W. R. Berkley Corporation Reports Third Quarter Results

W. R. Berkley Corporation (NYSE: WRB) today reported net income for the third quarter of 2012 of $101 million, or 71 cents per share, compared with $76 million, or 53 cents per share, for the third quarter of 2011.

Summary Financial Data

(Amounts in thousands, except per share data)
2012   2011   2012   2011
 
Gross premiums written $ 1,494,724 $ 1,306,300 $ 4,327,170 $ 3,821,434
Net premiums written 1,275,887 1,126,139 3,670,404 3,266,857
 
Net income 100,947 76,410 345,103 274,184
Net income per diluted share 0.71 0.53 2.41 1.87
 
Operating income (1) 86,136 62,626 283,360 227,274
Operating income per diluted share 0.61 0.43 1.98 1.55

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

Third quarter highlights included:

  • Book value per share increased $1.13, representing a 15% increase on an annualized basis.
  • Average rates on renewed policies increased 7.0%.
  • GAAP combined ratio was 95.8%.
  • Net premiums written increased 13.3%.
  • The Company repurchased 2 million shares of its common stock at an average cost of $37.05 per share and an aggregate cost of $73 million.

Commenting on the Company's performance, William R. Berkley, chairman and chief executive officer, said: "We were very pleased with our third quarter results. Significant rate increases were a part of our substantial growth in the quarter, and we continue to see positive trends in most lines of business.

"It is clear, as we enter the second year of significant rate increases, that the cyclical change is no longer hypothetical. Rate increases continue to be available for disciplined companies that recognize the need for adequate returns. The consequence of declining fixed income yields has increased the need for meaningful improvement in underwriting margin. We anticipate continued price increases over the next twelve months.

"Although our current yields were virtually unchanged from a year ago, investment returns still represent the most serious obstacle to achieving adequate returns. With ten-year treasury yields hovering around 2%, it is a challenge to maintain our current portfolio yield. Our shift in focus toward investing more for capital gains has rewarded us as we achieved significant income in the first three quarters and anticipate gains in excess of $75 million in the fourth quarter.

"We remain confident that we will be able to grow and raise prices for the foreseeable future. We continue to believe that we will be able to deliver outstanding returns to our shareholders," 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 Tuesday October 23, 2012 at 8:30 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)
  2012   2011   2012   2011
Revenues:
Net premiums written $ 1,275,887 $ 1,126,139 $ 3,670,404 $ 3,266,857
Change in unearned premiums (89,354 ) (70,316 ) (236,863 ) (211,293 )
Net premiums earned 1,186,533 1,055,823 3,433,541 3,055,564
Net investment income 116,019 114,063 434,888 409,261
Insurance service fees 26,208 22,279 77,121 69,487
Net investment gains:
Net realized gains on investment sales 17,226 21,238 84,989 73,812
Change in valuation allowance, net of other-than-temporary impairments 5,000     9,014   (400 )
Net investment gains 22,226   21,238   94,003   73,412  
Revenues from wholly-owned investees 68,087 65,922 173,196 175,943
Other income 1,428   406   2,204   1,364  
Total revenues 1,420,501   1,279,731   4,214,953   3,785,031  
Expenses:
Losses and loss expenses 736,632 683,980 2,147,306 1,965,351
Other operating costs and expenses 451,487 407,149 1,332,024 1,196,936
Expenses from wholly-owned investees 66,177 64,388 172,438 174,059
Interest expense 32,512   28,068   93,750   84,317  
Total expenses 1,286,808   1,183,585   3,745,518   3,420,663  
Income before income taxes 133,693 96,146 469,435 364,368
Income tax expense (32,685 ) (19,775 ) (124,291 ) (90,282 )
Net income before noncontrolling interests 101,008 76,371 345,144 274,086
Noncontrolling interests (61 ) 39   (41 ) 98  
Net income to common stockholders $ 100,947   $ 76,410   $ 345,103   $ 274,184  
 
Net income per share:
Basic $ 0.74 $ 0.55 $ 2.51 $ 1.95
Diluted $ 0.71 $ 0.53 $ 2.41 $ 1.87
 
Average shares outstanding:
Basic 136,553 138,816 137,512 140,535
Diluted 141,637 144,538 142,941 146,553

