W. R. Berkley Corporation Reports Second Quarter Results

W. R. Berkley Corporation (NYSE: WRB) today reported net income for the second quarter of 2012 of $109 million, or 76 cents per share, compared with $82 million, or 56 cents per share, for the second quarter of 2011.

Summary Financial Data

(Amounts in thousands, except per share data)
 
Second Quarter Six Months
2012   2011 2012   2011
 
Gross premiums written $ 1,430,920 $ 1,245,276 $ 2,832,446 $ 2,515,134
Net premiums written 1,190,991 1,057,415 2,394,517 2,140,718
 
Net income 108,838 82,184 244,156 197,774
Net income per diluted share 0.76 0.56 1.70 1.34
 
Operating income (1) 92,988 67,848 197,224 164,648
Operating income per diluted share 0.65 0.46 1.37 1.12

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

Second quarter highlights included:

  • Book value per share increased 83 cents, or 3%, to $30.68.
  • Average rates on renewed policies increased 6%.
  • GAAP combined ratio was 98.2%.
  • Net premiums written increased 12.6%.
  • The Company repurchased 1.3 million shares of its common stock at an average cost of $37.56 per share and an aggregate cost of $48.3 million.

Commenting on the Company's performance, William R. Berkley, chairman and chief executive officer, said: "We are pleased with the second quarter’s financial results. Premiums grew in excess of twelve percent, while average renewal rate increases were approximately six percent. The economy is not as robust as we had anticipated; thus, the pace of price increases is not accelerating as fast as we had expected. We still see pricing momentum throughout the balance of the year. Many companies are beginning to recognize their weakening loss reserve position, which will continue to put further upward pressure on the current pricing environment.

"Investment income was substantially higher in the second quarter primarily as a result of the strong performance of our investment funds. In spite of the more difficult environment, our overall investment returns have proved to be satisfactory, and we have continued to benefit from substantial realized gains from our non-fixed income portfolio. This is in part a result of our continuing ability to find small opportunities offering attractive returns.

"Overall, we have been able to deliver satisfactory after-tax returns on our capital, both because of our improving underwriting results and our stable investment income. We continue to have a positive outlook for the second half of the year as we work diligently to grow our business and effectively manage our capital," Mr. Berkley concluded.

Webcast Conference Call and Supplementary Information

The Company will hold its quarterly conference call with analysts and investors to discuss its earnings and other information on Wednesday July 25, 2012 at 10:00 a.m. eastern time. The conference call will be webcast live on the Company's website at www.wrberkley.com. A recording of the call 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 five segments of the property casualty insurance business: specialty insurance, regional property casualty insurance, alternative markets, reinsurance and international.

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 2012 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; 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, real estate, merger arbitrage 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; 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; the ability of our reinsurers to pay reinsurance recoverables owed to us; foreign currency and political risks relating to our international operations; 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; our ability to attract and retain key personnel and qualified employees; 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 2012 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
2012   2011 2012   2011
Revenues:
Net premiums written $ 1,190,991 $ 1,057,415 $ 2,394,517 $ 2,140,718
Change in unearned premiums (43,634 ) (40,171 ) (147,509 ) (140,977 )
Net premiums earned 1,147,357 1,017,244 2,247,008 1,999,741
Net investment income 161,250 149,072 318,869 295,198
Insurance service fees 27,036 25,035 50,913 47,208
Net investment gains:
Net realized gains on investment sales 24,286 23,290 67,763 52,574
Change in valuation allowance, net of other-than-temporary impairments   (400 ) 4,014   (400 )
Net investment gains 24,286   22,890   71,777   52,174  
Revenues from wholly-owned investees 55,434 56,134 105,109 110,021
Other income 384   574   776   958  
Total revenues 1,415,747   1,270,949   2,794,452   2,505,300  
Expenses:
Losses and loss expenses 731,202 674,276 1,410,674 1,281,371
Other operating costs and expenses 448,758 403,658 880,537 789,787
Expenses from wholly-owned investees 54,931 55,855 106,261 109,671
Interest expense 32,417   28,132   61,238   56,249  
Total expenses 1,267,308   1,161,921   2,458,710   2,237,078  
Income before income taxes 148,439 109,028 335,742 268,222
Income tax expense (39,535 ) (26,908 ) (91,606 ) (70,507 )
Net income before noncontrolling interests 108,904 82,120 244,136 197,715
Noncontrolling interests (66 ) 64   20   59  
Net income to common stockholders $ 108,838   $ 82,184   $ 244,156   $ 197,774  
 
Net income per share:
Basic $ 0.79 $ 0.58 $ 1.77 $ 1.40
Diluted $ 0.76 $ 0.56 $ 1.70 $ 1.34
 
Average shares outstanding:
Basic 138,181 141,637 137,997 141,408
Diluted 143,528 147,677 143,506 147,614

Operating Results by Segment

(Amounts in thousands, except ratios (1) (2))

 
 
