Business context and reporting period
W. R. Berkley Corporation is a property-and-casualty insurance holding company operating through Specialty, Regional, Alternative Markets, Reinsurance and International segments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods unless otherwise noted. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2012 | Six months 2012 | Comparison |
|---|---|---|---|
| Net premiums written | $1.191 billion | $2.395 billion | Up 12.6% for Q2 and 11.9% for six months |
| Net premiums earned | $1.147 billion | $2.247 billion | Up 12.8% and 12.4%, respectively |
| Total revenue | $1.416 billion | $2.794 billion | Up 11.4% and 11.5%, respectively |
| Net income to common stockholders | $108.8 million | $244.2 million | Up from $82.2 million and $197.8 million |
| Diluted EPS | $0.76 | $1.70 | Up from $0.56 and $1.34 |
| Net investment income | $161.3 million | $318.9 million | Up 8.2% and 8.0%, respectively |
| Operating cash flow | Not separately stated | $312.4 million | Up from $216.4 million |
Underwriting: The consolidated GAAP combined ratio was 98.2% in Q2 (101.2% in 2011) and 97.4% for the six months (98.9% in 2011); below 100% indicates underwriting profit. The six-month loss ratio was 62.8%, versus 64.1%, and the expense ratio was 34.6%, versus 34.8%. Six-month catastrophe losses were $31 million, down from $88 million. Favorable prior-year reserve development was $54.8 million including premium offsets, compared with $86.4 million.
Balance sheet and liquidity: At June 30, total assets were $19.46 billion, total equity $4.22 billion, and cash and cash equivalents $1.01 billion. Gross loss reserves were $9.49 billion, including $8.28 billion net of reinsurance. Senior notes and other debt were $1.87 billion; junior subordinated debentures were $243 million. Total debt carrying value was $2.11 billion, with a face amount of $2.13 billion. Debt represented 33% of total capitalization, up from 30% at year-end 2011. The company reported $312 million of operating cash flow and $515 million of net cash used in investing activities for the six months. It said approximately 84% of its investment portfolio was in cash, cash equivalents and marketable fixed-maturity securities.
Material changes versus the prior comparable period
- Growth was led by International and Specialty: six-month gross premiums written rose 27.6% and 11.6%, respectively. Overall gross premiums written increased 12.6% to $2.83 billion. Management attributed growth principally to geographic and product expansion. Average renewal rates increased approximately 6.2% for the six-month period, while renewal retention declined to 77.3% from 80.3%.
- Six-month net income increased by about $46 million, principally reflecting higher underwriting income, investment income and realized investment gains. Realized investment gains were $67.8 million, versus $52.6 million.
- Investment income benefited from investment funds, while the annualized yield on fixed maturities declined to 3.8% from 4.0%, reflecting lower reinvestment yields. Investment-fund results are generally reported on a one-quarter lag.
- Senior debt increased following issuance of $350 million of 4.625% senior notes in March 2012. Six-month interest expense rose to $61.2 million from $56.2 million.
- Adoption of updated insurance acquisition-cost guidance, applied retrospectively, reduced stockholders’ equity by $55 million as of January 1, 2012 and restated 2011 comparisons. Other accounting guidance adopted in 2012 changed presentation but did not affect results, financial position or liquidity.
Outlook, commentary, risks and unusual items
- The filing gives no specific earnings or premium guidance. Management said market rate increases accelerated in the first half of 2012, but loss costs were also rising and pricing in some lines remained below levels needed to meet return objectives. Fixed-income reinvestment yields remained low.
- After quarter-end, the company estimated its share of second-quarter energy-fund losses at approximately $20 million pretax, or $13 million after tax, to be reported in Q3 2012. This estimate reflects the funds’ reporting lag.
- Management described loss reserves as inherently uncertain, particularly for long-tail business and assumed reinsurance, which depends partly on information from ceding companies. Net reserves included approximately $1.4 billion for assumed reinsurance. A 1% change in frequency and 1% change in severity for 2011 claims was estimated to affect loss estimates by about $56 million; larger combinations could have greater impacts.
- Investment risks include interest-rate and credit movements, unrealized losses, mortgage-backed securities, loans, investment funds, merger arbitrage, real estate and foreign-currency exposures. Management considered reported investment-security losses primarily temporary and did not identify them as other-than-temporary impairments, but valuations and credit performance remain relevant risks.
- Ordinary-course insurance and reinsurance litigation and arbitration are reflected in reserves. The company did not expect these matters to materially adversely affect financial condition or results, while acknowledging adverse outcomes are possible. It reported no material change in previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether premium growth and renewal-rate increases persist, particularly given lower renewal retention and management’s warning that some pricing remains inadequate relative to loss costs.
- Whether the estimated $20 million pretax energy-fund loss is confirmed in Q3 results, and how investment-fund income and returns develop.
- Whether favorable reserve development continues; six-month favorable development was lower than in 2011, and long-tail reserve estimates remain sensitive to claims trends and reporting delays.
- How investment yields, credit quality and portfolio valuations respond to market changes, and whether the $13 million loan valuation allowance or other credit exposures change materially.
- How the increased debt burden, debt maturities and insurance-subsidiary dividend limits affect holding-company liquidity and capital flexibility.