W. R. Berkley Corporation — Q1 2014 Form 10-Q
Business context and period. W. R. Berkley is a commercial property and casualty insurance holding company with Insurance-Domestic, Insurance-International, and Reinsurance-Global segments. This unaudited report covers the three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2014 | Q1 2013 or prior date |
|---|---|---|
| Total revenue | $1,706.9 | $1,506.8 |
| Net premiums written | $1,525.9 | $1,377.0 |
| Net premiums earned | $1,363.6 | $1,232.1 |
| Net investment income | $168.7 | $135.9 |
| Net investment gains | $52.8 | $20.0 |
| Net income to common stockholders | $169.7 | $116.6 |
| Diluted EPS | $1.25 | $0.83 |
| Operating cash flow | $143.2 | $115.1 |
| Cash and cash equivalents at period end | $643.6 | $839.7 at December 31, 2013 |
| Total investments | $15,072.6 | $14,548.6 at December 31, 2013 |
| Total assets | $20,704.3 | $20,551.8 at December 31, 2013 |
| Total liabilities | $16,293.4 | $16,182.4 at December 31, 2013 |
| Debt and junior subordinated debentures, carrying value | $2,032.6 | $2,032.2 at December 31, 2013 |
| Total equity | $4,410.9 | $4,369.4 at December 31, 2013 |
Underwriting and margins. The consolidated GAAP combined ratio was 93.9%, versus 94.7% a year earlier, indicating underwriting profitability in both periods. The loss ratio was 60.3% versus 60.4%, and the expense ratio was 33.6% versus 34.3%. Segment combined ratios were 92.2% for Domestic (95.5% prior year), 99.3% for International (93.8%), and 97.4% for Global Reinsurance (91.3%).
Material changes and management commentary
- Net income increased 45%, which management attributed mainly to higher after-tax investment gains, investment income, and underwriting income. Diluted weighted-average shares fell to 135.4 million from 141.2 million, partly reflecting share repurchases.
- Gross premiums written rose 11% to $1,805.3 million, reflecting rate increases and greater exposures. Average renewal rates, adjusted for exposure changes, increased 4.6% versus 7.5% in Q1 2013. Global Reinsurance gross written premiums declined 8% amid increased competition.
- Management said market prices in some lines remain below levels needed to achieve long-term return objectives, while loss costs are also increasing. Recent rate increases are expected to flow into earned premiums over coming quarters. Management expects the expense ratio to improve further if insurance prices continue to increase at current levels.
- Net investment income rose 24%, primarily because investment-fund income increased to $53.8 million from $10.9 million. Fixed-maturity income declined; its average annualized yield fell to 3.4% from 3.7% as reinvestment yields remained low. Net realized investment gains were $52.8 million, primarily from selling a commercial real estate investment fund; management cautioned that such gains should not be expected to recur consistently.
- Catastrophe losses, net of reinsurance, were $14 million versus $5 million. Favorable prior-year reserve development was $24.9 million versus $23.5 million, including $28 million favorable in Domestic, partly offset by $3 million unfavorable in International and Reinsurance combined.
- Cash decreased by $196.2 million during the quarter. Investing activities used $134.0 million and financing activities used $203.9 million, including $192.7 million for share repurchases. Operating cash flow was positive at $143.2 million. The company reported approximately 80% of its investment portfolio in cash, cash equivalents, and marketable fixed-maturity securities.
- The company repurchased 4.8 million shares for $192.7 million during the quarter. Common stockholders’ equity was approximately $4.4 billion; reported equity per outstanding share was $34.30. Debt and junior subordinated debentures represented 32% of total capital.
- Real estate investments included $457.0 million in properties under development. The company expects to fund further development with a combination of its own funds and external financing.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management describes a more competitive insurance market, low fixed-income reinvestment yields, and selective reduction of business where pricing is inadequate. Principal risks include claim frequency and severity, reserve estimation—particularly long-tail and assumed reinsurance claims—catastrophes, investment and interest-rate risks, credit and currency exposure, competition, and reinsurer collectability. Management stated that risk factors were not materially changed from the 2013 Form 10-K.
Gross loss and loss-expense reserves were $10,215.0 million, including $8,802.1 million net of ceded reinsurance. The company reported $24.9 million of net favorable prior-year development. Ordinary-course insurance and reinsurance litigation is considered in reserves; management expects ultimate liabilities not to be material to financial condition, but adverse outcomes could materially affect results in a particular period. The filing reports no other material litigation contingency value.
Important facts for investors to verify
- Whether reserve estimates remain adequate as long-tail claims develop, and whether favorable prior-year development continues or reverses.
- Whether renewal pricing keeps pace with loss-cost inflation, particularly in International and Global Reinsurance, where combined ratios worsened year over year.
- How much future earnings depend on investment-fund results and realized gains, given the quarter’s large increase in both.
- Whether lower cash balances, share repurchases, and planned real-estate development remain consistent with claims liquidity and capital needs.
- Credit quality and valuation sensitivity across the investment portfolio, including municipal, mortgage-backed, fund, real-estate, and merger-arbitrage exposures.