W. R. Berkley(WRB) - 2022 Q4 - Annual Report

Part I Item 1. Business The company is a major commercial lines insurance holding company operating globally through Insurance and Reinsurance & Monoline Excess segments via a decentralized model - The company operates through a decentralized model with 59 businesses, 52 of which were developed internally, focusing on specialized niche markets[18][19] - The company's insurance subsidiaries hold strong financial strength ratings: A+ (Superior) from A.M. Best, A+ from S&P, A1 from Moody's, and AA- from Fitch[20][21][22] Net Premiums Written by Segment (2020-2022) | Segment | 2022 (In thousands) | 2021 (In thousands) | 2020 (In thousands) | | :--- | :--- | :--- | :--- | | Insurance | $8,784,146 | $7,743,814 | $6,347,101 | | Reinsurance & Monoline Excess | $1,219,924 | $1,119,053 | $915,336 | | Total | $10,004,070 | $8,862,867 | $7,262,437 | Insurance Segment The Insurance segment, comprising 87.8% of 2022 net premiums written, offers diverse commercial insurance with a combined ratio of 89.2% in 2022 - The Insurance segment is diversified across several specialty areas, including Excess & Surplus Lines for complex risks, tailored coverages for specific industries, specialized product lines like workers' compensation, and regionally focused standard commercial products[25][26][27][28] Insurance Segment Gross Premiums Written by Line (2020-2022) | Line of Business | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Other liability | 37.0% | 35.6% | 36.0% | | Short-tail lines | 23.2% | 22.2% | 23.3% | | Professional liability | 15.5% | 17.3% | 14.6% | | Workers' compensation | 11.7% | 12.4% | 14.3% | | Commercial auto | 12.6% | 12.5% | 11.8% | Insurance Segment Underwriting Ratios (2020-2022) | Ratio | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Loss ratio | 61.3% | 61.1% | 64.9% | | Expense ratio | 27.9% | 28.3% | 30.3% | | Combined ratio | 89.2% | 89.4% | 95.2% | Reinsurance & Monoline Excess Segment This segment provides treaty and facultative reinsurance, with casualty lines representing 61.7% of gross premiums and an improved combined ratio of 89.7% in 2022 - The segment offers reinsurance on both a portfolio (treaty) and individual risk (facultative) basis, with its monoline excess operations retaining risk solely on an excess basis[77] Reinsurance & Monoline Excess Gross Premiums Written by Line (2020-2022) | Line of Business | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Casualty | 61.7% | 61.8% | 58.1% | | Property | 19.9% | 19.2% | 22.1% | | Monoline Excess | 18.4% | 19.0% | 19.8% | Reinsurance & Monoline Excess Underwriting Ratios (2020-2022) | Ratio | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Loss ratio | 61.3% | 61.0% | 61.3% | | Expense ratio | 28.4% | 29.7% | 31.8% | | Combined ratio | 89.7% | 90.7% | 93.1% | Loss and Loss Expense Reserves Gross reserves for losses and loss expenses increased to $17.0 billion in 2022, reflecting a complex and subjective estimation process - Establishing loss reserves is a complex process involving estimates for known claims (case reserves) and incurred but not reported (IBNR) losses, considering factors like inflation and legal trends[90][91][92] - The company discounts certain workers' compensation reserves, primarily excess workers' compensation, using risk-free rates based on the U.S. Treasury yield curve, with an aggregate net discount of $416 million at the end of 2022[95][96] Reconciliation of Loss and Loss Expense Reserves (Net) | (In thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net reserves at beginning of year | $12,848,362 | $11,620,393 | $10,697,998 | | Net provision for losses | $5,861,750 | $4,953,960 | $4,468,706 | | Net payments for claims | ($4,347,910) | ($3,665,694) | ($3,598,649) | | Net reserves at end of year | $14,248,879 | $12,848,362 | $11,620,393 | | Gross reserves at end of year | $17,011,223 | $15,390,888 | $13,784,430 | Regulation The company is subject to extensive state, federal, and international regulations governing solvency, investments, market conduct, and data privacy - U.S. insurance subsidiaries are principally regulated by their domiciliary state insurance departments, which oversee solvency, investments, rates, and policy forms[104][105] - The company must comply with NAIC's Risk-Based Capital (RBC) requirements and annually submit an Own Risk and Solvency Assessment (ORSA) report[112][116] - International operations are subject to complex regulations, including the U.K.'s prudential regime (similar to Solvency II) and the EU's GDPR for data protection[138][141][146] Item 1A. Risk Factors The company faces significant risks from industry cycles, competition, reserve adequacy, catastrophes, regulations, and investment market fluctuations - Industry risks include cyclical pricing, significant competition, and the uncertainty of estimating loss reserves, which could prove inadequate[167][168][173] - The company is exposed to significant losses from natural and man-made catastrophes, with net catastrophe losses of $212 million in 2022[181] - The ongoing effects of the COVID-19 pandemic, potential for adverse legislative action, and uncertainty around ultimate claim losses remain a significant risk[183][184][185] - Investment portfolio risks include the impact of interest rate changes on the value of fixed maturity securities and volatility in equity, real estate, and other alternative investments[228][234] Item 2. Properties The company owned or leased approximately 4.3 million square feet of office space at year-end 2022, with rental expenses of $43.4 million - The company's total office space is 4,295,165 square feet, of which 1,048,136 sq. ft. is owned and 3,247,029 sq. ft. is leased[244] - Rental expense was $43.4 million in 2022, a slight decrease from $44.1 million in 2021[245] Item 3. Legal Proceedings The company is involved in ordinary course litigation, with estimated costs reflected in loss reserves and not expected to materially impact financial condition - The company is subject to legal proceedings arising in the ordinary course of business, and the estimated costs are included in its loss reserves[246] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock significantly