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

All right. Why don't we go ahead and get started. The first session here. First, I'd like to say, thanks for being here. I've got Rob Berkley, W.R. Berkley, CEO, with us.

And I wanted to first start with a more broad strategy update. Maybe if you could take us through some of your strategic objectives and just at a high level, what are the most important things that you're focused on over the next 12 to 18 months?

For us, Alex, I would sort of bifurcate that between what I would define as day-to-day operational activities, our desire to make sure that we are maximizing the opportunity. We are an organization that is in the specialty business, which inherently would suggest you're focused on, you're all about maximizing the opportunity in an opportunistic way. So it's been a very dynamic environment with inflation, both social and economic, and we have been trying to fully capitalize on that. In addition to that, perhaps on a slightly different nature, would be data technology, certainly very much a flavor of the day that everyone's talking about, everyone's reading about. And we, as an organization, are no exception where we are actively trying to build out tools that are going to allow us to make better decisions in a more timely way. And a lot of people tend to think about that through a lens of oh, it's for the actuaries and they're using it to sort of refine their analysis. But from our perspective, the applicability is far broader than that. It applies to pricing, risk selection, claims, distribution management and so on. The last piece that I would touch on that we have been working on, we continue to work on and will be working on in the future is what I would define is being somewhat more distribution agnostic. From our perspective, the customer being the insured is king or queen. Our view is that we want to meet them anywhere they wish to be met. So whether that's wholesale, whether that's retail or whether that's direct. So we are well on our way to a long journey, but we're well down the path of offering a variety of different products through different platforms. And again, different platforms engaging at different points of the marketplace from a distribution perspective.

So next, I wanted to go ahead and move right into the pricing conversation if that's all right. I'd say, in 2023, companies seem to remain fairly disciplined despite net investment income picking up. And if we maybe set aside workers' comp and financial lines, which maybe I'll come back to, but a bit of a different animal, how do you see that developing as we move into '24. Will companies continue to stay disciplined. Like we've had this tailwind from exposure to top line that I can't tell if -- maybe that's what kept people disciplined, but what's your perspective on that?

I think we all have a shared appreciation that a business like ours, the P&C space and the industry in general. There are 2 components to the economic model. There's the underwriting activity, and there's the investment activity. And ultimately, the 2 of them come together, hopefully, both viewed through a lens that we call risk-adjusted return and that generates the ultimate return. Obviously, as one component may be struggling, that would put more pressure on the other to deliver. So perhaps more specifically to your question, as you see investment income accelerating is that potentially going to undermine the underwriting discipline and the need to generate underwriting margin. And history would suggest, the answer is yes. That having been said, even if it's yes, I don't see that happening anytime soon. So really unpacking that a little bit more, why is it not going to happen tomorrow. It's not going to happen tomorrow because -- if you go back over an extended period of time as to how companies have positioned their fixed income portfolios during that extended period of lower interest rates you saw companies not just compromising on quality, but pushing out that duration. As a result of that, they're somewhat stuck. So are they benefiting on a new money rate being higher today than it was yesterday? Yes, clearly, that's the case. That having been said, unless they're willing to take a very large hit to book value, they have to work through that longer duration that they had signed up for us. So directionally, your point phrased as a question, yes, I agree with it, but I think it's going to take an extended period of time for us to get there.

Got it. That's very helpful. So the other thing I wanted to ask you about as we think through 2024 and margins in particular, I think, have benefited to some degree over -- from unit exposure over the past year. Different products, maybe to different degrees, a little hard from the outside to tell just how much that helps. Is that potentially decelerates with inflation beginning to come down. What kind of impact does that have for the industry for W. R. Berkley?

Look, there is no question that the insurance industry is not insulated from the health and well-being of the economy. Ultimately, the condition of our clients has an impact on us. Much of the industry prices its products off of payrolls, workers' comp or receipts and so on or appraised values. That having been said, there's nothing that leads me to believe that the momentum is going to hit a wall. I think what's really been driving the pricing cycle as of late has been and ultimately much of the premium growth, not all, but much of it has been loss activity. A cycle, if you will, is really driven by fear and greed. And that's what has, is, in all likelihood will continue to drive the cycle. The insurance industry went through a period of time where loss cost trend was relatively benign. Then we had an extended period of time as of late, where we are finding ourselves with frequency of severity on the shorter tail lines, particularly property. And on the liability side, we have this phenomenon called social inflation, which is essentially just larger awards coming out of the legal system. As a result of that, those 2 factors have driven quite frankly, the fear factor, where all of a sudden, companies are waking up both insurers and reinsurers and saying, this is not sustainable. And that is what introduced discipline and ultimately, the concern or the fear started to overshadow the greed. In my opinion, when you talk about top line, yes, the health and well-being of the economy has an impact, but ultimately, what has really driven the firming of the marketplace has been loss activity in the industry adapting to those new realities.

