W. R. Berkley(WRB) - 2023 Q1 - Quarterly Report

Part I — FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited consolidated financial statements and notes for Q1 2023, covering balance sheets, income, and cash flows Consolidated Balance Sheets The consolidated balance sheets show a slight increase in total assets and total equity from December 31, 2022, to March 31, 2023, primarily driven by an increase in investments and a reduction in accumulated other comprehensive loss Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2023 | December 31, 2022 | Change | Change (%) | | :-------------------------------- | :------------- | :---------------- | :----- | :--------- | | Total Assets | $34,296,064 | $33,815,103 | $480,961 | 1.42% | | Total Liabilities | $27,330,441 | $27,046,942 | $283,499 | 1.05% | | Total Equity | $6,965,623 | $6,768,161 | $197,462 | 2.92% | | Reserves for losses and loss expenses | $17,431,635 | $17,011,223 | $420,412 | 2.47% | | Fixed maturity securities | $18,091,113 | $17,587,349 | $503,764 | 2.86% | | Cash and cash equivalents | $1,242,357 | $1,449,346 | $(206,989) | -14.28% | Consolidated Statements of Income Net income to common stockholders significantly decreased for Q1 2023 compared to Q1 2022, primarily due to lower net investment gains and higher losses and loss expenses, despite increased net premiums earned Consolidated Statements of Income Highlights (in thousands, except per share data) | Metric | 3 Months Ended March 31, 2023 | 3 Months Ended March 31, 2022 | Change | Change (%) | | :-------------------------------- | :---------------------------- | :---------------------------- | :----- | :--------- | | Net premiums earned | $2,491,432 | $2,249,087 | $242,345 | 10.78% | | Net investment income | $223,398 | $173,512 | $49,886 | 28.75% | | Net investment gains | $23,010 | $366,265 | $(343,255) | -93.72% | | Total revenues | $2,895,004 | $2,915,409 | $(20,405) | -0.70% | | Losses and loss expenses | $1,538,755 | $1,339,252 | $199,503 | 14.90% | | Income before income taxes | $376,071 | $732,433 | $(356,362) | -48.65% | | Net income to common stockholders | $294,126 | $590,638 | $(296,512) | -50.20% | | Basic EPS | $1.07 | $2.13 | $(1.06) | -49.77% | | Diluted EPS | $1.06 | $2.12 | $(1.06) | -50.00% | Consolidated Statements of Comprehensive Income Comprehensive income to common stockholders significantly increased for Q1 2023 compared to Q1 2022, primarily due to a positive change in unrealized investment gains (losses), net of taxes Consolidated Statements of Comprehensive Income Highlights (in thousands) | Metric | 3 Months Ended March 31, 2023 | 3 Months Ended March 31, 2022 | Change | Change (%) | | :-------------------------------- | :---------------------------- | :---------------------------- | :----- | :--------- | | Net income before noncontrolling interests | $295,729 | $593,030 | $(297,301) | -50.13% | | Change in unrealized currency translation adjustments | $4,866 | $56,272 | $(51,406) | -91.36% | | Change in unrealized investment gains (losses), net of taxes | $180,799 | $(423,545) | $604,344 | -142.69% | | Other comprehensive income (loss) | $185,665 | $(367,273) | $552,938 | -150.55% | | Comprehensive income to common stockholders | $479,792 | $223,366 | $256,426 | 114.71% | Consolidated Statements of Stockholders' Equity The consolidated statements of stockholders' equity reflect an increase in retained earnings and a significant improvement in accumulated other comprehensive loss for Q1 2023 compared to the prior year, despite substantial dividends paid and treasury stock repurchases Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Metric | 3 Months Ended March 31, 2023 | 3 Months Ended March 31, 2022 | Change | | :-------------------------------- | :---------------------------- | :---------------------------- | :----- | | Retained earnings (End of period) | $10,296,539 | $9,582,790 | $713,749 | | Net income to common stockholders | $294,126 | $590,638 | $(296,512) | | Dividends paid | $(158,592) | $(22,983) | $(135,609) | | Accumulated other comprehensive loss (End of period) | $(1,078,917) | $(649,229) | $(429,688) | | Treasury stock (End of period) | $(3,387,538) | $(3,166,873) | $(220,665) | | Stock repurchased | $(135,152) | $0 | $(135,152) | Consolidated Statements of Cash Flows Net cash from operating activities decreased, and investing activities shifted from a net cash inflow to a net cash outflow for Q1 2023 compared to Q1 2022, primarily due to increased loss payments and reduced proceeds from investment sales Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 3 Months Ended March 31, 2023 | 3 Months Ended March 31, 2022 | Change | | :-------------------------------- | :---------------------------- | :---------------------------- | :----- | | Net cash from operating activities | $445,323 | $477,682 | $(32,359) | | Net cash (used in) from investing activities | $(359,430) | $518,563 | $(877,993) | | Net cash used in financing activities | $(295,726) | $(451,330) | $155,604 | | Net change in cash and cash equivalents | $(206,989) | $545,998 | $(752,987) | | Cash and cash equivalents at end of period | $1,242,357 | $2,114,841 | $(872,484) | Notes to Interim Consolidated Financial Statements The notes provide detailed explanations and breakdowns of the financial statements, covering accounting principles, per share data, investment portfolios, fair value measurements, loss reserves, and business segment performance (1) General - The unaudited consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information, reflecting