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

Good afternoon, everybody. Welcome to the further endeavors of the RBC Financials Conference. Hopefully, you've already had the opportunity to sit in on several sessions this morning. This afternoon, it's my honor to have the W.R. Berkley Corporation available. Rob Berkley, CEO, as you probably all know, and he's joined by William Berkley, Founder and Chairman of the company. Well, it seems like it's a lot longer. It's only been 6 years since Rob took over as CEO. And I went through -- when I was preparing for this, I looked it up. I guess W. R. Berkley shares are up about 150% since that date, which works out, too, if my math is right, about a 16% compound annual growth rate during that period of time. So it's one more reason I wish that we were all here in person because if we were all here together, I'd have everybody stand up and give a quick round of applause. But as it is, I'll take the opportunity to thank our guests for joining us and making their time available to us today. And let me turn it over to William Berkley, Bill, and you have some opening comments to just kind of frame our discussion a little bit as we get started.

Thank you very much, Mark. It's been an interesting time. The past 3 years have thrown more things at us than I can ever remember. 54 years ago when we started this company, I thought I would gain enough experience that when I turn this over to my son, there was little new I would find, and I was wrong. However, I will tell you that in the years since we started the company going public, Rob, in his 5 years has matched our compound rate of return. And now I expect he's going to do better than we did in the first 50 years. Certainly, he's on the road to do that. There's a lot of uncertainty. And that, in many ways, makes the operating environment more difficult but the opportunity is even greater, especially for us in our E&S business and our specialty business. Being well capitalized, being nimble by operating through small operating units, we're able to zig and zag to take advantage of those opportunities, be it in cyber, be it in COVID aventure or, in fact, trying to find other things we can do. We expect that those opportunities will continue. We see them every day, and we try to take advantage of them and starting new units by expanding other ones. That flexibility is something that's important. We're no longer a small company. It's the first time in 2021 we had over $10 billion of gross written premium, and we earned more than $1 billion. Our combined ratio was comfortably under 90. Company that's running on all cylinders, and we expect this year to be better, and we look ahead, taking advantage of all that we see not only in the underwriting area, not only in new and intriguing operations on the investment side as well. So I'm going to let Rob now talk about our business, and how we seize it piece by piece. Rob?

Thank you. Well, before we jump into it, Mark, first off, thank you very much for the invitation and allowing us to participate and thank you to all of your guests and their participation and tuning in. And certainly, I appreciate your kind words at the beginning, but let there be no misunderstanding, I have little to do with the results. This is very much a team sport, not an individual sport. And we, as an organization, are very fortunate to have a lot of very capable people that have an important hand or play an important role in achieving our goals. But thank you for the kind words. I would just echo our Chairman's comments about that the business is quite well-positioned. This is an interesting moment for the world. Obviously, perhaps we'll get into that. It's an interesting moment for our country. It's an interesting moment for the industry. And we, as an organization, I think, are particularly well-positioned to try and take advantage of the opportunities that are before us. So again, we can start to get into the nuts and crannies in any manner, Mark, you and your guests would like to.

Well, I think maybe the place to start, 3 years ago at this very conference, I asked you whether we might get a hard market or not, and you rather bullishly responded that you thought there were conditions that could give rise to one, which turned out to be correct. As we sit here now, again, with all the things going on in the world, economic, geopolitical, what have you. Maybe talk about how you see the cycle shaping up from where we're at, what are kind of the positive forces that will continue to drive it? What are maybe some of the negative forces that might create a headwind? Just kind of how you see the world as you sit here today?

When we -- sort of going back in time, as you pointed out, 3 years ago, there were a lot of factors that, at least through our lens, seemed to be driving or a change or a shift in the market. We know that interest rates have been low for an extended period of time. And obviously, that has a meaningful impact on the economic model of a P&C business, particularly one that has any tail to it. Number two, we certainly were aware of what has been labeled by many social inflation which is just shorthand for loss cost trend and the driving of loss activity in the awards that continue to elevate. More recently, obviously, we are seeing some phenomenon around financial inflation, which also is a further lever from our perspective that is driving change. So ultimately when the day is all done, it's a combination of social inflation, [ can ] activity, if you will, low investment income and more recently, financial inflation that has been putting pressure on the economic model. And then from our perspective, it was just a matter of time until the industry was going to have to respond to that. And I think that it always takes longer than you'd expected to. But we finally got there as an industry, and I think that there's a fair amount of momentum. I think one of the interesting things -- or a few of the interesting things about the cycle today, maybe a couple of fold. One, I think it's important to recognize that the commercial lines marketplace, all products do not march through the cycle in lockstep. Or in other words, we have some product lines that are at a different point of the cycle than other product lines. That is somewhat of a departure from what we had historically seen. If you go back to 2001 into 2002, followed by '03, you saw all product lines in some stage affirming together, similar back in '86, but not the case today. So that is clearly, in my opinion, a meaningful difference between then and now. A lot of the drivers continue to persist. This is clearly as far as keeping up with loss cost, it's a moving target. The idea that you can just raise your rates and catch up by raising your rate 10% and then you're there, that really does not apply the same way it has again at moments in the past. And it's because of what is driving those loss costs. And again, they continue to drive it forward. So long story short, Mark, from my perspective, I think a lot of the things that we anticipated came together, forced a shift in the market and a lot of those realities persist, and from our perspective, likely will continue to put pressure on a marketplace that needs to continue to firm from here.

