News Column

W. R. Berkley Corporation Reports Fourth Quarter Results

January 28, 2014

Operating Income per Share Increased 33%, Net Premiums Written Increased 11% GREENWICH, Conn. --(BUSINESS WIRE)-- W. R. Berkley Corporation (NYSE:WRB) today reported net income for the fourth quarter of 2013 of $130 million , or 93 cents per share. Summary Financial Data (Amounts in thousands, except per share data) Fourth Quarter Full Year 2013 2012 2013 2012 Gross premiums written $ 1,594,428 $ 1,452,709 $ 6,511,091 $ 5,779,879 Net premiums written 1,357,684 1,228,135 5,500,173 4,898,539 Net income 130,379 165,489 499,925 510,592 Net income per diluted share 0.93 1.17 3.55 3.56 Operating income (1) 119,243 90,430 430,168 373,790 Operating income per diluted share 0.85 0.64 3.06 2.61 Return on equity (2) 12.1 % 16.7 % 11.6 % 12.9 % (1) Operating income is a non-GAAP financial measure defined by the Company as net income excluding after-tax net investment gains and after-tax debt extinguishment costs. (2) Return on equity represents net income expressed on an annualized basis as a percentage of beginning of year stockholders’ equity. Commenting on the Company's performance, William R. Berkley , chairman and chief executive officer, said: "We were pleased with our fourth quarter results. Net written premiums were up 11% and the Company’s combined ratio improved. Price increases are outpacing loss cost trends, and although the fourth quarter rate increases were not as strong as the full year, margins have expanded further. We are beginning to make headway on our expense ratio, and anticipate additional improvement in both our overall underwriting results and our combined ratio in 2014. We remain focused on raising prices in order to maintain current margins and regain targeted profitability in some currently lagging lines of business. The challenge that our industry faces is the threat of inflation, which impacts pricing as well as adequate reserving. "We again reported positive reserve development, and anticipate this will continue if inflation remains below our expectation. Our paid loss ratio on our ongoing business is approximately 52%, which demonstrates a positive trend for the ultimate loss ratio. "Our investment performance was good while maintaining a high level of liquidity. The year-end portfolio duration was 3.3 years and our current investment strategy is likely to result in no material change in duration in 2014. We believe this strategy creates long term value for our shareholders by reducing risk, despite the fact that investment income declines in the short term. The constant tension between deflation fears and inflationary worries requires that we maintain a fixed income portfolio duration that approximates the duration of our liabilities. We continued to invest in non-fixed income securities and had over $125 million in realized gains for the year. We would expect 2014 will continue to generate significant gains. "Looking ahead, we expect profitability to improve further without giving consideration to unusual catastrophe activity over the next several years. And while there is new competition, a similar number of players have disappeared from the marketplace. Ultimately, the insurance business is rational over the long run, and the trends we currently see cause us to be optimistic as more rational players enter the industry. These investors search for good risk adjusted returns. We are confident that 2014 will be an excellent year," 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 Wednesday, January 29 , at 10:00 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 three segments of the property casualty business: Insurance-Domestic, Insurance-International and Reinsurance-Global. 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 2014 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, including new alternative entrants to the industry; 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; pending litigation and related coverage issues; 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; foreign currency and political risks relating to our international operations; our ability to attract and retain key personnel and qualified employees; 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 ("TRIA"), and the potential expiration of TRIA; the ability of our reinsurers to pay reinsurance recoverables owed to us; 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; 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 2014 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 2013 2012 2013 2012 Revenues: Net premiums written $ 