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

Great. Thanks. Good morning. It's Meyer Shields of KBW's equity research team. Our next session is with W. R. Berkley Corporation, and we are fortunate to have with us Executive Chairman, Bill Berkley; President and CEO, Rob Berkley; and we also have online Rich Baio, who's the CFO; and Karen Horvath, who is Vice President of Investor Relations. So I want to thank the Berkley team for sharing your time and your insights into what seems to me to maybe the noisiest period in the insurance industry that I can recall since I started getting on 30 years ago.

So I'm going to kick it off with the big question on pricing with a couple of nuances, I think. First, I was hoping you'd share your insights on the overall adequacy of insurance and reinsurance pricing. I think people get that, for the most parts, rates are rising, but the perception of risk is rising and other elements of return are worse. So how do you see the overall adequacy? And if you could share your expectations of overall industry-wide pricing as well, I think that will be a great way of starting off our conversation. I do want to also point out to everyone on the line that if you submit questions, we're more than happy to look at those and make sure that we are addressing what you want to hear. And with that, Rob, all yours.

Okay. Thank you, Meyer, and thank you for the opportunity to participate. We very much appreciate it. Before I get -- do you want to kick off with any comments on pricing?

You start it.

So from my perspective, and I think from our perspective, as an organization, I believe the view is shared broadly and widely within our clubhouse that pricing has had a bit of a headwind for several years. There were a lot of things that led up to it. There was a benign loss activity, both in much of the casualty market and we went through a period of time for a while, where quite frankly, the property market experienced benign loss activity as well. What has happened over the past several years that it's been a growing groundswell, is we've had a couple of forces. First of all, we've had the realities of lower investment income coming ever more into focus, and that is certainly the case today, but that has really been something that's been eroding over time. Number two, we are -- have seen a growing level of momentum as it relates to social inflation, which is certainly something that I think we are all focused on which, in other words, is just an important component that's driving loss costs up. Social inflation leers its head many ways, but particularly on our liability lines. And I use the words a building groundswell deliberately because it's not like property cat, where all of a sudden, there is an event and it comes into focus and quickly, people recognize there is a rate adequacy issue or the nature of the exposure has changed. In the liability lines, it just happens gradually over time and eventually, it comes into focus very sharply like you may have -- and we as an industry, there are many historic examples where we will have drifted off course. I think those realities coming into focus very quickly at this stage. And from our perspective, by and large, rate adequacy is short of where it should be. It is perhaps the most pronounced in the reinsurance market and some of the excess lines, but quite frankly, it's prevalent throughout the industry. And that is why we are seeing the type of response from the industry in pushing for the necessary rate. From our perspective, we do not see that momentum shifting. We see it continuing to build. As we've commented in the past, the need is not equal in all product lines, all product lines from a pricing perspective do not march in lockstep. We have commented in the past, for example, how commercial auto pricing, some number of years ago, started to firm. Then we started to see that impacting other lines of business, where we saw the momentum building in some of the professional lines, we are seeing it in the geo lines now more and more. Simultaneously, we've seen the erosion of comp rates. And from our perspective, that's been going on for some number of years, you're likely, late this year or in next year, see that rate erosion bottoming out at perhaps by the time we roll around to, call it, 2022, you'll see rates in all likelihood moving the other direction. So that's a high-level perspective is that how we're seeing rates. But again, long story short, rate adequacy is still a challenge for the industry, and we do not see anything that would derail the momentum from building from here.

Okay. Fantastic. A related question, with regard to adequacy, I think there's an awareness now among many industry participants that you need to price for these really remote events, like what is hopefully a once in a century pandemic and the associated issues with that. Can you talk about how you see that getting priced in or impacting pricing that? I'm describing it as a remote event, but however you would characterize it would be helpful.

Well, I think I'd only say one thing to start with and that is, you can't cover things that will be universal events, which is why pandemic is not covered because everyone has risk simultaneously. But remote events or the unforeseen, if you will, are always, in theory, priced in, it's what catastrophes are. But then you go to the remote catastrophic event. And I think it's really the edge of pricing, and it takes place when the things Rob was talking about before, prices have to get adequate to give you a margin for that. We have to differentiate things like the pandemic, which are universal risks that insurance is spreading the risk. It's not covering risks that everyone has simultaneously. So I think the adequate pricing should cover the unforeseen event, then it's got to get to be adequate to do that. This has happened in every pricing cycle. And when they become adequate, and you don't have those very unusual events. Everyone celebrates the extreme profitability and forgets about those unusual, unforeseen events, and thinks it's great.