normal recurring adjustments and consistent presentation with prior audited statements[23] - Management makes estimates and assumptions affecting reported amounts, with further details available in the Annual Report on Form 10-K for December 31, 2022[24] - The effective income tax rate differs from the federal rate primarily due to state and foreign income taxes, partially offset by tax-exempt investment income[25] (2) Per Share Data - Basic EPS is calculated by dividing net income by the weighted average common shares outstanding, including shares in a grantor trust for vested but deferred restricted stock units (RSUs)[26] - Diluted EPS uses the treasury stock method for stock incentive plans, with common equivalent shares excluded if anti-dilutive[26] Weighted Average Common Shares (in thousands) | Metric | 3 Months Ended March 31, 2023 | 3 Months Ended March 31, 2022 | | :----- | :---------------------------- | :---------------------------- | | Basic | 274,977 | 276,772 | | Diluted | 277,339 | 279,157 | (3) Recent Accounting Pronouncements and Accounting Policies - All accounting and reporting standards effective in 2023 or not yet effective were either not applicable or did not have a material impact on the Company[28][29] (4) Consolidated Statements of Comprehensive Income Changes in Accumulated Other Comprehensive Income (AOCI) (in thousands) | Metric | March 31, 2023 | March 31, 2022 | | :------------------------------------------ | :------------- | :------------- | | Beginning AOCI | $(1,264,581) | $(281,955) | | Other comprehensive income (loss) | $185,665 | $(367,273) | | Ending AOCI | $(1,078,917) | $(649,229) | | Amounts reclassified from AOCI (After-tax) | $25,584 | $9,591 | - The change in AOCI for Q1 2023 was primarily driven by a positive change in unrealized investment gains, contrasting with a loss in Q1 2022[30] (5) Statements of Cash Flows Interest Payments (in thousands) | Period | Interest Payments | | :----- | :---------------- | | Q1 2023 | $41,150 | | Q1 2022 | $52,899 | - No income taxes were paid for the three months ended March 31, 2023 and 2022[32] (6) Investments in Fixed Maturity Securities Fixed Maturity Securities by Type (March 31, 2023, in thousands) | Type | Amortized Cost | Fair Value | | :-------------------------------- | :------------- | :--------- | | Held to maturity | $51,873 | $55,721 | | Available for sale: | | | | U.S. government and government agency | $1,100,204 | $1,049,267 | | State and municipal | $2,899,206 | $2,789,359 | | Mortgage-backed | $2,060,674 | $1,897,729 | | Asset-backed | $3,960,140 | $3,845,453 | | Corporate | $7,447,625 | $7,125,649 | | Foreign government | $1,468,737 | $1,331,890 | | Total available for sale | $18,936,586 | $18,039,347 | | Total fixed maturity securities | $18,988,459 | $18,095,068 | Allowance for Expected Credit Losses - Held to Maturity Securities (in thousands) | Metric | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Beginning of period | $114 | $387 | | Provision for expected credit losses | $(7) | $(9) | | End of period | $107 | $378 | - The allowance for expected credit losses for available for sale securities decreased in Q1 2023 due to a decrease in unrealized losses, primarily associated with corporate securities, offset by foreign government securities[38] Fixed Maturity Securities by Contractual Maturity (March 31, 2023, in thousands) | Maturity | Amortized Cost | Fair Value | | :-------------------------- | :------------- | :--------- | | Due in one year or less | $1,568,436 | $1,528,990 | | Due after one year through five years | $8,864,666 | $8,503,127 | | Due after five years through ten years | $4,287,881 | $4,084,883 | | Due after ten years | $2,203,296 | $2,076,887 | | Mortgage-backed securities | $2,064,073 | $1,901,181 | | Total | $18,988,352 | $18,095,068 | (7) Investments in Equity Securities Equity Securities (in thousands) | Type | March 31, 2023 Fair Value | December 31, 2022 Fair Value | | :------------- | :------------------------ | :------------------------ | | Common stocks | $1,057,599 | $982,751 | | Preferred stocks | $222,356 | $203,143 | | Total | $1,279,955 | $1,185,894 | - Total equity securities increased by $94 million from December 31, 2022, to March 31, 2023[43] (8) Arbitrage Trading Account Arbitrage Trading Account Value (in thousands) | Date | Fair and Carrying Value | | :------------- | :---------------------- | | March 31, 2023 | $609,001 | | December 31, 2022 | $944,230 | - The primary focus of the arbitrage trading account is merger arbitrage, investing in securities of companies targeted in announced tender offers and mergers, typically with a short time horizon[44] - The Company uses put and call options to mitigate market condition impacts on the trading account, reporting them at fair value[45] (9) Net Investment Income Net Investment Income (in thousands) | Source | 3 Months Ended March 31, 2023 | 3 Months Ended March 31, 2022 | | :---------------------------------------------------- | :---------------------------- | :---------------------------- | | Fixed maturity securities, cash & cash equivalents, loans | $195,642 | $101,284 | | Arbitrage trading account | $18,256 | $9,187 | | Equity securities | $13,746 | $10,856 | | Investment funds | $2,180 | $52,012 | | Real estate | $(3,711) | $2,146 | | Gross investment income | $226,113 | $175,485 | | Investment expense | $(2,715) | $(1,973) | | Net investment income | $223,398 | $173,512 | - Net investment income increased by 28.75% year-over-year, primarily