filings.toolsItem 1. BUSINESS
91K characters. Original on sec.gov · Markdown
Item 1. BUSINESS
W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States. It operates in the following segments of the property casualty insurance business:
| • | Insurance-Domestic - commercial insurance business, including excess and surplus lines and admitted lines, primarily throughout the United States; |
| • | Insurance-International - insurance business primarily in the United Kingdom, Continental Europe, South America, Canada, Scandinavia, and Australia; and |
| • | Reinsurance-Global - reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, and the Asia-Pacific Region. |
Each of our three business segments is composed of individual operating units that serve a market defined by geography, products, services or types of customers. Each of our operating units is positioned close to its customer base and participates in a niche market requiring specialized knowledge about a territory or product. This strategy of decentralized operations allows each of our units to identify and respond quickly and effectively to changing market conditions and local customer needs, while capitalizing on the benefits of centralized capital, investment and reinsurance management, and corporate actuarial, financial, enterprise risk management and legal staff support.
Our business approach is focused on meeting the needs of our customers, maintaining a high quality balance sheet, and allocating capital to our best opportunities. New businesses are started when opportunities are identified and when the right talent and expertise are found to lead a business. Of our 49 operating units, 42 have been organized and developed internally and seven have been added through acquisition. Of these units, 24 have been formed since 2006.
Net premiums written, as reported based on United States generally accepted accounting principles (“GAAP”), for each of our operating segments for each of the past five years were as follows:
| Year Ended December 31, | |||||||||||||||||||
| (In thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
| Net premiums written: | |||||||||||||||||||
| Insurance-Domestic | $ | 4,517,587 | $ | 3,994,387 | $ | 3,569,883 | $ | 3,238,120 | $ | 2,938,223 | |||||||||
| Insurance-International | 828,076 | 756,185 | 664,459 | 551,910 | 430,252 | ||||||||||||||
| Reinsurance-Global | 651,284 | 749,601 | 664,197 | 567,338 | 482,451 | ||||||||||||||
| Total | $ | 5,996,947 | $ | 5,500,173 | $ | 4,898,539 | $ | 4,357,368 | $ | 3,850,926 |
| Year Ended December 31, | ||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
| Percentage of net premiums written: | ||||||||||||||
| Insurance-Domestic | 75.3 | % | 72.6 | % | 72.8 | % | 74.3 | % | 76.3 | % | ||||
| Insurance-International | 13.8 | 13.8 | 13.6 | 12.7 | 11.2 | |||||||||
| Reinsurance-Global | 10.9 | 13.6 | 13.6 | 13.0 | 12.5 | |||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Twenty-six of our twenty-seven insurance company subsidiaries rated by A.M. Best Company, Inc. (“A.M. Best”) have ratings of A+ (Superior) (the second highest rating out of 15 possible ratings), and one is rated A (Excellent) (the third highest rating). A.M. Best's ratings are based upon factors of concern to policyholders, insurance agents and brokers and are not directed toward the protection of investors. A.M. Best states: “The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance obligations. The ratings are not assigned to specific insurance policies or contracts and do not address any other risk.” A.M. Best reviews its ratings on a periodic basis, and its ratings of the Company's subsidiaries are therefore subject to change.
The twenty-three insurance company subsidiaries rated by Standard & Poor's (“S&P”) have financial strength ratings of A+ (the seventh highest rating out of twenty-seven possible ratings).
Our Moody's ratings are A2 for Berkley Insurance Company, Berkley Regional Insurance Company and Admiral Insurance Company (the sixth highest rating out of twenty-one possible ratings).
The following sections describe our reporting segments and their operating units in greater detail. These operating units underwrite on behalf of one or more affiliated insurance companies within the group. Certain operating units are identified by us herein for descriptive purposes only and are not legal entities. Unless otherwise indicated, all references in this Form 10-K to “W. R. Berkley,” “we,” “us,” “our,” the “Company” or similar terms refer to W. R. Berkley Corporation together with its subsidiaries and operating units. W. R. Berkley Corporation is a Delaware corporation formed in 1970.
Insurance-Domestic
Certain of our Insurance-Domestic operating units underwrite risks within the excess and surplus lines market and on an admitted basis. The risks are highly complex, often unique exposures that typically fall outside the underwriting guidelines of the standard insurance market or are best served by specialized knowledge of a particular industry. The lines of business underwritten by these operating units include premises operations, commercial automobile, property, general liability, products liability and professional liability lines. The customers are highly diverse. Each operating unit delivers their products through a variety of distribution channels, depending on the customer base and particular risks insured.
Other operating units provide insurance products and services that meet the specific needs of geographically differentiated customers by developing expertise in the niches that drive local communities. They provide commercial insurance products to customers primarily in 45 states and the District of Columbia. Key clients of these units are small-to-mid-sized businesses and state and local governmental entities. Business is sold through a network of non-exclusive independent agents who are compensated on a commission basis. These operating units are organized in a manner designed to provide them with the flexibility to adapt quickly to local market conditions and customer needs.
In addition to providing insurance products, certain of our operating units also provide a wide variety of fee-based services, including claims, administrative and consulting services.
Operating units comprising the Insurance-Domestic segment are as follows:
Acadia Insurance is a Northeast regional property casualty underwriter offering a broad portfolio of products exclusively through local independent agents in Connecticut, Maine, Massachusetts, New Hampshire, New York and Vermont. In addition to its general offerings, Acadia has specialized expertise in insuring regional businesses and industries such as construction, lumber and fishing.
Admiral Insurance provides excess and surplus lines coverage for commercial risks that generally consist of hard-to- place, specialized risks that involve moderate to high degrees of hazard. Its lines of business include general liability, professional liability, property, and excess and umbrella coverage. Admiral's professional liability and program operations include special coverages for technology, ambulatory surgery centers, chiropractors and concierge physicians. Its products are distributed exclusively by wholesale brokers.
American Mining Insurance offers workers' compensation insurance as well as general liability, automobile, and excess liability coverages to a broad range of firms within the mining and aggregate industries in the United States.
Berkley Accident and Health underwrites accident and health insurance and reinsurance products in four primary areas: medical stop loss, managed care, special risk and group captive. It has a diversified product and service portfolio serving a range of clients from small employers, health care organizations, and membership groups to Fortune 500 companies.
Berkley Aviation offers a wide range of aviation insurance products, including coverage for airlines, airplanes, helicopters, miscellaneous general aviation operations, non-owned aircraft, fixed-base operations, control towers, airports and other specialized niche programs. It places its business on an admitted and non-admitted basis nationwide.
Berkley Custom Insurance focuses on the excess casualty insurance market and offers umbrella liability, pollution liability, excess liability, construction wrap-ups and completed operations coverages to wholesalers, retailers, manufacturers, insurance companies, financial institutions and construction companies.
Berkley Design Professional specializes in professional liability insurance products and services for the design professional industry including architects, engineers and consultants. In addition, it has a specialized program for Certified Public Accountants (CPAs).
Berkley FinSecure serves the insurance needs of financial institutions, credit unions, mortgage lenders, mortgage servicers and trust managers. It offers a comprehensive range of property, casualty, professional liability, and specialty lines insurance products and loss control services, including financial institution-specific commercial package policies, workers' compensation, umbrella, commercial auto, management liability and crime coverages, and financial institution bonds.
Berkley Life Sciences offers a comprehensive spectrum of property casualty products to the life sciences industry on a global basis, including primary and excess liability coverage and commercial insurance. It serves pharmaceutical and biologic/
biotech companies, medical device companies, dietary supplement manufacturers, medical and research software developers, contract service organizations, research institutions and organizations, and other related businesses.
Berkley Medical Excess insures healthcare organizations such as hospitals and clinics that retain a portion of their risk exposure through a self-funded mechanism and seek to maximize the effectiveness and efficiency of their excess risk financing program.
Berkley Mid-Atlantic Group provides commercial property casualty coverages to a wide variety of businesses in Delaware, the District of Columbia, Maryland, Ohio, Pennsylvania, and Virginia. Focusing on middle market accounts, it complements its standard writings with specialized products in areas such as social services and construction.
