W. R. Berkley Corporation Reports Fourth Quarter Results

Operating Income per Share Increased 33%, Net Premiums Written Increased 11%

GREENWICH, Conn.--()--W. R. Berkley Corporation (NYSE:WRB) today reported net income for the fourth quarter of 2013 of $130 million, or 93 cents per share.

Summary Financial Data

(Amounts in thousands, except per share data)

 
  Fourth Quarter   Full Year
2013   2012 2013   2012
 
Gross premiums written $ 1,594,428 $ 1,452,709 $ 6,511,091 $ 5,779,879
Net premiums written 1,357,684 1,228,135 5,500,173 4,898,539
 
Net income 130,379 165,489 499,925 510,592
Net income per diluted share 0.93 1.17 3.55 3.56
 
Operating income (1) 119,243 90,430 430,168 373,790
Operating income per diluted share 0.85 0.64 3.06 2.61
 
Return on equity (2) 12.1 % 16.7 % 11.6 % 12.9 %

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

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

Commenting on the Company's performance, William R. Berkley, chairman and chief executive officer, said: "We were pleased with our fourth quarter results. Net written premiums were up 11% and the Company’s combined ratio improved. Price increases are outpacing loss cost trends, and although the fourth quarter rate increases were not as strong as the full year, margins have expanded further. We are beginning to make headway on our expense ratio, and anticipate additional improvement in both our overall underwriting results and our combined ratio in 2014. We remain focused on raising prices in order to maintain current margins and regain targeted profitability in some currently lagging lines of business. The challenge that our industry faces is the threat of inflation, which impacts pricing as well as adequate reserving.

"We again reported positive reserve development, and anticipate this will continue if inflation remains below our expectation. Our paid loss ratio on our ongoing business is approximately 52%, which demonstrates a positive trend for the ultimate loss ratio.

"Our investment performance was good while maintaining a high level of liquidity. The year-end portfolio duration was 3.3 years and our current investment strategy is likely to result in no material change in duration in 2014. We believe this strategy creates long term value for our shareholders by reducing risk, despite the fact that investment income declines in the short term. The constant tension between deflation fears and inflationary worries requires that we maintain a fixed income portfolio duration that approximates the duration of our liabilities. We continued to invest in non-fixed income securities and had over $125 million in realized gains for the year. We would expect 2014 will continue to generate significant gains.

"Looking ahead, we expect profitability to improve further without giving consideration to unusual catastrophe activity over the next several years. And while there is new competition, a similar number of players have disappeared from the marketplace. Ultimately, the insurance business is rational over the long run, and the trends we currently see cause us to be optimistic as more rational players enter the industry. These investors search for good risk adjusted returns. We are confident that 2014 will be an excellent year," 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 Wednesday, January 29, at 10:00 a.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 2014 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, real estate, merger arbitrage and private equity investments; pending litigation and related coverage issues; 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"), and the potential expiration of 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 2014 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)

 

 

  Fourth Quarter   Full Year
2013   2012 2013   2012
Revenues:
Net premiums written $ 1,357,684 $ 1,228,135 $ 5,500,173 $ 4,898,539
Change in unearned premiums 25,357   11,840   (273,636 ) (225,023 )
Net premiums earned 1,383,041 1,239,975 5,226,537 4,673,516
Investment income 138,991 151,875 544,291 586,763
Insurance service fees 27,004 26,012 107,513 103,133
Net investment gains 30,690 116,462 127,586 201,451
Change in investment valuation allowance, net of other than temporary impairments (6,042 ) (6,042 ) 9,014
Revenues from wholly-owned investees 122,723 73,917 407,623 247,113
Other income 272   360   1,026   2,564  
Total revenues 1,696,679   1,608,601   6,408,534   5,823,554  
Expenses:
Losses and loss expenses 848,599 801,173 3,197,024 2,948,479
Other operating costs and expenses 520,698 467,599 2,000,684 1,799,623
Expenses from wholly-owned investees 115,146 74,784 388,761 247,222
Interest expense 30,510   32,552   123,177   126,302  
Total expenses 1,514,953   1,376,108   5,709,646   5,121,626  
Income before income taxes 181,726 232,493 698,888 701,928
Income tax expense (46,338 ) (66,994 ) (193,587 ) (191,285 )
Net income before noncontrolling interests 135,388 165,499 505,301 510,643
Noncontrolling interests (5,009 ) (10 ) (5,376 ) (51 )
Net income to common stockholders $ 130,379   $ 165,489   $ 499,925   $ 510,592  
 
