W. R. Berkley(US:WRB)2022-08-02 20:21Part I — FINANCIAL INFORMATION Financial Statements Unaudited consolidated financial statements for the period ended June 30, 2022, show asset growth and increased net income Consolidated Financial Statements Total assets grew to $32.7 billion, while net income for the six-month period increased significantly to $770 million Consolidated Balance Sheet Highlights (Unaudited) | Metric | June 30, 2022 ($ thousands) | December 31, 2021 ($ thousands) | | :--- | :--- | :--- | | Total Investments | 22,268,690 | 22,171,814 | | Total Assets | 32,692,447 | 32,047,876 | | Reserves for losses and loss expenses | 16,145,821 | 15,390,888 | | Total Liabilities | 26,155,574 | 25,380,146 | | Total Stockholders' Equity | 6,514,485 | 6,653,011 | Consolidated Statement of Income Highlights (Unaudited) | Metric | Six Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2021 ($ thousands) | | :--- | :--- | :--- | | Net Premiums Written | 4,998,889 | 4,262,219 | | Net Premiums Earned | 4,606,244 | 3,821,580 | | Total Revenues | 5,428,297 | 4,452,955 | | Income Before Income Taxes | 954,995 | 596,008 | | Net Income to Common Stockholders | 769,960 | 466,763 | Net Income Per Share (Unaudited) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Basic EPS | $2.78 | $1.68 | | Diluted EPS | $2.76 | $1.66 | - Net cash from operating activities increased to $1.01 billion for the first six months of 2022, compared to $695.8 million in the same period of 202123 Note 7: Investments in Fixed Maturity Securities The fixed maturity securities portfolio, valued at $16.85 billion, experienced a significant increase in unrealized losses due to rising interest rates Fixed Maturity Securities by Type (June 30, 2022) | Security Type | Carrying Value ($ thousands) | | :--- | :--- | | Corporate | 5,689,125 | | Asset-backed | 4,292,488 | | State and municipal | 3,017,263 | | Foreign government | 1,604,111 | | Mortgage-backed | 1,477,099 | | U.S. government and government agency | 720,914 | | Total Available for Sale | 16,801,000 | - Gross unrealized losses on fixed maturity securities stood at $840.2 million as of June 30, 2022, a substantial increase from $124.2 million at December 31, 2021, primarily due to rising interest rates3839 - The allowance for expected credit losses on available-for-sale securities increased to $33.3 million as of June 30, 2022, from $22.2 million at the beginning of the period, mainly due to an increase in unrealized losses on foreign government securities41 Note 14: Net Investment (Losses) Gains Net investment gains for the six-month period reached $194.7 million, driven by a real estate sale, despite a net investment loss in the second quarter - A gain of $251 million was realized on the sale of a real estate investment in London during March 2022, which was the primary driver of net investment gains for the first half of the year62 Net Investment (Losses) Gains Breakdown (in thousands) | Component | For the Six Months Ended June 30, 2022 | For the Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net realized and unrealized gains on investments | $205,947 | $72,219 | | Change in allowance for expected credit losses | ($11,237) | ($13,316) | | Total Net Investment Gains | $194,710 | $58,903 | - For the three months ended June 30, 2022, the company experienced a net investment loss of $171.6 million, driven by a $131.5 million change in unrealized losses on equity securities62 Note 17: Reserves for Loss and Loss Expenses Gross loss reserves increased to $16.1 billion, with cumulative net COVID-19 related losses reaching approximately $303 million since the pandemic's start Reconciliation of Net Loss Reserves (Six Months Ended June 30, in thousands) | Description | 2022 | 2021 | | :--- | :--- | :--- | | Net reserves at beginning of period | $12,848,362 | $11,620,393 | | Net provision for losses (current year) | 2,748,725 | 2,308,309 | | Increase in estimates for prior years | 9,765 | 1,530 | | Net payments for claims | (2,006,972) | (1,764,819) | | Net reserves at end of period | $13,521,933 | $12,164,659 | - As of June 30, 2022, the company had recognized cumulative losses for COVID-19-related claims of approximately $303 million, net of reinsurance88150 - Favorable prior year development for the six months ended June 30, 2022 was $3 million (net of premiums), primarily from the Insurance segment's 2020 and 2021 accident years, partially offset by adverse development in the 2015-2019 accident years attributed to social inflation899091 Note 23: Business Segments The Insurance and Reinsurance segments both demonstrated strong premium growth, contributing $730 million and $150 million in pre-tax income respectively Segment Performance (Six Months Ended June 30, 2022, in thousands) | Segment | Net Premiums Earned | Pre-Tax Income (Loss) (excl. net investment gains) | | :--- | :--- | :--- | | Insurance | $4,032,991 | $729,873 | | Reinsurance & Monoline Excess | $573,253 | $149,805 | | Corporate, other and eliminations | $0 | ($119,393) | Net Premiums Earned by Line of Business (Six Months Ended June 30, 2022, in thousands) | Line of Business | Net Premiums Earned | | :--- | :--- | | Insurance Segment | | | Other liability | $1,538,754 | | Short-tail lines | $776,980 | | Workers' compensation | $585,067 | | Commercial automobile | $583,975 | | Professional liability | $548,215 | | Reinsurance & Monoline Excess Segment | | | Casualty reinsurance | $374,781 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong premium growth, an improved combined ratio, and the significant impact of a real estate sale on net income Critical Accounting Estimates Key estimates include loss reserves and investment fair values, which involve significant judgment, particularly for long-tail lines and illiquid securities - Reserves for losses and loss expenses are management's best estimate based on actuarial point estimates and qualitative factors130134136 - Approximately 21% of net loss reserves relate to the Reinsurance & Monoline Excess segment, which has a higher degree of uncertainty due to long settlement tails and reliance on information from ceding companies141 - The fair value of the vast majority of the Company's investment portfolio is based on observable data (Level 2 inputs), utilizing pricing models, benchmark curves, and broker quotes, as many fixed maturity securities do not trade daily169171 Results of Operations Net income for the six-month period rose to $770 million, driven by higher underwriting income and investment gains, with the GAAP combined ratio improving to 88.2% Consolidated GAAP Combined Ratio (Six Months Ended June 30) | Component | 2022 | 2021 | | :--- | :--- | :--- | | Loss Ratio | 60.2% | 60.8% | | Expense Ratio | 28.0% | 29.1% | | GAAP Combined Ratio | 88.2% | 89.9% | - Gross premiums written increased 15% to $5.9 billion for the first six months of 2022, with the Insurance segment growing 15% and the Reinsurance & Monoline Excess segment growing 12%179183 - The increase in net income for the first half of 2022 was primarily due to higher underwriting income and a significant gain from the sale of a real estate investment, which offset unrealized losses on equity securities178184 - The expense ratio improved to 28.0% in the first half of 2022 from 29.1% in 2021, as the 21% growth in net premiums earned outpaced the 16% increase in policy acquisition and insurance operating expenses189 Investments The $23.5 billion investment portfolio is dominated by fixed maturity securities with a short average duration of 2.4 years to manage interest rate risk Investment Portfolio Composition (June 30, 2022) | Asset Class | Carrying Value ($ thousands) | Percent of Total | | :--- | :--- | :--- | | Fixed maturity securities | 16,851,514 | 71.6% | | Investment funds | 1,702,270 | 7.2% | | Real estate | 1,304,094 | 5.5% | | Cash and cash equivalents | 1,277,294 | 5.4% | | Arbitrage trading account | 1,142,003 | 4.9% | | Equity securities | 1,155,326 | 4.9% | | Loans receivable | 113,483 | 0.5% | | Total Investments | 23,545,984 | 100.0% | - The average duration of the fixed maturity portfolio, including cash, was maintained at 2.4 years at both June 30, 2022, and December 31, 2021, reflecting a strategy to manage interest rate risk224233 Liquidity and Capital Resources The company maintains strong liquidity with increased operating cash flow of $1.0 billion and an improved debt-to-capital ratio of 30% - Cash flow from operating activities increased to $1.006 billion in H1 2022 from $696 million in H1 2021, driven by higher premium receipts235 - In Q1 2022, the company repaid $427 million in senior notes at maturity237 - In April 2022, it entered into a new $300 million revolving credit facility, which was undrawn as of the report date238 - The debt-to-total capital ratio improved to 30% at June 30, 2022, compared to 33% at December 31, 2021240 Quantitative and Qualitative Disclosure About Market Risk The company's primary market risks, including credit, interest rate, and foreign currency risks, are managed through asset-liability matching - The company's disclosure on market risk is contained within the MD&A section, specifically under "Investments - Market Risk"242 Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures are effective243 - No material changes to internal control over financial reporting were identified during the quarter244 Part II — OTHER INFORMATION Legal Proceedings Ongoing legal matters from ordinary business operations are not expected to have a material impact on the company's financial condition - The company is involved in legal proceedings in the ordinary course of business, which are considered in the establishment of loss reserves and are not expected to have a material impact on its financial condition101102245 Risk Factors No material changes to the company's previously disclosed risk factors were reported for the period - No material changes to risk factors were reported for the period246 Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any of its common stock during the second quarter of 2022 - No common stock was repurchased during the three months ended June 30, 2022247 Exhibits This section lists all exhibits filed with the report, including required CEO and CFO certifications - The report includes required certifications from the CEO and CFO pursuant to Sarbanes-Oxley Act rules249