Very hopeful. And this may be in the same vein involve this conversation. But I guess when we think about E&S markets and maybe the more specialized areas of admitted, it feels like that's grown a ton. There's a ton of momentum there. And there's a lot of things you can point to that structural about it. But there's also people that do the historical look around loss ratios and at some point, it totals back, right? And what you -- what's your perspective on the structural aspects and the potential for that to persist more indefinitely?

Just to make sure I understand, when you say structural, I just want to make sure I understand what you're referring to.

I'd say there's an argument that many of these specialty underwriters have much better expertise in the more complex risks that are increasingly coming to market. And there are aspects of that won't shift back towards the admitted market?

I think the reality is that the world is becoming a more complicated place. Risks are becoming more complicated as an extension and there is an ever more important place for a specialty writer because of that reality. The standard markets have very fixed appetites that, yes, from time to time, ebb and flow a bit, but it is much more, if you will, black box underwriting. From our perspective, will appetites of the standard market, yes, ebb and flow without a doubt. But when the day is all done, given the pace of change in the world and how there are new risks rearing their head every day, the specialty market is a good place to be. I think that you are going to likely -- more likely than not the growing concern within the standard market around particularly some of the liability lines that would fall under the specialty category. I think that there's a lot of pain that's still going to come through stemming from the '16 through '19 period. And I think that's coming more and more into sharp focus for many market participants. In particular, I would say, some of the reinsurers, I think, are starting to learn about something called social inflation that many of us have been grappling with for 5 years.

I want to come back to that point on some of the casualty reinsurance later. First, before we leave some of the pricing commentary. I did want to ask you about property. I know there was a more specific process you're going through on some of the property exposure and specifically like some of the non-cat property. Can you provide an update on just sort of where we are. I think you phrased it as pig moving through the python. How far is that pig?

I would say we're pretty far through the snake at this stage. Obviously, it takes a little bit of time because it's not just on a written basis, then you have to earn that through. But I think much of the refinement that we have made is taking hold. And it's my hope that you would have seen a little bit of that in Q3 and it's still early, but I'm hopeful you'll see more of that in Q4 and that will continue. Those benefits will continue to present themselves going forward as well. So I think the long story short is, I think we're well on our way. I think there is some other realities and that is -- there's been a change in the weather pattern. And I'm not interested in getting into a whole discussion about climate change, global warming, temporary, permanent. I think there's a reality, there's something different today than what we saw yesterday and how that instructs one to think about exposures is important. Once upon a time, we sort of primarily worried about things like just hurricanes or earthquakes, now there are parts of the country where you need to think about SCS, tornado, hail, straight-line wind, wildfire, other types of perils, flood in a different way than you had to. Clearly, there is growing evidence that would suggest the hail belt has moved north and east from where it historically has been. And the industry moves slowly to be very frank. But I think that it is finally adjusting and adapting to these new realities.

So I wanted to return to the conversation of social inflation. You said something on your last earnings call, I thought it was interesting. I think you referred to an elongated tail associated with social inflation. I just wanted to see if you unpack that a little bit. Is there something that's incremental that's been developing that you're seeing that caused you to say that? Or am I.

Yes, I think it's just -- it's I offered the comment then, but it wasn't necessarily something that we had seen in the 90 days prior. It's something that we've been seeing percolating over time. We've -- for some number of years, have been talking about this concept of social inflation, which again, is really just a legal system that is handing down awards that are considerably higher than what they would have been at moments in time in the past. What I was referring to specifically as far as an elongation of the tail was really more as far as the incurred tail goes, not so much necessarily the paid tail. There's incremental impact on the paid. It's really much more of the occurred. And it's really -- it's being driven by a plaintiff bar. They are taking new tactics where the latest -- one of the latest approaches they take is that they will effectively lie in the weeds until the 11th hour and then come forward with some extraordinary demand. So as opposed to once upon a time, there was some type of claim event, and you would get notice, oftentimes, you get notice at the 11th hour. So that does not allow that issue to come into focus in this timely manner as it once would have. So it creates a bit of noise, but ultimately, what it does is it instructs us as to how we need to be thinking about IBNR and how we're setting up reserves initially to anticipate this slight change in the incurred pattern.