Yes. If I could just add to that. I think as far as the COVID-19 and that situation that we're all trying to cope with and work our way through. As far as the industry is concerned, certainly, we need to -- there is the question around pricing as suggested a moment ago, but that's really something that's going to be addressed in our opinion through policy wording. And we think the wording, by and large, is clear, and that's going to work its way through the legal system. But without a doubt, there will be further clarification around that. To that end, a lot of the focus has been around wording on the property front, particularly around BI. But from our perspective, it is likely you will see a concerted effort on the part of the industry, clarifying on the liability front as well, in many cases, that there is no room for misunderstanding that the policy is what it is intended to cover and what it is not intended to cover when it comes to things such as communicable disease.

Understood. Yes, that makes a lot of sense. I want to give Berkley some explicit credit because, as you pointed out, detecting social inflation is a lot harder or detecting changes in social inflation is a lot harder than counting car accidents. And you've been beating the drum about social inflation becoming a worsening, and I would say, compounding concern for a while. I was wondering if we could dig a little deeper into maybe the variations of social inflation. Does it vary by region? Does it vary by account size? By line of business? And now that we're going through, again, hopefully, the -- getting closer to the end of the pandemic, is that alleviating or exacerbating those pressures?

Well, from my perspective, I think we all have finally gotten our head around the social inflation, to your point, is real. Does it vary by territory? Does it vary by product line? Clearly, certain territories, certain venues are more litigious, if you will, than others. Certain product lines lend themselves to having to cope with this circumstance more than others. The pandemic, I think there's multiple sides to the situation. One, there was a period of time when things were locked down very tight from the perspective of society. And as a result of that, there were not cars and trucks on the road, didn't have slip and falls. There were a whole host of things that led to there being in all likelihood, a period of time where frequency will prove to be down considerably. And I think that, that will come in -- has come into focus and will come to focus further. But I think the other piece sort of going the other way, if you look at the level of litigation and this general legal activity, around COVID-19 circumstances, if you like, it is very clear that we are living in a society today that is very litigious. There are examples of where before claims are even filed by insurers, they're already filing a lawsuit. So one would have thought intuitively, well, you put in a claim before you would even file a lawsuit. But I think that would be a data point that speaks to how aggressive the plaintiff, how aggressive parts of society are around looking for a legal remedy, which perhaps is not how people would have thought about things historically. And as it relates to the insurance industry, ultimately, as we've commented in the past, whatever the outcome is, ultimately, it's society that will pay the price. Because we are nothing more than a mechanism to help society cope with and spread risk. And as the costs go up, if they were to go up, then ultimately, premiums will go up.

Understood. And I guess, we're certainly seeing that manifest itself. I'd like to go back to the comments you made about workers' compensation because it seems like we've got 2 or 3 different dynamics going on right now. On the one hand, the contribution from investment income for a medium tail line of business, that's getting worse. And certainly, as you've said, the threat of litigation is worse than it had been and maybe getting worse. On the other hand, we do have depressed or delayed claim frequency. So I was hoping you could flesh out your optimism on that potential pricing inflection, I think you said 2022, which seems like a reasonable time line. And how that accommodates those contributing factors?

So look, from our perspective, there is in much of the insurance industry, as frustrating as it may be, a delayed reaction. And we tend to make choices as to whether we're going to steer the vehicle to the left or the right, oftentimes based on what we see in the rearview mirror. And again, that is what drives this delayed response and is a meaningful contributor to the cyclical nature of the industry, amongst other things. When we look at workers' compensation, there is no doubt that when people were sheltering in place, that is going to have an impact on loss activity, clearly the case. Having said that, from our perspective, knock on wood, hopefully, society will be able to be -- continue to open up. And hopefully, that will happen at an accelerated pace, and people will be back to work and all of the good things that will come with it. So from our perspective, this period of time when loss activity from a frequency perspective, in particular, has been solid benign, that is going to be in scheme of things, a relatively short, somewhat defined period of time. What has been going on for a more extended period of time has been a consistent and somewhat gradual erosion of pricing for the industry when it comes to workers' compensation. And it's been several years now. And while trend has certainly been the industry's friend when it comes to frequency, both long term and particularly as discussed a moment ago in the immediate term, there is no doubt in our mind that it is highly likely that there is going to be a growing impact of the rate action that has been taken by the industry let by state rating that goes over the past several months. And one could not have more that we have, is it going to end in tiers? Is it going to be severe? Has it been at moments in time in the past? I don't know. We'll have to see. But clearly, there will be an impact. And from our perspective, leading to an inflection point in the comp market due to the erosion of pricing over the past several years now.

Great. Thanks. I've gotten the same question actually from multiple people submitted. So I'm going to present it to you. And that is that with this combination of recovering economy, recovering exposure units and recovering claims and a positive pricing environment, how are you thinking about the potential for, I guess, both top line growth in the context of premiums and core or underlying loss ratio, combined ratio improvement as these higher rates earn in?

So obviously, I think we're all aware that there are a lot of factors that go into that. But before it, did you want to...

Why don't you start?

