Markel 4Q15 Earnings Call Notes

Thomas S. Gayner – Co-Chief Executive Officer

We emphasized defense in our investment operations last year

“In 2015, we emphasized defense in our investment operations as well. We did so through the following specific actions. First, we maintained our high credit quality profile in our fixed income operations. Secondly, we kept our equity exposure at the low end of our range for equity investments over the last 25 years. Thirdly, we maintained a strong and highly liquid balance sheet in order to be ready to actively deploy the funds when conditions warrant doing so.”

Given low interest rates you have to emphasize underwriting profitability

“So, first off, given the overall low interest rate environment that exists, no matter where you are, the need for underwriting profitability to earn any sort of return at all, goes up. You saw excellent underwriting results around here last year, and the targets that would be set, the hurdle rates for people to earn the incentive compensation that they’ve earned, those have been coming down over the last several years to reflect the business environment that we operate in.”

You’re not seeing wild cowboys operating with huge underwriting losses

“there is a reasonably rational basis of competition out there. You’re not seeing wild cowboys that are operating with huge underwriting losses thinking they can make it up on investment income, because, nobody, I think, is under that delusion and that is indeed different than what might have been the case 10 years, 20 years ago.”

There’s a bunch of capital everywhere and that’s pressuring rates

“I think those interest rates are a symptom of the excess capital that exists, again, not just in the insurance business, but in general. There’s just a bunch of capital everywhere, so the central banks may have opinions about what interest rates should be, but there’s also the fundamental laws of supply and demand, and interest rates are hugely influenced by market factors as much as what central banks might do.”

Been extending maturity of the bond portfolio

“And on the investment side, for a while, for a couple of years, we had been having a shorter maturity of the investment portfolio than our insurance liabilities, because I was worried about interest rates going up. About mid-year last year, I decided that I was wrong and that as the phrase goes, rates were likely lower for longer. And we started to extend the maturity of the bond portfolio a bit. And in this environment until further notice, we’ll operate in a more (39:39) than we were a couple of years before that.”

Travelers 4Q15 Earnings Call Notes

The Travelers Companies’ (TRV) CEO Alan Schnitzer on Q4 2015 Results

Commercial marketplace remains remarkably stable

“Broadly speaking, the market dynamics in the commercial insurance marketplace continued to be remarkably stable.”


“Let me take just a minute to comment on the leadership transition. What I suspect many of you want to hear from me is where do go from here? As I’ve explained to our leadership team, our challenge is this, to take today’s summit and make it tomorrow’s base camp.”

There are a lot of things that could change insurance markets over the coming years

“I guess what I would share with you is that we are very aware and deeply engaged in all of those things. So whether that’s – what’s going on with any of our competitors or what’s going on with technology or big data or driverless cars, consolidation among distribution, you could go on and on. I think what I would share with you is we’re very aware and deeply engaged…but as we think of everything that’s got the potential to change in this marketplace, nothing is going to change overnight. These are things that are all going to evolve and develop overtime.”

We think that the industry will continue to be focused on returns on products

“I’m not going to overly segment the portfolio. I think the backdrop to this is really the view of, do we think the industry is going to continue to fundamentally be focused on the returns on the products. And we think that’s the right way to be thinking about the business and we’re optimistic that the majority of the marketplace is actually looking at that.”

Focused on learning the personal lines business better

“So I had experienced managing essentially all of our commercial business and our businesses outside the U.S. what I haven’t had experienced with is, the personalized business on a relative basis not as much, personalized business in some of our functions like claim and IT and ops and things like that, risk control, so, I’m trying to spend a lot of time in those businesses and areas that I haven’t had the experience with, trying to spend a lot of time on the road out in the field with distribution and our employees in the field which has always been a priority of mine.”

