WR Berkley 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“Good morning. Market conditions in the third quarter, by and large, were a continuation of the trend that we’ve seen over the past several quarters. The casualty market and the workers’ comp market continue to benefit from rate increases. The professional markets, on the other hand, continue to be a bit of a mixed bag, with EPL pricing as well as private and non-for-profit D&O getting significant rate increases, lawyers also getting rate increases. Having said that, public D&O remains also very much bifurcated between the primary and the excess, with the primary getting meaningful rate increases, while the excess remains somewhat flat.

On the other end of the spectrum, the medical space, no pun intended, is somewhat of a bloodbath, quite frankly, with rates continuing to fall off, and the other miscellaneous D&O is also exceptionally competitive.

In our opinion, the professional space is probably some 12 to 24 months behind the casualty market when you think about it from the cycle.

The property market continues to fray around the edges. Clearly, a result of a lack of cat activity, along with the increasing supply of reinsurance capacity. These 2 factors are clearly putting a fair amount of downward pressure on pricing.”

“Obviously, rate in a vacuum is something that one needs to be very careful of. When we think about rate, we need to make sure that we’re not experiencing adverse selection as these higher rates are coming through. Our renewal retention ratio is the tool that we look to, to make sure that our rate increases are not creating this adverse selection. And our renewal-retention ratio for the quarter remained at approximately 80%, where it’s been for the past several quarters.”

“The fact of the matter is that we are in a business where we do not know our cost of goods sold until after the sale has been made.

As a result of that, we feel as though that it’s important to take a very measured approach in setting those initial picks. This is demonstrated by 27 quarters of positive reserve development, which is quite consistent with our approach, once again, of initially being cautious with picks and tightening as things develop over time.”

“The securitization of non-tail risks is having an impact on cat business and those large property risks. There’s lots of people who have investment portfolios who are looking for non-related risk profiles, and therefore, you’re seeing an increase in cat bonds and other kinds of behaviors. That’s going to continue to impact back on the business.”

“We think that people are beginning to recognize that investment returns are going to stay at this lower level, certainly for another 18 months, if not longer. ”

“Ever 100 basis points, as we’ve said, in loss investment income means you need, give or take, depending on the line of business, 4% or 5%, 6%, 7% more in underwriting profit. So whereas historically, people would say, if you’re right at a 93%, 94%, 95%, you’d get a good return, today, that number is 88%, 90% kind of a number to get a good return on your capital.”

“I think there’s quite a bit more of pain to go and a lot of people who are going to say, what are we going to do, and who are very, very short on their reserves for those — some of those things and are going to have to try to figure out a solution. But everyone doesn’t have to go out of business. Some of the people are plenty well capitalized and have plenty of smart people. They just have to face the reality that we have to do something. There will be more, however, than the 3 I mentioned that will go out of business.”

“what I would suggest to you is that oftentimes where the market has gotten the ugliest is oftentimes where you will see the greatest or the most severe reaction and the pendulum will swing farthest going in the other direction, and you just need to make sure that you don’t jump back in prematurely.”

“the reality is trying to figure out what your competitors do is a Rubik’s Cube.”

“I think these capital suppliers who are entering the business entirely based on models and forecasts are going to find out that human judgments actually are of value and important. And a number of them will get badly burned as they step away from the highly forecastable pieces of the business to other parts. So yes, they may step and put their toe in the water in other things, and I can assure you it will be extremely costly and short-lived.”

“We expect continued price increases, and as I said, I sort of bring my band a little closer, from 6% to 8% down to sort of 6.5% to 7.5%. But we’re quite optimistic and expect the balance of the year and next year to generate returns well within the range of our expectations and continue to have capital gains in line with the recent past. So thank you all very much. Have a great day.”

W.R. Berkley 2Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“The second quarter, by and large, was a continuation of the trends that we saw in Q1. Primary comp rates continue to move up at a healthy pace.”

“The property market has always been one that’s made us scratch our head from time to time. When the earth shakes or the wind blows, it seems as though people choose to back that out of the results. And when Mother Nature is kind to us, it seems as though people call it brilliance.”

