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TMCNet:  W. R. Berkley Corporation Reports Fourth Quarter Results

[January 28, 2013]

W. R. Berkley Corporation Reports Fourth Quarter Results

GREENWICH, Conn. --(Business Wire)--

W. R. Berkley Corporation (NYSE: WRB) today reported net income for the fourth quarter of 2012 of $165 million, or $1.17 per share, compared with $117 million, or 82 cents per share, for the fourth quarter of 2011.



Summary Financial Data

(Amounts in thousands, except per share data)

 

 

Fourth Quarter   Full Year
2012   2011 2012   2011
 
Gross premiums written $ 1,452,709 $ 1,255,879 $ 5,779,879 $ 5,077,313
Net premiums written 1,228,135 1,090,511 4,898,539 4,357,368
 
Net income 165,489 117,027 510,592 391,211
Net income per diluted share 1.17 0.82 3.56 2.69
 
Operating income (1) 90,430 82,290 373,790 309,564
Operating income per diluted share 0.64 0.58 2.61 2.13

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

Fourth quarter highlights included:

  • Return on equity of 16.7%.
  • Average rates on renewed policies increased 6.5%.
  • GAAP combined ratio was 98.1%.
  • Net premiums written increased 12.6%.
  • Net investment income up 30% to $152 million.
  • Special dividend of $1.00 per share of common stock paid in December 2012.

Commenting on the Company's performance, William R. Berkley, chairman and chief executive officer, said: "We are very pleased with the Company's fourth quarter performance. Our core underwriting results continued to improve as prices increased on renewal business for the third successive year and loss cost inflation continued at modest levels. The impact of Storm Sandy was mitigated by strategic reinsurance purchases, and our fourth quarter combined ratio was only slightly higher than the prior year.

"Our gross written premiums increased almost 16%. We continue to retain pricing power in most areas of the business, and our renewal retention remains satisfactory. We expect to have improved margins as higher prices are reflected in our earned premiums.

"As we have commented in the past, our investment income benefits from particular investment opportunities that produce better than market returns. We realized gains from both our private equity investments and our common stock portfolio, which contributed to our return on equity of just under 17% for the quarter. These types of investments are part of our normal strategy, and we expect additional realized gains to be achieved in the coming year.

"We paid a $1.00 per share special dividend in December, prior to the change in Federal tax laws. Together with our regular dividend, we distributed almost all of our fourth quarter earnings to our shareholders. We are increasingly optimistic about our ability to increase prices and deliver improving returns," 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 Tuesday, January 29, 2013, at 9:00 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 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 2013 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 2013 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
2012   2011 2012   2011
Revenues:
Net premiums written $ 1,228,135 $ 1,090,511 $ 4,898,539 $ 4,357,368
Change in unearned premiums 11,840   14,792   (225,023 ) (196,501 )
Net premiums earned 1,239,975 1,105,303 4,673,516 4,160,867
Net investment income 151,875 117,090 586,763 526,351
Insurance service fees 26,012 23,356 103,133 92,843
Net investment gains:
Net realized gains on investment sales 116,462 52,069 201,451 125,881
Change in valuation allowance, net of other-than-temporary impairments -   -   9,014   (400 )
Net investment gains 116,462   52,069   210,465   125,481  
Revenues from wholly-owned investees 73,917 72,735 247,113 248,678
Other income 360   400   2,564   1,764  
Total revenues 1,608,601   1,370,953   5,823,554   5,155,984  
Expenses:
Losses and loss expenses 801,173 693,014 2,948,479 2,658,365
Other operating costs and expenses 467,599 429,590 1,799,623 1,626,526
Expenses from wholly-owned investees 74,784 71,436 247,222 245,495
Interest expense 32,552   28,195   126,302   112,512  
Total expenses 1,376,108   1,222,235   5,121,626   4,642,898  
Income before income taxes 232,493 148,718 701,928 513,086
Income tax expense (66,994 ) (31,663 ) (191,285 ) (121,945 )
Net income before noncontrolling interests 165,499 117,055 510,643 391,141
Noncontrolling interests (10 ) (28 ) (51 ) 70  
Net income to common stockholders $ 165,489   $ 117,027   $ 510,592   $ 391,211  
 
Net income per share:
Basic $ 1.22 $ 0.85 $ 3.72 $ 2.80
Diluted $ 1.17 $ 0.82 $ 3.56 $ 2.69
 
Average shares outstanding:
Basic 135,861 137,174 137,097 139,688
Diluted 141,654 143,016 143,315 145,672

