W. R. Berkley Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. The company is a property and casualty insurance holding company with Insurance and Reinsurance & Monoline Excess segments.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenues | $2.157 billion | $1.811 billion |
| Net premiums written | $2.050 billion | $1.846 billion |
| Net premiums earned | $1.850 billion | $1.691 billion |
| Net investment income | $158.6 million | $174.8 million |
| Net investment gains (losses) | $34.8 million | $(177.2) million |
| Net income (loss) to common stockholders | $229.5 million | $(4.4) million |
| Diluted EPS | $1.23 | $(0.02) |
| Operating cash flow | $311.0 million | $152.6 million |
Revenue increased 19%, led by premium growth and the swing in investment gains. Net income improved by $234 million; management attributed the change principally to a $166 million after-tax improvement in investment gains and a $102 million after-tax increase in underwriting income. Net investment income fell 9%, mainly because yields on fixed maturities declined.
The consolidated GAAP combined ratio improved to 90.1% from 96.9% (below 100% indicates underwriting profit). The loss ratio was 60.6% versus 65.5%, and the expense ratio was 29.5% versus 31.4%. Insurance’s combined ratio was 90.6% versus 96.4%; Reinsurance & Monoline Excess improved to 87.4% from 100.6%.
Balance sheet, liquidity and capital
- Total assets were $29.79 billion at March 31, 2021, versus $28.57 billion at year-end 2020. Total equity was $6.43 billion, including $6.41 billion of stockholders’ equity.
- Cash and cash equivalents were $2.015 billion, down from $2.372 billion at year-end. Operating cash flow rose year over year; investing activities used $1.195 billion, while financing activities provided $528 million.
- Loss and loss expense reserves were $14.08 billion gross and $11.84 billion net of reinsurance. Unearned premiums were $4.29 billion.
- Senior notes and other debt plus subordinated debentures had a combined carrying value of $3.31 billion. Debt represented 34% of total capitalization, compared with 30% at year-end. Q1 included issuance of $300 million of 4.125% subordinated debentures and $400 million of 3.55% senior notes, and redemption of $110 million of subordinated debentures.
- Management reported that approximately 79% of the investment portfolio was in cash, cash equivalents and marketable fixed maturity securities. Total capitalization was $9.7 billion.
Material changes and management commentary
- Gross premiums written increased 11% to $2.485 billion. Average renewal rates for insurance and facultative reinsurance rose 11.0% after adjusting for exposure changes, or 12.8% excluding workers’ compensation. Workers’ compensation premiums declined while professional liability, other liability and commercial auto grew.
- Net investment gains were positive in Q1 2021, compared with substantial losses in Q1 2020. The 2021 result included realized gains, including from disposition of an investment fund and real estate assets, partly offset by unrealized equity-security losses. The company also recorded a $16.9 million increase in investment credit-loss allowances, principally related to foreign government securities.
- COVID-19-related losses recognized through March 31 were approximately $204 million net of reinsurance, including $120 million reported and $84 million IBNR. Q1 2021 current-accident-year COVID-19 losses were about $15 million. Management said the ultimate pandemic impact remains uncertain; lower claims frequency in some lines may abate as economic and legal activity resumes, while additional claims and coverage disputes remain possible.
- Prior-year reserve development was slightly favorable overall. Management noted favorable 2020 accident-year experience in some Insurance lines, partially offset by adverse development in 2016–2018 other liability claims, including large directors and officers and excess-and-surplus losses.
- In April 2021, the company announced redemption of $290 million of 5.75% subordinated debentures due 2056, scheduled for June 1. It expected an $8 million debt-extinguishment charge in Q2.
Outlook, risks and contingencies
The filing provides no specific earnings or premium guidance. Management said recent rate increases will continue to earn through future quarters, but cautioned that interim results are not necessarily indicative of full-year results. Key risks include reserve-estimation uncertainty, COVID-19 claims and potential policy-coverage expansion, reinsurance collectability, inflation and claims severity, catastrophe losses, investment-market and interest-rate volatility, credit risk, and foreign currency and regulatory risks. Management said ordinary-course litigation is not expected to materially affect financial condition, although adverse outcomes could materially affect a particular reporting period. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Track renewal pricing, premium growth and whether improved combined ratios persist as claims frequency normalizes.
- Monitor COVID-19 reported and IBNR losses, coverage disputes, reinsurance recoveries and reserve development by segment and accident year.
- Review investment income yields, realized and unrealized gains or losses, and changes in credit-loss allowances, especially for foreign government securities.
- Verify debt issuance and redemptions, the announced June 2021 debenture redemption, and the resulting interest and extinguishment costs.
- Assess cash-flow sustainability and liquidity alongside reserve payments, reinsurance balances and investment-portfolio composition.