W. R. Berkley Corporation (WRB) Earnings Call Transcript & Summary

Good morning. This is Mark Dwelle, Senior Insurance Analyst for RBC Capital Markets. Pleased this morning to welcome everybody to the RBC Virtual Financials Conference. Let me start by thanking all the participants both management and investors for their patience and support as we put this together this week, definitely big props to our conference team and sales for making everything happen in such a short period of time. Obviously, a revised format this morning as compared to what we would normally do. Hopefully, everybody will find it useful. And if it's not useful, hopefully, at least it's better than 14 days of quarantine. So few rules of the road for those participating online. You should see a question box on the left-hand corner of your webcast browser. Feel free to ask questions through that at any point in time. I'll start off with a couple of questions to kind of get the ball rolling. Then after that to the extent we have questions from those online, we'll jump over to some of those, then we'll continue with mine and keep going until we get to 10 after 11, that's when time is called. So with that, let me introduce our guests. If we were live, they wouldn't really need a whole lot of introduction, but since we're all hanging out in a cloud or on the beach or wherever we happen to be, we have the honor to introduce Rob Berkley, who is, of course, CEO of W.R. Berkley Corporation. As I was looking at the bio information, I noticed that your fifth anniversary as CEO is coming up this October. So congrats on that. Seems like it's been a lot longer, actually, but 5 years coming up.

I've made through.

Of course, great track record over that time period as well. The other thing I was noticing, shares have been up 67% since you took over, and that includes the sell-off that we've had over the last couple of weeks. So total return with all the special dividends and whatnot, job well done over that time frame. We also have in the room, another person who needs no introduction. Executive Chairman of W.R. Berkley, Bill Berkley. I don't really know where to begin to describe his resume. So I'll just say, he's been an industry icon for decades, and he's been a leader of a multitude of organizations, both corporate and philanthropic. Few in the industry have really created as much value for shareholders as Bill and Rob have, so we thank both of them for joining us here today.

With that, I think I'll jump in with the first question, and it's probably the one that's been on everybody's mind over the last few weeks. We've got the coronavirus. We've got a sharp decline in interest rates. Obviously, equity markets have responded to all of that. Taking each of those kind of in turn, can you talk about how these factors might impact W.R. Berkley, both directly, potential loss areas as well as indirectly, just interest rates and some of the other exposures that you might have.

Absolutely, Mark. This is Rob. So from our perspective, clearly, it's very unusual times that we're living through. And I think one of the challenges is for society, there still remains more questions than there are answers around coronavirus and what does it mean to society and how will we grapple with it and what the short term and the long-term consequences will be. Maybe to get specifically at the questions that you raised, on the underwriting side, we see this as not an overwhelming issue for the industry. There's been a lot of talk about business interruption. There's been talk about potential other types of liability. There's been chatter around workers' compensation. And as we have looked at these various pieces from our perspective, while we can't speak to every detail or nook and cranny through our lens, we do not see this as a big industry event at all. As it's been discussed by many, and we share the view, the area that is perhaps most exposed or susceptible to consequences as a result of the coronavirus would be event cancellation, if you will, in certain types of contingency insurance. And then, of course, there are certain components around travel insurance that would be exposed as well. Travel. We are -- to say we are a modest player would be generous. And just speaking, again, us specifically on the contingency front, I would tell you that while we do have a participation in the scheme of the group, it is also equally modest. As far as the -- some of the other pieces, of course, investment income is a component of our economic model and a fair amount of our investment portfolio is allocated to highly rated fixed income. I think we are benefiting from some of the strategic decisions we've made, particularly on the quality front as well as the duration front, given the shape of the yield curve. And from our perspective, the progress that we are making on the rate front will not just be addressing the need to -- that are stemming from social inflation, but we think will more than also compensate for investment income, which will undoubtedly be under pressure. For the...

Yes. I think, certainly, in the short run, I -- it ought to be sort of a banner quarter for GAAP book value growth with way the bond market has behaved. Obviously, you have a little bit of equity exposure offsetting that, but it seems like people are quick to discount the impact to investment income, but not necessarily quick to give credit for the fact that you'll make gains on the bond holdings that you already have.

So well, clearly, book value is going to benefit from this, at least in the short run, but we're conscious of what new money rates are. At the same time, some of our alternative investments, we think, are going to move pretty well, such as real estate and how we think about people viewing those as great asset classes to be in.