Operating Results by Segment

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

 
  Fourth Quarter   Full Year
2012   2011 2012   2011
 
Specialty:
Gross premiums written $ 544,928 $ 474,205 $ 2,071,193 $ 1,818,344
Net premiums written 452,131 408,425 1,747,687 1,554,516
Premiums earned 431,054 395,181 1,646,471 1,442,748
Pre-tax income 57,283 53,324 261,856 290,937
Loss ratio 65.4 % 63.8 % 62.8 % 59.4 %
Expense ratio 32.6 % 32.0 % 32.7 % 32.6 %
GAAP combined ratio 98.0 % 95.8 % 95.5 % 92.0 %
 
Regional:
Gross premiums written $ 292,360 $ 268,138 $ 1,218,602 $ 1,149,362
Net premiums written 266,303 247,127 1,119,274 1,064,507
Premiums earned 281,145 270,552 1,090,217 1,065,975
Pre-tax income 43,000 33,299 122,211 30,529
Loss ratio 56.2 % 57.9 % 59.6 % 68.0 %
Expense ratio 36.2 % 35.6 % 36.5 % 36.1 %
GAAP combined ratio 92.4 % 93.5 % 96.1 % 104.1 %
 
Alternative Markets:
Gross premiums written $ 206,727 $ 171,094 $ 971,370 $ 827,156
Net premiums written 146,855 121,980 702,922 619,097
Premiums earned 174,185 158,402 680,334 612,558
Pre-tax income 53,344 29,653 194,433 145,660
Loss ratio 68.5 % 73.3 % 71.4 % 72.3 %
Expense ratio 26.2 % 26.5 % 25.9 % 26.7 %
GAAP combined ratio 94.7 % 99.8 % 97.3 % 99.0 %
 
Reinsurance:
Gross premiums written $ 134,805 $ 115,474 $ 508,717 $ 453,170
Net premiums written 127,891 110,805 477,252 430,329
Premiums earned 119,487 110,788 446,939 426,008
Pre-tax income 18,526 16,368 93,268 83,150
Loss ratio 68.1 % 63.4 % 60.5 % 61.6 %
Expense ratio 38.2 % 39.7 % 40.1 % 40.5 %
GAAP combined ratio 106.3 % 103.1 % 100.6 % 102.1 %
 
International:
Gross premiums written $ 273,889 $ 226,968 $ 1,009,997 $ 829,281
Net premiums written 234,955 202,174 851,404 688,919
Premiums earned 234,104 170,380 809,555 613,578
Pre-tax income 11,376 11,613 62,061 39,033
Loss ratio 68.6 % 57.5 % 62.9 % 60.5 %
Expense ratio 34.8 % 41.1 % 37.2 % 40.2 %
GAAP combined ratio 103.4 % 98.6 % 100.1 % 100.7 %

Operating Results by Segment (Continued)

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

 
Fourth Quarter   Full Year
2012   2011 2012   2011
 
Corporate and Eliminations:
Net investment gains $ 116,462 $ 52,069 $ 210,465 $ 125,481
Interest expense (32,552 ) (28,195 ) (126,302 ) (112,512 )
Other revenues and expenses (3) (34,946 ) (19,413 ) (116,064 ) (89,192 )
Pre-tax income (loss) 48,964 4,461 (31,901 ) (76,223 )
 
Consolidated:
Gross premiums written $ 1,452,709 $ 1,255,879 $ 5,779,879 $ 5,077,313
Net premiums written 1,228,135 1,090,511 4,898,539 4,357,368
Premiums earned 1,239,975 1,105,303 4,673,516 4,160,867
Pre-tax income 232,493 148,718 701,928 513,086
Loss ratio 64.6 % 62.7 % 63.1 % 63.9 %
Expense ratio 33.5 % 34.3 % 34.1 % 34.6 %
GAAP combined ratio 98.1 % 97.0 % 97.2 % 98.5 %

(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 attributable to Storm Sandy, net of reinsurance recoveries and reinstatement premiums, were $40 million in the fourth quarter of 2012. Total losses from catastrophes were as follows (in thousands):

Fourth Quarter   Full Year
2012   2011 2012   2011
 
Specialty $ 6,560 $ 1,702 $ 18,213 $ 17,316
Regional 624 (268 ) 24,373 84,856
Alternative Markets 33 589 631 2,134
Reinsurance 19,811 6,294 20,691 23,973
International 13,786   6,232   16,290   25,086
Total $ 40,814   $ 14,549   $ 80,198   $ 153,365