driven by higher income from fixed maturity securities[46] (10) Investment Funds - The Company is not the primary beneficiary in any of its investment funds and accounts for its interests using the equity method[47] - Maximum exposure to loss from investment funds is limited to the carrying amount and unfunded commitments, which were $408 million as of March 31, 2023[48] Investment Funds Carrying Value and Income (in thousands) | Fund Type | Carrying Value (March 31, 2023) | Income (Loss) (Q1 2023) | Income (Loss) (Q1 2022) | | :---------------- | :------------------------------ | :---------------------- | :---------------------- | | Financial services | $444,645 | $(13,047) | $25,932 | | Transportation | $336,808 | $11,788 | $11,179 | | Real Estate | $216,871 | $956 | $16,364 | | Infrastructure | $119,042 | $3,355 | $841 | | Energy | $117,461 | $3,439 | $(892) | | Other funds | $366,740 | $(4,311) | $(1,412) | | Total | $1,601,567 | $2,180 | $52,012 | - Lifson Re, a Bermuda reinsurance company, increased its participation in the Company's reinsurance placements from 22.5% to 30.0% effective July 1, 2022[49] (11) Real Estate Real Estate Investment Carrying Value (in thousands) | Category | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------- | :---------------- | | Properties in operation | $1,111,713 | $1,114,167 | | Properties under development | $226,791 | $226,455 | | Total | $1,338,504 | $1,340,622 | - Properties in operation include a long-term ground lease in Washington, D.C., an office complex in New York City, and a completed portion of a mixed-use project in Washington D.C[51] - During Q1 2022, the Company sold a real estate investment in London, generating proceeds reported on the business disposition line in cash flows[52] (12) Loans Receivable Loans Receivable (in thousands) | Category | March 31, 2023 Amortized Cost | December 31, 2022 Amortized Cost | | :--------------- | :---------------------------- | :---------------------------- | | Real estate loans | $175,745 | $173,616 | | Commercial loans | $19,199 | $19,386 | | Total | $194,944 | $193,002 | - Real estate loans are secured by commercial and residential properties primarily in London and New York, with maturities through 2026[54] - The allowance for expected credit losses for loans receivable decreased in Q1 2023, primarily due to a decrease in the weighted average life of the loan portfolio[55] (13) Net Investment Gains Net Investment Gains (Losses) (in thousands) | Source | 3 Months Ended March 31, 2023 | 3 Months Ended March 31, 2022 | | :-------------------------------------------------------------------- | :---------------------------- | :---------------------------- | | Fixed maturity securities (net) | $(17,187) | $(1,279) | | Equity securities (net realized & unrealized) | $44,464 | $94,118 | | Real estate | $10,739 | $286,192 | | Other (net) | $(15,405) | $(6,987) | | Net realized and unrealized gains on investments | $22,611 | $369,882 | | Change in allowance for expected credit losses on investments | $399 | $(3,617) | | Net investment gains | $23,010 | $366,265 | | After-tax net investment gains | $18,160 | $287,823 | - Net investment gains significantly decreased to $23 million in Q1 2023 compared to $366 million in Q1 2022, primarily due to a large gain from the sale of a London real estate investment in 2022[58][59] (14) Fixed Maturity Securities in an Unrealized Loss Position Fixed Maturity Securities in Unrealized Loss Position (March 31, 2023, in thousands) | Type | Fair Value | Gross Unrealized Losses | | :-------------------------------- | :------------- | :---------------------- | | U.S. government and government agency | $741,134 | $54,665 | | State and municipal | $2,079,792 | $127,420 | | Mortgage-backed | $1,632,585 | $166,440 | | Asset-backed | $3,406,951 | $117,853 | | Corporate | $5,869,295 | $340,440 | | Foreign government | $1,026,306 | $109,835 | | Total | $14,756,063 | $916,653 | - Substantially all securities in an unrealized loss position are investment grade, except for foreign government securities, where a significant portion of the loss is due to currency exchange rates[61] - The Company believes unrealized losses are primarily due to temporary market and sector-related factors, not issuer-specific credit issues, and expects issuers to meet contractual obligations[63] (15) Fair Value Measurements - Fair value is measured using a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[64][65] - Substantially all fixed maturity securities are priced by independent pricing services using observable market data and are classified as Level 2[66] Assets Measured at Fair Value (March 31, 2023, in thousands) | Asset Type | Total | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :------------ | :---------- | :------------ | :-------- | | Fixed maturity securities available for sale | $18,039,347 | $— | $18,039,347 | $— | | Equity securities | $1,279,955 | $1,054,268 | $212,219 | $13,468 | | Arbitrage trading account | $609,001 | $574,096 | $31,251 | $3,654 | | Total | $19,928,303 | $1,628,364 | $18,282,817 | $17,122 | - There were no transfers into or out of Level 3 securities for the three months ended March 31, 2023, or for the year ended December 31, 2022[71] (16) Reserves for Loss and Loss Expenses - Reserves for losses and loss expenses include case reserves and incurred but not reported (IBNR) liabilities, established based on actuarial estimates and qualitative factors[73][75] - Key assumptions include expected loss ratios, loss