1,357,684 $ 1,228,135 $ 5,500,173 $ 4,898,539 Change in unearned premiums 25,357 11,840 (273,636 ) (225,023 ) Net premiums earned 1,383,041 1,239,975 5,226,537 4,673,516 Investment income 138,991 151,875 544,291 586,763 Insurance service fees 27,004 26,012 107,513 103,133 Net investment gains 30,690 116,462 127,586 201,451 Change in investment valuation allowance, net of other than temporary impairments (6,042 ) — (6,042 ) 9,014 Revenues from wholly-owned investees 122,723 73,917 407,623 247,113 Other income 272 360 1,026 2,564 Total revenues 1,696,679 1,608,601 6,408,534 5,823,554 Expenses: Losses and loss expenses 848,599 801,173 3,197,024 2,948,479 Other operating costs and expenses 520,698 467,599 2,000,684 1,799,623 Expenses from wholly-owned investees 115,146 74,784 388,761 247,222 Interest expense 30,510 32,552 123,177 126,302 Total expenses 1,514,953 1,376,108 5,709,646 5,121,626 Income before income taxes 181,726 232,493 698,888 701,928 Income tax expense (46,338 ) (66,994 ) (193,587 ) (191,285 ) Net income before noncontrolling interests 135,388 165,499 505,301 510,643 Noncontrolling interests (5,009 ) (10 ) (5,376 ) (51 ) Net income to common stockholders $ 130,379 $ 165,489 $ 499,925 $ 510,592 Net income per share: Basic $ 0.97 $ 1.22 $ 3.69 $ 3.72 Diluted $ 0.93 $ 1.17 $ 3.55 $ 3.56 Average shares outstanding: Basic 134,054 135,861 135,305 137,097 Diluted 139,665 141,654 140,743 143,315 Business Segment Operating Results (Amounts in thousands, except ratios) (1) (2) Fourth Quarter Full Year 2013 2012 2013 2012 Insurance-Domestic: Gross premiums written $ 1,182,977 $ 1,044,015 $ 4,803,753 $ 4,261,165 Net premiums written 985,958 865,289 3,994,387 3,569,883 Premiums earned 1,013,047 886,384 3,782,416 3,417,022 Pre-tax income 182,879 153,627 648,740 578,500 Loss ratio 60.5 % 63.1 % 61.3 % 63.5 % Expense ratio 32.3 % 32.5 % 32.7 % 32.5 % GAAP combined ratio 92.8 % 95.6 % 94.0 % 96.0 % Insurance-International : Gross premiums written $ 211,906 $ 214,454 $ 898,776 $ 802,057 Net premiums written 183,544 181,045 756,185 664,459 Premiums earned 182,786 175,682 723,151 631,841 Pre-tax income 5,828 8,352 56,922 51,639 Loss ratio 61.4 % 64.7 % 59.4 % 59.7 % Expense ratio 41.0 % 38.7 % 39.0 % 40.2 % GAAP combined ratio 102.4 % 103.4 % 98.4 % 99.9 % Reinsurance-Global: Gross premiums written $ 199,545 $ 194,240 $ 808,562 $ 716,657 Net premiums written 188,182 181,801 749,601 664,197 Premiums earned 187,208 177,909 720,970 624,653 Pre-tax income 23,173 21,550 110,425 103,690 Loss ratio 66.1 % 72.1 % 62.2 % 64.3 % Expense ratio 34.1 % 33.2 % 34.8 % 36.3 % GAAP combined ratio 100.2 % 105.3 % 97.0 % 100.6 % Corporate and Eliminations: Net realized investment gains $ 24,648 $ 116,462 $ 121,544 $ 210,465 Interest expense (30,510 ) (32,552 ) (123,177 ) (126,302 ) Other revenues and expenses (24,292 ) (34,946 ) (115,566 ) (116,064 ) Pre-tax income (loss) (30,154 ) 48,964 (117,199 ) (31,901 ) Consolidated: Gross premiums written $ 1,594,428 $ 1,452,709 $ 6,511,091 $ 5,779,879 Net premiums written 1,357,684 1,228,135 5,500,173 4,898,539 Premiums earned 1,383,041 1,239,975 5,226,537 4,673,516 Pre-tax income 181,726 232,493 698,888 701,928 Loss ratio 61.4 % 64.6 % 61.2 % 63.1 % Expense ratio 33.7 % 33.5 % 33.9 % 34.1 % GAAP combined ratio 95.1 % 98.1 % 95.1 % 97.2 % (1) Commencing with the first quarter of 2013, the Company reports its results in three segments – Insurance-Domestic (formerly, Specialty, Regional and Alternative Markets), Insurance-International and Reinsurance-Global. Reclassifications have been made to the Company’s 2012 financial information to conform with this presentation. (2) 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 the loss ratio and the expense ratio. Supplemental Information (Amounts in thousands) Fourth Quarter Full Year 2013 2012 2013 2012 Insurance-Domestic net premiums written: Other liability $ 348,817 $ 305,448 $ 1,373,653 $ 1,172,699 Workers' compensation 245,164 205,403 1,041,118 917,253 Short-tail lines (1) 198,216 179,397 800,082 757,537 Commercial automobile 119,824 107,170 502,535 464,058 Professional liability 73,937 67,871 276,999 258,336 Total $ 985,958 $ 865,289 $ 3,994,387 $ 3,569,883 Losses from catastrophes: Insurance-Domestic $ 1,387 $ 7,217 $ 37,346 $ 43,217 Insurance-International 4,557 13,163 11,438 13,952 Reinsurance-Global 7,102 20,434 16,214 23,029 Total $ 13,046 $ 40,814 $ 64,998 $ 80,198 Investment income (loss): Core portfolio (2) $ 110,361 $ 125,636 $ 456,148 $ 501,462 Investment funds 22,464 26,891 67,712 77,015 Arbitrage trading account 6,166 (652 ) 20,431 8,286 Total $ 138,991 $ 151,875 $ 544,291 $ 