Berkley Net Underwriters focuses on small and medium-sized commercial risks, using a web-based system to allow producers to quote, bind and service workers' compensation insurance products on behalf of W. R. Berkley Corporation member companies.
Berkley North Pacific provides local underwriting, claims and risk management services from its home office in Seattle, Washington and branch offices in Boise, Idaho, Spokane, Washington and Salt Lake City, Utah. It operates with a select group of agents in Washington, Oregon, Idaho, Montana and Utah to sell and service property and casualty policies for larger middle-market standard businesses and the specialty lines of agribusiness, motor carrier, petroleum distribution and construction.
Berkley Offshore Underwriting Managers is a specialist global underwriter of energy and marine risks. Its three divisions provide specialty insurance products in the energy upstream, energy liability and marine sectors.
Berkley Oil & Gas provides property casualty products and risk services to the United States energy sector. Its customer base includes risks of any size that work in the oil patch, including operators, drillers, geophysical contractors, well-servicing contractors, and manufacturers/distributors of oil field products, as well as those in the renewable energy sector.
Berkley Professional Liability specializes in professional liability insurance for publicly-traded and private entities based on a worldwide basis. Its liability coverages include directors and officers, fiduciary, employment practices, and sponsored insurance agents.
Berkley Program Specialists is a program management company offering both admitted and non-admitted insurance support on a nationwide basis for commercial casualty and inland marine program administrators with specialized insurance expertise. Its book is built around blocks of homogeneous business, or programs, allowing for efficient processes, effective oversight of existing programs and sound implementation of new programs.
Berkley Public Entity specializes in providing excess coverage and services to individual governmental and scholastic entities and intergovernmental risk sharing groups. Products include general liability, automobile liability, law enforcement liability, public officials and educator's legal liability, employment practices liability, incidental medical, property and crime.
Berkley Regional Specialty provides excess and surplus lines coverage on a national basis to small to medium-sized insureds with low to moderate insurance risk. Its product lines include general liability, liquor liability and some property and inland marine coverage. It serves a limited distribution channel consisting of select W. R. Berkley Corporation member company agents.
Berkley Risk Administrators provides insurance program management services to a variety of organizations, including self-insureds, captives, governmental entities, risk retention groups, and insurance companies. It is also a nationwide third-party claims administrator and is the nation's third largest servicing carrier for workers' compensation assigned risk plans, serving plans in 20 states.
Berkley Select specializes in underwriting professional liability insurance with a particular emphasis on large law firms, accounting firms and medical institution facilities. Its products are distributed nationwide through a limited number of brokers.
Berkley Southeast offers a wide array of commercial lines products in six southeastern states: Mississippi, Alabama, Georgia, Tennessee, North Carolina and South Carolina.
Berkley Specialty Underwriting Managers has two underwriting divisions. Its entertainment and sports division underwrites property casualty insurance products, both on an admitted and non-admitted basis, for the entertainment industry and sports-related organizations. The environmental division underwrites specialty insurance products for environmental customers such as contractors, consultants and owners of sites and facilities.
Berkley Surety provides a broad array of surety products for contract and commercial surety risks in the U.S. and Canada, including specialty niches such as environmental and secured credit for small contractors, through an independent agency and broker platform across a network of 16 field offices.
Berkley Technology Underwriters provides a broad range of first and third-party insurance programs for technology exposures and technology industries on both a local and global basis.
Carolina Casualty Insurance provides commercial insurance products and services to the transportation industry with an emphasis on intermediate and long-haul trucking and various classes of business and public automobile coverage. It underwrites on an admitted basis in all 50 states and the District of Columbia.
Clermont Specialty Managers is a provider of package insurance programs for high-end cooperative, condominium, and quality rental apartment buildings and upscale restaurants in the New York, New Jersey, Chicago and Washington, D.C. metropolitan markets, as well as other select markets.
Continental Western Group is a Midwest regional property and casualty insurance operation based in Des Moines, Iowa, providing underwriting and risk management services to a broad array of regional businesses in thirteen Midwest states. In addition to its generalist portfolio, Continental Western offers specialty underwriting solutions for diversified agriculture, construction, light manufacturing, transportation, volunteer fire departments, rural utilities, collector cars, public entity and implement dealers. Through its division, Berkley Agribusiness Risk Specialists, Continental Western offers insurance for larger commercial risks across the United States involved in the supply, storage, handling, processing and distribution of commodities related to the agriculture and food industries.
Gemini Transportation is a national provider of excess liability insurance for various domestic surface transportation industry businesses. It underwrites liability insurance policies for the railroad industry as well as excess liability policies for the trucking, busing and other industries that use rubber-wheeled vehicles for over-the-road use.
Key Risk Insurance is a provider of workers' compensation insurance products and services for employers in the public and private sectors in select Eastern and Southeastern States. It focuses on middle-market accounts in specialty niches and on larger self-insured entities, with a special emphasis on expert claims and managed-care services. Additionally, Key Risk's affiliate, Key Risk Management Services, provides third party administration of self-insured workers' compensation programs.
Midwest Employers Casualty provides excess workers' compensation insurance products to individual employers, groups and workers' compensation insurance companies across the United States. Its workers' compensation excess of loss products include self-insured excess of loss coverages, large deductible policies and reinsurance. Through its relationship with Berkley Net Underwriters, Midwest Employers Casualty also offers multi-state coverage for group self-insureds. It has developed sophisticated, proprietary analytical tools and risk management services that help its insureds lower their total cost of risk.
Monitor Liability Managers provides executive and professional liability insurance to small to middle-market risks on a nationwide basis. Its primary professional liability products are management liability, employment practices and fiduciary coverages for private companies and nonprofit organizations, and errors and omissions policies for accounting and law firms.
Nautilus Insurance Group insures excess and surplus lines risks for small to medium-sized commercial risks with low to moderate susceptibility to loss. It writes commercial excess and surplus lines business nationwide and admitted lines commercial business in a limited number of states. A substantial portion of Nautilus' business is written through its close, long-standing network of general agents, who are chosen on a highly selective basis.
Preferred Employers Insurance focuses exclusively on workers' compensation products and services for businesses in California. It serves over 12,000 customers covering a broad spectrum of industries throughout the state.
Riverport Insurance Services provides property casualty insurance coverages to human services organizations, including nonprofit and for-profit organizations, public schools and sports and recreational organizations. Riverport also insures special events. Its product offerings include traditional primary coverages and risk purchasing groups, as well as alternative market solutions for clients who wish to retain a larger share of their own risk.
Union Standard offers preferred commercial property and casualty insurance products and services to a wide range of small to medium size commercial entities through independent agents in Arizona, Arkansas, New Mexico, Oklahoma and Texas. Union Standard's strategy is built around relationships and service. In 2013, it formed Berkley Fire & Marine as a division to offer a wider range of inland marine products nationwide to customers of the regional operating units.
Vela Insurance Services specializes in commercial casualty insurance on an excess and surplus lines basis. Its primary focus is on general liability insurance for construction, manufacturing and general casualty clients as well as products liability and miscellaneous professional liability coverages distributed through wholesale insurance brokers.
Verus Underwriting Managers offers general liability, professional liability and property coverages for small to mid-sized commercial risks in the excess and surplus lines insurance market through a select group of appointed wholesale brokers and agents.