Second Quarter Six Months
2012   2011 2012   2011
 
Specialty:
Gross premiums written $ 542,052 $ 473,849 $ 992,673 $ 889,579
Net premiums written 454,028 405,433 843,556 763,550
Premiums earned 408,142 349,943 795,252 680,150
Pre-tax income 76,466 77,109 144,727 167,023
Loss ratio 61.6 % 60.6 % 61.5 % 57.5 %
Expense ratio 32.7 % 32.1 % 33.1 % 32.9 %
GAAP combined ratio 94.3 % 92.7 % 94.6 % 90.4 %
 
Regional:
Gross premiums written $ 290,999 $ 280,841 $ 604,583 $ 579,682
Net premiums written 267,650 260,579 557,849 540,203
Premiums earned 268,177 266,764 532,443 528,281
Pre-tax income (loss) 14,205 (16,042 ) 45,992 8,393
Loss ratio 66.3 % 77.6 % 62.7 % 70.1 %
Expense ratio 37.0 % 36.5 % 36.8 % 36.4 %
GAAP combined ratio 103.3 % 114.1 % 99.5 % 106.5 %
 
Alternative Markets:
Gross premiums written $ 218,087 $ 178,792 $ 492,316 $ 433,639
Net premiums written 147,641 121,819 350,857 322,373
Premiums earned 170,415 148,999 329,108 297,336
Pre-tax income 53,969 41,486 101,656 83,023
Loss ratio 71.7 % 72.2 % 72.1 % 72.4 %
Expense ratio 26.1 % 27.4 % 26.3 % 26.8 %
GAAP combined ratio 97.8 % 99.6 % 98.4 % 99.2 %
 
Reinsurance:
Gross premiums written $ 121,665 $ 106,866 $ 241,665 $ 219,430
Net premiums written 113,383 99,550 226,263 205,904
Premiums earned 109,515 105,836 215,853 211,314
Pre-tax income 25,927 25,336 53,624 50,673
Loss ratio 58.3 % 58.8 % 57.6 % 60.7 %
Expense ratio 41.1 % 42.0 % 41.2 % 40.6 %
GAAP combined ratio 99.4 % 100.8 % 98.8 % 101.3 %
 
International:
Gross premiums written $ 258,117 $ 204,928 $ 501,209 $ 392,804
Net premiums written 208,289 170,034 415,992 308,688
Premiums earned 191,108 145,702 374,352 282,660
Pre-tax income 15,309 11,248 34,949 13,501
Loss ratio 60.8 % 58.7 % 60.4 % 62.5 %
Expense ratio 38.7 % 41.3 % 38.2 % 40.3 %
GAAP combined ratio 99.5 % 100.0 % 98.6 % 102.8 %

Operating Results by Segment (Continued)

(Amounts in thousands, except ratios (1)(2))
 
Second Quarter Six Months
2012   2011 2012   2011
 
Corporate and Eliminations:
Net investment gains $ 24,286 $ 22,890 $ 71,777 $ 52,174
Interest expense (32,417 ) (28,132 ) (61,238 ) (56,249 )
Other revenues and expenses (3) (29,306 ) (24,867 ) (55,745 ) (50,316 )
Pre-tax loss (37,437 ) (30,109 ) (45,206 ) (54,391 )
 
Consolidated:
Gross premiums written $ 1,430,920 $ 1,245,276 $ 2,832,446 $ 2,515,134
Net premiums written 1,190,991 1,057,415 2,394,517 2,140,718
Premiums earned 1,147,357 1,017,244 2,247,008 1,999,741
Pre-tax income 148,439 109,028 335,742 268,222
Loss ratio 63.7 % 66.3 % 62.8 % 64.1 %
Expense ratio 34.5 % 34.9 % 34.6 % 34.8 %
GAAP combined ratio 98.2 % 101.2 % 97.4 % 98.9 %

(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 loss ratio and expense ratio.

(2) Losses from catastrophes were as follows (in thousands):

Second Quarter   Six Months
2012   2011 2012   2011
 
Specialty $ 6,321 $ 9,211 $ 6,823 $ 9,211
Regional 19,071 44,425 22,917 53,119
Alternative Markets 321 384 351 384
Reinsurance 458 6,796 486 11,296
International 54   2,606   54   13,656
Total $ 26,225   $ 63,422   $ 30,631   $ 87,666

(3) Other revenues and expenses include corporate investment income, expenses not allocated to the business segments and revenues and expenses from investments in wholly-owned, non-insurance subsidiaries that are consolidated for financial reporting purposes.

Selected Balance Sheet Information

(Amounts in thousands, except per share data)
 
June 30, 2012 December 31, 2011
 
Net invested assets (1) $ 15,388,680 $ 14,559,781
Total assets 19,462,106 18,403,873
Reserves for losses and loss expenses 9,488,668

9,337,134
Senior notes and other debt 1,865,380

1,500,503
Junior subordinated debentures 243,102 242,997
Common stockholders’ equity (2) (3) (4) 4,207,784

3,953,356
Common stock outstanding (3) (4) 137,167 137,520
Book value per share (4) (5) 30.68 28.75
Tangible book value per share (4) (5) 29.97 28.04

(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.

