W.R. Berkley Corp. Reports Operating Results (10-Q)

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Aug 07, 2009
W.R. Berkley Corp. (WRB, Financial) filed Quarterly Report for the period ended 2009-06-30.

W. R. Berkley Corporation is an insurance holding company which through its subsidiaries operates in all segments of the property casualty insurance business: regional property casualty insurance; reinsurance; specialty lines of insurance; alternative markets; and international. The company\'s regional insurance operations are conducted primarily in the Midwestern Southern and Northeastern sections of the United States. Reinsurance specialty insurance and alternative markets operations are conducted nationwide. W.R. Berkley Corp. has a market cap of $3.76 billion; its shares were traded at around $23.53 with a P/E ratio of 10.7 and P/S ratio of 0.8. The dividend yield of W.R. Berkley Corp. stocks is 1%. W.R. Berkley Corp. had an annual average earning growth of 23.5% over the past 5 years.

Highlight of Business Operations:

Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags. For example, as of December 31, 2008, initial loss estimates for accident years 1999 through 2007 were decreased by an average of 3% for lines with short reporting lags and by an average of 12% for lines with long reporting lags. For the latest accident year ended December 31, 2008, initial loss estimates were $1.7 billion for lines with short reporting lags and $1.1 billion for lines with long reporting lags.

The majority of the favorable reserve development for the specialty segment during 2009 and 2008 was associated with excess and surplus (E&S) business. E&S insurers are free from rate and form regulation and generally charge higher rates for business than that in the standard market. The favorable development for the E&S business was primarily caused by lower claim frequency trends. Claim frequency (i.e., the number of reported claims per unit of exposure) declined 7.5% in 2003, 10.5% in 2004, 5.1% in 2005, 5.5% in 2006 and 1.3% in 2007. These trends were significantly lower than the trends that were expected when initial reserves for those years were established. One reason for the lower than expected number of claims was the Companys introduction of more restrictive policy language which included additional exclusions that eliminated claims that would have previously been covered, particularly for the Companys building contractor business. In addition, as standard carriers tightened their underwriting criteria, the Company benefited from an influx of accounts from the standard market to the E&S market during these years. The more restrictive policy language and the influx of standard market business resulted in an improved risk profile within the E&S business and a reduction in loss costs that was greater than expected at the time reserves were initially established.

Loss Reserve Discount. The Company discounts its liabilities for excess and assumed workers compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Companys loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. As of June 30, 2009, these discount rates ranged from 2.5% to 6.5%, with a weighted average discount rate of 4.4%. For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate permitted by the Department of Insurance of the State of Delaware of 2.5%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $862 million and $847 million as of June 30, 2009 and December 31, 2008, respectively.

Read the The complete ReportWRB is in the portfolios of Robert Olstein of Olstein Financial Alert Fund, John Keeley of Keeley Fund Management, Ruane Cunniff of Ruane & Cunniff & Goldfarb Inc.