cost inflation rates, and reported/paid loss emergence patterns, which are reviewed and adjusted quarterly[76][79] Reconciliation of Net Reserves for Losses and Loss Expenses (in thousands) | Metric | March 31, 2023 | March 31, 2022 | | :------------------------------------------ | :------------- | :------------- | | Net reserves at beginning of period | $14,248,879 | $12,848,362 | | Net provision for losses and loss expenses | $1,538,755 | $1,339,252 | | Net payments for claims | $1,216,755 | $1,018,254 | | Foreign currency translation | $1,154 | $9,983 | | Net reserves at end of period | $14,572,033 | $13,179,343 | | Gross reserves at end of period | $17,431,635 | $15,722,889 | - Adverse prior year development (net of additional and return premiums) was $24 million in Q1 2023, primarily due to property catastrophe losses from 2022 events and adverse development on casualty lines for 2016-2019 accident years, partially offset by favorable development on 2022 casualty lines[88][89][90][91] - COVID-19 related claims, net of reinsurance, totaled approximately $344 million as of March 31, 2023, with $43 thousand recognized in Q1 2023[87] (17) Fair Value of Financial Instruments Fair Value of Financial Instruments (in thousands) | Instrument | March 31, 2023 Carrying Value | March 31, 2023 Fair Value | December 31, 2022 Carrying Value | December 31, 2022 Fair Value | | :---------------------------------------------------- | :---------------------------- | :------------------------ | :------------------------------- | :------------------------ | | Fixed maturity securities | $18,091,113 | $18,095,068 | $17,587,349 | $17,591,626 | | Equity securities | $1,279,955 | $1,279,955 | $1,185,894 | $1,185,894 | | Arbitrage trading account | $609,001 | $609,001 | $944,230 | $944,230 | | Loans receivable | $194,944 | $187,455 | $193,002 | $187,981 | | Senior notes and other debt | $1,827,981 | $1,501,671 | $1,828,823 | $1,439,188 | | Subordinated debentures | $1,008,551 | $836,796 | $1,008,371 | $805,600 | - Fair values for fixed maturity securities, equity securities, and arbitrage trading accounts are based on valuation techniques described in Note 15[96] - Fair values of loans receivable, senior notes, and subordinated debentures are estimated using Level 2 inputs, such as current institutional purchaser yield requirements or spreads for similar securities[96] (18) Premiums and Reinsurance Related Information Premiums and Reinsurance Financial Information (in thousands) | Metric | 3 Months Ended March 31, 2023 | 3 Months Ended March 31, 2022 | | :-------------------------------- | :---------------------------- | :---------------------------- | | Total net premiums written | $2,574,824 | $2,413,254 | | Total net premiums earned | $2,491,432 | $2,249,087 | | Ceded losses and loss expenses incurred | $315,476 | $243,294 | | Ceded commissions earned | $118,418 | $117,445 | Allowance for Expected Credit Losses - Premiums and Fees Receivable (in thousands) | Metric | 2023 | 2022 | | :-------------------------------- | :--- | :--- | | Beginning of period | $30,660 | $25,218 | | Change in expected credit losses | $1,693 | $3,018 | | End of period | $32,353 | $28,236 | - The Company reinsures a portion of its exposures to reduce net liability and catastrophe losses, with estimated amounts due from reinsurers reported net of an allowance for expected credit losses[98] (19) Restricted Stock Units - Restricted Stock Units (RSUs) generally vest over three to five years and are expensed pro-ratably over the vesting period[99] RSU Expenses (in thousands) | Period | RSU Expenses | | :----- | :----------- | | Q1 2023 | $12,000 | | Q1 2022 | $11,000 | (20) Litigation and Contingent Liabilities - The Company is subject to disputes, litigation, and arbitration in the ordinary course of business, primarily related to insurance and reinsurance claims, which are considered in loss reserves[100] - While adverse outcomes are possible, the Company expects its ultimate liability from such matters not to be material to its financial condition[100] (21) Leases - The Company recognizes a right-of-use asset and a lease liability for operating leases with terms over 12 months, reported within other assets and other liabilities, respectively[101] Lease Information (in thousands, except years and rates) | Metric | March 31, 2023 | March 31, 2022 | | :-------------------------------------------------------------------- | :------------- | :------------- | | Lease cost (Q1) | $10,188 | $10,198 | | Cash paid for lease liabilities (Q1) | $10,563 | $10,993 | | Right-of-use assets obtained in exchange for new lease liabilities (Q1) | $5,313 | $17,269 | | Right-of-use assets (period end) | $164,547 | $180,424 | | Lease liabilities (period end) | $199,225 | $217,086 | | Weighted-average remaining lease term | 7.1 years | 7.3 years | | Weighted-average discount rate | 4.49% | 4.58% | (22) Business Segments - The Company operates in two reportable business segments: Insurance (commercial insurance globally) and Reinsurance & Monoline Excess (reinsurance and excess risk retention globally)[105][110] Segment Revenues and Pre-Tax Income (Q1 2023, in thousands) | Segment | Earned Premiums | Investment Income | Other Revenues | Total Revenues | Pre-Tax Income (Loss) | | :-------------------------- | :-------------- | :---------------- | :------------- | :------------- | :-------------------- | | Insurance | $2,181,876 | $166,086 | $9,577 | $2,357,539 | $352,199 | | Reinsurance & Monoline Excess | $309,556 | $52,055 | $— | $361,611 | $101,712 | | Corporate, other and eliminations | $— | $5,257 | $147,587 | $152,844 | $(100,850) | | Net investment gains | $— | $— | $23,010 | $23,010 | $23,010 | | Total | $2,491,432 | $223,398 | $180,174 | $2,895,004 | $376,071 | Net Premiums Earned by Major Line of Business (in thousands) | Line of Business | 2023 | 2022 | | :-------------------------- | :----------- | :----------- | | Insurance: | | | | Other liability | $857,149 | $749,391 | | Short-tail lines | $430,503 | $375,212 | | Commercial automobile | $311,422 | $282,234 | | Workers' compensation | $305,561 | $285,423 | | Professional liability | $277,241 | $270,575 | | Total Insurance | $2,181,876 | $1,962,835 | | Reinsurance & Monoline Excess: | | | | Casualty reinsurance | $193,730 | $184,122 | | Monoline excess | $58,644 | $51,896 | | Property reinsurance | $57,182 | $50,234 | | Total Reinsurance & Monoline Excess | $309,556 | $286,252 | | Total | $2,491,432 | $2,249,087 | SAFE HARBOR STATEMENT This statement indicates that forward-looking statements are based on current plans and expectations, subject to various risks and uncertainties, and the Company does not undertake to update them - Forward-looking statements are based on historical performance and current plans, estimates, and expectations[114] - These statements are subject to various risks and uncertainties, including the cyclical nature of the property casualty industry, competition, claims development, investment risks, catastrophic losses, economic conditions, and regulatory changes[114] - The Company does not undertake any obligation to update or revise any forward-looking statement, except as required by applicable laws[115] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, detailing its business strategy, critical accounting estimates, and a comprehensive analysis of revenues, expenses, and investment performance for Q1 2023 compared to 2022 Overview W. R. Berkley Corporation is a decentralized insurance holding company operating globally in Insurance and Reinsurance & Monoline Excess segments, with profitability driven by insurance operations and diverse investments - W. R. Berkley Corporation is a decentralized insurance holding company with two segments: Insurance and Reinsurance & Monoline Excess, operating globally[117] - Profitability is primarily affected by premium rates, claim severity and frequency, and investment income/gains from a diverse portfolio including fixed maturity securities, equity, merger arbitrage, investment funds, loans, and real estate[119][120][121] - The Company sold a London office building in Q1 2022, realizing a pre-tax gain of $317 million ($251 million after adjustments)[122] - The COVID-19 pandemic continues to affect results, leading to reduced loss frequency in some lines, but its ultimate impact remains uncertain[123] Critical Accounting Estimates This section details critical accounting estimates, including reserves for losses and loss expenses, assumed reinsurance premiums, and allowance for expected credit losses on investments, highlighting their subjective nature and influencing factors Reserves for Losses and Loss Expenses - Reserves for losses and loss expenses are management's best estimates based on actuarially derived point estimates and qualitative factors, subject to change due to the long period between loss occurrence and payment[125][126][130][131] - Actuarial methods include paid/incurred loss development, Bornhuetter-Ferguson, and frequency/severity methods, supplemented by industry data for 'tail factors'[130] - Key assumptions are expected loss ratios, loss cost inflation, and reported/paid loss emergence patterns, with greater uncertainty for long-tail lines of business[132][135] Net Reserves for Losses and Loss Expenses by Segment (in thousands) | Segment | March 31, 2023 | December 31, 2022 | | :-------------------------- | :------------- | :---------------- | | Insurance | $11,524,946 | $11,233,924 | | Reinsurance & Monoline Excess | $3,047,087 | $3,014,955 | | Total Net Reserves | $14,572,033 | $14,248,879 | - Net prior year development was unfavorable by $23.9 million in Q1 2023, compared to favorable $0.6 million in Q1 2022, primarily due to property catastrophe losses and adverse casualty development[143][147][148][149] - The Company discounts its liabilities for certain workers' compensation reserves, with an aggregate net discount of $411 million at March 31, 2023, using risk-free discount rates[154][155] Assumed Reinsurance Premiums - Assumed reinsurance premiums are estimated at contract inception and revised as actual amounts are reported, with related earned premiums, commissions, and incurred losses recorded accordingly[157] - Estimates are based on reinsurance agreement terms, information from ceding companies, market conditions, economic trends, and the Company's experience[157] Estimated Assumed Premiums Receivable (in thousands) | Date | Amount | | :------------- | :----- | | March 31, 2023 | $61,000 | | December 31, 2022 | $60,000 | Allowance for Expected Credit Losses on Investments - For fixed maturity securities in an unrealized loss position, credit losses are recognized in net investment gains, while non-credit factors are recognized in other comprehensive income[158] - The allowance for expected credit losses uses a third-party model based on underlying collateral performance under various economic and default scenarios, involving subjective judgments[159] - As of March 31, 2023, the allowance for expected credit losses on fixed