Yes, true. And cap rates on real estate at whatever, 0.5% or wherever we're at by now this morning, ought to be pretty good. So anyway, okay. Well, thank you for that one. The other one that, I think, probably is top of mind for most investors right now is really the whole current P&C pricing, rate environment. I've noted many times in some of our notes and in our weekly that on our stage a year ago, you commented on the notion of social inflation and how that would eventually have to drive some degree of pricing. So maybe if you could give us some of your updated thoughts on kind of where we are on the pricing cycle right now? What, if anything, the lower interest rates may have as far as driving that further? And really just kind of a current perspective on that part of the equation?

Well, it's been our view for some time, as you referenced through the exception of workers' compensation in the commercial line space, there was need for rate and a meaningful amount. And that was driven by what we saw happening on the loss cost front, stemming from social inflation. And we think that the industry got lulled into a false sense of security because we've been through a period where loss cost trend has been very benign. And again, we saw early signs a couple of years ago that, that was not going to continue. In addition to that, obviously, the low interest rate environment has been going on for some time, and we've hit new lows more recently, but that's clearly putting more pressure on the situation, as you alluded to a moment ago. So when we look at our own numbers, as you saw in the fourth quarter, we got approximately -- are approaching 9 points of rate in the portfolio ex workers' compensation. And there's nothing that we see on the horizon that would lead us to believe that the momentum will erode from here. And we see that not just because the rate we're achieving, but we're also looking at our renewal retention ratio or the amount of business that we're holding on to and it gives us a degree of comfort. As we are pushing that rate, we are not alienating or driving the business away. In fact, it's sticking. And then, of course, as we've spoken about in the past, we have our new business relativity metric, which compares the pricing on our new business compared to our renewal book. And again, we're actually getting a higher rate, if you will, on new business than renewal business, which makes sense for a whole host of reasons. So when we look at these different metrics and a variety of others, from our perspective, we do not see the momentum slowing from here. The marketplace is not moving in perfect lockstep amongst all product lines, obviously, workers' comp being the big outlier going the other way. But even within the world of professional or casualty or property or in the excess space, you're seeing the market harden to directionally again together, but not in lockstep. But the momentum, in our opinion, will continue to build. And clearly, the pressure -- increased pressure around investment income that has come about even more recently in a more severe manner is likely to drive rates even higher as carriers are trying to achieve an appropriate risk-adjusted return.

Are you seeing where competitors are withdrawing capacity? Or is this -- I'm trying to get at some of the dynamics of where the competition is it -- it's probably not demand driven. It's going to be more of a supply and then just various competitors, all kind of being in the same boat as far as needing to get rated and not being willing to accept less than what they need or not much less anyway?

So we certainly are seeing examples and many of them of people withdrawing from classes and, in some cases, whole product lines. And there are some, what I would define as very significant players in meaningful parts of the market curtailing or withdrawing again. And that is what is creating pockets of opportunity that we have not seen, Oh! Gosh and certainly, a decade-and-a-half or so as far as that type of opportunity. This is being driven by a couple of different things, but the evidence is clear in the standard market. But it's abundantly clear in the specialty market and the most extreme examples would be the spike in submissions that we're seeing coming into our E&S carriers, and to a great extent, but not quite as great extent to specialty companies. We are seeing it in our standard carriers, but not quite to the same extent. And this is just being driven again by some people curtailing their appetite within the specialty and E&S space, but really the big tsunami that's building, if you will, is coming about as a result of standard carriers realizing over the past several years, they've overreached and they are narrowing their appetite, not just pushing up rates, they certainly are doing that, but they're narrowing their appetite and basically weeding out of their portfolio exposures that probably shouldn't have been there to begin with. But -- and then that business makes its way into the specialty market or specifically the E&S market. And again, we are seeing evidence in that and just how our submission counts are spiking in many of our operations.

That's interesting. You mentioned like 15 years ago, I'm probably the junior person in the room. I've only been around the business about 20 years. But I remember that, that same phenomenon kind of in the '02 to '05 sort of time frame. And it was -- then companies weren't blessed with the same information systems they have today. They were just -- they were running from everything that they were losing money on. Now we're a little bit smarter, but it's the same phenomenon. If you waded into waters that were too deep, there's only one way back out. And clearly, you guys are seeing that other companies have said much the same. On the loss cost side of the equation, are you seeing any changes there? Any acceleration relative to what you recently reported? Or any warning signs that you're watching for on the loss side?