The following table sets forth the percentage of gross premiums written by each Insurance-Domestic operating unit:
| Year Ended December 31, | ||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
| Acadia Insurance | 8.4 | % | 8.2 | % | 8.6 | % | 9.0 | % | 9.2 | % | ||||
| Admiral Insurance | 6.2 | 5.9 | 6.1 | 6.8 | 7.5 | |||||||||
| American Mining | 0.8 | 0.8 | 0.9 | 1.0 | 1.0 | |||||||||
| Berkley Accident and Health | 3.4 | 3.0 | 3.6 | 3.3 | 2.2 | |||||||||
| Berkley Aviation | 1.0 | 1.0 | 1.5 | 1.7 | 1.8 | |||||||||
| Berkley Custom Insurance | 2.8 | 2.8 | 0.7 | — | — | |||||||||
| Berkley Design Professional | 0.1 | — | — | — | — | |||||||||
| Berkley FinSecure | 0.8 | 0.9 | 0.8 | 0.8 | 0.5 | |||||||||
| Berkley Life Sciences | 1.1 | 1.1 | 0.8 | 0.6 | 0.5 | |||||||||
| Berkley Medical Excess | 1.0 | 0.9 | 0.9 | 1.0 | 1.2 | |||||||||
| Berkley Mid-Atlantic Group | 2.8 | 4.4 | 4.9 | 5.4 | 6.1 | |||||||||
| Berkley Net Underwriters | 4.3 | 4.0 | 3.5 | 2.5 | 2.2 | |||||||||
| Berkley North Pacific | 1.9 | 1.8 | 1.8 | 1.5 | 1.4 | |||||||||
| Berkley Offshore Underwriting Managers | 2.0 | 2.3 | 2.2 | 2.0 | 1.7 | |||||||||
| Berkley Oil & Gas | 4.1 | 3.9 | 3.2 | 2.2 | 0.4 | |||||||||
| Berkley Professional Liability | 2.1 | 1.3 | 1.2 | 1.1 | 1.1 | |||||||||
| Berkley Program Specialists | 1.4 | 1.5 | 1.8 | 3.1 | 3.1 | |||||||||
| Berkley Public Entity | 0.4 | 0.4 | 0.2 | — | — | |||||||||
| Berkley Regional Specialty | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 | |||||||||
| Berkley Risk Administrators | 4.6 | 4.9 | 4.8 | 4.0 | 3.2 | |||||||||
| Berkley Select | 2.1 | 2.7 | 2.9 | 2.6 | 2.5 | |||||||||
| Berkley Southeast | 3.0 | — | — | — | — | |||||||||
| Berkley Specialty Underwriting Managers | 6.2 | 6.6 | 7.9 | 7.0 | 5.4 | |||||||||
| Berkley Surety | 1.4 | 1.3 | 1.3 | 1.6 | 1.7 | |||||||||
| Berkley Technology Underwriters | 0.5 | 0.3 | 0.1 | — | — | |||||||||
| Carolina Casualty Insurance | 2.2 | 2.4 | 2.3 | 2.3 | 2.2 | |||||||||
| Clermont Specialty Managers | 1.5 | 1.5 | 1.6 | 1.7 | 1.8 | |||||||||
| Continental Western Group | 4.5 | 5.9 | 6.4 | 7.0 | 8.2 | |||||||||
| Gemini Transportation | 1.1 | 1.0 | 1.1 | 1.0 | 0.8 | |||||||||
| Key Risk Insurance | 3.5 | 3.3 | 3.2 | 3.1 | 3.3 | |||||||||
| Midwest Employers Casualty | 2.9 | 2.9 | 3.4 | 4.4 | 6.3 | |||||||||
| Monitor Liability Managers | 2.6 | 3.1 | 3.1 | 3.9 | 4.5 | |||||||||
| Nautilus Insurance Group | 5.5 | 5.8 | 6.2 | 6.6 | 7.2 | |||||||||
| Preferred Employers Insurance | 2.5 | 2.1 | 2.0 | 1.9 | 1.9 | |||||||||
| Riverport Insurances Services | 0.7 | 0.8 | 1.4 | 1.7 | 1.5 | |||||||||
| Union Standard | 3.1 | 5.2 | 5.3 | 5.5 | 6.3 | |||||||||
| Vela Insurance Services | 3.7 | 3.5 | 2.2 | 2.1 | 2.2 | |||||||||
| Verus Underwriting Managers | 0.9 | 1.0 | 0.7 | 0.4 | — | |||||||||
| Other | 2.5 | 1.1 | 1.0 | 0.8 | 0.7 | |||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
The following table sets forth percentages of gross premiums written, by line, by our Insurance-Domestic operations:
| Year Ended December 31, | ||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
| Other liability | 31.9 | % | 32.4 | % | 30.7 | % | 31.2 | % | 30.4 | % | ||||
| Workers' compensation | 27.2 | 27.0 | 26.8 | 25.3 | 26.3 | |||||||||
| Short-tail lines | 21.8 | 22.0 | 23.5 | 23.5 | 22.4 | |||||||||
| Commercial auto | 10.4 | 10.7 | 11.2 | 12.1 | 12.7 | |||||||||
| Professional liability | 8.7 | 7.9 | 7.8 | 7.9 | 8.2 | |||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Insurance-International
Through our Insurance-International operating units, we write business in more than 60 countries worldwide, with branches or offices in 15 locations outside the United States, including the United Kingdom, Continental Europe, South America, Canada, Scandinavia, and Australia. In each of our operating territories, we have built decentralized structures that allow products and services to be tailored to each regional customer base. Our businesses are managed by teams of professionals with expertise in local markets and knowledge of regional environments.
Berkley Canada underwrites specialty, casualty and surety lines of business on behalf of the Canadian branch of Berkley Insurance Company. It specializes in commercial casualty and professional liability, and offers a broad portfolio of risk products that include commercial general liability, umbrella, professional liability, directors' and officers', commercial property and surety, in addition to niche products for specific industries such as technology and life sciences.
Berkley Latinoamérica is a leading provider of property, casualty, automobile, surety, group life and health and workers' compensation products and services in its operating territories of Argentina, Brazil, Uruguay and Colombia. Its largest operation, Berkley International Seguros, offers a wide range of property casualty products in Argentina, where it is a leading provider of surety, engineering, cargo and personal accident coverages. Berkley International ART, Berkley Latinoamérica's workers' compensation carrier in Argentina, is focused on small to medium-sized risks in its operating territories. Berkley International Seguros do Brasil provides surety products to small and medium-sized risks throughout Brazil, and Berkley International Seguros (Uruguay) is a provider of customized property casualty insurance products and services to small and medium-sized businesses in Uruguay.
Lloyd's Syndicate 2791 Participation represents the Company's minority participation in a Lloyd's syndicate that writes a broad range of mainly short-tail classes of business.
W. R. Berkley Insurance (Australia) underwrites general insurance business in Australia, including professional indemnity insurance for companies of all sizes.
W. R. Berkley Insurance (Europe) is based in the United Kingdom, with branches in Spain, Ireland, Norway, Sweden and Germany. Its product offering includes professional indemnity, directors' and officers' liability, medical malpractice, general liability, personal accident and travel, engineering and construction. It also offers expertise in marine, cargo, and commercial property and casualty packages.
W. R. Berkley Syndicate 1967 at Lloyd's focuses on lines of business more global in nature and where access to the Lloyd's distribution platform allows us to further expand our international reach. It works actively with select W. R. Berkley Corporation member companies to access business for which the Lloyd's platform is best suited. Syndicate 1967's book of business includes accident, commercial property and a specialized book of marine business. Through its division Berkley Asset Protection, it provides products that protect high-value commercial and personal assets, including fine art.
The following table sets forth the percentages of gross premiums written by our Insurance-International operating units:
| Year Ended December 31, | ||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
| Berkley Canada | 3.4 | % | 4.4 | % | 4.6 | % | 4.9 | % | 3.9 | % | ||||
| Berkley Latinoamérica | 29.5 | 32.6 | 34.9 | 38.2 | 43.8 | |||||||||
| Lloyd's Syndicate 2791 Participation | 4.0 | — | — | — | — | |||||||||
| W. R. Berkley Insurance (Australia) | 8.3 | 8.6 | 5.3 | 4.1 | 3.3 | |||||||||
| W. R. Berkley Insurance (Europe) | 31.3 | 31.5 | 32.8 | 31.3 | 32.7 | |||||||||
| W. R. Berkley Syndicate 1967 | 23.5 | 22.9 | 22.4 | 21.5 | 16.3 | |||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
The following table sets forth percentages of gross premiums written, by line, by our Insurance-International operations:
| Year Ended December 31, | ||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
| Short-tail lines | 55.1 | % | 51.8 | % | 49.4 | % | 41.4 | % | 35.7 | % | ||||
| Commercial auto | 13.1 | 15.5 | 18.0 | 19.8 | 23.3 | |||||||||
| Professional liability | 12.8 | 12.9 | 15.1 | 17.6 | 20.0 | |||||||||
| Other liability | 11.7 | 10.4 | 7.2 | 10.3 | 9.5 | |||||||||
| Workers' compensation | 7.3 | 9.4 | 10.3 | 10.9 | 11.5 | |||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Reinsurance-Global
We provide other insurance companies and self-insureds with assistance in managing their net risk through reinsurance on either a portfolio basis, through treaty reinsurance, or on an individual basis, through facultative reinsurance.