Net income per share:
Basic $ 0.97 $ 1.22 $ 3.69 $ 3.72
Diluted $ 0.93 $ 1.17 $ 3.55 $ 3.56
 
Average shares outstanding:
Basic 134,054 135,861 135,305 137,097
Diluted 139,665 141,654 140,743 143,315

Business Segment Operating Results

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

 
  Fourth Quarter   Full Year
2013   2012 2013   2012
Insurance-Domestic:
Gross premiums written $ 1,182,977 $ 1,044,015 $ 4,803,753 $ 4,261,165
Net premiums written 985,958 865,289 3,994,387 3,569,883
Premiums earned 1,013,047 886,384 3,782,416 3,417,022
Pre-tax income 182,879 153,627 648,740 578,500
Loss ratio 60.5 % 63.1 % 61.3 % 63.5 %
Expense ratio 32.3 % 32.5 % 32.7 % 32.5 %
GAAP combined ratio 92.8 % 95.6 % 94.0 % 96.0 %
 
Insurance-International:
Gross premiums written $ 211,906 $ 214,454 $ 898,776 $ 802,057
Net premiums written 183,544 181,045 756,185 664,459
Premiums earned 182,786 175,682 723,151 631,841
Pre-tax income 5,828 8,352 56,922 51,639
Loss ratio 61.4 % 64.7 % 59.4 % 59.7 %
Expense ratio 41.0 % 38.7 % 39.0 % 40.2 %
GAAP combined ratio 102.4 % 103.4 % 98.4 % 99.9 %
 
Reinsurance-Global:
Gross premiums written $ 199,545 $ 194,240 $ 808,562 $ 716,657
Net premiums written 188,182 181,801 749,601 664,197
Premiums earned 187,208 177,909 720,970 624,653
Pre-tax income 23,173 21,550 110,425 103,690
Loss ratio 66.1 % 72.1 % 62.2 % 64.3 %
Expense ratio 34.1 % 33.2 % 34.8 % 36.3 %
GAAP combined ratio 100.2 % 105.3 % 97.0 % 100.6 %
 
Corporate and Eliminations:
Net realized investment gains $ 24,648 $ 116,462 $ 121,544 $ 210,465
Interest expense (30,510 ) (32,552 ) (123,177 ) (126,302 )
Other revenues and expenses (24,292 ) (34,946 ) (115,566 ) (116,064 )
Pre-tax income (loss) (30,154 ) 48,964 (117,199 ) (31,901 )
 
Consolidated:
Gross premiums written $ 1,594,428 $ 1,452,709 $ 6,511,091 $ 5,779,879
Net premiums written 1,357,684 1,228,135 5,500,173 4,898,539
Premiums earned 1,383,041 1,239,975 5,226,537 4,673,516
Pre-tax income 181,726 232,493 698,888 701,928
Loss ratio 61.4 % 64.6 % 61.2 % 63.1 %
Expense ratio 33.7 % 33.5 % 33.9 % 34.1 %
GAAP combined ratio 95.1 % 98.1 % 95.1 % 97.2 %

(1) Commencing with the first quarter of 2013, the Company reports its results in three segments – Insurance-Domestic (formerly, Specialty, Regional and Alternative Markets), Insurance-International and Reinsurance-Global. Reclassifications have been made to the Company’s 2012 financial information to conform with this presentation.

(2) 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)

  Fourth Quarter   Full Year
2013   2012 2013   2012
Insurance-Domestic net premiums written:
Other liability $ 348,817 $ 305,448 $ 1,373,653 $ 1,172,699
Workers' compensation 245,164 205,403 1,041,118 917,253
Short-tail lines (1) 198,216 179,397 800,082 757,537
Commercial automobile 119,824 107,170 502,535 464,058
Professional liability 73,937   67,871   276,999   258,336  
Total $ 985,958   $ 865,289   $ 3,994,387   $ 3,569,883  
 
Losses from catastrophes:
Insurance-Domestic $ 1,387 $ 7,217 $ 37,346 $ 43,217
Insurance-International 4,557 13,163 11,438 13,952
Reinsurance-Global 7,102     20,434   16,214   23,029  
Total $ 13,046   $ 40,814   $ 64,998   $ 80,198  
 
Investment income (loss):
Core portfolio (2) $ 110,361 $ 125,636 $ 456,148 $ 501,462
Investment funds 22,464 26,891 67,712 77,015
Arbitrage trading account 6,166   (652 ) 20,431   8,286  
Total $ 138,991   $ 151,875   $ 544,291   $ 586,763  
 
