BERKLEY W R CORP quarterly report, Q2 FY2020

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W. R. Berkley Corporation — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.

Business context

W. R. Berkley is a global property-and-casualty insurance holding company operating through Insurance and Reinsurance & Monoline Excess segments, alongside corporate and non-insurance businesses. Insurance operations and investments are its primary revenue and earnings sources.

Financial performance and position

  • Q2 revenue and earnings: Total revenues were $1.936 billion, down 4% from $2.023 billion. Net income to common stockholders was $71.3 million, or $0.38 per diluted share, versus $216.7 million, or $1.12, a year earlier. Lower investment income and underwriting income were the main drivers of the earnings decline.
  • First-half revenue and earnings: Total revenues were $3.747 billion, down 5% from $3.960 billion. Net income to common stockholders was $66.8 million, or $0.35 per diluted share, versus $397.4 million, or $2.06.
  • Premiums: Q2 net premiums earned rose 2% to $1.677 billion, while net premiums written were nearly flat at $1.740 billion. For the first half, net premiums earned increased 4% to $3.368 billion and net premiums written increased 4% to $3.586 billion. Average renewal rates for insurance and facultative reinsurance rose 10.9% in Q2 and 10.0% for the first half, adjusted for exposure changes.
  • Underwriting margins: The consolidated Q2 GAAP combined ratio increased to 98.7% from 93.9%; first-half ratio increased to 97.8% from 94.1%. Insurance’s Q2 ratio was 97.7% (93.8% in 2019), while Reinsurance & Monoline Excess recorded 105.1% (95.2%), indicating an underwriting loss in that segment. First-half ratios were 97.1% for Insurance and 102.9% for Reinsurance & Monoline Excess.
  • Claims and reserves: Q2 losses and loss expenses were $1.135 billion, versus $1.029 billion. First-half losses were $2.242 billion, versus $2.017 billion. First-half catastrophe losses, net of reinsurance, were $225 million, including approximately $143 million of COVID-19-related losses; $106 million of the COVID-19 estimate was IBNR. Net favorable prior-year development was $7 million for the first half, compared with $14 million in 2019.
  • Investments: Q2 net investment income fell 55% to $85.4 million; first-half income fell 25% to $260.2 million. First-half net realized and unrealized investment results were a loss of $81.6 million, compared with a gain of $142.2 million in 2019. Q2 net investment gains were $77.9 million, including a $16.2 million benefit from changes in expected-credit-loss allowances. The company cited investment-fund losses, lower fixed-income yields and holding more cash as factors in weaker investment income.
  • Cash flow and liquidity: First-half operating cash flow was $579.9 million, up from $402.6 million, primarily reflecting a CARES Act tax-payment deferral. Cash and cash equivalents were $2.431 billion at June 30, versus $1.024 billion at year-end 2019. The company reported more than $1.5 billion of cash and liquid investments at the holding company and approximately 79% of its investment portfolio in cash, cash equivalents and marketable fixed-maturity securities.
  • Debt and equity: Senior notes and other debt had a carrying value of $1.725 billion; subordinated debentures were $1.199 billion. Total debt carrying value was $2.925 billion, with $2.973 billion face value. The company issued $300 million of 4.00% senior notes due 2050 in May. Debt represented 34% of total capitalization, compared with 30% at year-end. First-half share repurchases were $298.9 million for 5.6 million shares; common stockholders’ equity was $5.8 billion at quarter-end.

Material changes and unusual items

  • The company attributed the first-half $330 million decline in net income primarily to a $191 million after-tax reduction in investment gains, a $91 million after-tax reduction in underwriting income—primarily from COVID-19 losses—and a $68 million after-tax reduction in net investment income.
  • COVID-19-related claims, lower claim frequency in some lines, financial-market disruption and reduced aviation-related business affected results. The company recorded approximately $143 million of COVID-19 claims losses net of reinsurance and approximately $21 million of reinstatement premiums for the first half.
  • Q2 investment-fund income included losses associated with first-quarter market disruption because investment-fund results are generally reported on a one-quarter lag. The company also recorded expected-credit-loss allowances under newly adopted accounting guidance, ASU 2016-13, effective January 1, 2020.
  • Operating cash flow benefited from the deferral of tax payments until July 15, 2020. The company reported no income taxes paid in the first half of 2020, compared with $82.8 million paid in the first half of 2019.

Outlook, risks and contingencies

The filing provides no specific earnings or revenue guidance. Management said the pandemic’s scope, duration and financial effects remain highly uncertain and that first-half results may not indicate the remainder of 2020 or beyond. The company said its financial position and liquidity improved during Q2, while warning that further pandemic effects could materially affect results, financial position and liquidity.

  • COVID-19 claim estimates may change materially; claims could exceed reserves, including from event cancellation, workers’ compensation, business interruption and other coverages. The company noted legal and regulatory efforts to expand coverage beyond policy terms and exclusions.
  • Reinsurers may dispute or delay COVID-19-related recoveries; reduced availability or renewal of reinsurance could increase net exposure.
  • Economic disruption could reduce insurance demand and premiums, raise credit risk from policyholders and intermediaries, and drive additional investment losses or lower future investment income.
  • Other disclosed risks include reserve-estimation uncertainty, catastrophe losses, market and interest-rate risk, foreign currency exposure, and operational and cybersecurity risks associated with remote work. Ordinary-course litigation is not expected to materially affect financial condition, although adverse outcomes could materially affect a particular period.

Important facts for investors to verify

  • How COVID-19 claims and potential coverage expansion evolve, and whether the $143 million first-half net loss estimate and related IBNR prove adequate.
  • Whether premium-rate increases translate into earned premium growth and sustain underwriting profitability, particularly in Reinsurance & Monoline Excess, whose Q2 combined ratio exceeded 100%.
  • Whether investment-fund returns, fixed-income yields and credit-loss allowances recover or create further earnings volatility.
  • How much first-half operating cash flow reflects the temporary tax-payment deferral, and whether liquidity remains robust as claims and other obligations are paid.
  • The effect of share repurchases and new debt issuance on capital, leverage and per-share results.