Berkley Re America is a specialty treaty reinsurance underwriter with an emphasis on providing solutions for insurance companies, or units within insurance companies, that have a successful business model built upon specialization in the products they underwrite. Its lines of business include general and products liability, environmental liability, professional liability, medical malpractice, automobile, umbrella and excess liability, workers' compensation, and property.
Berkley Re Asia Pacific, which comprises the Australian, Hong Kong and Singapore branches of Berkley Insurance Company, provides property and casualty reinsurance to the Asia Pacific marketplace. With offices in Brisbane, Sydney, Hong Kong and Singapore, each branch focuses on excess of loss reinsurance, targeting both property and casualty treaty and facultative contracts, through multiple distribution channels.
Berkley Re Direct is a direct casualty facultative reinsurance underwriter serving clients through a nationwide network of regional offices. Its facultative reinsurance products include automatic, semi-automatic and individual risk assumed reinsurance. Berkley Re Direct also provides its customers value-added services across its lines, including underwriting, claims and actuarial consultation.
Berkley Re UK writes international property casualty treaty accounts. Its territorial scope includes reinsured clients domiciled in the United Kingdom, Europe, Africa, the Middle East and the Caribbean.
Facultative ReSources is a broker market casualty, professional liability and property facultative underwriter based in Stamford, Connecticut. It provides expertise across many lines of facultative business, and has recently broadened its expertise in a number of specialized areas, including professional liability and property hazards in emerging technologies.
The following table sets forth the percentages of gross premiums written by each Reinsurance-Global operating unit:
| Year Ended December 31, | ||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
| Berkley Re America | 49.4 | % | 43.7 | % | 45.9 | % | 49.9 | % | 53.6 | % | ||||
| Berkley Re Asia Pacific | 21.3 | 24.8 | 22.1 | 24.4 | 18.1 | |||||||||
| Berkley Re Direct | 7.2 | 6.5 | 6.2 | 7.2 | 7.8 | |||||||||
| Berkley Re UK | 11.2 | 9.1 | 6.9 | 0.2 | — | |||||||||
| Facultative ReSources | 10.9 | 8.6 | 8.4 | 7.9 | 11.6 | |||||||||
| Other | — | 7.3 | 10.5 | 10.4 | 8.9 | |||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
The following table sets forth the percentages of gross premiums written, by property versus casualty business, by our Reinsurance-Global operations:
| Year Ended December 31, | ||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
| Casualty | 66.9 | % | 65.6 | % | 66.9 | % | 70.7 | % | 69.0 | % | ||||
| Property | 33.1 | 34.4 | 33.1 | 29.3 | 31.0 | |||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Results by Industry Segment
Summary financial information about our segments is presented on a GAAP basis in the following table:
| Year Ended December 31, | |||||||||||||||||||
| (In thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
| Insurance-Domestic | |||||||||||||||||||
| Revenue | $ | 4,807,418 | $ | 4,294,213 | $ | 3,944,942 | $ | 3,586,181 | $ | 3,434,686 | |||||||||
| Income before income taxes | 796,309 | 648,740 | 578,500 | 467,126 | 589,138 | ||||||||||||||
| Insurance-International | |||||||||||||||||||
| Revenue | 857,782 | 770,190 | 677,637 | 545,467 | 407,704 | ||||||||||||||
| Income before income taxes | 29,779 | 56,922 | 51,639 | 36,912 | 15,172 | ||||||||||||||
| Reinsurance-Global | |||||||||||||||||||
| Revenue | 758,931 | 810,060 | 731,585 | 628,872 | 600,265 | ||||||||||||||
| Income before income taxes | 115,677 | 110,425 | 103,690 | 85,271 | 134,996 | ||||||||||||||
| Other(1) | |||||||||||||||||||
| Revenue | 704,797 | 534,071 | 469,390 | 395,464 | 281,414 | ||||||||||||||
| Income (loss) before income taxes | 10,431 | (117,199 | ) | (31,901 | ) | (76,223 | ) | (140,396 | ) | ||||||||||
| Total | |||||||||||||||||||
| Revenue | 7,128,928 | 6,408,534 | 5,823,554 | 5,155,984 | 4,724,069 | ||||||||||||||
| Income before income taxes | $ | 952,196 | $ | 698,888 | $ | 701,928 | $ | 513,086 | $ | 598,910 |
| (1) | Represents corporate revenues, corporate expenses, net investment gains and losses, and revenues and expenses from investments in wholly-owned, non-insurance subsidiaries that are consolidated for financial reporting purposes. |
The table below represents summary underwriting ratios on a GAAP basis for our segments. Loss ratio is losses and loss expenses incurred expressed as a percentage of net premiums earned. Expense ratio is underwriting expenses expressed as a percentage of net premiums earned. Underwriting expenses do not include expenses related to insurance services or unallocated corporate expenses. Combined ratio is the sum of the loss ratio and the expense ratio. The combined ratio represents a measure of underwriting profitability, excluding investment income. A number in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit:
| Year Ended December 31, | ||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
| Insurance-Domestic | ||||||||||||||
| Loss ratio | 60.2 | % | 61.3 | % | 63.5 | % | 64.9 | % | 61.1 | % | ||||
| Expense ratio | 31.6 | 32.7 | 32.5 | 32.6 | 32.5 | |||||||||
| Combined ratio | 91.8 | % | 94.0 | % | 96.0 | % | 97.5 | % | 93.6 | % | ||||
| Insurance-International | ||||||||||||||
| Loss ratio | 62.8 | % | 59.4 | % | 59.7 | % | 57.4 | % | 59.2 | % | ||||
| Expense ratio | 40.0 | 39.0 | 40.2 | 42.7 | 43.6 | |||||||||
| Combined ratio | 102.8 | % | 98.4 | % | 99.9 | % | 100.1 | % | 102.8 | % | ||||
| Reinsurance-Global | ||||||||||||||
| Loss ratio | 62.0 | % | 62.2 | % | 64.3 | % | 64.3 | % | 55.9 | % | ||||
| Expense ratio | 34.0 | 34.8 | 36.3 | 38.0 | 38.6 | |||||||||
| Combined ratio | 96.0 | % | 97.0 | % | 100.6 | % | 102.3 | % | 94.5 | % | ||||
| Total | ||||||||||||||
| Loss ratio | 60.8 | % | 61.2 | % | 63.1 | % | 63.9 | % | 60.2 | % | ||||
| Expense ratio | 33.0 | 33.9 | 34.1 | 34.6 | 34.4 | |||||||||
| Combined ratio | 93.8 | % | 95.1 | % | 97.2 | % | 98.5 | % | 94.6 | % |
Investments
Investment results, before income taxes, were as follows:
| Year Ended December 31, | |||||||||||||||||||
| (In thousands) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
| Average investments, at cost(1) | $ | 15,560,335 | $ | 14,848,386 | $ | 14,545,371 | $ | 13,631,552 | $ | 13,356,380 | |||||||||
| Net investment income(1) | $ | 600,885 | $ | 544,291 | $ | 586,763 | $ | 526,351 | $ | 530,525 | |||||||||
| Percent earned on average investments(1) | 3.9 | % | 3.7 | % | 4.0 | % | 3.9 | % | 4.0 | % | |||||||||
| Net investment gains (2) | $ | 254,852 | $ | 121,544 | $ | 210,465 | $ | 125,481 | $ | 56,581 | |||||||||
| Change in unrealized investment gains (3) | $ | 72,889 | $ | (399,122 | ) | $ | 135,282 | $ | 147,998 | $ | 176,588 |
| (1) | Includes investments, cash and cash equivalents, trading accounts receivable from brokers and clearing organizations, trading account securities sold but not yet purchased and unsettled purchases. |
| (2) | Represents realized gains on investments not classified as trading account securities. |
| (3) | Represents the change in unrealized investment gains for available for sale securities. |
For comparison, the following are the coupon returns for the Barclays U.S. Aggregate Bond Index and the dividend returns for the S&P 500® Index:
| Year Ended December 31, | ||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
| Barclays U.S. Aggregate Bond Index | 3.2 | % | 3.1 | % | 3.5 | % | 4.0 | % | 4.2 | % | ||||
| S&P 500® Index | 2.1 | 2.4 | 2.5 | 2.1 | 2.3 |
The percentages of the fixed maturity portfolio categorized by contractual maturity, based on fair value, on the dates indicated, are set forth below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay certain obligations.