“Our new business relativity metric came in at 3.6%. This is a metric that we talked about with some of you in the past. It’s our effort to try and compare the rates that we’re getting on new business with our renewal book. We think that this is an important metric because, obviously, you want to make sure the new business that you’re adding to the portfolio, in no way, is undermining or diluting the margin in your book. And, in addition to that, obviously, new business as opposed to renewal business you know less about, so consequently, some type of surcharge would be logical and appropriate.”

“When you put all the pieces together, we ended up with a combined of a 96.6% compared to 98.2% for the second quarter last year”

“f you look at the profitability of insurance companies, insurance companies have always made their money from investment income, and investment returns are down substantially…the fact is you’re facing serious changes in what’s going off your portfolio and what you’re able to invest in. The alternative is to bet on no inflation for an extended period of time, which is not something we’re prepared to do, nor are most of our competitors.”

“if you look at the economic model of an insurance company, much of the rate increases people have been seeking stem from their concerns having to do from loss activity. And the impact, which is even more leveraged of investment income declining, is likely to force people to raise rates even beyond what they had done to date.”

“First of all, the skills and distribution required to write the kind of business we do is really quite different than what they do. Second of all, Berkshire is going to write at a profit. My friend, Mr. James [ph], is absolutely determined to get his share of the market, but not, I emphasize not, at any cost. He’s going to write the business where he thinks he can make money. And nobody should be afraid of that competition. He’s going to give good service, give good capacity. And he’s going to want to share the market, and he’s going to do it through those basis. But he’s not going to be a price cutter. Some people have entered the business to buy their share. I think Berkshire, by and large, is going to try and do it in other ways using their capacity, their credit and their ability to put large lines down. But I don’t think most of the people we compete with have the market position or the underwriters to move down to write smaller risks…But I don’t think Berkshire is going to be a market leader in pricing. I think they’re going to be — try to be a market leader in capacity and quick answers because that’s something they have.”

WR Berkley 1Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“the low interest rate environment is also beginning to have a real impact on investment income and consequently, overall profitability for the industry, and people are beginning to recognize the issue and react. There has been a lot of talk about this over the past couple years, but we’re now beginning to see it translate into action in the form of greater discipline on the underwriting side.”

“in the short run, we’re less concerned with inflation because we think the dollar is still the place to go and we think that foreign flows into the U.S. will really keep inflation under control, certainly, in the next 12 to 18 months. So we’re feeling a little less pressure for inflation being around the corner, which is causing us not to be in such a rush to shorten the duration of our portfolio”

“we are noticing a great difference as to the tone and the attitude when it comes to pricing of primary versus excess in a couple of parts of the overall marketplace. Our hypothesis or theory is that the excess tends to take a little more time for the results to come through and for people to recognize the issues that they may be facing, as opposed to a primary where the consequent has come through in a more timely manner, which is why you’re seeing people respond to the primary more quickly.”

“We’re looking for market opportunities which we think is a sustainable opportunity. We want to differentiate based on intellectual capital and expertise as opposed to purely just capacity because that makes you write for becoming even more of a commodity.”

“the excess comp market is the epitome of risk in this environment. And that is because it’s such a long tail line, inflation is inevitable to impact their cost of claims because you have — the average duration of about 17 or 18 years and you know you’ll have inflation long before we get to that point in time of a substantial degree. And you have the discount based on current interest rates, if you’re cautious. And if you’re not cautious, you choose an optimistic interest rate. And that optimistic interest rate could cause you to have a huge difference in your pricing. So the combination of optimism as to low inflation forever and higher interest rates than we currently have can create differentials in price of 50%, and you can justify it. And just you have to worry about retiring before you have to pay the piper.”

“the reality is with investment returns down a lot, you’ve got to get underwriting profit. So there’s nothing I see that’s going to change that trend for certainly through next year. I think there will be continued price increase pressure through this year and through at least next year, with increasing pressure, honestly, as we get towards the end of this year and into next year.”