BERKLEY W R CORP quarterly report, Q1 FY2022

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W. R. Berkley Corporation — Q1 2022 Form 10-Q

Business context and period. The company is a global property-and-casualty insurance holding company with Insurance and Reinsurance & Monoline Excess segments. This unaudited report covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Amounts below are in U.S. dollars.

Financial performance and position

  • Revenue and premiums: Total revenue was $2.915 billion, up 35%. Net premiums written rose 18% to $2.413 billion; net premiums earned increased 22% to $2.249 billion. Gross premiums written grew 15% to $2.860 billion. Average renewal rates for insurance and facultative reinsurance increased 7.2% adjusted for exposure changes, or 8.3% excluding workers’ compensation.
  • Profit: Net income attributable to common stockholders was $590.6 million, versus $229.5 million; diluted EPS was $2.12 versus $0.82. Results included $366.3 million of net investment gains, including a $251 million after-costs-and-currency gain on the London real estate sale. The filing attributes most of the year-over-year earnings increase to investment gains and higher underwriting income.
  • Underwriting and margins: The consolidated GAAP combined ratio improved to 87.8% from 90.1% (below 100% indicates underwriting profit). The loss ratio was 59.5% versus 60.6%, and the expense ratio was 28.3% versus 29.5%. Insurance’s combined ratio improved to 87.6% from 90.6%; Reinsurance & Monoline Excess worsened to 89.4% from 87.4%.
  • Investment income and other income: Net investment income increased 9% to $173.5 million. Investment-fund income rose, while arbitrage-account income declined. Non-insurance business revenue increased to $97.8 million from $87.4 million.
  • Cash flow and liquidity: Operating cash flow was $477.7 million, up from $311.0 million. Cash and cash equivalents were $2.115 billion at quarter-end, versus $1.569 billion at year-end 2021. Investing cash flow was positive $518.6 million, including $906.8 million received in connection with a business disposition; financing cash flow was negative $451.3 million, including $426.5 million of debt repayments. Management reported that 77.9% of investment-related assets were in cash, cash equivalents and marketable fixed maturities.
  • Debt and capital: Debt carrying value was $2.842 billion at March 31, including $1.834 billion of senior notes and other debt and $1.008 billion of subordinated debentures. The company repaid $77 million of senior notes at maturity in January and $350 million in March. Debt represented 29% of total capitalization, down from 33% at year-end 2021. Total equity was $6.888 billion; common stockholders’ equity was $6.865 billion.
  • Balance sheet and comprehensive income: Total assets were $32.251 billion. Accumulated other comprehensive loss widened to $649.2 million from $282.0 million, mainly reflecting after-tax unrealized investment losses of $423.5 million. Gross unrealized losses on fixed maturities were $454.0 million, compared with $124.2 million at year-end; management said losses were primarily market- and sector-related and that substantially all securities in loss positions were investment grade, except for foreign-government securities.

Material changes versus Q1 2021

  • Net income rose by $361 million. Management cited the London property-sale gain, increased underwriting income from premium growth and lower loss and expense ratios, and higher investment income. The sale generated a $317 million pretax gain before transaction expenses and foreign-currency effects, or $251 million after those adjustments.
  • Premium growth reflected higher rates and exposure, as well as a decision to retain more business. Ceded reinsurance premiums were 16% of gross written premiums, versus 17%; about 82% of premiums expiring in 2022 were renewed, versus 81% in 2021.
  • Net investment gains increased to $366.3 million from $34.8 million. Besides the property-sale gain, 2022 included a $93.2 million increase in unrealized equity-security gains.
  • Catastrophe losses, net of reinsurance, declined to $29 million from $36 million. Excluding catastrophe losses and prior-year reserve development, the consolidated loss ratio improved to 58.3% from 58.9%.
  • Cash from operations increased, while cash provided by investing activities included significant disposition proceeds. Debt repayments lowered the debt share of capitalization.

Outlook, commentary, risks and unusual items

  • The filing provides no specific earnings or revenue guidance. Management’s forward-looking statements discuss industry and company outlook for 2022 and beyond, but emphasize substantial uncertainty and do not constitute a forecast of achieved results.
  • Management said recent rate increases would continue to earn through future quarters and that the fixed-maturity portfolio’s short duration was intended to limit mark-to-market exposure and allow flexibility as interest rates change. Investment-fund and other alternative-investment income may be more volatile.
  • COVID-19 losses recognized to date were approximately $290 million net of reinsurance, including $268 million reported and $22 million IBNR. Q1 2022 current-accident-year COVID-19 losses were about $1 million. Management said ultimate impacts remain uncertain, including potential changes in claim frequency, severity, coverage interpretations and reinsurance recoveries.
  • Prior-year reserve development was approximately $1 million favorable net of additional and return premiums. Favorable Insurance-segment development was largely offset by adverse development in Reinsurance & Monoline Excess. The filing notes adverse development in older casualty years driven by more large losses, alongside continued uncertainty in long-tail reserves.
  • Key risks include reserve estimation, social and economic inflation, claims trends, catastrophe and climate-related losses, COVID-19, investment-market and interest-rate volatility, credit and currency risks, reinsurance recoverability, and legal or regulatory changes. The company said there were no material changes to the risk factors disclosed in its 2021 Form 10-K. Ordinary-course litigation is not expected to materially affect financial condition, though adverse outcomes could materially affect a particular reporting period.
  • Unusual items and subsequent events: the company sold its London office building in March; acquired an 80% interest in a residential and commercial textiles business for $51.1 million, subject to final purchase-accounting valuation; and effected a 3-for-2 stock split on March 23. On April 1, it entered a $300 million unsecured revolving credit facility, with a possible increase to $500 million; no borrowings were outstanding as of the report date.

Important facts for investors to verify

  1. How much of Q1 earnings growth is attributable to the non-recurring London property sale and investment-market gains, versus recurring underwriting and investment income.
  2. Whether premium-rate increases and retention levels continue to support profitable growth as claims frequency normalizes and inflation affects loss severity.
  3. How long-tail reserve development evolves, particularly in other liability, professional liability and assumed reinsurance, and whether COVID-19-related claims or coverage disputes increase.
  4. The impact of rising interest rates and market volatility on the investment portfolio, unrealized losses, investment income and capital.
  5. Execution and final valuation of the textiles acquisition, and any future use or covenant constraints associated with the new revolving credit facility.