586,763 Other operating costs and expenses: Underwriting expenses $ 465,933 $ 415,126 $ 1,771,128 $ 1,592,746 Service expenses 22,157 20,990 88,662 84,986 Debt extinguishment costs — — 6,709 — Net foreign currency gains (3,732 ) (3,219 ) (10,120 ) (6,092 ) Other costs and expenses 36,340 34,702 144,305 127,983 Total $ 520,698 $ 467,599 $ 2,000,684 $ 1,799,623 Cash flow from operations before reinsurance commutation payments $ 254,640 $ 222,108 $ 881,335 $ 675,457 Cash flow from operations $ 193,103 $ 222,108 $ 819,798 $ 675,457 Reconciliation of operating and net income: Operating income (3) $ 119,243 $ 90,430 $ 430,168 $ 373,790 After-tax investment gains, net of noncontrolling interest 11,136 75,059 74,118 136,802 After-tax debt extinguishment costs — — (4,361 ) — Net income $ 130,379 $ 165,489 $ 499,925 $ 510,592 (1) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, boiler and machinery and other lines. (2) Core portfolio includes fixed maturity securities, equity securities, cash and cash equivalents, real estate and loans receivable. (3) Operating income is a non-GAAP financial measure defined by the Company as net income excluding after-tax net investment gains and after-tax debt extinguishment costs. Management believes that excluding net realized investment gains and debt extinguishment costs provides a useful indicator of trends in the Company’s underlying operations. Selected Balance Sheet Information (Amounts in thousands, except per share data) December 31, 2013 December 31, 2012 Net invested assets (1) $ 15,540,488 $ 15,681,803 Total assets 20,551,796 20,155,896 Reserves for losses and loss expenses 10,080,941 9,751,086 Senior notes and other debt 1,692,442 1,871,535 Junior subordinated debentures 339,800 243,206 Common stockholders’ equity (2) 4,336,035 4,306,217 Common stock outstanding (3) 132,233 136,018 Book value per share (4) 32.79 31.66 Tangible book value per share (4) 31.74 30.95 (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, net of related liabilities. (2) After-tax unrealized investment gains were $257 million and $518 million as of December 31, 2013 and 2012, respectively. Unrealized currency translation losses were $61 million and $37 million as of December 31, 2013 and 2012, respectively. (3) During the fourth quarter of 2013, the Company repurchased 2,953,280 shares of its common stock for $127 million . During the full year 2013, the Company repurchased 3,924,355 shares of its common stock for $166 million . (4) 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. Investment Portfolio December 31, 2013 (Amounts in thousands) Carrying Value Percent of Total Fixed maturity securities: United States government and government agencies $ 884,859 5.7 % State and municipal: Special revenue 2,142,866 13.8 % State general obligation 757,652 4.9 % Pre-refunded 626,601 4.0 % Corporate backed 430,961 2.8 % Local general obligation 329,132 2.1 % Total state and municipal 4,287,212 27.6 % Mortgage-backed securities: Agency 993,890 6.4 % Residential - Prime 187,871 1.2 % Residential — Alt A 94,280 0.6 % Commercial 81,136 0.5 % Total mortgage-backed securities 1,357,177 8.7 % Corporate: Industrial 1,533,935 9.9 % Asset-backed 1,266,385 8.1 % Financial 1,108,051 7.1 % Utilities 194,437 1.3 % Other 104,933 0.7 % Total corporate 4,207,741 27.1 % Foreign government 879,858 5.7 % Total fixed maturity securities (1) 11,616,847 74.8 % Equity securities available for sale: Common stocks 160,775 1.0 % Preferred stocks 122,562 0.8 % Total equity securities available for sale 283,337 1.8 % Cash and cash equivalents (2) 1,000,132 6.4 % Investment funds (3) 1,059,220 6.8 % Real estate 715,242 4.6 % Arbitrage trading account 522,127 3.4 % Loans receivable 343,583 2.2 % Net invested assets $ 15,540,488 100.0 % (1) Total fixed maturity securities had an average rating of AA- and an average duration of 3.3 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. (3) Investment funds are net of related liabilities of $8 million . Foreign Government Fixed Maturity Securities December 31, 2013 (Amounts in thousands) Carrying Value Australia $ 256,413 Canada 157,094 United Kingdom 132,550 Argentina 116,062 Germany 67,422 Brazil 53,949 Norway 53,206 Supranational (1) 33,083 Singapore 6,762 Uruguay 3,317 Total $ 879,858 (1) Supranational represents investments in the North American Development Bank , European Investment Bank and International Bank for Reconstruction & Development . Karen A. Horvath Vice President - External Financial Communications 203-629-3000 Source: W. R. Berkley Corporation


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