Jay Benet

Continue to generate much more capital than we need to support our business

“We continue to generate much more capital than we need to support our businesses and consistent with our ongoing capital management strategies as you heard from Alan. We returned to almost $1.2 billion of excess capital to our shareholders this quarter through dividends of $183 million and common share repurchases of a little over $1 billion.’

Premium to surplus ratios are not really relevant anymore

“The premium to surplus ratio, I would view as not being relevant at all. I mean that was a ratio that was used at a time when rating agencies and regulators didn’t have the sophisticated models they have today.”

Brian MacLean

Pricing trends remained consistent

“Pricing trends remained relatively consistent with renewal rate change still slightly positive at the end of the year, while new business volume in our domestic business saw a modest increase.”

Conversations are tilting towards price declines

“A couple of years ago, almost every conversation was starting with some form of price increase even for the best accounts, because everybody saw where the trends were and that is gradually mitigated overtime. But even with those better accounts, the conversation start somewhere with trying to renew it at a modest decline or flat.”

Bill Heyman

We think funds have marked down their energy portfolios enough that there shouldn’t be a lot more downside

“During the year most funds wrote down their holdings and in some cases after the write-downs the price of petroleum rose but nothing was written up again. So we think a lot of these portfolios have been marked pretty hard. That said, if we had to predict either way, there is probably a little downside left in the portfolio but the portfolio isn’t that big that the amount are to be material then the aggregate.”

Doreen Spadorcia

Haven’t seen anything to suggest that higher miles driven is leading to more accidents

“So let me just talk a little bit about miles driven. The data shows that probably year-to-date the miles driven are up about 2.5% per capita and there is still a lot of debate about whether that makes a difference if it’s a long trip, a short trip, whether there is unemployment, whether you have safety features in your vehicles, and so you know we watch that closely but our long term trend of 3% anticipate that and we really haven’t seen anything that that particular item is causing us to view frequency differently today.”

WR Berkley 2Q15 Earnings Call Notes

There’s been a lot of industry change but conditions have remained pretty consistent

“The second quarter, as suggested a moment ago, has been a period of significant change for the industry, but much of that change stem from the level of M&A activity that persisted through the quarter. Having said that, while it has given people something to talk about, the reality is that the underlying market conditions have been reasonably consistent, though in some cases perhaps incrementally more competitive.”

Global reinsurance remains painfully competitive

“the global reinsurance market that remains painfully competitive as well. Having said that, the pace of erosion seems to be slowing, which is giving reason for perhaps guarded optimism that we are approaching the bottom.”

Capital markets are so flexible that there is not as much need for permanent capital

“We also think capital management reflects a different view that we have than many of our competitors, where they think getting bigger and having more permanent capital is a good solution. We think, if anything, capital markets are more opportunistic, more flexible, and there are things to do to have capital that’s available to you. And therefore maintaining ever-increasing permanent capital can be more like an anchor than a sail of the winds that helps you move ahead.”

There’s so much uncertainty out there, particularly with regards to inflation

“The global economy has never been as uncertain in my recollection. Not that there’s a huge crisis here, but there’s lots of uncertainty. The spread between the duration of our bond portfolio and the duration of our liabilities is as great as it’s ever been, being a year, because we’re worried about inflation. We don’t know what’s around the corner but we know it’s out there given economic activities and economic policies.”

Ultimately the system of taxation has to be universal

“I think that ultimately the system of taxation in our country only can work when business done in the United States pays tax on a universal basis. Otherwise, everyone will find ways to do business here and move their incomes offshore. That is not how it works in the insurance business at the present time. So that being said, I think there will be someone, something done to address the tax issues.”

We don’t see that we’re going to grow the business that much, if we did, we would tap sources of external capital

“for a couple of years we’ve tried to maintain our capital levels at roughly the same level because external capital is available at very low costs, much lower costs than our average cost of capital. So we’re not going to reduce our capital, but we also don’t see that we’re going to be able to grow our business a huge amount. So if we can grow our business 5% or 7%, there’s external capital that we can find ways of obtaining for that amount of growth. ”

William stepping down as CEO October 31

“on October 31st I will step down as Chief Executive and Rob is going to take over. So it will be not five decades but I’ll be out of this box at that point and he’ll take care of it, then I’ll be Chairman.”