Let me just ask a couple of follow-up questions related to some of those points. One is just from the standpoint of your customers, are we reaching any kind of stage where customers are starting to say, look, this is 3 years in a row, you've pushed some rate on us, no more, we can't handle it anymore. And then second, just from a competitive standpoint, are you seeing any of your competitors, I'll say, start to get cold feet and say, you know what, maybe this is good enough. We don't need to push any harder, the so-called cheating phase of the market where some people start to play for share rather than play for profits.

Mark, look I think anytime you see meaningful rate increases coming through year after year at some point, particularly with larger accounts, the customer starts to pause and scratch their head. Oftentimes, they don't remember years ago, the year after year rate decreases that they were experiencing. And this is in part just a response to that. As far as the firmness of the market, as I suggested a couple of moments ago, a lot of the drivers are still there. Social inflation is not abating. Financial inflation certainly is a new reality that needs to be grappled with. We'll see what [ con ] activity is for the year. But overall, pressure on loss cost continues, arguably, and perhaps we'll get on to this a little bit later. For us, interest rates will be moving up. Certainly, it's been our expectation, though we do not foresee the conflict in Eastern Europe and between the Ukraine and Russia and what that will mean for interest rates. But putting that aside, we still believe rates will be moving up. That will provide a little bit of lift on the investment income front. But it's going to be, in our opinion, incremental, and it's not going to save the challenges at the economic model basis. Again, that's just one person's perspective on the situation.

I appreciate it.

As far as competitors go, we do see announcements of new entrants coming into the specialty space. From our perspective to the extent that they're up and running, it's not very visible. There may be a fair number of announcements, but if you look at the presence or market share that they have at this stage, at least it's rounding. The big question is, for an organization like ours that focuses on the specialty market, is to what extent is the standard market appetite going to ebb and flow. The big opportunity for a specialty market is things that fall outside of the standard market appetite. And as they contract their appetite, more falls off their table, more opportunity for us. So we're going to -- we obviously watch very carefully as to what their appetite is and try and make sure that we are well-positioned to respond appropriately. I would tell you that, by and large, the standard market, I think, is not through contracting their appetite. But again, we will see with time.

That's great perspective. Maybe continuing. You had -- last year was, as you both pointed out in your opening comments, last year was a terrific year for top line growth for the company. We know pricing was a factor. We know some exposure unit growth was a factor. Maybe if you can talk about just some of the other areas; product initiatives, market initiatives, anything you might be doing kind of new that's expanding out the franchise sort of true organic growth, if you will, that isn't just price and volume of -- on the customer side.

So we are really at this stage, growing on all fronts. As you point out, certainly, we're getting a lift because we -- our rates are going up, and we're collecting more premium with that. In addition to that, the health and well-being of our insureds, we're seeing their payrolls, their receipts, their revenue increasing and that enters to our benefit from a premium perspective as well. I would tell you, at this stage, in addition to that, much of the organization outside of workers' compensation, we are adding to policy count, if you will, as well. Beyond the -- if I can bifurcate organic growth between businesses that are already in existence versus businesses that we are starting now, we have seen, again, healthy growth with the existing businesses or same-store sales, if you like. At the same time, we've made a few announcements over the past several months about new businesses, both in the professional liability space as well as the construction space and, finally, in the small business space. So -- of those businesses, 2 of the 3 are very operational. The third one will be operational as we make our way through the year.