So next, I wanted to ask you about reserves. And I think prior year development in general has been pretty benign for you all in aggregate. There's been some conversation around, well, you're not totally immune to some of the things that happened on the older casualty reserves. But the way you've booked more recent accident years has obviously offset some of that. And so -- just wanted to get your perspective on that dynamic. And maybe in particular, if you have any way for us to think through how seasoned we're getting on some of the older stuff. And at what point that's going to die down relative to, I think, what looks like pretty strong reserving on the recent [indiscernible].

So as opposed to sitting here and trying to put lipstick on the pig that everyone can see, it's still a pig just wearing lipstick. Here's the reality. The reality is that this is an industry where you sell your product oftentimes many years before you know your cost of goods sold. During the '16 to '19 period, the industry did not appreciate how things were starting to percolate and the legal environment was starting to shift. By the way, ourselves included. And it was -- so '18 to '19, when it started to come into clear focus for us that this business that we have been writing ultimately, there's this phenomenon called social inflation that was going to have a dramatic impact on our loss costs. That business had already been written. It was in the oven baking. So ultimately, the question was what do we do to try and catch up to what loss costs are in as timely a manner as possible, and look to address that. The '16 through '19 year, in my opinion, I believe the view is shared by others, has proven to be challenging for the reasons that I just described for the industry. I think some market participants saw it earlier, some who saw it earlier actually chose to respond. And then there are others that are having to play catch up more or later in the game, I should say. So when I think about those realities, then ultimately, the question is, what do you do going forward? And as you would have -- those of you that follow the company, we've published the information on a quarterly basis. What our rate increases are, we started to take serious underwriting action. Yes, certainly, how it instructed us from a selection perspective, a terms and conditions perspective, but also from a pricing perspective and the rate increases that we've gotten over the past couple of years, are quite significant, again, to try and play a bit of catch-up at this stage. So today, where are we? I think we're in a pretty good place. As far as the '16 through '19 year, how baked is that? Well, I can't give you a silver bullet answer. But Alex, what I would share with you is this that -- the average life of our loss reserves is approximately 3.5 years. And if you believe that we started to get our arms appropriately around things sort of '19 through '20, -- to '20, somewhere in there. And you then take that mile marker and you apply 3.5 years, that could arguably give you a good indicator as to how far along we are in getting that sorted. As far as some of the more recent years, yes, I think that we're in a pretty good place. But I think after the reminder that we got coming out of the '16 through '19 year of that reality of you never know exactly what tomorrow will bring. We're just not going to declare victory prematurely on those years. I haven't said that. I expect in my personal opinion, more likely than not, there's going to be good news coming out of those more recent years.

Very helpful. Next topic on reinsurance, I guess, first, maybe just be interested in your view of the pricing environment headed into next year and I think you guys looked at it as an opportunity but didn't really leg into it. Sort of some maybe thought you might at the beginning of this year. Are you seeing anything incremental getting you more excited about property catastrophe at this point?

I think we've we erode a fair amount of cat-exposed property on the reinsurance front, both a bit of treaty and a bit on the facultative side. So more than we had, did we turn into RenRe overnight? Absolutely not, and we had no and have no intention to do so. But we're pleased to participate. I think it's not just about how much premium you write per se. It's also about what type of exposure that you're taking on. So I would tell you that there are parts of our portfolio where we're maybe writing a similar amount of premium, but we have half the exposure. So there's a limit to how much volatility we want to introduce to our business. The amount that we're willing to entertain obviously is to a great extent driven by rate adequacy. So are we doing more today than we did yesterday. Yes. We'll have to see how things unfold at one-one. I expect we'll probably do a bit more again. If we go through the '24 year and it's relatively clean, I think there's a reasonable chance that you're going to see cat pricing start to erode. And then we'll have to assess how quickly that's eroding and how quickly we go from having a foot in the water back to having a toe in the water.

Got it. And then maybe a similar question, but on the casualty side. You mentioned some of the reinsurers are having rationalized what's gone on in some of the reserve and social inflation impacts there. Are you seeing impacts to that in pricing that are beginning to make that any more attractive? Or is it still a place that you got to be careful.

I think it's -- on the reinsurance front, it's still a little bit early. I was at a conference in the fall where a lot of industry participants get together and it was shocking to me to hear some several very large reinsurers coming and sharing with us their observations and talking about this new phenomenon called social inflation, and how concerned they were about it. And we couldn't help but pause and scratch our head and politely ask what planet they've been on for the past 5 years or so because it's nothing new. Ultimately, I think that as far as the broader liability aligns for reinsurance, I think you're more likely to see discipline returning to that part of the market over the next 12, 18, 24 months. And simultaneously, unless we see a lot of cat activity or a meaningful amount of cat activity, I think you're going to see that eroding.