| Year Ended December 31, | ||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
| 1 year or less | 7.0 | % | 8.0 | % | 5.8 | % | 6.6 | % | 6.7 | % | ||||
| Over 1 year through 5 years | 32.4 | 30.5 | 30.7 | 28.3 | 27.3 | |||||||||
| Over 5 years through 10 years | 29.8 | 27.5 | 23.4 | 25.3 | 25.9 | |||||||||
| Over 10 years | 20.4 | 22.3 | 25.5 | 25.5 | 27.1 | |||||||||
| Mortgage-backed securities | 10.4 | 11.7 | 14.6 | 14.3 | 13.0 | |||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
At December 31, 2014, the fixed maturity portfolio had an average duration of 3.2 years.
Loss and Loss Adjustment Expense Reserves
To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss.
In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment based upon known information about the claim at that time. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but not reported (“IBNR”) to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and other fees and general expenses of administrating the claims adjustment process. Reserves are established based upon the then current legal interpretation of coverage provided.
In examining reserve adequacy, several factors are considered in estimating the ultimate economic value of losses. These factors include, among others, historical data, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that past experience, adjusted judgmentally for the effects of current developments and anticipated trends, is an appropriate basis for predicting future outcomes. Reserve amounts are necessarily based on management’s informed estimates and judgments using currently available data. As additional experience and other data become available and are reviewed, these estimates and judgments may be revised. This may result in reserve increases or decreases that would be reflected in our results in periods in which such estimates and assumptions are changed.
The risk and complexity of estimating loss reserves are greater when economic conditions are uncertain. It is especially difficult to estimate the impact of inflation on loss reserves given the current economic environment and related government actions. Whereas a slowing economy would generally lead to lower inflation or even deflation, increased government spending would generally lead to higher inflation. A change in our assumptions regarding inflation would result in reserve increases or decreases that would be reflected in our earnings in periods in which such assumptions are changed.
Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claim administration will cost. While the methods for establishing the reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties, which are beyond the Company’s control. These variables are affected by external and internal events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage, legislative changes and claim handling and reserving practices, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Although the loss reserves included in the Company’s financial statements represent management’s best estimates, setting reserves is inherently uncertain and the Company cannot provide assurance that its current reserves will prove adequate in light of subsequent events.
We discount our liabilities for excess workers’ compensation business and the workers’ compensation portion of our reinsurance 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 Company’s 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. At December 31, 2014, the discount rates by year ranged from 2.0% to 6.5% with a weighted average discount rate of 4.2%. 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%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $746 million, $837 million and $867 million at December 31, 2014, 2013 and 2012, respectively.
To date, known asbestos and environmental claims at our insurance company subsidiaries have not had a material impact on our operations. These claims have not materially impacted us because these subsidiaries generally did not insure the larger industrial companies which were subject to significant asbestos or environmental exposures prior to 1986 when an absolute pollution exclusion was incorporated into standard policy language.
Our net reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $36 million at both December 31, 2014 and 2013. The Company’s gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $56 million and $59 million at December 31, 2014 and 2013, respectively. Net incurred losses and loss expenses for reported asbestos and environmental claims increased by approximately $4 million, $5 million and $2 million in 2014, 2013 and 2012, respectively. Net paid losses and loss expenses for reported asbestos and environmental claims were approximately $3 million, $3 million and $2 million in 2014, 2013 and 2012, respectively. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make a reasonable actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential effect of significant unresolved legal matters, including coverage issues as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain.
The table below provides a reconciliation of the beginning of year and end of year property casualty reserves for the indicated years:
| (In thousands) | 2014 | 2013 | 2012 | ||||||||
| Net reserves at beginning of year | $ | 8,683,797 | $ | 8,411,851 | $ | 8,172,112 | |||||
| Net provision for losses and loss expenses: | |||||||||||
| Claims occurring during the current year (1) | 3,495,825 | 3,221,393 | 2,997,995 | ||||||||
| Decrease in estimates for claims occurring in prior years (2)(3) | (75,764 | ) | (78,810 | ) | (102,571 | ) | |||||
| Loss reserve discount amortization (4) | 70,506 | 54,441 | 53,055 | ||||||||
| Total | 3,490,567 | 3,197,024 | 2,948,479 | ||||||||
| Net payments for claims: | |||||||||||
| Current year | 898,944 | 822,787 | 698,834 | ||||||||
| Prior years | 2,216,283 | 2,055,284 | 2,010,101 | ||||||||
| Total | 3,115,227 | 2,878,071 | 2,708,935 | ||||||||
| Foreign currency translation | (88,496 | ) | (47,007 | ) | 195 | ||||||
| Net reserves at end of year | 8,970,641 | 8,683,797 | 8,411,851 | ||||||||
| Ceded reserves at end of year | 1,399,060 | 1,397,144 | 1,339,235 | ||||||||
| Gross reserves at end of year | $ | 10,369,701 | $ | 10,080,941 | $ | 9,751,086 | |||||
| Net change in premiums and losses occurring in prior years: | |||||||||||
| Decrease in estimates for claims occurring in prior years (2) | $ | 75,764 | $ | 78,810 | $ | 102,571 | |||||
| Retrospective premium adjustments for claims occurring in prior years (3) | 9,088 | 19,046 | — | ||||||||
| Net favorable premium and reserve development on prior years | $ | 84,852 | $ | 97,856 | $ | 102,571 |
| (1) | Claims occurring during the current year are net of discounts of $21,306,000, $22,680,000 and $26,078,000 in 2014, 2013 and 2012, respectively. |
| (2) | The decrease in estimates for claims occurring in prior years is net of discounts. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $116,866,000 in 2014, $77,430,000 in 2013 and $100,667,000 in 2012. |
| (3) | For certain retrospectively rated insurance polices and reinsurance agreements, changes in loss and loss adjustment expenses for prior years are offset by additional or return premiums. |
| (4) | In 2014, the Company entered into a commutation agreement that resulted in a reduction in prior year workers' compensation reserves of $30 million on an undiscounted basis and $12 million on a discounted basis. |
Also, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information regarding the decrease in estimates for claims occurring in prior years.
A reconciliation between the reserves as of December 31, 2014 as reported in the accompanying consolidated GAAP financial statements and those reported on the basis of statutory accounting principles (“SAP”) in the Company’s U.S. regulatory filings is as follows:
| (In thousands) | |||
| Net reserves reported in U.S. regulatory filings on a SAP basis | $ | 8,587,479 | |
| Reserves for non-U.S. companies | 696,740 | ||
| Loss reserve discounting(1) | (313,523 | ) | |
| Ceded reserves | 1,399,060 | ||
| Other | (55 | ) | |
| Gross reserves reported in the consolidated GAAP financial statements | $ | 10,369,701 |
(1) For statutory purposes, the Company discounts its workers’ compensation reinsurance reserves at 2% as permitted by the Department of Insurance of the State of Delaware. In its GAAP financial statements, the Company discounts excess workers’ compensation reserves at the risk-free rate and assumed workers’ compensation reserves at the statutory rate.
The following table presents the development of net reserves for 2004 through 2014. The top line of the table shows the estimated reserves for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This represents the estimated amount of losses and loss expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not reported to us. The upper portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years.