I think that we have an appropriate level of sensitivity and caution when we think about our loss costs. As we've been, I guess, beating on this drum for some number of years now, there's just been a growing amount of evidence that social inflation or, if you will, the awards that are coming out of the legal system are on the rise in a very notable way. So I would suggest to you, there's nothing that we've seen over the past couple of months that is radically different from what we've been talking about for the past couple of years. I think the only difference is there is more data points that are available that support the position or the view.

Okay. That makes sense. I mean, I guess -- I mean, clearly, your rate increases are generally outpacing loss cost trends, at least ex workers' comp. I guess, that -- that's really the only choice at this stage is to try to get ahead of the trend as much as is reasonable as customers can bear, I suppose, and try to use that as a tool to start rebuilding margins, reserves as necessary, et cetera.

Obviously, we -- our priority -- we have a bunch of priorities, but one of them always is to make sure that we are charging an appropriate rate for the exposure in order to achieve the desired risk-adjusted return. And the reality is that the exposure has changed over the past couple of years because of social inflation and we are obviously responding to that and how we think about rate. As we reported in the fourth quarter, we got just shy of 9 points of rate, I think it was like 8.9 or something along those lines. And we are comfortable at this stage at those type of rate increases. We are outpacing trend overall for the portfolio. So is trend more today than it was yesterday? Yes. But with those type of rate increases, we are reasonably confident that we are adding to margin -- our underwriting margin, if you will. But clearly, again, that takes time, takes time for that higher-rated premium to earn through. And also, given the uncertainties of the world and particularly around loss costs, will it come through in our underwriting margin? Without a doubt, but we are going to be appropriately thoughtful and measured before we start dropping our loss picks.

Thanks for that. Just a reminder to those on the line, if there's any questions, if I'm not taking the discussion where you want it to go, by all means, fill in that question box with any thoughts you have. I don't see any on my dashboard right now. Hopefully, if you have any, let them fly, otherwise, I'll keep going. Workers' comp is one of the lines that I feel like it's been a little bit of an anomaly. Normally when you have sort of full employment in a reasonably robust economy, you see workers' comp trends get weaker and then pricing follows in behind that. What are you seeing in that market? What do you see is going on there? And any chance that, that may -- that line may contribute to some of the rate improvement as '20 unfolds as well?

So when we look at comp, obviously, it's a product line that from an underwriting profit perspective has had a tremendous run over the past several years. And it's that set of results that has led state rating bureaus to take the action that they have. Having said that, the trends are still notably benign, primarily driven by frequency. The severity trend continues to be challenged because of medical inflation. But on the frequency front, it's certainly something that we have not seen any compelling evidence yet, but we are scratching our head wondering, in a tight labor market, are you going to see an increase in frequency of loss? Why do we, I guess, speculate in that direction? Because our view is in a tight labor market, you tend to get people working more over time. And you tend to get people that may not be as well trained in certain roles and people working overtime often will lead to injury because they are tired. And people are not as well trained often can lead to injury as well because they don't have experience in a certain type of role, and again, they can get hurt. So we'll have to see how it plays out. When -- generally speaking, while we don't have a perfect crystal ball, our view is that you're going to see comp pricing continue to come down through 2020 and our guesstimate is that early first half of 2021, you'll probably see it bottoming out. And we'll have to see, over time, how long we bump along the bottom before things start to go the other way again.

And maybe all the young people coming into the workforce, maybe they're just not as foolhardy as us old timers were. You'd added they're all just pushing buttons, so it's a lot harder to get hurt doing that. I don't know. But -- yes, it's been a remarkable run on workers' comp. I was just looking at industry statistics the other day, and I think '18 was a record year for combined ratio until they tallied up '19. And now '19 is the record year for combined ratio. So -- in terms of best. It wasn't that long ago. That it was always a triple digit.

Those things can change quickly. So again, we'll have to see how it unfolds. But again, it's probably going to be some time before we see that market switch direction and begin to firm again.

And I know a lot of times in the past when you get a firming market like this. Berkley's had a practice of kind of planting seeds and starting new business units and things of that nature. Is that anything that you're looking at right now? And maybe in that vein, a couple of years ago, you started the high net worth personal lines business. Maybe you can provide an update on how that's going?

