W. R. Berkley Corporation — Q1 2019 Form 10-Q
Business context and reporting period. The company is a global property-and-casualty insurance holding company. This unaudited report covers the three months ended March 31, 2019, compared with the same 2018 period. Its reportable segments are Insurance and Reinsurance & Monoline Excess; the latter includes business reclassified from Insurance. Per-share amounts reflect the 3-for-2 stock split effective April 2, 2019.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $1,937 million | $1,891 million |
| Net premiums written | $1,710 million | $1,665 million |
| Net premiums earned | $1,593 million | $1,567 million |
| Net investment income | $158 million | $175 million |
| Net realized and unrealized investment gains | $69 million | $48 million |
| Income before income taxes | $229 million | $211 million |
| Net income to common stockholders | $181 million | $166 million |
| Diluted earnings per share | $0.94 | $0.87 |
| Operating cash flow | $78 million provided | $20 million used |
- Underwriting and margins: The consolidated GAAP combined ratio improved to 94.3% from 94.6% (below 100% indicates underwriting profit). The loss ratio rose to 62.0% from 61.4%, while the expense ratio improved to 32.3% from 33.2%. Insurance’s combined ratio was 94.0% versus 93.8%; Reinsurance & Monoline Excess improved to 96.8% from 101.3%.
- Premiums: Gross premiums written increased 3%. Average renewal premium rates for insurance and facultative reinsurance rose 4.6% after adjusting for exposure changes, or 6.4% excluding workers’ compensation. Policy renewal rates were 77.3%, versus 78.3% a year earlier.
- Profit change: Common-stockholder net income increased 9%. Management cited higher investment gains, foreign-currency gains and underwriting income, partly offset by lower investment-fund income and higher corporate and interest expenses.
- Balance sheet and liquidity: At March 31, total assets were $25.6 billion, total equity $5.8 billion, and cash and cash equivalents $937 million. Investments totaled $18.0 billion. Management reported approximately 77% of the investment portfolio in cash, cash equivalents and marketable fixed-maturity securities.
- Debt: Senior notes and other debt plus subordinated debentures had a carrying value of $2.78 billion and face amount of $2.82 billion. Debt represented 33% of total capitalization, compared with 34% at year-end 2018. Q1 interest expense was $41 million, up from $37 million.
- Reserves: Gross loss and loss-expense reserves were $12.09 billion; net reserves were $10.37 billion. Prior-year development, net of premium offsets, was favorable by $6.7 million, compared with $12.2 million favorable in Q1 2018.
Changes, outlook and risks
- Net investment income fell 9%, mainly because investment-fund income declined by $29 million, particularly from real estate and energy funds. Fixed-maturity income and arbitrage-account income increased. The company notes that alternative-investment income can fluctuate more than other investment income.
- Investment gains increased to $69 million, including $27 million of net realized gains on sales and a $42 million increase in unrealized equity-security gains. These gains are market-dependent and management does not expect realized gains necessarily to recur.
- Q1 catastrophe losses, net of reinsurance, were $13 million, versus $7 million. Excluding catastrophe losses and prior-year development, the consolidated loss ratio was 61.6%, compared with 61.7%.
- Reserve estimates are inherently uncertain, particularly for long-tail casualty and assumed-reinsurance business. Q1 included favorable workers’ compensation development, partly offset by adverse development from large other-liability and professional-liability claims and older casualty facultative business.
- The company reported no specific earnings or revenue guidance. Its forward-looking statements identify risks including pricing and competition, claims inflation and reserve adequacy, catastrophe losses and climate-related events, investment and credit-market volatility, reinsurance recoverability, foreign-currency and political risks including Brexit, and cyber and regulatory risks.
- Adopting lease accounting in Q1 added a $185 million right-of-use asset and a $215 million lease liability; management said adoption did not affect results or liquidity. The company also disclosed that ordinary-course litigation outcomes could be material to results in an individual reporting period, though it does not expect ultimate liability to be material to financial condition.
Important facts for investors to verify
- Whether premium-rate increases and renewal trends continue, and how they translate into earned premiums and underwriting results.
- Reserve development by segment and line of business, especially long-tail casualty and reinsurance exposures, against the company’s actuarial assumptions.
- Whether investment-fund income recovers or remains volatile, and how investment gains, portfolio valuation and credit exposures evolve.
- Liquidity, debt maturities and the ability of reinsurers to pay amounts due; the filing reports $1.94 billion due from reinsurers at quarter-end.
- How the April 2019 stock split and segment reclassification affect comparisons in subsequent reports.