Understood. Maybe a reinsurance question, but maybe from the perspective of a buyer from your primary side, with becoming more difficult to get coverage on some of the secondary perils and the shifting alley that hailstorms come through and everything. How are you managing that risk on the primary side, any changes to the way you're buying reinsurances that we should think through.

I think that we as an organization have somewhat of a luxury by design where we are not a large limits player. If you look at our portfolio of the policies where you're legally allowed to have policy limits, approximately 90% of our policy count has a limit of $2 million or less. So inherently, that means we are less captive to the reinsurance marketplace. And again, that's by design. We don't want to find ourselves in a situation where the tail is wagging the dog. And by extension, we have the ability to be a little bit more of an opportunistic buyer. Essentially, reinsurance is just renting somebody else's capital and we have a choice as to whether we're using ours or we're renting someone else's, and we look at the economics. That having been said, the reinsurance marketplace, which once upon a time, the relationship between reinsurers and cedents was very much a partnership. For us, we bifurcate it. There are some reinsurers that are truly our partners throughout the cycle. And there are others where it's very much of an opportunistic transactional relationship. And we have a -- we draw a clear distinction between the two. I think the last piece as far as our reinsurance buying. And I think some people have picked up on this, others perhaps less so is we created a vehicle a few years ago, which I think makes sense at any point throughout the cycle, but part of the catalyst was we could see that the reinsurance marketplace was likely going to be shifting and this platform is called Lifson Re. And it's effectively an internal platform or almost a sidecar that takes a 30% quota share on everything that we buy with -- that has more than one participant in the treaty. Why does this matter? Why am I flagging it now? Because the fact that 30% treaty is placed on day 1 puts us in a much better negotiating position with the reinsurance marketplace just because of the simple realities of supply and demand. We have less to place and that puts us on a firmer foot and for the negotiation.

So I wanted to circle back on workers' compensation. I know you've sort of been vocal over time on the severity trends there, and it seems that it's getting louder and some of the potential issues that could arise around loss trend. What's the latest view from you on that. What do you think about some of these higher loss trend indications that we've heard from one broker in particular I can think of. And I mean, is there going to be any relief from the NCCI any type?

Well, NCCI, which I think is a great organization, and I had the good fortune of serving on the board twice has a really exceptional history and a consistent one of maybe getting it right, but always being late. So I think that NCCI has a lot of data, but they tend to be late in making the call. And I think, again, history would support that. As far as the marketplace goes, I think the COVID period and the benefits that stemmed from frequency trend sort of through things, a little bit of a curve ball. In addition to that, I think the bigger driver around severity trend, in particular, is the questions around medical costs. And from our perspective, when you look at a claims dollar within the workers' comp space, over half of it is associated with medical. And if we just sort of put back to the side for a moment, and think about this situation that most healthcare providers find themselves in large health systems. They are in a terrible pickle. Their economic condition is very challenged. And while there continues to be demand for their product and service, their economic model to a great extent, is quite frankly broken. They had many of the challenges that came as a result of inflation, economic inflation, including payroll, but much of their revenue is locked in through multiyear contracts. So if you are a large health care system, you are stuck as far as repricing your product because of the multiyear agreement that you had with payers. But your cost and what you had to pay for labor amongst other things, kept going up. So as a result of that, I think there's been a pinch point in the cost around medical. And I think that pinch point is just being relieved right now as those multiyear deals between payers and providers are being renegotiated. And I think medical inflation in general you're going to see more and more pressure on that front. And the workers' compensation just going full circle to a comment or 2 before. Medical is a big part of every claims dollar within the comp space. And I think that's going to be a reality. The other overarching reality is rates have come down dramatically across the country, eventually hit bottom. And from our perspective between the rate cuts, which tend to be driven by what people see in the rearview mirror, along with health care costs and where they're going, we think that can set the table for a challenging time for comp in the future but it takes time.

Yes. Understood. Shifting gears a little bit on the investment portfolio. Just be interested if you have any update on any allocation shifts. I know the duration has been a little on the lower side. Any views on what's going on in the real estate market and if that's an opportunity.

