W. R. Berkley Corporation — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. W. R. Berkley is a commercial property-and-casualty insurance holding company with Specialty, Regional, Alternative Markets, Reinsurance and International segments. Financial statements received an unqualified audit opinion; the auditor also reported effective internal controls over financial reporting.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $5.156 billion | $4.724 billion |
| Net premiums written | $4.357 billion | $3.851 billion |
| Net premiums earned | $4.161 billion | $3.836 billion |
| Net investment income | $526 million | $531 million |
| Net investment gains | $125 million | $57 million |
| Income before taxes | $518 million | $603 million |
| Net income to common stockholders | $395 million | $449 million |
| Diluted EPS | $2.71 | $2.90 |
| Operating cash flow | $670 million | $451 million |
- Underwriting: Consolidated GAAP combined ratio was 98.3%, compared with 94.5% in 2010; below 100% indicates underwriting profit before investment income. Loss ratio increased to 63.9% from 60.2%. Specialty was 91.9%; Regional 103.9%; Alternative Markets 99.0%; Reinsurance 102.0%; International 100.5%.
- Balance sheet at year-end: Total assets were $18.488 billion; investments $13.440 billion; cash and cash equivalents $912 million; gross loss reserves $9.337 billion; total liabilities $14.472 billion; common stockholders’ equity $4.008 billion.
- Debt and liquidity: Senior notes and other debt carried at $1.501 billion and junior subordinated debentures at $243 million. Total capitalization was $5.8 billion, with debt representing 30%. Management reported about 85% of the investment portfolio in cash, cash equivalents and marketable fixed-income securities. Insurance-subsidiary dividends available without regulatory approval in 2012 were approximately $417 million.
- Shareholder returns: 2011 declared dividends were $0.31 per share. The company repurchased 5.2 million shares for an aggregate $157 million.
Material changes versus 2010
- Revenue rose 9%, net premiums written rose 13%, and net income fell 12%. Management attributed the earnings decline mainly to weaker underwriting, partly offset by higher investment gains.
- Gross premiums written increased 15% to $5.077 billion, led by Specialty and International growth; International gross premiums grew 38%. Renewal retention rose to approximately 80% from 77%, and average renewal pricing increased about 2.3%.
- Catastrophe losses, net of reinsurance, increased to $153 million from $81 million, including U.S. wind and hail storms, the Japan earthquake and Thailand floods. Favorable prior-year reserve development declined to $182 million from $234 million.
- Net investment income slipped 1% as lower arbitrage income offset other results; net realized investment gains increased. Operating cash flow improved, while cash and cash equivalents rose to $912 million from $643 million.
- Regional and Reinsurance segment underwriting moved to losses on a combined-ratio basis. Regional pre-tax income declined to $32 million from $117 million; Reinsurance pre-tax income declined to $83 million from $130 million.
Fourth quarter: Revenue was $1.371 billion and net income was $117.9 million, or diluted EPS of $0.82, versus revenue of $1.231 billion, net income of $126.9 million and diluted EPS of $0.85 in Q4 2010.
Outlook, commentary, risks and unusual items
- Management described signs of a hardening insurance market and said 2011 pricing was generally stable or modestly improved. It cautioned that loss costs were also rising and market prices in some lines remained below its return objectives. No specific earnings or revenue guidance for 2012 is provided in the supplied filing text.
- Key exposures include reserve-estimation uncertainty and long-tail claims, catastrophe losses, competitive pricing, investment-market and interest-rate risk, reinsurer collectability, credit risk, foreign currency and political risk, regulation, and the availability of capital and reinsurance. The company retains significant risk relative to some competitors.
- Net reserves were $8.172 billion, including $892 million of aggregate net discount. Favorable prior-year reserve development supported 2011 results; management states reserves are estimates and may prove inadequate. Asbestos and environmental net reserves were $34 million and were not considered material to operations, though estimation uncertainty is higher.
- Reinsurance recoverables were $1.216 billion, including amounts associated with state funds and pools; some balances are secured. Management does not believe ordinary-course litigation and arbitration will materially affect results, but adverse outcomes remain possible.
- In 2011 the company acquired a London office-building business for $251 million and an inactive insurer for $23 million. It also committed up to $328 million to investment funds. Management estimated adoption of new deferred-acquisition-cost accounting guidance would reduce common equity by $50–$60 million as of January 1, 2012.
- TRIA protection was scheduled through December 31, 2014; the company estimated its 2012 deductible at approximately $542 million. Other regulatory matters include Dodd-Frank oversight and anticipated EU Solvency II implementation.
Important facts for investors to verify
- Whether the 2011 deterioration in combined ratio—especially Regional and Reinsurance—continues, and how much future earnings rely on favorable reserve development.
- Reserve adequacy, loss-cost inflation and the sensitivity of estimates to claim frequency and severity; review the reserve-development triangles and assumptions.
- Exposure and valuation risk in the municipal-bond portfolio, mortgage-backed securities, real estate, loans and other non-fixed-income investments.
- Liquidity at the parent level, access to regulated-subsidiary dividends, and debt maturities, including the $201 million due in 2013.
- Whether premium growth and improved renewal pricing translate into underwriting profitability, given rising catastrophe losses and continued competitive pressure.