Regulatory pressure makes it important not to stay small. We have to do what’s right for our shareholders

“I think consolidation serves a purpose. In the case of our business, regulators and regulatory pressures makes it important not to stay small. We’re big enough that we can deal with it. We’ve always had the same view. We’re here to do what’s right for our shareholders. We’ll always do what’s right for our shareholders. But that being said, we can continue to generate great returns over the long run for our shareholders, and if somebody comes up and says, “Hey, we’d like to talk to you about something,” we’re always willing to talk. If it’s good for our shareholders, it’s good for us.”

I think the consolidation that’s happening is more about ego

“I think that the consolidation that’s happening now is frequently about management ego or management rewards and less amount — less than it is about what you need to run your business.”

We think there will be an opportunity to do something with capital in the next two or three years

“We think we can always find capital which we will do on an opportunistic basis when we see reason or need. And we’re not — if I was talking about three, five, seven years, I wouldn’t be talking about it. This is something we see in the next year or two or three, where we think there’ll be an opportunity to do something.”

The tax system is a long run competitive disadvantage

“we’re always willing to do what we think is in the best interest of our shareholders. We think we have some level of obligation to this country. We just think at the moment, the way the taxes are, we won’t be able to compete in the long run when we’re paying taxes at 30-plus percent and we have many competitors who are paying very low tax rates. And they do it, forget about what they show on their statements, they do it in many ways, through loss portfolio, transfers, because then they don’t pay tax on the discounted value of their reserves, through all kinds of vehicles, some of which they feel are justified and some of which they don’t. But the bottom line is, how much cash taxes do you pay? And it’s a competitive disadvantage that in the long run you can’t continue with.”

Travelers FY 1Q15 Earnings Call Notes

ROE of 14.5%

“We are very pleased to start 2015 by reporting another strong quarter with operating income of $827 million or $2.53 per share and an operating return on equity of 14.5%. Our underwriting results remained very strong across all of our business units as evidenced by our combined ratio of 88.9%.”

Weather patterns have changed

we note that weather patterns do seem to be different. This change when combined with increased real-estate development, causes us to be very attentive to incorporating the real cost of weather uncertainty in our business. Part of the answer to this challenge above and beyond price and policy terms is helping our customers consider their risks and protect their assets in the most thoughtful ways possible. ”

Weather patterns continue to be unpredictable

“Regarding the weather, patterns continue to be unpredictable and that was clearly evidenced by another challenging quarter. Weather losses in the first quarter of 2015 were slightly higher than the first quarter of 2014, but more importantly in both years we experienced losses above our expectations, driven by the polar vortex last year and the extreme snowing cold in the northeast in 2015. Much has been written about the snowfall in Boston this year, which at over 110 inches was a record for the season. But the real story is that nearly 95 inches of this snowfall came in just a 30-day period. To show just how unusual that was the Washington Post cited a meteorologist who calculated that Boston should not expect to see another 30 days with that much snow for another “approximately 26,315 years.” Now, I’m not sure what they meant by approximately but suffice it to say was an extremely unusual event.”

We’re seeing significant cat losses from what we expect to be low severity events

“our expectations for cat losses are significantly higher today than they were just six or seven years ago. And importantly, historically we would have expected to have been below budget absent a fairly significant Atlantic storm. Unfortunately it has now become all too common for us to have significant cat losses from what we traditionally thought were the lower severity frequency events like tornado, hail and winter storms. So weather patterns are changing and accordingly we’re continuing to reassess and manage our property exposure and pricing in a thoughtful way.”