Other operating costs and expenses:
Underwriting expenses $ 465,933 $ 415,126 $ 1,771,128 $ 1,592,746
Service expenses 22,157 20,990 88,662 84,986
Debt extinguishment costs 6,709
Net foreign currency gains (3,732 ) (3,219 ) (10,120 ) (6,092 )
Other costs and expenses 36,340   34,702   144,305   127,983  
Total $ 520,698   $ 467,599   $ 2,000,684   $ 1,799,623  
 
Cash flow from operations before reinsurance commutation payments $ 254,640 $ 222,108 $ 881,335 $ 675,457
Cash flow from operations $ 193,103 $ 222,108 $ 819,798 $ 675,457
 
Reconciliation of operating and net income:
Operating income (3) $ 119,243 $ 90,430 $ 430,168 $ 373,790
After-tax investment gains, net of noncontrolling interest 11,136 75,059 74,118 136,802
After-tax debt extinguishment costs     (4,361 )  
Net income $ 130,379   $ 165,489   $ 499,925   $ 510,592  

(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 and after-tax debt extinguishment costs. Management believes that excluding net realized investment gains and debt extinguishment costs provides a useful indicator of trends in the Company’s underlying operations.

Selected Balance Sheet Information

(Amounts in thousands, except per share data)

 
  December 31, 2013   December 31, 2012
 
Net invested assets (1) $ 15,540,488 $ 15,681,803
Total assets 20,551,796 20,155,896
Reserves for losses and loss expenses 10,080,941 9,751,086
Senior notes and other debt 1,692,442 1,871,535
Junior subordinated debentures 339,800 243,206
Common stockholders’ equity (2) 4,336,035 4,306,217
Common stock outstanding (3) 132,233 136,018
Book value per share (4) 32.79 31.66
Tangible book value per share (4)

31.74

30.95

(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 $257 million and $518 million as of December 31, 2013 and 2012, respectively. Unrealized currency translation losses were $61 million and $37 million as of December 31, 2013 and 2012, respectively.

(3) During the fourth quarter of 2013, the Company repurchased 2,953,280 shares of its common stock for $127 million. During the full year 2013, the Company repurchased 3,924,355 shares of its common stock for $166 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

December 31, 2013

(Amounts in thousands)

 
  Carrying

Value

  Percent

of Total

 
Fixed maturity securities:
United States government and government agencies $ 884,859 5.7 %
State and municipal:
Special revenue 2,142,866 13.8 %
State general obligation 757,652 4.9 %
Pre-refunded 626,601 4.0 %
Corporate backed 430,961 2.8 %
Local general obligation 329,132   2.1 %
Total state and municipal 4,287,212   27.6 %
Mortgage-backed securities:
Agency 993,890 6.4 %
Residential - Prime 187,871 1.2 %
Residential — Alt A 94,280 0.6 %
Commercial 81,136   0.5 %
Total mortgage-backed securities 1,357,177   8.7 %
Corporate:
Industrial 1,533,935 9.9 %
Asset-backed 1,266,385 8.1 %
Financial 1,108,051 7.1 %
Utilities 194,437 1.3 %
Other 104,933   0.7 %
Total corporate 4,207,741   27.1 %
Foreign government 879,858   5.7 %
Total fixed maturity securities (1) 11,616,847   74.8 %
Equity securities available for sale:
Common stocks 160,775 1.0 %
Preferred stocks 122,562   0.8 %
Total equity securities available for sale 283,337   1.8 %
Cash and cash equivalents (2) 1,000,132 6.4 %
Investment funds (3) 1,059,220 6.8 %
Real estate 715,242 4.6 %
Arbitrage trading account 522,127 3.4 %
Loans receivable 343,583   2.2 %
Net invested assets $ 15,540,488   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 are net of related liabilities of $8 million.

 Foreign Government Fixed Maturity Securities

         December 31, 2013

         (Amounts in thousands)

 
  Carrying Value
 
Australia $ 256,413
Canada 157,094
United Kingdom 132,550
Argentina 116,062
Germany 67,422
Brazil 53,949
Norway 53,206
Supranational (1) 33,083
Singapore 6,762
Uruguay 3,317
Total $ 879,858

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

Contacts

Karen A. Horvath
Vice President - External Financial Communications
203-629-3000

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Contacts

Karen A. Horvath
Vice President - External Financial Communications
203-629-3000