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W. R. Berkley Corporation Reports Second Quarter Results

July 27, 2015

Released : 07/27/2015

Net Income of $123 Million, Return on Equity 10.7%

GREENWICH, Conn.--(BUSINESS WIRE)-- W. R. Berkley Corporation (NYSE:WRB) today reported net income for the second quarter of 2015 of $123 million, or $.95 per share.

Summary Financial Data

(Amounts in thousands, except per share data)

 
  Second Quarter   Six Months
2015   2014 2015   2014
 
Gross premiums written $ 1,811,398 $ 1,772,401 $ 3,663,203 $ 3,577,668
Net premiums written 1,543,925 1,489,776 3,119,327 3,015,656
 
Net income 123,035 179,961 241,342 349,634
Net income per diluted share 0.95 1.35 1.84 2.60
 
Operating income (1) 105,124 109,002 211,052 244,385
Operating income per diluted share 0.81 0.82 1.61 1.82
 
Return on equity (2) 10.7 % 16.6 % 10.5 % 16.1 %

(1) Operating income is a non-GAAP financial measure defined by the Company as net income excluding after-tax net investment gains.

(2) Return on equity represents net income expressed on an annualized basis as a percentage of beginning of year stockholders’ equity.

Second quarter highlights included:

  • Repurchased 2.6 million shares of our common stock for $127 million.
  • GAAP combined ratio was 94.2%.
  • Insurance-Domestic net premiums written grew 7%.
  • Return on equity was 10.7% after-tax and 15.5% pre-tax.

Commenting on the Company's performance, William R. Berkley, chairman and chief executive officer, said: "We were pleased with our second quarter results. While the environment is becoming more competitive, we continue to emphasize those parts of our business that offer the best profit potential while simultaneously pursuing new business opportunities.

"In the insurance business, risk is a constant concern. For that reason, we choose cautiously in selecting our reserving assumptions to guard against potential inflation. We also maintain the duration of our investment portfolio shorter than the duration of our liabilities in anticipation of the risk of rising interest rates.

"We believe that the nature and availability of capital within our industry is changing. Our objective is to optimize risk-adjusted return; thus, managing our balance sheet requires a constant examination of our capital structure. As owners, our management team is committed to maximizing long-term shareholder value creation.

"We are well positioned with a strong track record of capitalizing upon opportunities in the market as they arise. We continue to target a return of 15% or better over the long run," Mr. Berkley concluded.

Webcast Conference Call

The Company will hold its quarterly conference call with analysts and investors to discuss its earnings and other information on Monday, July 27, 2015 at 5:00 p.m. eastern time. The conference call will be webcast live on the Company's website at www.wrberkley.com. A replay of the webcast will be available on the Company's website approximately two hours after the end of the conference call.

About W. R. Berkley Corporation

Founded in 1967, W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates in three segments of the property casualty business: Insurance-Domestic, Insurance-International and Reinsurance-Global.

Forward Looking Information

This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2015 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to: the cyclical nature of the property casualty industry; the impact of significant competition, including new alternative entrants to the industry; the long-tail and potentially volatile nature of the insurance and reinsurance business; product demand and pricing; claims development and the process of estimating reserves; investment risks, including those of our portfolio of fixed maturity securities and investments in equity securities, including investments in financial institutions, municipal bonds, mortgage-backed securities, loans receivable, investment funds, including real estate, merger arbitrage, energy related and private equity investments; the effects of emerging claim and coverage issues; the uncertain nature of damage theories and loss amounts; natural and man-made catastrophic losses, including as a result of terrorist activities; general economic and market activities, including inflation, interest rates, and volatility in the credit and capital markets; the impact of the conditions in the financial markets and the global economy, and the potential effect of legislative, regulatory, accounting or other initiatives taken in response to it, on our results and financial condition; foreign currency and political risks relating to our international operations; our ability to attract and retain key personnel and qualified employees; continued availability of capital and financing; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; our retention under the Terrorism Risk Insurance Act of 2002, as amended ("TRIA"); the ability of our reinsurers to pay reinsurance recoverables owed to us; other legislative and regulatory developments, including those related to business practices in the insurance industry; credit risk related to our policyholders, independent agents and brokers; changes in the ratings assigned to us or our insurance company subsidiaries by rating agencies; the availability of dividends from our insurance company subsidiaries; potential difficulties with technology and/or data security; the effectiveness of our controls to ensure compliance with guidelines, policies and legal and regulatory standards; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission. These risks and uncertainties could cause our actual results for the year 2015 and beyond to differ materially from those expressed in any forward-looking statement we make. Any projections of growth in our revenues would not necessarily result in commensurate levels of earnings. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Consolidated Financial Summary