We’re not seeing loss cost trends vary from how we’ve underwritten them

“we’re not seeing anything as it relates to loss cost trends that’s surprising to us or different from what our assumptions are. ”

“But at this stage, our reserves, as we always do are best estimates of what we see today and we’ll just see how they develop going forward.”

We make reserve assumptions and then we decide to act based on the pricing that’s given to us in the marketplace

“Couple of times in your question, you referenced pricing and its impact on reserve. And we just don’t — pricing is not a factor as we set up reserves for our business. Our reserves are driven by costs. And the pricing what we sell it for is driven by the marketplace. And so the notion that our reserves are sit differently in a different pricing environment is just wrong; it’s just not correct.”

Private equity investments didn’t perform so well

“In private equity, the decline over the last two quarters was pronounced…for what is worth real estate this quarter performed very well at levels equal to first quarter 2014. Hedge funds performed better; the shortfall was in private equity and 50% of it came from 15% of the portfolio. So, that’s the story.”

Retention rate is a leading indicator of stability of the market

“To us, the leading indicator about lack of stability in the market and the way in which you can best assess the sort of near term is retention. It is really to me personally given my experience is remarkable that we had a record retention in our domestic business insurance business while still getting positive renewal rate. I just think that’s really quite remarkable and speaks to the stability of the business.”

Retention rate has come a long way

“I’m getting a little long in the tooth but I go back to the late 60s when retentions in the middle market were in high 60s; 70 was considered a pretty stable month. This quarter in the middle market, we were like in the 87%; it just shows you the magnitude of the difference and really I think just reinforces the way in which we run the business.”

Travelers 4Q14 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. Full transcripts can be found at Seeking Alpha

Returned $4 B to shareholders

“we returned over $4 billion in capital to our shareholders through dividends and buybacks, while still maintaining our significant balance sheet strength.”

Industry is much more stable than it used to be

“We remain optimistic about our ability to successfully execute these strategies. Our own observation is that the markets in which we do business remained fairly stable. For the last several years, we have shared with you that while we recognize that we could be wrong, we were skeptical of the concept of the old-fashioned severe insurance pricing cycle, where a bell to go off and it would be a few years of very high price increases and then another bell would go off and there would be significant price declines.”

Advanced analytics have contributed

“Advanced analytics and a more demanding regulatory and oversight environment have also meaningfully contributed. While there will always be changes in pricing both, increases and decreases in response to changes in loss costs, expense , interest rates or changes in real or perceived risk, as there are in many industries, we continue to believe that the amplitude of the cycle has narrowed substantially.”

Underwrite the account, don’t just blindly price to trend

“We have not issued an edict to the field that says get trend on every account. That would be a dumb thing to do. We say to them manage the long-term return given everything you know about the agent, the account, profile of that account and manage it thoughtfully and if that means that account is going to renew flat for a year or two, that is okay, so that is really the comment about stair step that I was speaking to.”

We really have no interest in the reinsurance business

“We really have no interest in the reinsurance business in the broadest sense, so to the extent that there are the things happening in the arena Bermuda or otherwise, we largely do not pay attention to it and I do not really have a view on the value that has created there. I am not knowledgeable I am not close enough to it to have a thoughtful view.”

We are a return driven organization

“We have always said about acquisitions and this hasn’t changed. It is very, very much the same. We are a return-driven organization, the principal view that we would take for looking at anything is what would it do to our return profile over time. Would it potentially improve our return dynamics and that could be either in magnitude or in volatility. To the extent there is diversification, geographic expansion and providing lower volatility returns that could meet the threshold also.”

We are big enough, we don’t need to be any bigger

“We are big enough, we do not need to be any bigger, but we are driven about returns, driven by them.”

