W. R. Berkley Corporation — Q1 2011 Form 10-Q
Business context and reporting period
W. R. Berkley is a commercial property-and-casualty insurance holding company operating through specialty, regional, alternative markets, reinsurance and international segments. This unaudited filing covers the three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. Management cautions that quarterly results are not necessarily indicative of full-year results.
Financial and operating performance
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Total revenues | $1.234 billion | $1.154 billion, up 7% |
| Net premiums written | $1.083 billion | $984 million, up 10% |
| Net premiums earned | $982 million | $931 million, up 6% |
| Net investment income | $146 million | $144 million, up 2% |
| Net realized investment gains | $29 million | $6 million |
| Income before taxes | $160 million | $161 million |
| Net income to common stockholders | $116 million | $119 million, down 2% |
| Diluted EPS | $0.79 | $0.74 |
| Operating cash flow | $55 million | $57 million |
The consolidated GAAP combined ratio was 96.3%, versus 94.1%; below 100% indicates underwriting profit. The loss ratio increased to 61.8% from 59.1%, while the expense ratio improved to 34.5% from 35.0%. Favorable prior-year reserve development was $51 million, compared with $62 million. Catastrophe losses were $24 million, including $9 million of regional storm losses and an estimated $15 million for Japan and New Zealand earthquakes and Australian floods.
Segment combined ratios were: specialty 87.8% (91.5%); regional 98.5% (92.7%); alternative markets 98.7% (90.1%); reinsurance 101.8% (94.2%); and international 105.6% (111.5%). Specialty remained the strongest underwriting performer; reinsurance and international were above 100%.
Balance sheet, debt and liquidity
- At March 31, 2011, total assets were $17.984 billion, total liabilities $14.185 billion and total equity $3.799 billion, compared with $17.529 billion, $13.819 billion and $3.710 billion, respectively, at year-end 2010.
- Investments totaled $13.242 billion, including $11.252 billion in fixed maturities; cash and cash equivalents were $630 million. Management reported approximately 85% of the investment portfolio in cash, cash equivalents and marketable fixed-maturity securities.
- Gross loss and loss expense reserves were $9.173 billion, including $8.042 billion net of reinsurance; unearned premiums were $2.113 billion.
- Senior notes, junior subordinated debentures and other debt had a carrying value of $1.740 billion and face amount of $1.758 billion. Total capitalization was $5.5 billion; debt represented 31% of capital, versus 32% at year-end.
- Operating cash flow was $55 million; investing activities used $75 million and financing activities provided $13 million. Cash declined by $13 million during the quarter.
Material changes and management commentary
- Gross premiums written rose 13%, chiefly from specialty and international expansion. Renewal retention was 79%, compared with 78% for full-year 2010; the average rate on renewed policies increased 0.7%.
- International gross written premiums increased 41% and specialty increased 21%. Management said pricing was generally stable, but prices in some lines remained below levels needed to meet its return objectives; market competition remained a concern.
- Net income declined mainly because of lower underwriting income, partly offset by higher realized investment gains. Lower diluted share count, following 2010 repurchases, contributed to higher diluted EPS.
- Fixed-maturity investment income fell to $122 million from $125 million, and its annualized yield declined to 4.0% from 4.2%. Management cited historically low interest rates as a pressure on investment returns.
- Prior-year reserve development was favorable by $51 million, mainly from accident years 2005–2009, partly offset by adverse development in earlier years. Alternative markets had unfavorable development, including higher estimated costs for certain long-term disability claims.
- The company acquired an inactive insurer for $23 million cash; it had $21 million of cash and investments and no net loss reserves. About $2 million of the price was allocated to intangible assets.
- Management provided no specific numerical earnings or premium guidance in the supplied filing text. It identified industry cyclicality, pricing and demand, claims and reserve estimation, catastrophe losses, investment risk, reinsurance recoverability, and regulatory and foreign-currency risks as factors that could affect results.
Risks, contingencies and unusual items
Management considered investment-security unrealized losses primarily temporary and reported no Q1 2011 other-than-temporary impairment charges, versus $3 million in Q1 2010. At March 31, fixed maturities had $83 million of gross unrealized losses; management said the securities were not delinquent or in covenant default. Loans receivable were carried at $349 million, net of a $20 million valuation allowance, with estimated fair value of $312 million; the nine largest loans were secured by commercial real estate.
Ordinary-course insurance and reinsurance litigation and arbitration are reflected in reserves. The company did not expect the ultimate outcome to materially adversely affect financial condition or results, while acknowledging adverse outcomes remain possible. Management reported no material change in previously disclosed risk factors and stated disclosure controls were effective, with no material quarter-specific change in internal control over financial reporting.
Key facts for investors to verify
- Whether reserve assumptions and favorable prior-year development remain supportable, especially for long-tail and assumed reinsurance claims.
- How catastrophe estimates, reinsurance recoverables and the reported $1.131 billion of ceded loss reserves develop.
- Whether premium growth and renewal pricing are adequate to offset competitive pressure and segment combined ratios above 100%.
- Credit quality, valuation and exposure concentrations in commercial real-estate loans, investment funds, municipal bonds and other investments.
- Debt maturities, liquidity and the effect of persistently low interest rates on future investment income.
- The subsequent results and integration or other consequences of the $23 million inactive-insurer acquisition.