W. R. Berkley Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. W. R. Berkley is a commercial property-casualty insurance holding company operating in domestic insurance, international insurance, and global reinsurance. Amounts below are U.S. dollars.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $7.206 billion | $7.129 billion |
| Net premiums written | $6.190 billion | $5.997 billion |
| Net premiums earned | $6.041 billion | $5.744 billion |
| Income before taxes | $732.0 million | $952.2 million |
| Net income to common stockholders | $503.7 million | $648.9 million |
| Diluted earnings per share | $3.87 | $4.86 |
| Operating cash flow | $881.3 million | $734.8 million |
| Net investment income | $512.6 million | $600.9 million |
| Net investment gains | $92.3 million | $254.9 million |
| Combined ratio | 93.7% | 93.8% |
Premiums earned grew about 5%; net income fell 22%. Management attributed the decline mainly to lower after-tax investment gains (down $106 million) and investment income (down $60 million), partly offset by higher after-tax underwriting income ($14 million). The 2015 combined ratio remained below 100%, indicating underwriting profitability before investment income. The expense ratio rose to 33.2% from 33.0%, while the loss ratio improved to 60.5% from 60.8%.
Net investment income fell 15%, primarily because of lower energy-fund income; the average fixed-maturity yield declined to 3.2% from 3.4%. Net realized gains were $125.6 million, but $33.3 million of other-than-temporary impairments reduced reported net investment gains. The 2014 comparison included an $86 million gain on a London office property sale.
At December 31, 2015, total assets were $21.731 billion, investments were $15.351 billion, cash and cash equivalents were $763.6 million, and common stockholders’ equity was $4.600 billion. Loss reserves were $10.669 billion gross and $9.245 billion net. Senior notes and other debt plus subordinated debentures had a carrying value of approximately $2.185 billion; debt represented 32% of total capitalization, versus 35% in 2014. The company reported that approximately 80% of its investment portfolio was in cash, cash equivalents, and marketable fixed-income securities.
Full-year diluted EPS was $3.87. In fourth-quarter 2015, revenue was $1.811 billion, net income was $109.7 million, and diluted EPS was $0.85; fourth-quarter 2014 net income was $110.7 million and diluted EPS was $0.83.
Changes and segment trends
- Domestic net premiums written rose to $4.813 billion from $4.518 billion; segment pretax income declined to $724.7 million from $796.3 million. Its combined ratio increased to 92.4% from 91.8%.
- International net premiums written declined to $778.6 million from $828.1 million, although gross premiums grew 4% in local-currency terms. Segment pretax income improved to $51.9 million from $29.8 million, and the combined ratio improved to 99.6% from 102.8%.
- Global reinsurance net premiums written declined to $598.1 million from $651.3 million. Segment pretax income fell to $94.9 million from $115.7 million, while the combined ratio was 96.6% versus 96.0%.
- Average renewal premium rates increased 1.2% in 2015, down from 3.4% in 2014; renewal retention decreased to 77% from 79%. Management said loss costs were rising and pricing in some lines remained below levels needed to meet long-term return objectives.
- Prior-year reserve development remained favorable but moderated: $63 million net of premium offsets in 2015, versus $85 million in 2014 and $98 million in 2013. Catastrophe losses fell to $58 million from $87 million.
Outlook, risks, and unusual items
- The filing gives no specific quantitative earnings or revenue guidance for 2016. Management described selective reduction of business where expected returns are inadequate and cited low interest rates, slowing rate increases, rising loss costs, and strong competition as pressures.
- Key risks include reserve-estimation uncertainty, long-tail claims and emerging coverage issues, catastrophe losses, investment-market and interest-rate volatility, currency exposure, reinsurance recoverability, competitive pricing, and regulatory change. Management noted that actual reserve outcomes may differ materially from estimates.
- Prior-year reserves developed favorably by $63 million net of premium offsets; favorable workers’ compensation and other-liability development was partly offset by adverse commercial-auto development, including large long-haul trucking losses. The filing provides a sensitivity illustration: a 1% increase in both claim frequency and severity for 2015 claims would increase the loss estimate by about $73 million.
- TRIPRA coverage was extended through 2020. The company’s estimated 2016 aggregate deductible was approximately $850 million; federal participation for covered losses was scheduled to decline from 84% over time.
- Solvency II became effective in the EU on January 1, 2016. The company had a one-year waiver, subject to conditions, of the group solvency capital requirement; future regulatory capital effects remain uncertain.
- Ordinary-course insurance litigation was not expected by management to materially affect financial condition, though an adverse outcome could materially affect results in an individual reporting period. The company also had commitments of up to $117 million to investment funds and $485 million for real-estate development, outside the contractual-obligations table.
- The company repurchased 4.5 million shares for $224 million in 2015 and declared $0.47 per share in dividends. The 2014 dividend total of $1.43 included a special $1.00 dividend. The 2015 year included distribution of a previously accrued $59.4 million executive retirement benefit.
Important facts for investors to verify
- Whether reserve adequacy and favorable prior-year development persist, particularly for workers’ compensation, long-tail liability, and commercial auto.
- Whether premium rates keep pace with loss-cost inflation as renewal-rate increases slow and retention declines.
- How investment-fund performance, low reinvestment yields, and further impairments affect investment income and earnings; some fund results are reported on a one-quarter lag.
- Liquidity and parent-company debt-service capacity, including the dependence on regulated subsidiary dividends; approximately $684 million could be paid by subsidiaries in 2016 without regulatory approval.
- Progress and costs related to real-estate development, regulatory capital requirements, and Solvency II compliance.