If you tell your underwriters to grow, you’ll get growth

“Underwriters will do, good ones, will do with precision what you ask them to do, so you better be really good at knowing what you are asking of them….If you tell an underwriter grow, they will. We don’t tell them that, we tell them to find thoughtful ways to deploy capital. If they cannot, it is okay. It’s okay. No one will ever be asking you why they did not meet their volume budget, because first time you asked them that they will meet at the next quarter and all of us understand that you would never speak to loan officer that way at the back”

The feedback loop is so much faster than it was 20 years ago

“I can’t overstate how different that is than it was 20 years ago. It is just quite different. I think most importantly is that the feedback loop between what goes on in the field and what is really – knowledge at the home office to ways going on is stunningly shorter than it was 20 years ago, so the ability to act and react to changes not just cyclical big time changes, but local changes on offices, on market, on company in a local place is just that much better.”

Travelers 3Q14 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. Full transcripts can be found at Seeking Alpha

Hit a 15.2% ROE

“as demonstrated by our operating returning on equity of 15.2%. In addition to posting very strong financial results, the underlying dynamics in our businesses are showing very solid performance and give us continued optimism about our future financial results.’

Have reduced shares outstanding by 51% in last 8 years

“he Board of Directors initiated the current share repurchase program on May 2nd, 2006 a little over 8 years ago. On May 1st, 2006 the day before the board authorization Travelers market capital was $30.2 billion and we had approximately 696 million shares outstanding. Since that time, we’ve repurchased over 416 million shares at an average price of $56.50 per share issued a net amount of approximately 51 million shares mostly in connection with share-based incentive comp awards, and now have 331 million shares outstanding at the end of the current quarter, a 52% reduction in our common shares.”

Since returns are strong, can start to grow the top line

“as overall returns have become more consistent with our long-term objective, we have begun to see improving top line trends. We have said many times that volume is never our goal, but that we always seek opportunities to add business that meets our target returns.”

You can’t always depend on the kindness of strangers

“I have also been asked whether we would be interested in building a book of business and in effect arbitraging it against the reinsurance opportunity. And I am always mindful that when you take on a risk on the right side of your balance sheet, there is some permanence to it; and the reinsurance profile on the left may or may not be permanent. And you’ve got to be very cautious and careful about not finding yourself in an unreinsured position or in a mismatch, which can happen and has happened.”

I am hopeful that this business will prove to be less cyclical than it was in the past

“I am hopeful, maybe even cautiously optimistic, that we will not – and I said this by the way 10 years ago – maybe not 10, maybe 8 years ago. I personally believe that the property and casualty business will have a meaningfully lower level of cyclicality. Never said zero, but always said a less, lower amplitude of that cyclicality. There are a host of reasons why I believe that. Analytics and data are just one, but a very important one.

And I think it has proven on the way down before we entered into this cycle. I think it has been proven here on the way up. I am hopeful, maybe even optimistic, that that will turn out to be true on the way down. We don’t see anything in the way in which business is done at the point of sale in the market that would suggest that we are at a precipice, that would suggest that something fundamentally is going to change next month, next quarter, or frankly even next year.”

Wild cyclicality is bad for everyone

“Wild cyclicality up or down is actually bad for everybody. And better insight, better data, better analytics is actually better for everybody. You get better analysis, you get better, more thoughtful pricing related to risk.”

Travelers 2Q14 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. Full transcripts can be found at Seeking Alpha

11% ROE

“Operating income was $673 million or $1.93 per share. Operating return on equity was 11.04% and we continue to make great progress on lifting our returns, largely in response to continuing very low interest rates and continuing volatile weather. Who would have thought that we’d be talking about a polar vortex in July and at 2.5% ten year treasury in 2014”

Decline in rate doesn’t mean the environment has gotten more competitive

“we just caution everyone from reacting to the decline in the headline number as an indication that the environment generally has become meaningfully and broadly more competitive.”

Retention is best indicator of a competitive environment

“We’ve always said, and have for many years, that retention is going to be the leading indicator of a changing competitive environment.”