So we are constantly looking for new opportunities. And obviously, there's been some dislocation in the market recently. And our expectation is there will continue to be dislocation in the market, though it will ebb and flow. And we believe that we're well positioned to take advantage of that, whether that be starting new businesses through attracting teams of people with specialized expertise within a particular niche where we think they are good uses of our shareholders' capital or whether it be opportunities for existing operations that are part of the group that we'll see upside opportunity as the market transitions or continues to transition. Many of the businesses that we've started over the past several years have a platform that can be scaled and scaled in a meaningful way from where it is today. So we are confident that there is a lot of leverage for this organization going forward as we see the market working with us a bit more. We are very focused on underwriting discipline. So there were many of these businesses that we started over the past several years that -- because of that underwriting discipline, the scale did not get to where it can get to going forward. Or in other words, I wouldn't say they were subscale, but they were more modest in size relative to the opportunity that we see for them going forward. And in some ways, that gets to the leverage that we see potentially, not just on the loss ratio, but on the expense ratio as well as those operations increase their premium from here.

Yes, we've definitely brought down the expense ratio over the last couple of years. And I -- inevitably, some of it's numerator and some of it's denominator, but the business growth definitely makes that process a little bit easier. We'll change gears a little bit and talk about the investment strategy. You guys have had very good success in pursuing sort of a total return approach. I mean I would think, given the cash flows you generate and the size of the portfolio, some of the recent market turmoil might even create some opportunities. Anything you'd like to share there? Or just how you're thinking about the portfolio in general during a difficult month or so?

I think that, first of all, we've always had enough liquid securities, i.e., short to intermediate-term fixed income securities to meet all our liabilities. That's not going to change. How we invest the balance of our funds, our capital account and other longer-term funds is a slightly different judgment we make and it changes from funds to real estate. And we'll continue to do that. I think that we were probably, couple of months ago, more inclined to sell real estate, more actively with the returns and the cap rates than we might see today. Although if real estate cap rates come down reflecting short-term rates, we would obviously reconsider that. But it's a constantly changing and adjusting situation we're always looking for where and what we think we can do we're best at. Today, we're looking at opportunities, and they range from private equity opportunities to real estate projects and buildings where there's an opportunity for either short or long-term cash flows. And one of the benefits of being a property casualty insurance company, you're going to have a long-term look at values and creation of values. And that gives us some particularly good opportunities. And I think one of the things that we're cognizant of is quality of tenant is a really big plus in the tenants in all the buildings and all the real estate we have, our top grade quality tenants.

Obviously, investment income -- investment is a topic that's produced some investor questions. So finally -- we finally found the 1 people who wanted to talk about. Two questions, both from the line. One was, is there a level -- an interest rate level where investment income becomes an actual stress on the business that you need to think about, different allocations or changing your durations or quality? And then in a related question, you have a energy limiter -- you've always had energy-related investments. Anything you can -- anything you're thinking about there, given some of the oil rate pressure that's emerged? Both of those are from the line.

You go ahead.

Well, I think, first of all, we've had a long-term being certainly a number of years, drive for rate and underwriting profitability as interest rates have come down, they're clearly lower than they are. We think our -- most of our money is fiduciary money, and we're not going to put that at risk by lowering the quality or take no risk on duration of our portfolio. We'll look for ways to be creative and find opportunities since we're not, in our history, ever been in need of short-term cash flows. We can buy securities with short to intermediate maturities that don't pay current cash flows because we don't need the cash coming in on a monthly or quarterly basis. So we have a little more space for creativity, but we're not going to risk duration or quality of securities for fixed income securities. And we're going to continue to find the real estate and other investments to be the quality that's coming through with the idea that we are fiduciaries. As to oil, we've not really been a big investor in oil. We've been a modest investor in oil. I think there's a couple of partnerships, but we have not been big oil investors.

Yes, I would just add to that as far as the energy piece, it's a relatively modest component of our alternative investing. I think it gets a disproportionate amount of attention because how it comes through in the funds. So in the scheme of the investment portfolio, as was suggested a moment ago, it's relatively modest. But we get the volatility and how that volatility coming through on the funds, it gets a disproportionate amount of attention. So again, it's -- when you think about our investment portfolio, it's probably give or take rounding in the scheme of things. It just gets because how the accounting works, it may appear as though it's more. And just, I guess, the only other comment I would echo what was already said that the approach and the sensitivity around duration and credit quality, that's not something that's new today, that's something that's been in place for a long time.

Okay. I think with that we are basically at our time. I thank you both very much for your time, and everybody is free to give a polite applause wherever they may be sitting. Thanks very much. Those on the web, you can -- there will be a -- this is recorded, so there's a web replay if there's any particular bits of it that you didn't get the first time through. Thanks very much, and look forward to speaking to you again soon.

Thanks, Mark. Appreciate you having us.