(Amounts in thousands, except per share data)

 
  Second Quarter   Six Months
2015   2014 2015   2014
Revenues:
Net premiums written $ 1,543,925 $ 1,489,776 $ 3,119,327 $ 3,015,656
Change in unearned premiums (50,884 ) (72,131 ) (154,273 ) (234,399 )
Net premiums earned 1,493,041 1,417,645 2,965,054 2,781,257
Investment income 127,583 138,729 251,822 307,440
Insurance service fees 35,942 26,922 72,460 55,625
Net investment gains 27,557 109,168 46,601 161,922
Revenues from wholly-owned investees 105,596 104,285 198,202 197,125
Other income 46   240   305   526  
Total revenues 1,789,765   1,796,989   3,534,444   3,503,895  
Expenses:
Losses and loss expenses 906,235 867,778 1,806,943 1,689,873
Other operating costs and expenses 573,582 534,150 1,124,628 1,049,316
Expenses from wholly-owned investees 98,730 101,296 188,400 193,026
Interest expense 33,031   30,311   67,569     60,641  
Total expenses 1,611,578   1,533,535   3,187,540   2,992,856  
Income before income taxes 178,187 263,454 346,904 511,039
Income tax expense (55,138 ) (83,277 ) (105,411 ) (161,178 )
Net income before noncontrolling interests 123,049 180,177 241,493 349,861
Noncontrolling interests (14 ) (216 ) (151 ) (227 )
Net income to common stockholders $ 123,035   $ 179,961   $ 241,342   $ 349,634  
 
Net income per share:
Basic $ 0.99 $ 1.41 $ 1.93 $ 2.72
Diluted $ 0.95 $ 1.35 $ 1.84 $ 2.60
 
Average shares outstanding:
Basic 123,781 127,668 124,869 128,765
Diluted 129,988 133,304 131,228 134,323

Business Segment Operating Results

(Amounts in thousands, except ratios) (1)

 
  Second Quarter   Six Months
2015   2014 2015   2014
Insurance-Domestic:
Gross premiums written $ 1,421,922 $ 1,351,624 $ 2,831,099 $ 2,694,566
Net premiums written 1,202,588 1,123,843 2,396,219 2,250,224
Premiums earned 1,159,653 1,041,745 2,277,195 2,045,252
Pre-tax income 175,953 176,855 342,819 379,040
Loss ratio 61.6 % 60.9 % 61.6 % 60.4 %
Expense ratio 31.5 % 32.3 % 31.4 % 32.4 %
GAAP combined ratio 93.1 % 93.2 % 93.0 % 92.8 %
 
Insurance-International:
Gross premiums written $ 237,032 $ 265,200 $ 520,258 $ 542,386
Net premiums written 198,490 222,622 429,998 448,443
Premiums earned 191,729 201,868 385,463 387,192
Pre-tax income 7,517 11,510 28,820 29,257
Loss ratio 59.5 % 60.7 % 58.7 % 60.0 %
Expense ratio 41.6 % 38.8 % 40.3 % 39.4 %
GAAP combined ratio 101.1 % 99.5 % 99.0 % 99.4 %
 