The “cumulative redundancy” represents the aggregate change in the estimates over all prior years. The impact on the results of operations of the past three years of changes in reserve estimates is shown in the reconciliation tables above. It should be noted that the table presents a “run off” of balance sheet reserves, rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. For example, assume a claim that occurred in 2004 is reserved for $2,000 million as of December 31, 2004. Assuming this claim estimate was changed in 2014 to $2,300 million, and was settled for $2,300 million in 2014, the $300 million deficiency would appear as a deficiency in each year from 2004 through 2014.
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||||||||||||||||||||
| Net reserves, discounted | $ | 4,723 | $ | 5,867 | $ | 6,948 | $ | 7,823 | $ | 8,123 | $ | 8,148 | $ | 8,000 | $ | 8,172 | $ | 8,412 | $ | 8,684 | $ | 8,971 | ||||||||||||||||||||||
| Reserve discount | 503 | 575 | 700 | 788 | 846 | 877 | 898 | 892 | 867 | 837 | 746 | |||||||||||||||||||||||||||||||||
| Net reserves, undiscounted | $ | 5,226 | $ | 6,442 | $ | 7,648 | $ | 8,611 | $ | 8,969 | $ | 9,025 | $ | 8,898 | $ | 9,064 | $ | 9,279 | $ | 9,521 | $ | 9,717 | ||||||||||||||||||||||
| Net reserves re-estimated as of: | ||||||||||||||||||||||||||||||||||||||||||||
| One year later | $ | 5,440 | $ | 6,499 | $ | 7,560 | $ | 8,431 | $ | 8,737 | $ | 8,778 | $ | 8,715 | $ | 8,963 | $ | 9,202 | 9,404 | |||||||||||||||||||||||||
| Two years later | 5,588 | 6,578 | 7,494 | 8,239 | 8,560 | 8,596 | 8,624 | 8,866 | 9,140 | |||||||||||||||||||||||||||||||||||
| Three years later | 5,763 | 6,592 | 7,363 | 8,192 | 8,420 | 8,543 | 8,504 | 8,772 | ||||||||||||||||||||||||||||||||||||
| Four years later | 5,816 | 6,556 | 7,370 | 8,137 | 8,433 | 8,460 | 8,400 | |||||||||||||||||||||||||||||||||||||
| Five years later | 5,834 | 6,636 | 7,376 | 8,195 | 8,373 | 8,388 | ||||||||||||||||||||||||||||||||||||||
| Six years later | 5,929 | 6,677 | 7,437 | 8,144 | 8,343 | |||||||||||||||||||||||||||||||||||||||
| Seven years later | 5,983 | 6,755 | 7,421 | 8,135 | ||||||||||||||||||||||||||||||||||||||||
| Eight years later | 6,041 | 6,762 | 7,428 | |||||||||||||||||||||||||||||||||||||||||
| Nine years later | 6,046 | 6,780 | ||||||||||||||||||||||||||||||||||||||||||
| Ten years later | 6,055 | |||||||||||||||||||||||||||||||||||||||||||
| Cumulative redundancy (deficiency), undiscounted | $ | (829 | ) | $ | (338 | ) | $ | 220 | $ | 476 | $ | 626 | $ | 637 | $ | 498 | $ | 292 | $ | 139 | $ | 117 | $ | — | ||||||||||||||||||||
| Cumulative amount of net liability paid through: | ||||||||||||||||||||||||||||||||||||||||||||
| One year later | $ | 1,174 | $ | 1,341 | $ | 1,437 | $ | 1,663 | $ | 1,751 | $ | 1,812 | $ | 1,722 | $ | 2,010 | $ | 2,055 | $ | 2,216 | ||||||||||||||||||||||||
| Two years later | 2,106 | 2,363 | 2,636 | 2,935 | 3,106 | 3,052 | 3,118 | 3,409 | $ | 3,598 | ||||||||||||||||||||||||||||||||||
| Three years later | 2,836 | 3,219 | 3,558 | 3,956 | 4,039 | 4,066 | 4,105 | 4,495 | ||||||||||||||||||||||||||||||||||||
| Four years later | 3,384 | 3,856 | 4,279 | 4,616 | 4,786 | 4,802 | 4,896 | |||||||||||||||||||||||||||||||||||||
| Five years later | 3,813 | 4,327 | 4,733 | 5,152 | 5,337 | 5,413 | ||||||||||||||||||||||||||||||||||||||
| Six years later | 4,131 | 4,649 | 5,116 | 5,565 | 5,815 | |||||||||||||||||||||||||||||||||||||||
| Seven years later | 4,355 | 4,937 | 5,424 | 5,943 | ||||||||||||||||||||||||||||||||||||||||
| Eight years later | 4,575 | 5,163 | 5,719 | |||||||||||||||||||||||||||||||||||||||||
| Nine years later | 4,740 | 5,392 | ||||||||||||||||||||||||||||||||||||||||||
| Ten years later | 4,917 |
For certain retrospectively rated insurance polices and reinsurance agreements, changes in loss and loss adjustment expenses for prior years are offset by additional or return premiums. Such premiums are not reflected in the above table.
The following table presents the development of gross reserves for 2004 through 2014.
| (In millions) | ||||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||||||||||||||||||||
| Net reserves, discounted | $ | 4,723 | $ | 5,867 | $ | 6,947 | $ | 7,823 | $ | 8,123 | $ | 8,148 | $ | 8,000 | $ | 8,172 | $ | 8,412 | $ | 8,684 | $ | 8,971 | ||||||||||||||||||||||
| Ceded reserves | 727 | 845 | 837 | 855 | 877 | 924 | 1,017 | 1,165 | 1,339 | 1,397 | 1,399 | |||||||||||||||||||||||||||||||||
| Gross reserves, discounted | 5,450 | 6,712 | 7,784 | 8,678 | 9,000 | 9,072 | 9,017 | 9,337 | 9,751 | 10,081 | 10,370 | |||||||||||||||||||||||||||||||||
| Reserve discount | 573 | 654 | 761 | 867 | 944 | 944 | 968 | 953 | 924 | 888 | 811 | |||||||||||||||||||||||||||||||||
| Gross reserves, undiscounted | $ | 6,023 | $ | 7,366 | $ | 8,545 | $ | 9,545 | $ | 9,944 | $ | 10,016 | $ | 9,985 | $ | 10,290 | $ | 10,675 | $ | 10,969 | $ | 11,181 | ||||||||||||||||||||||
| Gross reserves re-estimated as of: | ||||||||||||||||||||||||||||||||||||||||||||
| One year later | $ | 6,241 | $ | 7,406 | $ | 8,509 | $ | 9,396 | $ | 9,696 | $ | 9,810 | $ | 9,879 | $ | 10,179 | $ | 10,673 | $ | 10,823 | ||||||||||||||||||||||||
| Two years later | 6,382 | 7,529 | 8,454 | 9,178 | 9,566 | 9,662 | 9,749 | 10,141 | 10,573 | |||||||||||||||||||||||||||||||||||
| Three years later | 6,600 | 7,561 | 8,300 | 9,163 | 9,445 | 9,580 | 9,681 | 10,029 | ||||||||||||||||||||||||||||||||||||
| Four years later | 6,670 | 7,508 | 8,335 | 9,081 | 9,427 | 9,539 | 9,540 | |||||||||||||||||||||||||||||||||||||
| Five years later | 6,680 | 7,617 | 8,316 | 9,109 | 9,386 | 9,433 | ||||||||||||||||||||||||||||||||||||||
| Six years later | 6,804 | 7,635 | 8,360 | 9,082 | 9,310 | |||||||||||||||||||||||||||||||||||||||
| Seven years later | 6,839 | 7,699 | 8,358 | 9,029 | ||||||||||||||||||||||||||||||||||||||||
| Eight years later | 6,888 | 7,716 | 8,315 | |||||||||||||||||||||||||||||||||||||||||
| Nine years later | 6,904 | 7,694 | ||||||||||||||||||||||||||||||||||||||||||
| Ten Years later | 6,875 | |||||||||||||||||||||||||||||||||||||||||||
| Gross cumulative redundancy (deficiency) | $ | (852 | ) | $ | (328 | ) | $ | 230 | $ | 516 | $ | 634 | $ | 583 | $ | 445 | $ | 261 | $ | 102 | $ | 146 | — |
For certain retrospectively rated insurance polices and reinsurance agreements, changes in loss and loss adjustment expenses for prior years are offset by additional or return premiums. Such premiums are not reflected in the above table.