Yes. So as far as the investment portfolio goes, I think at a high level, we've been rewarded for the position that we took on duration. I think as a result of that, the impact of book value for us was far more modest than the impact that many of our peers have seen. And in addition to that, going back to a part of the conversation earlier, our ability to benefit from higher rates is -- has been turbocharged compared to many of our peers because of the duration. And obviously, our growth and our cash flow has been very strong as well. So there's a lot of momentum there. As far as the portfolio and overall, I think given where fixed income rates are, there's less of a catalyst to feel like you need to seek out alternatives. So when we think about risk-adjusted return, not just on the underwriting side, but when we think about it on the investment side, we think the fixed income space is an interesting place to be. As far as real estate goes, I think the decision to sell a large asset that we had in London was proved to be a good one and as far as what we currently have, we feel comfortable with that. I think as far as real estate goes, the world is gradually coming back to work. Maybe it's not 5 days a week, but people still need space. But it is, I wouldn't say a slow walk. It's been a little bit of a crawl, which seems to be accelerating. And for those that are in this space, I think it's turning into a world of haves and have nots. If you're in A markets with A buildings, I think you're in a pretty good place. If you're in a B market or especially even if you're in an A market with a B building, I think that's a tough road to hoe. And fortunately, we are not -- that's not a place we are. We're in a good place.

Got it. Next, on capital. We've seen sort of premiums to surplus, which is the very high level metric that the outsiders can kind of look at, go ticking up, and a lot of that is because of the rate and -- but also unit exposure going up. At what point does that need to be worked on for the industry? How do you all look at capital? Do you have runway to keep pursuing the growth?

Well, at this stage, as of late, we've been generating capital more quickly than we can use it, hence, the returning capital to its owners, whether that be through repurchase or dividends, which have been the 2 tools that we've been primarily using. As far as our position with capital goes, we feel very comfortable where we are. The way we think about it is -- we have a view as to how much we need, what we think our growth prospects are and then how much cushion we want to have above and beyond that. And then that will instruct us what type of surplus we may have, which then leads to the question, what is the most efficient way to return it to the owners. In a perfect world, we'll use all the capital and then some that we have. I think you would have seen our growth ticking up as we made our way through the year. And our hope is that we will be able to continue to take advantage of market opportunities and grow the business. But as far as excess capital goes, I think you'll see us -- to the extent we have it, continue to look to return it to the shareholders. The only other piece on that is as some, perhaps all are aware. The rating agency is, particularly S&P are in the final stages of refining their model and ultimately, we'll see how that plays out. But our expectation is that it will be a positive thing for us.

One quick one on homeowners insurance. I know it's not really much business that you dig into. But you did have -- or you have this Berkley One product. And so you've sort of approached it, I think, more from the E&S side. And just interested on what do you think of what's going on in that market right now with the catastrophe changes and the pricing challenges with regulators. And is that an opportunity for you?

So as far as personal lines goes, maybe taking half a step back, Alex, in the final 37, 36 seconds that we have here. We, as an organization, have zero interest in participating in commodity activities. We have a great interest in participating in product lines where we can differentiate ourselves based on intellectual capital and expertise. We as an organization in all likelihood will never have the cheapest cost of capital. And quite frankly, we will, in all likelihood, never have the most efficient factory floor. So ultimately, as opposed to trying to play the game the way others do, the question is, how do we play the game in a manner that makes sense and plays to our strengths. Specialty lines, people, knowledge, expertise, et cetera. The homeowners marketplace is like much of personal lines is a commodity business. Cost of capital, efficient factory floor, those are the big drivers. We -- when we talk about the consumer or personal line space, have elected to play in a particular niche that being the high net worth or private client space, where customers are willing to pay more because they recognize the value proposition that you bring to the table. So for us, I think, yes, we do play in the space but in the broad sense, but if you peel a few layers back, it's really a very different activity addressing a very different audience that has a very different set of priorities. As far as the marketplace goes and some of the challenges that we see in places like South Florida or California or even places like Texas or perhaps in Illinois. And quite frankly, in the broader sense across the country. This is just the reality of people starting to accept loss costs. And the industry has an uncanny ability when there's been a lot of loss activity to try and discount that and say, yes, it was just a one-off. But ultimately, when you see that pattern year-over-year and you're seeing the disruption of capital, eventually people will say no more. And when you have a regulatory environment, which we all know is challenging for the insurance industry that has oftentimes not always, but oftentimes, a political bent to it, that can lead a bad situation to a worse place. And effectively, that's what we're seeing in many of these markets where people can't buy insurance because carriers are saying, I don't want to play the game anymore because you won't allow me to charge what I need to charge given the exposure. And then all of a sudden, you get a vacuum, that's the simple reality of it. And ultimately, hopefully, between regulators and consumers and carriers and everyone, all other stakeholders, we can find a better point of equilibrium.

Got it. Well, thank you very much for being with us.

Thank you for the invitation. I appreciate everyone's time.

Thank you, everybody.

Have a good holiday.