W. R. Berkley Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. The company is a commercial property-and-casualty insurer and reinsurer, with additional investment and non-insurance businesses. Amounts below are in U.S. dollars.
Key financial results
- Revenue: Total revenue was $1.870 billion, up 3.5% from $1.807 billion. Net premiums earned rose 2.8% to $1.570 billion; net premiums written fell 1.0% to $1.647 billion.
- Profit: Net income to common stockholders was $123.4 million, up 3.3% from $119.5 million. Diluted EPS was $0.96 versus $0.93. Income before taxes was $184.3 million, and the effective tax rate was 32% versus 31%.
- Investment results: Net investment income increased 14% to $148.9 million. Net realized investment gains were $52.3 million versus $25.5 million; Q1 2017 included $42.7 million of gains on available-for-sale equity securities. There were no other-than-temporary impairments, compared with $18.1 million in Q1 2016.
- Underwriting: The consolidated GAAP combined ratio was 95.7%, versus 93.5% (below 100% indicates underwriting profit). Insurance reported 93.8% versus 93.0%; Reinsurance deteriorated to 112.9% from 97.6%. The consolidated loss ratio increased to 62.4% from 60.4%, while the expense ratio was 33.3% versus 33.1%.
- Cash flow and liquidity: Operating cash flow was $75.5 million, down from $140.8 million, which management attributed mainly to timing of claim payments and premium collections. Cash and equivalents were $608.4 million, down from $795.3 million. The company said approximately 78% of its investment portfolio was in cash, cash equivalents and marketable fixed-maturity securities.
- Balance sheet and debt: Total assets were $23.55 billion and total liabilities $18.33 billion. Loss and loss expense reserves were $11.22 billion, including $9.72 billion net of ceded reserves. Debt carrying value was $2.487 billion (face amount $2.522 billion); debt represented 32% of total capitalization, versus 33% at year-end. Total equity was $5.22 billion.
Material changes and management commentary
- Net income increased principally because after-tax investment gains rose about $29 million and after-tax investment income rose about $12 million. These benefits were partly offset by an approximately $21 million after-tax decline in underwriting income and an $11 million increase in other expenses.
- Gross premiums written declined 1% to $1.936 billion. Insurance gross premiums grew 1%, while Reinsurance gross premiums fell 18%, including declines in both property and casualty. Renewal retention was 75.9%, compared with 77.8%; average renewal premium rates for insurance and facultative reinsurance increased 1.7%, adjusted for exposure changes.
- Prior-year development was net favorable by $2.4 million, versus $12.3 million favorable in Q1 2016. Insurance had $26.2 million favorable development, largely workers’ compensation; Reinsurance had $23.8 million adverse development, mainly reserve strengthening for UK motor bodily-injury claims after the UK Ogden discount rate changed from +2.5% to -0.75%.
- The company acquired an 89.5% interest in a worldwide textile-solutions business for $72.5 million in March. The acquisition valuation was preliminary. Non-insurance business revenue fell to $65.4 million from $101.8 million, primarily following the 2016 sale of Aero Precision Industries.
- Management said insurance pricing increases had slowed, loss costs had risen, and prices in certain lines remained below levels needed to meet long-term return objectives; it intends to reduce business selectively where returns are inadequate. It also noted historically low fixed-maturity returns and greater fluctuation in alternative-investment income.
Outlook, risks and contingencies
The filing provides no specific quantitative earnings or revenue guidance. Forward-looking statements are subject to risks including pricing and competition, claims severity and frequency, reserve-estimation uncertainty, catastrophe losses, investment and interest-rate volatility, reinsurance recoverables, foreign-currency and political risks (including Brexit), and availability of capital. Management said it expects ultimate liability from ordinary-course litigation and arbitration not to be material to financial condition, while acknowledging adverse outcomes could materially affect results in a particular period. No material changes to the previously disclosed risk factors were reported.
Reserve estimates rely on actuarial methods and assumptions, and the filing cautions that actual outcomes may differ. The company disclosed that a 1% change in both frequency and severity for 2016 claims would affect the loss estimate by approximately $392 million; a 10% change in both would have an estimated effect of approximately $804 million. The company also reported $362 million in unfunded investment-fund commitments.
Important facts for investors to verify
- Whether the UK Ogden-rate change leads to further adverse Reinsurance reserve development, and whether favorable workers’ compensation trends continue.
- How underwriting performance develops, particularly Reinsurance’s 112.9% combined ratio, and whether renewal pricing keeps pace with loss costs.
- How much of reported earnings depends on realized investment gains, and the risks associated with the sharp increase in the merger-arbitrage account to $753 million from $300 million.
- Whether operating cash flow recovers and the company can meet claim payments, debt maturities and investment commitments under adverse conditions.
- Final valuation and subsequent performance of the textile-solutions acquisition, and the collectability of reinsurance recoverables and investment-fund exposures.