Reinsurance
We follow a common industry practice of reinsuring a portion of our exposures and paying to reinsurers a portion of the premiums received on the policies that we write. Reinsurance is purchased principally to reduce net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does make the assuming reinsurer contractually liable to the insurer to the extent of the reinsurance coverage. We monitor the financial condition of our reinsurers and attempt to place our coverages only with substantial, financially sound carriers. As a result, generally the reinsurers who reinsure our casualty insurance must have an A.M. Best rating of “A (Excellent)” or better with at least $500 million in policyholder surplus and the reinsurers who cover our property insurance must have an A.M. Best rating of “A- (Excellent)” or better with at least $500 million in policyholder surplus.
Regulation
U.S. Regulation
Our U.S. insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they do business.
Overview. Our domestic insurance subsidiaries are subject to statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. This regulation relates to such matters as the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of certain policy forms and premium rates; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; establishment and maintenance of reserves for unearned premiums, loss expenses and losses; and requirements regarding numerous other matters. Our property casualty subsidiaries, other than excess and surplus and reinsurance subsidiaries, must generally file all rates with the insurance department of each state in which they operate. Our excess and surplus and reinsurance subsidiaries generally operate free of rate and form regulation.
Holding Company Statutes. In addition to regulatory supervision of our insurance subsidiaries, we are subject to state statutes governing insurance holding company systems. Typically, such statutes require that we periodically file information with
the appropriate state insurance commissioner, including information concerning our capital structure, ownership, financial condition and general business operations. Under the terms of applicable state statutes, any person or entity desiring to purchase more than a specified percentage (commonly 10%) of our outstanding voting securities would be required to obtain prior regulatory approval of the purchase.
The National Association of Insurance Commissioners (“NAIC”) adopted amendments to the model holding company law in 2010, expanding upon the regulation of holding company systems (the "2010 Amendments"). The 2010 Amendments include increased group-level reporting requirements, submission of an annual enterprise risk report by a regulated insurance company's ultimate controlling person and increased information made accessible to regulators regarding an insurer's non-insurer affiliates.
The 2010 Amendments must be adopted by the individual state legislatures and insurance regulators in order to be effective. To date, 39 states have adopted them, and in order to maintain compliance with NAIC standards, the remaining states must adopt them in whole or substantial part by January 2016. In 2014, additional amendments were adopted by the NAIC which would authorize U.S regulators to lead or participate in the group-wide supervision of certain international insurance groups.
Additionally, the NAIC recently adopted the Risk Management and Own Risk and Solvency Assessment Model Act (the “ORSA Model Act”). The ORSA Model Act requires an insurance holding company system’s chief risk officer to submit annually to its lead state insurance regulator an Own Risk and Solvency Assessment Summary Report (“ORSA”). The ORSA is a confidential internal assessment of the material and relevant risks associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks.
The ORSA Model Act must be adopted by the individual state legislature and insurance regulators in order to be effective. The ORSA Model Act’s requirements generally became effective on January 1, 2015 in the states that have adopted it.
We cannot predict the impact, if any, that these amendments and compliance with the ORSA Model Act will have on our business, financial condition or results of operations.
Risk Based Capital Requirements. The NAIC utilizes a Risk Based Capital (“RBC”) formula that is designed to measure the adequacy of an insurer's statutory surplus in relation to the risks inherent in its business. The RBC formula develops a risk adjusted target level of adjusted statutory capital by applying certain factors to various asset, premium and reserve items. The NAIC RBC Model Law provides for four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control. The RBC of each of our domestic insurance subsidiaries was above any RBC action level as of December 31, 2014.
Insurance Regulatory Information System. The NAIC also has developed a set of 13 financial ratios referred to as the Insurance Regulatory Information System (“IRIS”). On the basis of statutory financial statements filed with state insurance regulators, the NAIC annually calculates these IRIS ratios to assist state insurance regulators in monitoring the financial condition of insurance companies. The NAIC has established an acceptable range for each of the IRIS financial ratios.
Guaranty Funds. Our U.S. insurance subsidiaries are also subject to assessment by state guaranty funds when an insurer in a particular jurisdiction has been judicially declared insolvent and insufficient funds are available from the liquidated company to pay policyholders and claimants. The protection afforded under a state's guaranty fund to policyholders of the insolvent insurer varies from state to state. Generally, all licensed property casualty insurers are considered to be members of the fund, and assessments are based upon their pro rata share of direct written premiums. The NAIC Model Post-Assessment Guaranty Fund Act, which many states have adopted, limits assessments to an insurer to 2% of its subject premium and permits recoupment of assessments through rate setting. Likewise, several states (or underwriting organizations of which our insurance subsidiaries are required to be members) have limited assessment authority with regard to deficits in certain lines of business.
Additionally, state insurance laws and regulations require us to participate in mandatory property-liability “shared market,” “pooling” or similar arrangements that provide certain types of insurance coverage to individuals or others who otherwise are unable to purchase coverage voluntarily provided by private insurers. Shared market mechanisms include assigned risk plans and fair access to insurance requirement or “FAIR” plans. In addition, some states require insurers to participate in reinsurance pools for claims that exceed specified amounts. Our participation in these mandatory shared market or pooling mechanisms generally is related to the amount of our direct writings for the type of coverage written by the specific arrangement in the applicable state.
Excess and Surplus Lines. The regulation of our U.S. subsidiaries' excess and surplus lines insurance business differs significantly from the regulation of our admitted business. Our surplus lines subsidiaries are subject to the surplus lines regulation and reporting requirements of the jurisdictions in which they are eligible to write surplus lines insurance. Although the surplus lines business is generally less regulated than admitted business, strict regulations apply to surplus lines placements in the laws of every state and the regulation of surplus lines insurance may undergo changes in the future. Federal or state measures may be introduced to increase the oversight of surplus lines insurance in the future.
Dividends. We receive funds from our insurance company subsidiaries in the form of dividends and management fees for certain management services. Annual dividends in excess of maximum amounts prescribed by state statutes may not be paid without the approval of the insurance commissioner of the state in which an insurance subsidiary is domiciled. See “Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
Trade Practices. State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing marketing and sales practices, policyholder services, claims management and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations.
Investment Regulation. Investments by our domestic insurance companies must comply with applicable laws and regulations which prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and certain other qualifications.
The Terrorism Risk Insurance Act. The Terrorism Risk Insurance Act of 2002 (as amended, “TRIA”), established a Federal program that provides for a system of shared public and private compensation for insured losses resulting from acts of terrorism. The program is effective through December 31, 2020. TRIA is applicable to almost all commercial lines of property and casualty insurance but excludes commercial auto, burglary and theft, surety, professional liability and farm owners' multi-peril insurance. Insurers with direct commercial property and casualty insurance exposure in the United States are required to participate in the program and make available coverage for certified acts of terrorism. TRIA's definition of certified acts includes domestic terrorism. Federal participation will be triggered under TRIA when the Secretary of Treasury certifies an act of terrorism. Under the program, the federal government will currently pay 85% of an insurer's covered losses in excess of the insurer's applicable deductible. This amount will decrease to 80% on a pro-rata basis over five years, beginning in 2016. The insurer's deductible is based on 20% percent of earned premium for the prior year for covered lines of commercial property and casualty insurance. Based on our 2014 earned premiums, our deductible under TRIA during 2015 will be approximately $786 million. The federal program will not pay losses for certified acts unless such losses exceed $100 million. This threshold will increase to $200 million on a pro-rata basis over five years beginning in 2016. TRIA limits the federal government's share of losses at $100 billion for a program year. In addition, an insurer that has satisfied its deductible is not liable for the payment of losses in excess of the $100 billion cap.
Federal Regulation. Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives could have an impact on our business in a variety of ways. In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which effected sweeping changes to financial services regulation in the United States. The Dodd-Frank Act created two new federal government bodies, the Federal Insurance Office (the “FIO”) and the Financial Stability Oversight Council (the “FSOC”), which may impact the regulation of insurance. Although the FIO has preemption authority over state insurance laws that conflict with certain international agreements, it does not have general supervisory or regulatory authority over the business of insurance. The FIO has authority to represent the United States in international insurance matters and is authorized to monitor the U.S. insurance industry and identify potential regulatory gaps that could contribute to systemic risk.