Okay. I'm going to lead off, Meyer, then he's going to correct me. So there are a lot of factors out there. Factor number one is clearly, we have a rate environment where the type of rate increases that we've been seeing for the past several quarters are significant. And over the past few quarters, I think it's unquestionable that we are comfortably outpacing loss cost trend by several hundred basis points. So will that impact margin without a gap? In addition to that, as we discussed a moment ago, shelter in place, is that going to have an impact on loss costs for some period of time? Clearly. As it relates to growth, we, as an industry, are not completely insulated from the health and well-being of our insureds. When our insureds, their businesses are shrinking, that impacts us. Much of what we do is priced off of payrolls or priced off of revenue or receipts. Not all, but much. When -- it's not just when their businesses are shrinking, but when they go out of business, clearly, they do not need to buy insurance. So the way we think about things at this stage is our margins improving, it's hard to imagine they are not. Or in other words, yes, it is our expectation that they are. Rate adequacy from our perspective is always of paramount importance. So when you see where we're going and how we're growing the business at this stage, a lot of it is being driven by rate. And there is a modest, but existing headwind having to do with the health and well-being of our clients. So long story short, I think you're going to continue to see rate. I think you're going to continue to see margin improvement. And as the economy opens up, you're going to start to see our growth rate accelerate considerably from here, is how I would see things going forward.

Okay. Thank you. Bill, you were going to add something, I think?

Yes. I think that everything in that question is reasonably easy to predict except that economic activity issue. And economic activity issue has to do with what is going to happen, what the politics is going to be, what stimulation is going to be. And I think that ultimately, the insurance industry is a reflection of economic activity to a greater or lesser degree. We see the economy down 8% or 10%. We may make all of that and then sum up with pricing, but we're not independent of that economic activity. And that's really going to be a cornerstone. And we would expect the economy is going to do better than it has done for the past couple of quarters. But will it resume robust growth is not something that's easy to call at the moment.

But when it does open back up and once the economy starts to fire on a few more cylinders, I think it's likely that you will see our growth rate steepen considerably. Because if you look at history, we, as an organization because of the nature of the types of businesses that we have within [ our group ], the types of business that we write, we can do particularly well during these type of market conditions.

Right. Can I ask you to flesh that out a little bit? I think I understand what you're saying, but I was hoping for a little more color.

Because of the nature of the business that we write, a significant amount of our effort is in the specialty lines, particularly in the [ E&S ] lines. As you see a firming market, a lot of that business will come out of the standard market, make its way into the specialty market and then [indiscernible] E&S market. What we have seen over the past several quarters is a lot of change in behavior in some of the large specialty and E&S players. More recently, what we're seeing is not just that, but we're seeing a growing level of momentum of a change in appetite coming out of the standard market as well and driving more business into the specialty and E&S market. Again, hard to know exactly how firm the market will get and how much is going to be coming flooding into the specialty and E&S market. But clearly, we are seeing growing submissions at a very healthy pace. We are seeing the opportunity to get the rate, and we are quickly seeing the opportunity on the terms and conditions front, which I know is something that is very difficult for people outside looking in to try and quantify what does that mean. And a lot of people get very considered on, well, how much rate are you getting? And then they try and back into what does that mean for margin based on the loss cost trend assumption. What I would tell you as powerful as rate is, terms, conditions, attachment point, et cetera, et cetera, has as much or more leverage on how bottom line than this straight-up rate.

Okay. That's -- I mean, I agree. It's really difficult for us to put into a chart, but that's an important statement that you're making. Over the past 10, 20 years, there's been a thesis that I think has been disproven that from an industry-wide perspective, you've got better data and analytics, and therefore, that will moderate the cycle. And I think we're seeing, for relevant lines of business, a legitimately hard market. In the past, hard markets have overshot, and they ultimately turn into soft market. And I was wondering how a company with the antennae that Berkley has -- can take advantage of that industry-wide tendency to overshoot pricing and maximize return generation given that proclivity?

Did you want to -- look, from our perspective, data and analytics clearly have been, continue to be and will be ever more important tools for the industry to use. But to your point, the cycle is still alive and well, and the pendulum still swings back and forth. Do I think that the data and analytics help us make better decisions? Clearly, they do. But do I think it is going to completely ameliorate the cyclical nature of the industry? No. Why? Because, quite frankly, the cycle is driven by human nature as much as it is anything else and the data and analytics have been there and available for many years, but people choose to create the [ tea leaves ] in a way that tells a story that they want to hear in our perspective. So I think that there will be more data and analytics in the future. I think it will certainly help product lines where there are large data sets, where there's a degree of homogeneity. But when you're in the specialty lines the way we are, while we certainly are using those tools more and more every day, there's not necessarily always the same level of applicability because of the nature of the business not having the level of homogeneity in the data sets.

Okay. A question, pardon me, that was recently submitted is just looking for an understanding of the interplay of rate increases and margin between insurance and reinsurance. And you've started off saying that reinsurance was more pressured. Are we seeing a catch-up in rate adequacy there?