maturity securities was $37 million, and for loans receivable was $2 million[161][162] Fair Value Measurements - The Company classifies financial securities into a three-level fair value hierarchy (Level 1: quoted prices, Level 2: observable inputs, Level 3: unobservable inputs) based on market activity and input observability[164][165] - The vast majority of the Company's portfolio is classified as Level 2, with prices provided by independent pricing services or syndicate managers based on observable market data[164][167][168] Fixed Maturity Securities Available for Sale by Pricing Source (March 31, 2023, in thousands) | Pricing Source | Carrying Value | Percent of Total | | :-------------------------- | :------------- | :--------------- | | Independent pricing services | $17,555,166 | 97.3% | | Syndicate manager | $67,780 | 0.4% | | Directly by the Company (Observable data) | $416,401 | 2.3% | | Total | $18,039,347 | 100.0% | Results of Operations for the Three Months Ended March 31, 2023 and 2022 This section analyzes the Company's financial performance for Q1 2023 compared to Q1 2022, highlighting changes in premiums, net income, investment income, and operating expenses, detailing segment-specific results, loss ratios, and the impact of catastrophe losses and prior year reserve development Business Segment Results Business Segment Underwriting Performance (Q1 2023 vs. Q1 2022) | Segment | Gross Premiums Written 2023 | Gross Premiums Written 2022 | Net Premiums Earned 2023 | Net Premiums Earned 2022 | Loss Ratio 2023 | Loss Ratio 2022 | Expense Ratio 2023 | Expense Ratio 2022 | GAAP Combined Ratio 2023 | GAAP Combined Ratio 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :------------------------- | :------------------------- | :-------------- | :-------------- | :----------------- | :----------------- | :----------------------- | :----------------------- | | Insurance | $2,652,234 | $2,484,799 | $2,181,876 | $1,962,835 | 62.8% | 59.5% | 28.7% | 28.1% | 91.5% | 87.6% | | Reinsurance & Monoline Excess | $397,083 | $375,038 | $309,556 | $286,252 | 54.5% | 59.9% | 29.5% | 29.5% | 84.0% | 89.4% | | Consolidated | $3,049,317 | $2,859,837 | $2,491,432 | $2,249,087 | 61.8% | 59.5% | 28.8% | 28.3% | 90.6% | 87.8% | - The consolidated GAAP combined ratio increased to 90.6% in Q1 2023 from 87.8% in Q1 2022, indicating a decrease in underwriting profitability[173] Net Income to Common Stockholders Net Income to Common Stockholders (in thousands, except per share data) | Metric | 2023 | 2022 | Change | Change (%) | | :-------------------------- | :----------- | :----------- | :----- | :--------- | | Net income to common stockholders | $294,126 | $590,638 | $(296,512) | -50.20% | | Weighted average diluted shares | 277,339 | 279,157 | (1,818) | -0.65% | | Net income per diluted share | $1.06 | $2.12 | $(1.06) | -50.00% | - The $297 million decrease in net income was primarily due to a $270 million after-tax reduction in net investment gains (from a 2022 real estate sale and reduced equity security gains) and a $31 million after-tax reduction in underwriting income[173] - Partially offsetting factors included a $39 million after-tax increase in net investment income due to rising interest rates and a larger portfolio, and a $2 million after-tax reduction in interest expense[173] Premiums Premiums Written (in thousands) | Metric | 2023 | 2022 | Change | Change (%) | | :-------------------- | :----------- | :----------- | :----- | :--------- | | Gross premiums written | $3,049,317 | $2,859,837 | $189,480 | 6.62% | | Net premiums written | $2,574,824 | $2,413,254 | $161,570 | 6.69% | | Net premiums earned | $2,491,432 | $2,249,087 | $242,345 | 10.78% | - Gross premiums written increased by 7% in 2023, driven by increases in both the Insurance segment ($167 million) and Reinsurance & Monoline Excess segment ($22 million)[174] - Average renewal premium rates for insurance and facultative reinsurance increased by 7.2% (7.2% adjusted for exposures, 8.3% excluding workers' compensation) in 2023[175] Net Investment Income Net Investment Income and Yields (in thousands) | Source | 2023 Amount | 2022 Amount | 2023 Yield | 2022 Yield | | :---------------------------------------------------- | :------------ | :------------ | :--------- | :--------- | | Fixed maturity securities, cash & cash equivalents, loans | $195,642 | $101,284 | 3.8% | 2.2% | | Arbitrage trading account | $18,256 | $9,187 | 9.4% | 3.1% | | Equity securities | $13,746 | $10,856 | 4.8% | 4.7% | | Investment funds | $2,180 | $52,012 | 0.5% | 13.7% | | Real estate | $(3,711) | $2,146 | (1.1%) | 0.5% | | Total Net Investment Income | $223,398 | $173,512 | 3.5% | 2.9% | - Net investment income increased by 29% to $223 million in 2023, primarily due to a $94 million increase from fixed maturity securities driven by rising interest rates and a larger portfolio[177] - This increase was partially offset by a $50 million decrease in income from investment funds[177] Insurance Service Fees Insurance Service Fees (in thousands) | Period | Amount | | :----- | :----- | | 2023 | $32,857 | | 2022 | $27,951 | - Insurance service fees increased to $33 million in 2023 from $28 million in 2022, mainly due to organic growth in the insurance distribution, third-party administrator, and workers' compensation assigned risk plan servicing businesses[178] Net Realized and Unrealized Gains on Investments Net Realized and Unrealized Gains on Investments (in thousands) | Period | Amount | | :----- | :----- | | 2023 | $22,611 | | 2022 | $369,882 | - Net realized and unrealized gains on investments decreased significantly to $23 million in 2023 from $370 million in 2022[179] - The 2022 gains included a $251 million net gain from the sale of a London real estate investment and a $93 million increase in unrealized gains on equity securities[180] Change in Allowance for Expected Credit Losses on Investments Change in Allowance for Expected Credit Losses on Investments (in thousands) | Period | Pre-tax Change | | :----- | :------------- | | 2023 | $(399) | | 2022 | $3,617 | - The pre-tax change in allowance for expected credit losses on investments decreased by $399 thousand in 2023, primarily due to a change in estimate[181] Revenues from Non-Insurance Businesses Revenues from Non-Insurance Businesses (in thousands) | Period | Amount | | :----- | :----- | | 2023 | $124,200 | | 2022 | $97,776 | - Revenues from non-insurance businesses increased to $124 million in 2023 from $98 million in 2022, mainly due to growth in aviation-related and commercial/residential textile businesses acquired in 2022[182] Losses and Loss Expenses Losses and Loss Expenses (in thousands) | Metric | 2023 | 2022 | | :---------------------------------------------------- | :----------- | :----------- | | Losses and loss expenses | $1,538,755 | $1,339,252 | | Consolidated loss ratio | 61.8% | 59.5% | | Catastrophe losses (net of reinsurance recoveries) | $48,000 | $29,000 | | Adverse prior year reserve development (net of premium offsets) | $24,000 | $(1,000) | | Loss ratio excluding catastrophe losses and prior year reserve development | 58.9% | 58.3% | - The consolidated loss ratio increased to 61.8% in 2023 from 59.5% in 2022, driven by higher catastrophe losses and adverse prior year reserve development[183] - Insurance segment loss ratio increased to 62.8% (from 59.5%), while Reinsurance & Monoline Excess segment loss ratio decreased to 54.5% (from 59.9%)[185] Other Operating Costs and Expenses Other Operating Costs and Expenses (in thousands) | Category | 2023 | 2022 | | :-------------------------------- | :----------- | :----------- | | Policy acquisition and insurance operating expenses | $718,276 | $635,453 | | Insurance service expenses | $25,180 | $22,466 | | Net foreign currency losses (gains) | $9,495 | $(4,168) | | Other costs and expenses | $72,624 | $60,148 | | Total | $825,575 | $713,899 | - The expense ratio increased by 0.5 points to 28.8% in 2023, mainly due to lower ceding commissions, increased compensation costs, and new start-up operating unit expenses[184] - Net foreign currency losses were $9 million in 2023, compared to gains of $4 million in 2022, primarily due to the strengthening of the U.K. sterling and Euro against the U.S. dollar[186] Expenses from Non-Insurance Businesses Expenses from Non-Insurance Businesses (in thousands) | Period | Amount | | :----- | :----- | | 2023 | $122,767 | | 2022 | $94,855 | - Expenses from non-insurance businesses increased to $123 million in 2023 from $95 million in 2022, mainly due to the acquired aviation-related and residential/commercial textile businesses[188] Interest Expense Interest Expense (in thousands) | Period | Amount | | :----- | :----- | | 2023 | $31,836 | | 2022 | $34,970 | - Interest expense decreased to $32 million in 2023 from $35 million in 2022, following the repayment of $77 million of 8.7% senior notes and $350 million of 4.625% senior notes in Q1 2022[189] Income Taxes Effective Income Tax Rate | Period | Rate | | :----- | :--- | | Q1 2023 | 21.4% | | Q1 2022 | 19.0% | - The higher effective income tax rate in Q1 2023 was primarily due to a net reduction in the Company's valuation allowance against foreign tax credits and foreign net operating losses[190] - U.S. deferred income taxes have not been provided on approximately $173 million of undistributed earnings from non-U.S. subsidiaries, as these earnings are intended for permanent reinvestment[191] Investments The Company's investment strategy focuses on maintaining liquidity and matching asset duration with liabilities, with a portfolio including fixed maturity securities, equity securities, investment funds, real estate, arbitrage trading accounts, and loans receivable, while managing market risks - The Company's investment strategy aims to maintain adequate liquidity and match the average duration of its investment portfolio (2.4 years at March 31, 2023) with its liabilities[193][203] Total Investments by Asset Class (March 31, 2023, in thousands) | Asset Class | Carrying Value | Percent of Total | | :------------------------------------ | :------------- | :--------------- | | Fixed maturity securities | $18,091,113 | 72.4% | | Equity securities | $1,279,955 | 5.1% | | Cash and cash equivalents | $1,843,534 | 7.4% | | Investment funds | $1,601,567 | 6.5% | | Real estate | $1,338,504 | 5.4% | | Arbitrage trading account | $609,001 | 2.4% | | Loans receivable | $194,944 | 0.8% | | Total Investments | $24,958,618 | 100.0% | - The Company manages interest rate risk through portfolio duration and currency risk by matching foreign currency assets and liabilities[203][204] Fixed Maturity Securities - The Company's policy is generally to hold fixed maturity securities to maturity, but the available-for-sale portfolio is actively managed to match assets and liabilities and adjust for market conditions and tax considerations[196] - Investment decisions to hold or sell are based on underlying fundamentals, expectations for interest rates, credit spreads, and currency values to maximize total