On December 12, 2013, the FIO delivered a report to Congress on how to modernize and improve the system of insurance regulation in the U.S. The report recommended that, in the short term, the U.S. system of insurance regulation can be modernized through state-based improvements combined with certain federal actions. The report identified areas for direct federal involvement in international standard setting, the FIO participation in supervisory colleges which monitor the regulation of large national and internationally active insurance groups and federal pursuit of international covered agreements to afford nationally uniform treatment of reinsurance collateral requirements. The report also made several recommendations for state reform of insurance regulation including changes to the state regulation of insurance company solvency, group supervision and corporate governance. The FIO report stated that the system of U.S. insurance regulation can be modernized and improved in the short-term, while warning that if the states do not act in the near term to effectively regulate matters on a consistent and cooperative basis, in the FIO’s view there will be a greater role for federal regulation of insurance.
The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to the United States financial stability in the event of the insurer's material financial distress or failure. An insurer so designated by FSOC could be subject to Federal Reserve supervision and heightened prudential standards. As of December 31, 2014, three insurance groups had been so designated. Based upon our current business model and balance sheet, we do not believe that we will be designated by the FSOC as such an institution. Although the potential impacts of the Dodd-Frank Act on the U. S. insurance industry is not clear, our business could be affected by changes to the U.S. system of insurance regulation or our designation or the designation of insurers or reinsurers with which we do business as systemically significant non-bank financial companies.
International Regulation
Our insurance subsidiaries based in the United Kingdom are regulated by the Prudential Regulation Authority ("PRA") and the Financial Conduct Authority ("FCA"). The PRA's primary objective is to promote the safety and soundness of insurers for the protection of policyholders, while the FCA has three operational objectives: (i) to secure an appropriate degree of protection for consumers, (ii) to protect and enhance the integrity of the United Kingdom financial system, and (iii) to promote effective competition in the interests of consumers. The PRA and FCA oversee compliance with established periodic auditing and reporting requirements, risk assessment reviews, minimum solvency margins and individual capital assessment requirements, dividend restrictions, restrictions governing the appointment of key officers, restrictions governing controlling ownership interests and various other requirements. Our Lloyd's syndicate and managing agency are also regulated by the PRA, FCA and Lloyd's. Through Lloyd's, we are licensed to write business in various countries throughout the world by virtue of Lloyd's international licenses. In each such country, we are subject to the laws and insurance regulation of that country. Additionally, PRA and FCA regulations also impact us as “controller” (a PRA/FCA defined term) of our U.K.-regulated subsidiaries, whereby we are required to notify the PRA/FCA about significant events relating to their controllers (i.e. persons or entities which have certain levels of influence over the regulated entities) as well as changes of control, and to submit an annual report regarding their controllers. Through the PRA/FCA's Approved Persons regime, certain employees and directors are subject to regulation by the PRA and FCA as to their fitness. In addition, certain employees are individually registered at Lloyd's.
In the European Union, a new insurance regulatory regime governing, among other things, capital adequacy and risk management called “Solvency II” is scheduled to take effect on January 1, 2016. In anticipation of the implementation of Solvency II, Lloyd’s applies a capital adequacy test to all Lloyd’s syndicates, including our syndicate, that is based on Solvency II principles. Solvency II provides for the supervision of group solvency. Under Solvency II, it is possible that the U.S. parent of a European Union subsidiary could be subject to certain Solvency II requirements if the regulator determines that the subsidiary's capital position is dependent on the parent company and the U.S. company is not already subject to regulations deemed “equivalent” to Solvency II. While it is not certain how or if these actions will impact us, we do not currently expect the capital management strategies for our U.S. and international companies will be materially impacted.
Our international underwriting subsidiaries are also subject to varying degrees of regulation in certain countries in Scandinavia, Continental Europe, South America, Australia, Southeast Asia and Canada. Generally, our subsidiaries must satisfy local regulatory requirements. While each country imposes licensing, solvency, auditing and financial reporting requirements, the type and extent of the requirements differ substantially. Key areas where country regulations may differ include: (i) the type of financial reports to be filed; (ii) a requirement to use local intermediaries; (iii) the amount of reinsurance permissible; (iv) the scope of any regulation of policy forms and rates; and (v) the type and frequency of regulatory examinations.
Competition
The property casualty insurance and reinsurance businesses are highly competitive, with many insurance companies of various sizes, as well as other entities offering risk alternatives such as self-insured retentions or captive programs, transacting business in the United States and internationally. We compete directly with a large number of these companies. Competition in our industry is largely measured by the ability to provide insurance and services at a price and on terms that are reasonable and acceptable to the customer. Our strategy in this highly fragmented industry is to seek specialized areas or geographic regions where our insurance subsidiaries can gain a competitive advantage by responding quickly to changing market conditions. Our subsidiaries establish their own pricing practices based upon a Company-wide philosophy to price products with the intent of making an underwriting profit. As a result of increased competition, from 2005 to 2010 we generally experienced both downward pressure on pricing for many of our insurance lines as well as demands by insureds and cedants for better terms and conditions. Although prices have generally increased since the beginning of 2011, current market price levels for certain lines of business remain below the prices required for the Company to achieve its long-term return objectives.
Competition for Insurance-Domestic business comes from other specialty insurers, regional carriers, large national multi-line companies and reinsurers. Our specialty operating units compete with excess and surplus insurers as well as standard carriers. Other regional units compete with mutual and other regional stock companies as well as national carriers. Additionally, direct writers of property casualty insurance compete with our regional units by writing insurance through their salaried employees, generally at a lower acquisition cost than through independent agents such as those used by the Company.
Our Insurance-International operations compete with native insurance operations both large and small, which in some cases are related to government entities, as well as with branches or local subsidiaries of multinational companies.
Competition for the Reinsurance-Global business, which is especially strong, comes from domestic and foreign reinsurers, which produce their business either on a direct basis or through the broker market. These competitors include Swiss Re, Munich Re, Berkshire Hathaway, Transatlantic Reinsurance, Partner Re and others.
In recent years, various institutional investors have increasingly sought to participate in the property and casualty insurance and reinsurance industries. Well-capitalized new entrants to the property and casualty insurance and reinsurance industries, or existing competitors that receive substantial infusions of capital, provide increasing competition, which may adversely impact
our business and profitability. Further, an expanded supply of reinsurance capital may lower costs for insurers that rely on reinsurance and, as a consequence, those insurers may be able to price their products more competitively.
Additionally, competition from insurers and reinsurers based in Bermuda and other tax-advantaged jurisdictions continues to increase, including from domestic based subsidiaries of foreign-based entities in the excess and surplus lines businesses.
Employees
As of January 30, 2015, we employed 7,521 individuals. Of this number, our subsidiaries employed 7,396 persons and the remaining persons were employed at the parent company.
Other Information about the Company's Business
We maintain an interest in the acquisition and startup of complementary businesses and continue to evaluate possible acquisitions and new ventures on an ongoing basis. In addition, our insurance subsidiaries develop new coverages or lines of business to meet the needs of insureds.
Seasonal weather variations and other events affect the severity and frequency of losses sustained by the insurance and reinsurance subsidiaries. Although the effect on our business of catastrophes such as tornadoes, hurricanes, hailstorms, earthquakes and terrorist acts may be mitigated by reinsurance, they nevertheless can have a significant impact on the results of any one or more reporting periods.
We have no customer which accounts for 10 percent or more of our consolidated revenues.
Compliance by W. R. Berkley and its subsidiaries with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to protection of the environment, has not had a material effect upon our capital expenditures, earnings or competitive position.
The Company's internet address is www.wrberkley.com. The information on our website is not incorporated by reference in this annual report on Form 10-K. The Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are accessible free of charge through this website as soon as reasonably practicable after they have been electronically filed with or furnished to the SEC.
Previous: Cover and table of contents · Next: Item 1A. RISK FACTORS