Great. That's helpful. Maybe turning -- well, let me take 1 second, just remind the audience, if you have any questions, you can enter those into the dialogue box on the side of your screen, those get passed on through to me, and I'm certainly happy to relay those on to the team here as we go along. While we wait to accumulate, see if we get any questions from that avenue, we change gears just a little bit. One of the things that you guys did back in 2020 took what -- at the time, I suppose it seemed like a little bit of a bold approach to investments and said, "All right, we're going to smarten up and focus on shortening the duration, focus on keeping the credit quality high, sacrifice a little bit of current investment income in exchange for the opportunity to invest on a longer-term basis later on. As we sit now with the Fed pri ops getting ready to change gears a little bit. Where do you stand at this point? And how are you thinking about things going forward?

Clearly, we made those shifts. We brought our duration of our portfolio down from somewhat over 3 years down to just a little over 2 years, 2.25 years. We also shifted into nontraditional investment. We've shifted into some real estate and private equity and a few other things, which has been rewarding some of our real estate we've gotten out of give us again to go back to that more flexible mode. We think that clearly, we didn't anticipate the Ukraine war. And that sort of has an impact on interest rates. And we sit and look and say, okay, without that, I think interest rates would move up faster than they will. But right now, America is one of the safe places to put your money. And I think the world is going to be sending money here. So we don't think interest rates on the short side will move up as much as we thought 3 months ago. Three months ago, we would have said, the 10-year will be 3, 3.25 by the end of the year. Say, we would say more like 2.25, maybe 2.5. So we're a little more cautious. We think there are still opportunities, and we're searching for special niches where we can invest our money. We'll probably move our duration up a little bit, but not much.

I would just add to that, Mark. If you think about what was just shared, and you think about what to extrapolate from there, what does that mean for, I don't know, an A-plus rated corporate and the type of yield that would be available on that. We think it's going to be quite accretive to our economic model. So if you look at what our book yield is today, when you look at where rates are going, we think that it will be helpful.

No, I think that's definitely -- it makes sense. You really -- we've moved -- I'll put words in your mouth, but maybe we've moved from a phase where the top line is the featured part of the story to early where the bottom line with the combination of maybe a bump in investment income as well as the earnings and all the great premium that you've written over the last couple of years, really starts to energize the bottom line, but it wasn't good last year, just -- there's a pipeline.

I think what you just flagged is perhaps one of the things that's not fully contemplated by some observers. I think people are looking at our top line growth. People are pleased to see the health, if you will, in the underwriting results. But I'm not sure if people fully appreciate, you add another 100 basis points plus on top of our book yield, the leverage for our economic model and that is quite consequential.

Maybe with that in mind, 2 question on -- a couple of questions related to loss cost trends and inflation and social inflation. We've certainly seen a lot of or heard a lot of discussion about just regular financial inflation. Can you talk about what areas of your business are most directly impacted by, I'll say, ordinary financial inflation? And obviously, the book is more liability oriented, which is more of kind of a social inflation kind of a feature. But where are you most directly impacted by regular financial inflation?

On the underwriting side -- I think the investment side speaks for itself. On the underwriting side of the business, as you pointed out, it's going to be more of the shorter tail lines of business, if you will. It's going to be very much property, auto physical damage, products of that nature. The liability, yes, you certainly have -- I should have added to the property. It's not just construction. You got to remember business interruption as well. On the liability side, as you pointed out, and I share your view, Mark. Certainly, it's applicable, but less applicable. You can see it potentially on the professional liability front to a certain extent as well.

Do you get much feed through from wage inflation maybe in the workers' comp book or just in general liability awards?

Most visible in the -- you see it across the board as far as inflation goes. So you're going to see it, again, going back to a comment earlier in the payrolls, when it comes to workers' comp, you're going to see it in a GL policy, if you will, because a lot of that is priced off of receipts or revenue of an establishment. And then, of course, property, I think it speaks for itself. I think one of the challenges in the financial inflationary environment for property versus liability. Workers' compensation or GL or anything where there is an audit component. We can have an estimate as to, for example, what the exposure or the revenue will be for that entity when we're pricing up GL. And then we get to the end, and we have the ability to go back and audit and say, "Well, you said you were going to have $100 of revenue and you had $115 of revenue. So we then get to go back and charge more. Property, generally speaking, they come up with an appraised value at the inception of the policy, and you live with that for the life of the policy. So that because you don't have the same opportunity to go back and adjust for inflation.

Matching isn't quite as real time. You have to wait for the next renewal to kind of size it up again.

Right. There's not the opportunity for the true-up, if you will.

Yes. Okay. That makes sense. I've got a question from the audience. It's actually a 2-part question there. I'll say they're both kind of vaguely topical. One was, a little over a year ago, everybody was worried about COVID and business interruption lawsuits. Are there any -- is there any notable litigation still outstanding related to that? And then secondly, and I guess really unrelated, is do you have any particular exposure to either Ukraine or Russia?