Reinsurance-Global:
Gross premiums written $ 152,444 $ 155,577 $ 311,846 $ 340,716
Net premiums written 142,847 143,311 293,110 316,989
Premiums earned 141,659 174,032 302,396 348,813
Pre-tax income 27,122 25,866 47,384 57,940
Loss ratio 54.9 % 63.4 % 58.8 % 64.0 %
Expense ratio 38.7 % 31.9 % 37.1 % 32.4 %
GAAP combined ratio 93.6 % 95.3 % 95.9 % 96.4 %
 
Corporate and Eliminations:
Net realized investment gains $ 27,557 $ 109,168 $ 46,601 $ 161,922
Interest expense (33,031 ) (30,311 ) (67,569 ) (60,641 )
Other revenues and expenses (26,931 ) (29,634 ) (51,151 ) (56,479 )
Pre-tax gain (loss) (32,405 ) 49,223 (72,119 ) 44,802
 
Consolidated:
Gross premiums written $ 1,811,398 $ 1,772,401 $ 3,663,203 $ 3,577,668
Net premiums written 1,543,925 1,489,776 3,119,327 3,015,656
Premiums earned 1,493,041 1,417,645 2,965,054 2,781,257
Pre-tax income 178,187 263,454 346,904 511,039
Loss ratio 60.7 % 61.2 % 60.9 % 60.8 %
Expense ratio 33.5 % 33.2 % 33.1 % 33.4 %
GAAP combined ratio 94.2 % 94.4 % 94.0 % 94.2 %

(1) Loss ratio is losses and loss expenses incurred expressed as a percentage of premiums earned. Expense ratio is underwriting expenses expressed as a percentage of premiums earned. GAAP combined ratio is the sum of the loss ratio and the expense ratio.

Supplemental Information

(Amounts in thousands)

 
  Second Quarter   Six Months
2015   2014 2015   2014
Insurance-Domestic net premiums written:
Other liability $ 405,763 $ 400,289 $ 795,257 $ 771,720
Workers' compensation 326,104 283,995 681,438 630,865
Short-tail lines (1) 240,914 235,972 463,375 443,081
Commercial automobile 133,971 129,282 273,151 263,808
Professional liability 95,836   74,305   182,998   140,750
Total $ 1,202,588   $ 1,123,843   $ 2,396,219   $ 2,250,224
 
Losses from catastrophes:
Insurance-Domestic $ 22,297 $ 38,370 $ 36,591 $ 51,111
Insurance-International 393 272 561 1,403
Reinsurance-Global 1,797   1,148   1,797   1,246
Total $ 24,487   $ 39,790   $ 38,949   $ 53,760
 
Investment income (loss):
Core portfolio (2) $ 105,849 $ 109,431 $ 215,048 $ 218,824
Investment funds 21,851 22,356 27,912 76,155
Arbitrage trading account (117 ) 6,942   8,862   12,461
Total $ 127,583   $ 138,729   $ 251,822   $ 307,440
 
Other operating costs and expenses:
Underwriting expenses $ 500,234 $ 470,296 $ 982,294 $ 928,434
Service expenses 32,374 23,607 63,458 45,864
Net foreign currency loss 3,076 1,993 2,509 1,659
Other costs and expenses 37,898   38,254   76,367   73,359
Total $ 573,582   $ 534,150   $ 1,124,628   $ 1,049,316
 
Cash flow from operations $ 271,871 $ 111,459 $ 332,883 $ 254,623
 
Reconciliation of operating and net income:
Operating income (3) $ 105,124 $ 109,002 $ 211,052 $ 244,385
After-tax investment gains 17,911   70,959   30,290   105,249
Net income $ 123,035   $ 179,961   $ 241,342   $ 349,634

(1) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, boiler and machinery and other lines.

(2) Core portfolio includes fixed maturity securities, equity securities, cash and cash equivalents, real estate and loans receivable.

(3) Operating income is a non-GAAP financial measure defined by the Company as net income excluding after-tax net investment gains. Management believes that excluding net investment gains provides a useful indicator of trends in the Company’s underlying operations.