(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)

 
December 31, 2012   December 31, 2011
 
Net invested assets (1) $ 15,681,803 $ 14,559,781
Total assets 20,155,896 18,403,873
Reserves for losses and loss expenses 9,751,086 9,337,134
Senior notes and other debt 1,871,535 1,500,503
Junior subordinated debentures 243,206 242,997
Common stockholders' equity (2) (3) (4) 4,306,217 3,953,356
Common stock outstanding (3) (4) 136,018 137,520
Book value per share (4) (5) 31.66 28.75
Tangible book value per share (4) (5) 30.95 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 $518 million and $430 million as of December 31, 2012 and 2011, respectively. Unrealized currency translation losses were $37 million and $61 million as of December 31, 2012 and 2011, respectively.

(3) During the fourth quarter of 2012, the Company repurchased 170,300 shares of its common stock at an average cost of $37.00 per share. During 2012, the Company repurchased 3.4 million shares of its common stock at an average cost of $37.24 per share and an aggregate cost of $128 million.

(4) The Financial Accounting Standards Board has issued new 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 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)

 
Fourth Quarter   Full Year
2012   2011 2012   2011
 
Reconciliation of operating income to net income:
Operating income (1) $ 90,430 $ 82,290 $ 373,790 $ 309,564
Investment gains, net of tax 75,059   34,737   136,802   81,647  
Net income $ 165,489   $ 117,027   $ 510,592   $ 391,211  
 
Return on equity (2) 16.7 % 12.8 % 12.9 % 10.7 %
 
Cash flow from operations $ 222,108 $ 185,036 $ 675,457 $ 670,279
 
Other operating costs and expenses:
Underwriting expenses $ 415,126 $ 378,644 $ 1,592,746 $ 1,438,129
Service expenses 20,990 19,467 84,986 75,231
Net foreign currency (gains) losses (3,219 ) 287 (6,092 ) (1,884 )
Other costs and expenses 34,702   31,192   127,983   115,050  
Total $ 467,599   $ 429,590   $ 1,799,623   $ 1,626,526  

(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 common stockholders' equity.

Investment Portfolio

December 31, 2012

(Amounts in thousands)

 
  Carrying

Value

  Percent

of Total

 
Fixed maturity securities:
United States government and government agencies $ 898,463 5.7 %
State and municipal:
Special revenue 2,243,455 14.3 %
Pre-refunded 917,207 5.8 %
State general obligation 888,498 5.7 %
Local general obligation 399,783 2.5 %
Corporate backed 384,766   2.5 %
Total state and municipal 4,833,709   30.8 %
Mortgage-backed securities:
Agency 1,110,385 7.1 %
Commercial 273,568 1.7 %
Residential - Prime 236,372 1.5 %
Residential - Alt A 128,136   0.8 %
Total mortgage-backed securities 1,748,461   11.1 %
Corporate:
Industrial 1,590,816 10.2 %
Financial 799,602 5.1 %
Asset-backed 596,428 3.8 %
Utilities 235,409 1.5 %
Other 129,461   0.8 %
Total corporate 3,351,716   21.4 %
Foreign 1,111,607   7.1 %
Total fixed maturity securities (1) 11,943,956   76.1 %
 
Equity securities available for sale:
Common stocks 282,066 1.8 %
Preferred stocks 93,956   0.6 %
Total equity securities available for sale 376,022   2.4 %
 
Cash and cash equivalents (2) 1,245,505 7.9 %
Investment funds (2) 778,547 5.0 %
Real estate 606,735 3.9 %
Loans receivable 401,961 2.6 %
Arbitrage trading account 329,077   2.1 %
Net invested assets $ 15,681,803   100.0 %

(1) Total fixed maturity securities had an average rating of AA- and an average duration of 3.4 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 $31 million.

 Foreign Fixed Maturity Securities

         December 31, 2012

         (Amounts in thousands)

 
  Government   Corporate   Total
Australia $ 230,308 $ 114,000 $ 344,308
Canada 129,822 50,681 180,503
United Kingdom 142,036 33,668 175,704
Argentina 125,396 30,750 156,146
Germany 90,748 - 90,748
Brazil 51,752 - 51,752
Norway 38,625 - 38,625
Supranational (1) 37,013 - 37,013
Netherlands - 14,427 14,427
Switzerland - 11,403 11,403
Singapore 6,985 - 6,985
Uruguay 3,576 - 3,576
New Zealand 417   -   417
Total $ 856,678   $ 254,929   $ 1,111,607

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


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