Operating Results by Segment

(Amounts in thousands, except ratios (1) (2))
  2012   2011   2012   2011
 
Specialty:
Gross premiums written $ 533,592 $ 454,560 $ 1,526,265 $ 1,344,139
Net premiums written 452,000 382,541 1,295,556 1,146,091
Premiums earned 420,165 367,417 1,215,417 1,047,567
Pre-tax income 59,846 70,590 204,573 237,613
Loss ratio 62.4 % 58.3 % 61.8 % 57.8 %
Expense ratio 32.1 % 32.9 % 32.8 % 32.9 %
GAAP combined ratio 94.5 % 91.2 % 94.6 % 90.7 %
 
Regional:
Gross premiums written $ 321,659 $ 301,542 $ 926,242 $ 881,224
Net premiums written 295,122 277,177 852,971 817,380
Premiums earned 276,629 267,142 809,072 795,423
Pre-tax income (loss) 33,219 (11,163 ) 79,211 (2,770 )
Loss ratio 57.2 % 74.2 % 60.8 % 71.5 %
Expense ratio 35.9 % 35.9 % 36.5 % 36.2 %
GAAP combined ratio 93.1 % 110.1 % 97.3 % 107.7 %
 
Alternative Markets:
Gross premiums written $ 272,327 $ 222,423 $ 764,643 $ 656,062
Net premiums written 205,210 174,744 556,067 497,117
Premiums earned 177,041 156,820 506,149 454,156
Pre-tax income 39,433 32,984 141,089 116,007
Loss ratio 72.9 % 70.9 % 72.4 % 71.9 %
Expense ratio 24.8 % 26.7 % 25.8 % 26.8 %
GAAP combined ratio 97.7 % 97.6 % 98.2 % 98.7 %
 
Reinsurance:
Gross premiums written $ 132,247 $ 118,266 $ 373,912 $ 337,696
Net premiums written 123,098 113,620 349,361 319,524
Premiums earned 111,599 103,906 327,452 315,220
Pre-tax income 21,118 16,109 74,742 66,782
Loss ratio 58.1 % 61.5 % 57.8 % 60.9 %
Expense ratio 40.0 % 40.9 % 40.8 % 40.7 %
GAAP combined ratio 98.1 % 102.4 % 98.6 % 101.6 %
 
International:
Gross premiums written $ 234,899 $ 209,509 $ 736,108 $ 602,313
Net premiums written 200,457 178,057 616,449 486,745
Premiums earned 201,099 160,538 575,451 443,198
Pre-tax income 15,736 13,919 50,685 27,420
Loss ratio 60.8 % 60.0 % 60.5 % 61.6 %
Expense ratio 38.3 % 39.1 % 38.2 % 39.9 %
GAAP combined ratio 99.1 % 99.1 % 98.7 % 101.5 %

Operating Results by Segment (Continued)

(Amounts in thousands, except ratios (1)(2))
2012   2011   2012   2011
 
Corporate and Eliminations:
Net investment gains $ 22,226 $ 21,238 $ 94,003 $ 73,412
Interest expense (32,512 ) (28,068 ) (93,750 ) (84,317 )
Other revenues and expenses (3) (25,373 ) (19,463 ) (81,118 ) (69,779 )
Pre-tax loss (35,659 ) (26,293 ) (80,865 ) (80,684 )
 
Consolidated:
Gross premiums written $ 1,494,724 $ 1,306,300 $ 4,327,170 $ 3,821,434
Net premiums written 1,275,887 1,126,139 3,670,404 3,266,857
Premiums earned 1,186,533 1,055,823 3,433,541 3,055,564
Pre-tax income 133,693 96,146 469,435 364,368
Loss ratio 62.1 % 64.8 % 62.5 % 64.3 %
Expense ratio 33.7 % 34.5 % 34.3 % 34.7 %
GAAP combined ratio 95.8 % 99.3 % 96.8 % 99.0 %

(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):

     

2012
  2011 2012   2011
 
Specialty $ 4,830 $ 6,403 $ 11,653 $ 15,614
Regional 832 32,005 23,749 85,124
Alternative Markets 247 1,161 598 1,545
Reinsurance 394 6,383 880 17,679
International 2,450   5,198   2,504   18,854
Total $ 8,753   $ 51,150   $ 39,384   $ 138,816