Selected Balance Sheet Information

(Amounts in thousands, except per share data)

 
  June 30, 2015   December 31, 2014
 
Net invested assets (1) $ 16,184,039 $ 16,508,087
Total assets 21,689,809 21,716,691
Reserves for losses and loss expenses 10,622,374 10,369,701
Senior notes and other debt 1,843,865 2,115,527
Subordinated debentures 340,190 340,060
Common stockholders’ equity (2) 4,502,187 4,589,945
Common stock outstanding (3) 122,482 126,749
Book value per share (4) 36.76 36.21
Tangible book value per share (4) 35.22 34.72

(1) Net invested assets include investments, cash and cash equivalents, trading accounts receivable from brokers and clearing organizations, trading account securities sold but not yet purchased and unsettled purchases, net of related liabilities.

(2) After-tax unrealized investment gains were $223 million and $306 million as of June 30, 2015 and December 31, 2014, respectively. Unrealized currency translation losses were $137 million and $123 million as of June 30, 2015 and December 31, 2014, respectively.

(3) During the second quarter of 2015, the Company repurchased 2,565,422 shares of its common stock for $127 million. During the first six months of 2015, the Company repurchased 4,395,912 shares of its common stock for $218 million.

(4) Book value per share is total common stockholders’ equity divided by the number of common shares outstanding. Tangible book value per share is total common stockholders’ equity excluding the after-tax value of goodwill and other intangible assets divided by the number of common shares outstanding.

Investment Portfolio

June 30, 2015

(Amounts in thousands)

 
  Carrying

Value

  Percent

of Total

 
Fixed maturity securities:
United States government and government agencies $ 715,367 4.4 %
State and municipal:
Special revenue 2,450,825

15.1

%
State general obligation 691,871

4.3

%
Pre-refunded 473,708 2.9 %
Corporate backed 432,424

2.7

%
Local general obligation 325,089   2.0 %
Total state and municipal 4,373,917  

27.0

%
Mortgage-backed securities:
Agency 918,826

5.7

%
Residential - Prime 138,329 0.9 %
Commercial 69,338 0.4 %
Residential - Alt A 64,031   0.4 %
Total mortgage-backed securities 1,190,524  

7.4

%
Corporate:
Industrial 1,866,845

11.5

%
Asset-backed 1,652,155

10.2

%
Financial 1,323,007

8.2

%
Utilities 190,482 1.2 %
Other 116,363   0.7 %
Total corporate 5,148,852  

31.8

%
Foreign government 967,150  

6.0

%
Total fixed maturity securities (1) 12,395,810  

76.6

%
Equity securities available for sale:
Preferred stocks 94,322 0.6 %
Common stocks 59,191   0.4 %
Total equity securities available for sale 153,513   1.0 %
Investment funds (3)

1,122,171

6.9 %
Arbitrage trading account 830,212 5.1 %
Real estate 820,257

5.1

%
Cash and cash equivalents (2)

602,665

3.7

%
Loans receivable 259,411   1.6 %
Net invested assets $

16,184,039

  100.0 %

(1) Total fixed maturity securities had an average rating of AA- and an average duration of 3.3 years.

(2) Cash and cash equivalents includes trading accounts receivable from brokers and clearing organizations, trading account securities sold but not yet purchased and unsettled purchases.

(3) Investment funds include an investment in publicly traded common stock of HealthEquity, Inc. (HQY), which is carried on the equity method of accounting. At June 30, 2015, the investment in HQY had a carrying value of $45 million and a fair value of $457 million.

Investment funds are reported net of related liabilities of $2 million.

 

Foreign Government Fixed Maturity Securities

June 30, 2015

(Amounts in thousands)

 
  Carrying Value
 
Australia $ 244,374
United Kingdom 188,127
Canada 162,441
Argentina 160,430
Germany 59,330
Brazil 54,477
Supranational (1) 48,312
Norway 32,770
Colombia 6,830
Singapore 6,316
Uruguay 3,743
Total $ 967,150

(1) Supranational represents investments in the North American Development Bank, European Investment Bank and International Bank for Reconstruction & Development.

W. R. Berkley Corporation
Karen A. Horvath
Vice President - External
Financial Communications
203-629-3000

Source: W. R. Berkley Corporation

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