W. R. Berkley Corporation — Q3 2020 Form 10-Q
Business context and reporting period. W. R. Berkley is a commercial property-and-casualty insurance holding company operating through Insurance and Reinsurance & Monoline Excess segments, alongside non-insurance businesses. This unaudited report covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net premiums written | $1,879 | $1,750 | $5,465 | $5,203 |
| Net premiums earned | $1,749 | $1,677 | $5,117 | $4,917 |
| Total revenues | $2,040 | $1,966 | $5,786 | $5,926 |
| Net income to common stockholders | $152 | $165 | $219 | $563 |
| Diluted EPS | $0.81 | $0.85 | $1.15 | $2.91 |
| Consolidated GAAP combined ratio | 93.7% | 93.6% | 96.4% | 93.9% |
| Net cash from operating activities | Not separately stated in the supplied filing text | $1,137 | $795 |
Profitability and underwriting. The nine-month loss ratio rose to 65.6% from 62.2%, while the expense ratio improved to 30.8% from 31.7%. The combined ratio remained below 100%, indicating underwriting profit, but deteriorated year over year. In Q3, the combined ratio was nearly flat; Insurance was 94.1% versus 93.0%, while Reinsurance & Monoline Excess improved to 90.3% from 98.3%.
Balance sheet and liquidity. At September 30, total assets were $28.2 billion, total equity $6.0 billion, and cash and cash equivalents $2.57 billion, compared with $1.02 billion at year-end 2019. Investments totaled $18.3 billion. The company reported $1.6 billion of cash and liquid investments at the holding company and said approximately 79% of its investment portfolio was in cash, cash equivalents and marketable fixed maturities. Senior notes and other debt were $1.63 billion and subordinated debentures $1.44 billion, for $3.07 billion total debt carrying value. Debt represented 34% of total capitalization, up from 30% at year-end 2019.
Material changes versus the prior comparable period
- Premium growth: Nine-month gross premiums written increased 6% to $6.63 billion and net premiums written increased 5%. Average renewal rates for insurance and facultative reinsurance rose 10.7% after adjusting for exposure changes, or 13.0% excluding workers’ compensation. Workers’ compensation premiums declined.
- Lower year-to-date earnings: Nine-month net income fell $344 million. Management attributed the decline chiefly to a $161 million after-tax reduction in investment gains, an $88 million after-tax reduction in underwriting income, and an $83 million after-tax decline in net investment income, as well as higher tax expense.
- Investment income and gains: Nine-month net investment income declined 21% to $403 million, reflecting lower fixed-income yields, portfolio repositioning toward cash, and sharply lower investment-fund income. Net investment results shifted to a $60 million loss from $144 million of gains in 2019. Q3 investment gains were $39 million, including a $47 million benefit from a reduction in expected-credit-loss allowances, primarily following security dispositions.
- Cash generation and capital actions: Nine-month operating cash flow increased to $1.14 billion. The company issued senior and subordinated debt during 2020 and repurchased 5.82 million common shares for $312 million through September 30. It paid $0.35 per share in dividends during the nine-month period.
Outlook, management commentary, risks and unusual items
- COVID-19 exposure and uncertainty: The company recorded approximately $143 million of COVID-19-related losses, net of reinsurance, for the first nine months: $121 million in Insurance and $22 million in Reinsurance & Monoline Excess. Of this amount, $69 million was reported and $74 million was IBNR. No additional COVID-19-related losses were recognized in Q3. Management said lower claim frequency in some lines partly offset pandemic claims, but further claims and changes to loss trends remain uncertain.
- Coverage and reinsurance risks: Management warned that legislative, regulatory or judicial efforts to expand coverage—including business interruption claims without physical damage—could result in losses exceeding established reserves. Reinsurers may dispute coverage or delay or decline payments. The company also cited potential premium-demand weakness, market losses, credit risk, and operational and cybersecurity disruption.
- Reserves: Nine-month prior-year development was $12 million favorable, compared with $17 million favorable in 2019. Favorable workers’ compensation development was partly offset by adverse professional-liability and assumed-reinsurance development. Management emphasized the uncertainty inherent in estimates, especially for long-tail and assumed-reinsurance business.
- Investments and rates: The company shortened fixed-maturity portfolio duration to 2.3 years from 2.8 years at year-end 2019 and held a larger cash position, citing flexibility amid low yields and market uncertainty. Investment-fund and alternative-asset returns may fluctuate more significantly.
- Debt after quarter-end: In October 2020, the company redeemed $350 million of 5.625% subordinated debentures due 2053 and expected a pretax $8 million debt-extinguishment charge in Q4. Management expected recent refinancing at lower rates to reduce interest expense.
- Guidance and legal matters: The filing provides no specific earnings or premium guidance. Management’s forward-looking statements are subject to significant risks, and interim results are not necessarily indicative of full-year results. Ordinary-course insurance and reinsurance litigation is considered in reserves; adverse outcomes could materially affect results in a particular period, although management does not expect ultimate liability to be material to financial condition.
Important facts for investors to verify
- How COVID-19 claim emergence, coverage disputes and reinsurance recoveries compare with the $143 million recognized and the $74 million IBNR estimate.
- Whether the deterioration in the nine-month combined ratio and segment loss ratios persists as premium rate increases are earned.
- Whether reserve development remains favorable, particularly given adverse large-loss trends in professional liability and assumed reinsurance.
- How lower investment yields, realized and unrealized market movements, and investment-fund results affect earnings and capital.
- The effect of debt redemption, new borrowing and share repurchases on leverage, liquidity and per-share results.