(2) After-tax unrealized investment gains were $492 million and $430 million as of June 30, 2012 and December 31, 2011, respectively. Unrealized currency translation losses were $63 million and $61 million as of June 30, 2012 and December 31, 2011, respectively.

(3) During 2012, the Company repurchased 1.3 million shares of its common stock at an average cost of $37.56 per share and an aggregate cost of $48.3 million.

(4) The Financial Accounting Standards Board recently issued guidance regarding the treatment of costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of the types of costs that can be capitalized and specifies that the costs must be directly related to the successful acquisition of a new or renewed insurance contract. We adopted this guidance effective January 1, 2012 and retrospectively adjusted our previously issued financial statements (including the applicable 2011 information contained herein). The effect of adopting this guidance retrospectively was to decrease deferred acquisition costs by $84 million, common stockholders' equity by $55 million and book value per share by 40 cents as of December 31, 2011. The new guidance also resulted in minor changes to other operating costs and expenses and expense ratios.

(5) 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.

Supplemental Information

(Amounts in thousands)
 
Second Quarter Six Months
2012   2011 2012   2011
 
Reconciliation of operating income to net income:
Operating income (1) $ 92,988 $ 67,848 $ 197,224 $ 164,648
Investment gains, net of tax 15,850   14,336   46,932   33,126  
Net income $ 108,838   $ 82,184   $ 244,156   $ 197,774  
 
Return on equity (2) 11.0 % 9.0 % 12.4 % 10.8 %
 
Cash flow from operations $ 238,649 $ 160,949 $ 312,411 $ 216,392
 
Other operating costs and expenses:
Underwriting expenses $ 395,920 $ 355,113 $ 777,943 $ 695,596
Service expenses 21,635 19,562 41,227 36,891
Net foreign currency losses (gains) 137 9 (1,297 ) 529
Other costs and expenses 31,066   28,974   62,664   56,771  
Total $ 448,758   $ 403,658   $ 880,537   $ 789,787  

(1) Operating income is a non-GAAP financial measure defined by the Company as net income excluding net investment gains and losses. Management believes that excluding net investment gains and losses, which are often discretionary and frequently relate to economic factors, provides a useful indicator of trends in the Company’s underlying operations.

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

Investment Portfolio

June 30, 2012

(Amounts in thousands)
   
Carrying

Value
Percent

of Total
 
Fixed maturity securities:
United States government and government agencies $ 985,544 6.4 %
State and municipal:
Special revenue 2,232,298 14.5 %
State general obligation 930,140

6.1
%
Local general obligation 454,977 3.0 %
Pre-refunded 1,145,838 7.4 %
Corporate backed 468,082  

3.0
%
Total state and municipal 5,231,335   34.0 %
Mortgage-backed securities:
Agency 1,119,253 7.3 %
Residential - Prime 238,175 1.5 %
Residential - Alt A 129,447 0.8 %
Commercial 178,719   1.2 %
Total mortgage-backed securities 1,665,594   10.8 %
Corporate:
Industrial 1,434,608 9.3 %
Financial 663,598 4.3 %
Utilities 222,999

1.5
%
Asset-backed 486,623 3.2 %
Other 109,956   0.7 %
Total corporate 2,917,784   19.0 %
Foreign 1,026,671   6.7 %
Total fixed maturity securities (1) 11,826,928   76.9 %
 
Equity securities available for sale:
Common stocks 439,246 2.9 %
Preferred stocks 122,539   0.8 %
Total equity securities available for sale 561,785   3.7 %
 
Cash and cash equivalents (2) 1,209,331 7.9 %
Investment funds (2) 685,527 4.5 %
Real estate 360,787 2.2 %
Arbitrage trading account 419,249 2.7 %
Loans receivable 325,073   2.1 %
Net invested assets $ 15,388,680   100.0 %

(1) Total fixed maturity securities had an average rating of AA- and an average duration of 3.4 years.

(2) Cash equivalents includes trading accounts receivable from brokers and clearing organizations, trading account securities sold but not yet purchased and unsettled purchases. Investment funds are net of related liabilities of $43 million.

 Foreign Fixed Maturity Securities

         June 30, 2012

         (Amounts in thousands)
     
Government Corporate Total
Australia $ 181,857 $ 111,278 $ 293,135
United Kingdom 123,948 41,882 165,830
Germany 91,594 27,532 119,126
Canada 101,176 48,834 150,010
Argentina 115,728 115,728
Brazil 46,695 46,695
Supranational (1) 38,185 38,185
Norway 36,891 36,891
Switzerland 31,507 31,507
Finland 6,694 6,694
Netherlands 11,144 11,144
Singapore 8,394 8,394
Uruguay 2,917 2,917
New Zealand 415     415
Total $ 747,800   $ 278,871   $ 1,026,671

(1) Supranational represents investments in the North American Development Bank, European Investment Bank and Inter-American Development Bank.

Copyright Business Wire 2010

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