(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)
 
September 30, 2012   December 31, 2011
 
Net invested assets (1) $ 15,593,589 $ 14,559,781
Total assets 19,932,912 18,403,873
Reserves for losses and loss expenses 9,562,877 9,337,134
Senior notes and other debt 1,877,431 1,500,503
Junior subordinated debentures 243,154 242,997
Common stockholders’ equity (2) (3) (4) 4,324,401 3,953,356
Common stock outstanding (3) (4) 135,957 137,520
Book value per share (4) (5) 31.81 28.75
Tangible book value per share (4) (5) 31.09 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 $557 million and $430 million as of September 30, 2012 and December 31, 2011, respectively. Unrealized currency translation losses were $37 million and $61 million as of September 30, 2012 and December 31, 2011, respectively.

(3) During 2012, the Company repurchased 3.3 million shares of its common stock at an average cost of $37.25 per share and an aggregate cost of $121 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)
2012   2011   2012   2011
 
Reconciliation of operating income to net income:
Operating income (1) $ 86,136 $ 62,626 $ 283,360 $ 227,274
Investment gains, net of tax 14,811   13,784   61,743   46,910  
Net income $ 100,947   $ 76,410   $ 345,103   $ 274,184  
 
Return on equity (2) 10.2 % 8.4 % 11.6 % 10.0 %
 
Cash flow from operations $ 140,938 $ 268,851 $ 453,349 $ 485,243
 
Other operating costs and expenses:
Underwriting expenses $ 399,677 $ 363,889 $ 1,177,620 $ 1,059,485
Service expenses 22,769 18,873 63,996 55,764
Net foreign currency (gains) (1,575 ) (2,700 ) (2,873 ) (2,171 )
Other costs and expenses 30,616   27,087   93,281   83,858  
Total $ 451,487   $ 407,149   $ 1,332,024   $ 1,196,936  

(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

September 30, 2012

(Amounts in thousands)
  Carrying

Value
  Percent

of Total
 
Fixed maturity securities:
United States government and government agencies $ 937,313 6.0 %
State and municipal:
Special revenue 2,198,657 14.1 %
State general obligation 890,990 5.7 %
Local general obligation 391,181 2.5 %
Pre-refunded 995,605 6.4 %
Corporate backed 430,658   2.8 %
Total state and municipal 4,907,091   31.5 %
Mortgage-backed securities:
Agency 1,145,102 7.3 %
Residential - Prime 245,739 1.6 %
Residential - Alt A 154,538 1.0 %
Commercial 158,008   1.0 %
Total mortgage-backed securities 1,703,387   10.9 %
Corporate:
Industrial 1,620,807 10.4 %
Financial 725,550 4.7 %
Utilities 219,452 1.4 %
Asset-backed 578,357 3.7 %
Other 109,983   0.7 %
Total corporate 3,254,149   20.9 %
Foreign 1,090,472   7.0 %
Total fixed maturity securities (1) 11,892,412   76.3 %
 
Equity securities available for sale:
Common stocks 324,881 2.1 %
Preferred stocks 100,441   0.6 %
Total equity securities available for sale 425,322   2.7 %
 
Cash and cash equivalents (2) 1,344,765 8.6 %
Investment funds (2) 708,550 4.5 %
Real estate 433,686 2.8 %
Arbitrage trading account 417,446 2.7 %
Loans receivable 371,408   2.4 %
Net invested assets $ 15,593,589   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. Investment funds are net of related liabilities of $39 million.

 Foreign Fixed Maturity Securities

         September 30, 2012

         (Amounts in thousands)
  Government   Corporate   Total
Australia $ 204,583 $ 113,990 $ 318,573
United Kingdom 139,804 33,693 173,497
Canada 121,137 51,321 172,458
Argentina 124,833 24,559 149,392
Germany 94,056 27,461 121,517
Brazil 46,650 46,650
Norway 38,092 38,092
Supranational (1) 36,950 36,950
Netherlands 11,511 11,511
Switzerland 11,231 11,231
Singapore 6,990 6,990
Uruguay 3,187 3,187
New Zealand 424     424
Total $ 816,706   $ 273,766   $ 1,090,472

(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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