W. R. Berkley Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company is a property-and-casualty insurance holding company with Insurance and Reinsurance & Monoline Excess segments. Unless stated otherwise, amounts below are in U.S. dollars.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenues | $2.424B | $2.040B | $6.877B | $5.786B |
| Net premiums written | $2.325B | $1.879B | $6.587B | $5.465B |
| Net premiums earned | $2.081B | $1.749B | $5.903B | $5.117B |
| Net investment income | $180M | $143M | $507M | $403M |
| Income before taxes | $332M | $206M | $928M | $305M |
| Net income to common stockholders | $261M | $152M | $728M | $219M |
| Diluted EPS | $1.40 | $0.81 | $3.89 | $1.15 |
- Q3 revenue and net income rose about 19% and 72%, respectively; nine-month revenue and net income rose about 19% and 233%.
- Consolidated GAAP combined ratio improved to 90.4% from 93.7% in Q3 and to 90.1% from 96.4% for the nine-month period. A ratio below 100% indicates underwriting profit.
- Q3 segment combined ratios were 89.3% for Insurance (94.1% prior year) and 98.4% for Reinsurance & Monoline Excess (90.3%). For nine months, they were 89.9% and 91.6%, respectively.
- Q3 renewal rates increased 8.8% after adjusting for exposure changes (10.1% excluding workers’ compensation); nine-month rates increased 9.5% (10.8% excluding workers’ compensation). Gross premiums written rose 23% in Q3 and 20% year to date.
Balance sheet, cash flow and capital
- At September 30, total assets were $31.5B, total equity $6.7B, and cash and cash equivalents $2.1B. Net loss reserves were $12.5B and gross loss reserves $14.9B.
- Senior notes and other debt plus subordinated debentures totaled $3.27B carrying value, versus $2.73B at December 31, 2020. Debt represented 33% of total capitalization, compared with 30% at year-end 2020.
- Nine-month operating cash flow was $1.52B, up from $1.14B. Investing activities used $2.04B, largely reflecting purchases of fixed-maturity securities; financing provided $222M. Cash declined $303M from year-end.
- Management reported approximately 78.2% of the investment portfolio in cash, cash equivalents and marketable fixed-maturity securities. Total capitalization was $9.9B. The company repurchased $122M of shares in the first nine months and paid $156M in common dividends.
Material changes and management commentary
- Management attributed the nine-month earnings increase primarily to higher underwriting income from premium growth and improved loss and expense ratios, higher investment gains, and stronger investment-fund income. Investment gains were $78M versus losses of $60M a year earlier; much of the 2021 gain related to real estate asset sales and an investment-fund disposition. These gains may not recur.
- Net investment income increased 26% year to date, largely from investment funds. Income from fixed-maturity securities declined as yields fell. Management said it shortened fixed-maturity portfolio duration to limit mark-to-market sensitivity and maintain flexibility.
- Year-to-date catastrophe losses, net of reinsurance, were $154M versus $297M. The consolidated loss ratio excluding catastrophe losses and prior-year development improved to 58.9% from 60.0%.
- Prior-year development was favorable by $5M net of premium offsets, versus $12M favorable in 2020. Favorable Insurance development, particularly in 2020 accident-year commercial auto and other liability, was partly offset by adverse development in older liability years and Reinsurance & Monoline Excess. Management cited more large losses and social inflation in some casualty lines.
- Investment-fund income was unusually strong year over year, and investment-fund results are generally reported on a one-quarter lag. The company also recorded $12M of debt extinguishment costs related to 2021 redemptions; refinancing and new debt issuance were expected to reduce interest expense going forward.
Outlook, risks and contingencies
- The filing provides no specific earnings, premium-growth or combined-ratio guidance. Management noted that recent rate increases will continue to earn through future quarters, but cautioned that interim results are not necessarily indicative of full-year results.
- COVID-19 effects remain uncertain. At September 30, the company had recognized approximately $256M of COVID-related losses net of reinsurance, including $37M of IBNR; $46M of current accident-year losses were recognized during the first nine months of 2021. Management warned that renewed variants, changing claim frequency, inflation, and possible efforts to expand policy coverage could result in losses exceeding reserves.
- Key exposures include the inherent uncertainty of long-tail loss reserves, social inflation and large casualty claims, catastrophe events and climate change, investment and interest-rate risks, foreign-exchange and political risks, reinsurance recoverability, and cyber and regulatory risks. The filing states there were no material changes to previously disclosed risk factors.
- Ordinary-course insurance and reinsurance disputes, litigation and arbitration are considered in reserves. Management does not expect ultimate liabilities to be material to financial condition, though adverse outcomes could materially affect a particular reporting period.
Important facts for investors to verify
- Whether premium growth and renewal-rate increases persist, and whether they continue to outpace claim-cost inflation.
- Reserve development by accident year and segment, especially older casualty years, excess-of-loss treaties and the effects of social inflation.
- COVID-19 claim emergence and whether reported losses, IBNR and reinsurance recoverables remain adequate.
- The sustainability and volatility of investment-fund returns, real-estate-related gains, and other nonrecurring investment gains.
- Debt growth, refinancing benefits, liquidity and the effect of investment purchases and capital returns on cash balances.