insurance reported a 93.0% combined ratio versus 93.5%; Reinsurance reported 97.8% versus 98.0%. Insurance net premiums earned rose to $1.375 billion from $1.311 billion, while Reinsurance premiums earned fell to $152.0 million from $160.7 million.
- Net income increased modestly, supported by higher after-tax underwriting income and net investment income, partly offset by lower after-tax investment gains and impairments. Diluted weighted-average shares declined to 128.5 million from 132.5 million.
- Net investment income increased 4.7% to $130.1 million. Net realized investment gains were $25.5 million, but the company also recognized $18.1 million of other-than-temporary impairments on common stocks; there were no such impairments in Q1 2015.
Material changes and capital position
- Gross premiums written increased 6% to $1.956 billion, primarily reflecting 7% growth in new business. Renewal retention was 77.8%, down from 79.2%; average renewal rates increased 1% after adjusting for exposure changes.
- Management said loss costs were also rising and pricing in some lines remained below levels needed to achieve long-term return objectives. The company said it selectively reduces business where returns are inadequate.
- Operating cash flow more than doubled year over year, mainly due to timing of tax payments, premium collections, and expense payments. Investing activities used $105.6 million; financing activities provided $27.4 million. Cash increased $73.9 million during the quarter.
- Management described the investment portfolio as highly liquid: approximately 83% was in cash, cash equivalents, and marketable fixed-maturity securities. Fixed-maturity portfolio duration, including cash, was 3.1 years, down from 3.3 years at year-end.
- Total capitalization was about $7 billion; debt and subordinated debentures represented 32% of capital. In March, the company issued $110 million of 5.9% junior subordinated debentures due 2056. It repurchased 734,055 shares for $37.4 million and paid $14.7 million in common dividends.
- In February, the company acquired an 85% interest in a promotional-merchandise distribution business for $42.3 million. The purchase-price allocation was preliminary.
- Beginning in Q1 2016, domestic and international insurance operations were combined into one Insurance reporting segment; prior-period segment information was revised accordingly.
Outlook, risks, and unusual items
- The filing provides no specific numerical earnings, premium-growth, or combined-ratio guidance. Management noted that historically low fixed-income yields weigh on investment income and that alternative investments may produce greater fluctuations in returns.
- Key risks include competitive and cyclical insurance pricing, claims frequency and severity, reserve-estimation uncertainty, catastrophe losses, inflation, interest rates and credit markets, investment performance, foreign currency and political exposure, reinsurance recoverability, and access to capital. Management cautioned that premium growth does not necessarily translate into comparable earnings growth.
- Net loss reserves were $9.372 billion, including $1.435 billion for Reinsurance. The filing emphasizes uncertainty in estimating long-tail and assumed-reinsurance claims; illustrative frequency-and-severity changes for 2015 claims produce loss-estimate impacts ranging from about $73 million to $767 million across the scenarios presented.
- Prior-year reserve development was favorable by $12.3 million, broadly similar to Q1 2015. Workers’ compensation development was favorable, partly offset by adverse commercial-auto development attributed to higher large-loss activity. Catastrophe losses, net of reinsurance, were $16 million versus $14 million.
- Management said ordinary-course insurance and reinsurance disputes are not expected to materially affect financial condition, though adverse outcomes could materially affect a particular period’s results. The filing reported no material change in previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether pricing increases keep pace with claims-cost inflation, particularly in lines management says remain underpriced, and whether renewal retention continues to decline.
- Whether favorable reserve development persists, especially given adverse commercial-auto trends and the uncertainty in long-tail and assumed-reinsurance reserves.
- The performance and valuation of alternative investments, real estate under development, and the investment portfolio; reconcile the $18.1 million common-stock impairment with future investment results.
- Whether operating cash flow remains strong beyond this quarter, given management’s emphasis on timing effects, and whether liquidity and capital remain adequate as claims and development funding needs evolve.
- The final valuation and operating contribution of the acquired business, and the cost and effects of the new subordinated debt and ongoing share repurchases.