return[197] Equity Securities - Equity securities primarily consist of common and preferred stocks in companies across various sectors, with a focus on financial institutions and energy, chosen for potential growth opportunities[198] Investment Funds - As of March 31, 2023, investment funds had a carrying value of $1.6 billion, including significant holdings in financial services, other funds (deferred compensation trust), transportation, real estate, infrastructure, and energy funds[199] - Investment fund earnings or losses are generally reported on a one-quarter lag[199] Real Estate - Real estate investments include directly owned properties held for investment, such as a long-term ground lease in Washington D.C., an office complex in New York City, and a mixed-use project in Washington D.C. (partially under development)[200] - The Company plans to fund further development costs for the mixed-use project using a combination of its own funds and external financing[200] Arbitrage Trading Account - The arbitrage trading account consists of direct investments in merger arbitrage securities, focusing on publicly held companies subject to announced tender offers and mergers[201] Loans Receivable - Loans receivable, carried at amortized cost net of a $2 million allowance for expected credit losses, totaled $195 million (fair value $187 million) at March 31, 2023[202] - This includes $176 million in real estate loans (secured by commercial and residential properties in London and New York) and $19 million in commercial loans (secured by business assets)[202] Market Risk - The fair value of investments is exposed to fluctuations in credit quality and interest rates, managed through models and stress tests[203] - Currency risk on international investments is managed by matching foreign currency assets and liabilities where appropriate[204] Liquidity and Capital Resources This section discusses the Company's cash flow, debt structure, equity, and total capitalization, highlighting the decrease in operating cash flow, debt repayments, credit facility availability, and the impact of common stock repurchases and dividends - Cash flow from operating activities decreased to $445 million in Q1 2023 from $478 million in Q1 2022, primarily due to increased loss and loss expense payments[206] - The Company maintains a highly liquid investment portfolio (79% in cash, cash equivalents, and marketable fixed maturity securities) to meet payment obligations[207] - Total debt outstanding was $2.837 billion (carrying value) at March 31, 2023, with significant repayments made in Q1 2022[208] - The Company has a $300 million senior unsecured revolving credit facility (expandable to $500 million) with no outstanding borrowings as of March 31, 2023[209] - Total common stockholders' equity was $6.9 billion at March 31, 2023, with 2,038,391 shares repurchased for $135.2 million during Q1 2023[210] - The Company declared a regular quarterly cash dividend of $0.10 per share and a special cash dividend of $0.50 per share in Q1 2023[210] Item 3. Quantitative and Qualitative Disclosure About Market Risk This section refers to the market risk disclosures provided within the 'Investments - Market Risk' subsection of the Management's Discussion and Analysis of Financial Condition and Results of Operations - Market risk disclosures are incorporated by reference from the 'Investments - Market Risk' section within the MD&A[213] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the Company's disclosure controls and procedures, concluding they were effective as of March 31, 2023, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023[214] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2023[215] PART II — OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 20 of the interim consolidated financial statements for information regarding legal proceedings - Information on legal proceedings is provided in Note 20 to the interim consolidated financial statements[216] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2022 - No material changes have occurred to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022[217] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section summarizes the Company's common stock repurchases during the three months ended March 31, 2023, and the remaining authorized shares for purchase Common Stock Repurchases (Q1 2023) | Month | Total Shares Purchased | Average Price Paid Per Share | | :------------ | :--------------------- | :--------------------------- | | January 2023 | 729,600 | $69.09 | | February 2023 | 644,965 | $67.06 | | March 2023 | 663,826 | $62.50 | - The Company repurchased a total of 2,038,391 shares of common stock during the three months ended March 31, 2023[218] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the 2023 Performance Unit Award Agreement, CEO and CFO certifications under Rule 13a-14(a)/15d-14(a), and certifications under 18 U.S.C. Section 1350 - Exhibits include the 2023 Performance Unit Award Agreement, CEO and CFO certifications (Rule 13a-14(a)/15d-14(a)), and certifications under 18 U.S.C. Section 1350[219] SIGNATURES This section contains the signatures of W. Robert Berkley, Jr., President and Chief Executive Officer, and Richard M. Baio, Executive Vice President and Chief Financial Officer, certifying the filing of the report on May 4, 2023 - The report is signed by W. Robert Berkley, Jr., President and Chief Executive Officer, and Richard M. Baio, Executive Vice President and Chief Financial Officer, on May 4, 2023[222]