Property and casualty insurer W.R. Berkley Corp. (WRB) has reported core operating earnings of 46 cents per share for the second quarter of 2011, 3 cents ahead of the Zacks Consensus Estimate, on the back of higher net premium written, coupled with high net investment income. Earnings, however, declined 29% year over year.
On a GAAP basis, net income dropped 25% to $83 million from $110 million reported in the year-ago quarter, while earnings per share declined year over year to 56 cents from 70 cents.
Total revenue of $1.27 billion beat the Zacks Consensus Estimate of $1.16 billion and also upped 9.5% year over year. The revenue upside was due to improvements in all the revenue components – premiums earned, investment income, insurance service fees, investment gains, revenues from wholly owned investees, and other income.
Total expenses also increased 13.7% year over year to $1.16 billion, led by an increase in all its components – loss and loss expenses, other operating costs, expenses from wholly owned subsidiaries and interest expense.
Catastrophe loss for the quarter more than doubled from $30 million incurred in the previous quarter and stood at $63 million.
Segment Details
The Specialty segment’s net premium written clocked a double-digit increase of 18.5% year over year to $405 million. Combined ratio deteriorated 260 basis points (bps) to 92.5% in the quarter due to higher loss ratio (340 bps), partially offset by an 80 basis point decline in expenses ratio.
The Regional segment’s net premiums written inched up 0.8% year over year to $260.6 million. Combined ratio plunged 1620 basis points to 113.9% in the quarter owing to a significantly higher loss ratio (1540), coupled with a 70 basis point increase in expense ratio.
The Alternative Markets segment reported a 4% increase in net premiums written to $121.8 million in the quarter. Combined ratio declined 840 bps to 99.6% in the quarter, led by a considerably higher loss ratio (700 bps) and a 140 basis point increase in expense ratio.
The Reinsurance segment’s net premiums written decreased 7.4% year over year to $99.4 million. Combined ratio deteriorated 410 basis points to 100.8% in the quarter, led by a significantly higher loss ratio, coupled with a modest hike in expense ratio.
The International segment recorded the highest growth in net premiums written during the second quarter. Net premiums written surged 25% year over year to $170 million. Combined ratio improved 250 basis points to 99.8% on the back of a decline in both expenses ratio as well as loss ratio.
Dividend Increase
During the quarter, Berkley announced a 14% hike in annual dividend to 32 cents. The dividend was paid on July 1, 2011 to stockholders of record at the close of business on June 14, 2011. This represented the seventh straight increase from 12 cents paid in 2005. The company has grown its annual dividend by an average of over 18% annually over the past six years. The most recent hike is almost in line with the average, with the annualized dividend yield being 1.00%. This is quite commendable for an insurance company, considering the beating it had for the past four years.
Formation of New Units
During the quarter, Berkley announced the formation of a new unit called Berkley Technology Underwriters, LLC with headquarters in Minneapolis, Minnesota. The new wing will provide insurance solutions for small and mid-sized technology businesses by underwriting casualty and property, as well as professional liability insurance for them. Matthew A. Mueller, carrying an experience of more than 30 years in the property and casualty insurance industry, will be appointed as the president of the new entity.
Berkley also announced the formation of another new unit called Berkley Re UK Ltd. in London, which will focus on underwriting casualty and property treaty reinsurance. With a business model similar to Berkley’s other reinsurance units (Berkley Re America, Berkley Re Asia and Berkley Re Australia), this unit is expected to start writing business from the fourth quarter of 2011. Richard Fothergill, with a 25-year experience in the property and casualty reinsurance industry, will be appointed as the president of Berkley Re UK.
Our Take
Summing up the results for the quarter, we see that Berkley was able to preserve its favorable earnings performance despite significant catastrophe losses on the back of increase in premium volumes and insurance rate hikes. Berkley has maintained the premium growth trend since the second quarter of 2010. The quarter also witnessed an average rate increase of 2%, which marked the second aggregate rate hike for the group in the last 17 quarters.The first rate increase (1%) was recorded in the first quarter. Management believes that going forward, rate will continue to shoot up, particularly in the commercial market segment.
Berkley’s International segment is also gearing up to contribute increased revenue to the group. The quarter saw an increase in net premiums, which surpassed the contributions from other segments.
A stable operating performance, along with continuous share repurchases, will keep earnings momentum high in the near term.
Peers Chubb Corp. (CB) and The Travelers Companies Inc. (TRV), reported their second quarter earnings last week. While Chubb surpassed the Zacks Consensus Estimate by 25 cents per share, Travelers fell short of the estimates by posting a wider-than-expected loss due to heavy catastrophe losses.
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