outperformed market indices, and it executed share repurchases and paid both regular and special dividends in 2022 - The Board declared regular quarterly dividends and a special dividend of $0.50 per share in the second quarter of 2022[249] Comparison of 5-Year Cumulative Total Return (Assumes $100 Investment) | Index | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | W. R. Berkley Corporation | $100.00 | $104.61 | $150.46 | $145.72 | $185.56 | $240.56 | | S&P 500 Index | $100.00 | $95.61 | $125.70 | $148.81 | $191.48 | $156.69 | | S&P 500 P&C Insurance Index | $100.00 | $95.31 | $119.97 | $127.56 | $149.90 | $178.27 | Share Repurchases in Q4 2022 | Month | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | October 2022 | 325,596 | $69.22 | | November 2022 | 938,494 | $69.29 | | December 2022 | — | — | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income grew to $1.38 billion in 2022, driven by a 13% increase in net premiums written and a significant gain from a real estate sale - The company's profitability is driven by its insurance operations and investments, with a decentralized structure allowing it to capitalize on niche opportunities[257][258] - A 3-for-2 common stock split was completed on March 23, 2022, and all per-share amounts in the report reflect this split[262] - The company sold a London office building in March 2022, realizing a pre-tax gain of $317 million ($251 million after adjustments)[263] Critical Accounting Estimates Reserves for losses and loss expenses are the most critical accounting estimate, with net reserves totaling $14.2 billion at year-end 2022 - Establishing loss reserves is inherently uncertain and involves management's best estimates based on actuarial projections and qualitative factors like inflation and loss emergence patterns[269][272] - As of December 31, 2022, the company had recognized approximately $341 million in losses for COVID-19-related claims, net of reinsurance[285] Net Prior Year Development (2020-2022) | (In thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Increase in prior year loss reserves | ($54,511) | ($863) | ($627) | | Increase in prior year earned premiums | $18,106 | $7,510 | $16,807 | | Net (unfavorable) favorable prior year development | ($36,405) | $6,647 | $16,180 | Results of Operations Net income rose to $1.38 billion in 2022, supported by strong premium growth, increased investment income, and a stable combined ratio of 89.3% - Net investment income increased 16% to $779 million in 2022, primarily due to rising interest rates and a larger fixed maturity portfolio[324] Consolidated Underwriting Results (2021-2022) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Gross premiums written | $11,909,052 | $10,700,134 | | Net premiums written | $10,004,070 | $8,862,867 | | Net premiums earned | $9,561,429 | $8,106,031 | | Loss ratio | 61.3% | 61.1% | | Expense ratio | 28.0% | 28.5% | | GAAP combined ratio | 89.3% | 89.6% | Net Income to Common Stockholders (2021-2022) | (In thousands, except per share data) | 2022 | 2021 | | :--- | :--- | :--- | | Net income to common stockholders | $1,381,062 | $1,022,490 | | Net income per diluted share | $4.94 | $3.66 | Liquidity and Capital Resources The company maintained strong liquidity with operating cash flow of $2.6 billion and total capitalization of $9.6 billion at year-end 2022 - Cash flow from operating activities increased to $2,569 million in 2022 from $2,184 million in 2021, driven by higher premium receipts[356] - Total capitalization was $9.6 billion at December 31, 2022, with debt representing 30% of the total[361] - In 2022, the company repurchased 1.4 million shares for $94 million and paid $235 million in common stock dividends[360] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuation, managed by maintaining a short portfolio duration of 2.4 years - The company manages interest rate risk by matching the duration of its investment portfolio to its liabilities; the effective duration of the fixed maturity portfolio was 2.4 years at the end of 2022[375] Interest Rate Sensitivity of Fixed Maturity Portfolio (as of Dec 31, 2022) | Change in Interest Rates | Estimated Change in Fair Value (In thousands) | | :--- | :--- | | 300 basis point rise | ($1,297,772) | | 100 basis point rise | ($450,899) | | Base scenario | $0 | | 100 basis point decline | $463,339 | | 300 basis point decline | $1,403,291 | Item 8. Financial Statements and Supplementary Data This section includes audited financial statements for 2020-2022 and an unqualified audit opinion from KPMG LLP, which identified loss reserves as a critical audit matter - The independent auditor, KPMG LLP, issued an unqualified opinion, stating the financial statements are presented fairly in all material respects[380] - The auditor identified the estimation of reserves for losses and loss expenses as a critical audit matter due to the significant measurement uncertainty and complex judgments involved[385][386] Notes to Consolidated Financial Statements The notes detail key accounting policies, including the valuation of the $22.9 billion investment portfolio and the composition of the $17.0 billion in gross loss reserves Item 9A. Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2022 - Management concluded that both disclosure controls and internal controls over financial reporting were effective as of December 31, 2022[584][589] - The independent registered public accounting firm issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[592] Part III Items 10-14 Required information on governance, compensation, and security ownership is incorporated by reference from the company's forthcoming proxy statement - Details regarding directors, executive compensation, security ownership, related transactions, and accountant fees are incorporated by reference from the forthcoming proxy statement[603][604][605][609][610] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statement schedules and exhibits, such as material contracts and governance documents, filed with the Form 10-K report - This section provides an index to supplementary financial schedules and a list of all exhibits filed with the report, including governance documents and material contracts[611][613]