W. R. Berkley Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. The company is a commercial property and casualty insurance holding company with Insurance and Reinsurance segments, as well as non-insurance businesses.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenues | $1.848 billion | $1.856 billion | $3.718 billion | $3.663 billion |
| Net income to common stockholders | $109.0 million | $109.0 million | $232.5 million | $228.5 million |
| Diluted EPS | $0.85 | $0.85 | $1.81 | $1.78 |
| Net premiums earned | $1.569 billion | $1.560 billion | $3.139 billion | $3.087 billion |
| Net investment income | $135.3 million | $129.0 million | $284.1 million | $259.2 million |
| Net realized investment gains | $40.5 million | $6.3 million | $92.8 million | $31.8 million |
- Underwriting: The six-month consolidated GAAP combined ratio was 95.4%, versus 94.2% in 2016; a ratio below 100% indicates an underwriting profit. Insurance was 94.0% versus 93.6%, while Reinsurance deteriorated to 108.7% from 99.3%. For Q2, the consolidated ratio was 95.1% versus 94.9%; Insurance was 94.1%, and Reinsurance was 104.4%.
- Premiums and claims: Six-month gross premiums written declined 2% to $3.823 billion and net premiums written declined 3% to $3.211 billion; earned premiums rose 2%. The consolidated six-month loss ratio increased to 61.9% from 61.1%. Catastrophe losses were $47 million versus $56 million, and favorable prior-year reserve development was $24 million versus $29 million.
- Cash flow: Operating cash flow was $224.9 million for the first six months, down from $332.3 million. Investing activities used $224.3 million; financing activities used $18.5 million. Cash and cash equivalents were $788.4 million at June 30, 2017, versus $795.3 million at year-end 2016. Management reported that approximately 79% of the investment portfolio was in cash, cash equivalents and marketable fixed-maturity securities.
- Balance sheet and debt: Total assets were $23.993 billion and total liabilities $18.668 billion. Stockholders’ equity was $5.287 billion; equity per outstanding share was $43.59. Debt, including senior notes and subordinated debentures, had a carrying value of $2.487 billion and face amount of $2.521 billion. Debt represented 32% of total capitalization, compared with 33% at year-end.
- Other metrics: The six-month effective tax rate was 32.2%, compared with 31.2%. Total loss reserves were $11.324 billion gross and $9.823 billion net of reinsurance.
Material changes versus the prior comparable period
- Six-month net income rose 2%, primarily reflecting higher after-tax investment gains and investment income, partly offset by lower underwriting income, foreign-currency losses and non-insurance business income. Q2 net income was essentially unchanged.
- Six-month net investment gains increased substantially, to $92.8 million from $31.8 million. The filing cautions that realized gains depend on market conditions and should not be assumed to recur.
- Non-insurance revenue fell to $135 million from $226 million, mainly following the August 2016 sale of Aero Precision Industries; related expenses also declined.
- Reinsurance gross premiums written fell 23% for the first half, driven by lower property and casualty premiums. Average renewal rates for insurance and facultative reinsurance rose 1.2% on an exposure-adjusted basis, while policy renewal retention was 76.5%, versus 77.2%.
- Operating cash flow declined, primarily because of the timing of claim payments and payments to taxing authorities. Interest expense increased to $73.6 million from $67.0 million.
Outlook, risks and unusual items
- The filing provides no specific quantified earnings or revenue guidance. Management said pricing increases have moderated, loss costs have risen, and prices in certain lines remain below levels needed to meet long-term return objectives; the company is selectively reducing business where it believes returns are inadequate. Fixed-maturity investment returns remain historically low, and alternative investments may cause greater fluctuations in investment income.
- Prior-year reserve development was favorable by $23.6 million net of premium offsets, but combined this with $49.4 million of favorable Insurance development and $25.8 million of adverse Reinsurance development. The adverse Reinsurance development was largely tied to UK motor bodily injury claims following a reduction in the Ogden discount rate from +2.5% to -0.75%.
- Management’s reserve estimates are inherently uncertain, particularly for long-tail and assumed reinsurance claims. The filing illustrates that a 1% change in both frequency and severity for 2016 claims could change the estimated loss amount by approximately $76.9 million; larger changes could have substantially greater effects.
- In July 2017, the company sold a Washington, D.C. office building and expected to recognize an approximately $120 million pre-tax gain in Q3 2017. In March 2017, it acquired an 89.5% interest in a worldwide textile-solutions business for $72.5 million; acquired asset and liability valuations were preliminary.
- Ordinary-course insurance and reinsurance litigation includes possible extra-contractual, punitive-damage or bad-faith claims. Management does not expect ultimate liabilities to be material to financial condition, but adverse outcomes could materially affect results in a particular period.
- Other stated risks include reserve and claims volatility, catastrophic losses, competition and pricing, investment and credit risks, interest rates, foreign currency and political risks (including Brexit), reinsurance recoverables, regulation, and technology or data-security issues. The company reported no material changes to the risk factors in its 2016 Form 10-K.
Important facts for investors to verify
- Whether Reinsurance underwriting performance and the effects of the UK Ogden rate change develop as expected.
- Whether favorable Insurance reserve trends persist, and how reserve assumptions and long-tail claims evolve.
- How much future earnings depend on realized investment gains, market-sensitive alternative investments and non-recurring items.
- The realization and timing of the expected $120 million pre-tax gain on the Washington, D.C. property sale.
- The liquidity and valuation of investments, and the ability of reinsurers to pay recoverables as due.
- The performance and final purchase accounting for the 2017 textile-solutions acquisition, and the effect of the reduced cash flow from operations.