Okay. So question number one as far as where do we stand as an industry and resolving the question around business interruption as a component of property cover stemming from COVID. And while I think there are a couple -- there are still some loose ends, if you will, and I don't mean to gloss over them. But I think at this stage, it's fair to say just some loose end as far as still outstanding challenging the position. That having been said, I think for the most part, it's pretty well-established that COVID does not trigger -- or the possible presence of the virus does not trigger business interruption as a component of a property policy. As far as our exposure to Russia and Ukraine, those are not consequential markets for us and based on our ability to look at our book to the extent we have exposure or direct exposure, I should say, it's going to be de minimis. And when I say direct, it's because indirect exposure, we could have an ensure that sends products to Ukraine or so on and so forth. Obviously, as a result of globalization, it's a reasonably tangled web. But as far as direct exposure, very, very modest. And quite frankly, I would suggest it's closer to rounding based on everything we can see right now in the -- relative to over $2 billion of earned premium we have running through every quarter.

That's kind of what I would have guessed based on the disclosures that I tried to look up in the filings and whatnot, it seemed like it would be...

Yes. I mean there are some of the obvious product lines that have exposure. Property, by and large, and we're not a big property market as you suggested. But clearly, war exclusions will apply. We are not a player. We -- by design, we do not write trade credit insurance, so on and so forth. So it's not our appetite.

Okay. Jumping back again to kind of the prior line of question. We're talking -- and you had mentioned -- I was talking about the wage inflation. I guess one of the biggest laggards in the pricing environment has been workers' comp. You've hypothesized, I've hypothesized, everybody's hypothesized reasons why that market never really saw the pricing trends. Every now and then, it seems to show signs of bottoming. What are you seeing now? Are the returns there still very good? Does it need rate? Or is it a line that is doing well enough, particularly in the current environment.

Well, I -- let me bifurcate that answer, if I may, between reflections on our own business versus how we see the industry. Quickly, on our own business, we see clearly a challenging market but due to the great expertise of our colleagues, we think we're still generating healthy returns. But there is no doubt, there is a meaningful amount of discipline. You would have seen us in -- earlier in '21 and in '20, shrinking that line of business, and we were just shedding the count. Now later in '21, you started to see that product line grow for us. But it wasn't that we were writing a lot of new accounts. It was these payrolls that had gotten compressed as the economy opened back up, people came back to work and the payroll started to go back up again. In addition to that, obviously, wage inflation is driving increases in premium as well. That all having been said, we think that while there were many challenges that came with COVID, as far as frequency trends for the industry overall in comp included, it was a positive. As COVID goes away and we see frequency return to a more traditional norm, I think the industry needs to be mindful of that. The other piece that has really gotten quite a bit of our own attention internally is severity trend. And we, as an organization, have been paying attention to the data and what we see around severity trend. And we are -- I wouldn't say concerned about it, but it has our attention. And I'm not quite sure that the industry overall is paying enough attention to severity trend. And I think you're going to hear people over the next 12 months start to talk about that more and more. I would also draw your attention just to demonstrate that we're not always sort of chicken little in the room. But we are now hearing commentary coming out of California, WCIRB, in particular, starting to offer comments about severity trends. So look, about 3 or 4 years ago, we started to talk about this thing called social inflation and a lot of people thought that we were just seeing ghosts or more concerned than we should have been. Sometimes we get it right, sometimes we don't. Sometimes it's a real problem. Sometimes it's just a ghost. But the reality is that when we are looking at the data for severity and comp, we think it's something that not just us, but the industry needs to be actively grappling with. Unfortunately, when you have a lot of these rating bureaus, they tend to look at data that's 2 years old. And comp, no different than other product lines as we like to talk about around here, you can't just focus on what's in the rearview mirror. You need to pay attention to what's out the front windshield too.

No, I think it's excellent perspective and I would agree with you wholeheartedly on some of these bureaus is they tell you what time it was yesterday when I want to know what the weather is today. So we are pretty much at our time. I guess I'll end there and say I appreciate you taking the time to share a bunch of your insights today. I think it was a very worthwhile session. We covered a lot of ground in a pretty short period of time. So thank you very much for making the time available and your honest and thoughtful answers. With that, I will turn it back. I know you guys have a session coming up. So we'll end the session here so that you can -- we can move on to that one.

Thank you very much for the opportunity to participate, Mark, and thank you to all of your guests for their time and engagement.