In the 90s retention got down to the 60s

“I’ll go back to the last really difficult pricing environment that we had, which was back into the ‘90s, you’ll see retention rates in middle market drop down into the high 60s. And that really defined what was going on, there was tremendous churn in the marketplace. It didn’t happen overnight, but retention rates declined and that followed, that led, if you will, the overall rate dynamic”

Everyone needs to feel good to retain the customer

“the real emotional content behind retention is agent comfortable, market comfortable, customer comfortable, a terrific set of circumstances where everybody feels good and fair and equitable in the relationship. And that will encourage accounts to stay where they are. And that’s a really good thing, it’s good for the accounts by the way.”

The industry has evolved over the last 20 years

“I think much better management in the industry than wasn’t the case 20 years ago. You look at capital deployment philosophies; it’s different than it was 20 years ago.”

“And I’ve listened to other companies and how they report, I don’t think we’re unique in that regard, I think – I listen to other companies and I’m impressed by what I hear and the nature of controls and procedures and the thoughtfulness and I think is a consequence the magnitude – there’ll always be some cyclicality here and there’s cyclicality in every business. But I said, coming close to probably 8 or 9 years ago, I thought that the amplitude on the way up as well as the amplitude on the way down were going to be much more narrow.

I think that was true obviously on the way up we will now see it on the way down. So that’s what I think, and we’ll find out, I think the leadership in this industry has come to understand that attempting to grow market share by marginally changing price, and actually creating share holder value from it is impossible. I think about it all the time, and I don’t know how to do it and I’m not sure anybody else does. And so we’ve all learned within our own cultures and our own environment and our own strategies, how to manage our businesses to create shareholder value, that’s what we’re supposed to do.”

A storm can hit commercial lines unevenly

“when you get into tornado, hail the, the impacts in the commercial business can be really random and volatile.

Personal lines you have a storm and it hits the neighborhood and we can kind of see the claims. In business insurance you can hit our risk or not hit our risk and it could dramatically change the number. So that’s the perspective relative to kind of normal. PI about normal this quarter BI a little bit worse than normal.’

Travelers 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Strong ROE

“Our operating return on equity of nearly 18% in the quarter is the highest since the fourth quarter of 2009 when we posted just over 18%.”

“record net and operating income per diluted share of $2.95, operating ROE of 17.8%, and a GAAP combined ratio of 85.7% – were exceptional.”

Look at everything, but you don’t need to take on every risk

“Our own situation is really unchanged, which is that we’ll look at anything because you always learn by whatever you look at, but our interest is very selective.”

No sense in getting bigger just for the sake of being bigger

“We’ve achieved a level of performance and returns and profitability that we at least domestically don’t need to be any bigger to be successful. If we can be and continue to be successful, that’s fine. Being bigger and being less successful is a bad trade-off, so we’re always evaluating whatever we look at in the context of return on invested capital – on invested capital, importantly. It’s margins, profitability, all that, so I’d say that our interest domestically remains unchanged but relatively highly selective.”

Just because high ROE doesn’t mean that’s the new run rate, we’re still not at mid teens long term ROE

“We’re not there – most definitively, we’re not there. In order to achieve our goal, and it’s not vague by intention, it’s vague because our business is simply not as precise as some people tend to think. This mid-teens ROE over time, to achieve that, you’re going to have to achieve periods of time where you exceed mid-teens, because there will be good weather, there will be bad weather, and that’s going to move back and forth. So we still have to make progress, so there’s no particular change in our approach, our philosophy, what we’re trying to achieve.”

Not even sure mid teens ROE is possible in this interest rate environment

“At this level of interest rate, I’m still not 100% convinced that it is achievable in today’s environment.”

It’s critical to have a strategic goal

“We said several quarters ago – I’ll reiterate it today – it remains an aspirational goal. I think that it’s critical in an organization to express a strategic goal, and absent something fundamentally changing that’s permanent, sticking with it. It’s not just words that we use here in a webcast; it’s embedded in the systems by which we price product, it’s embedded in the systems by which we evaluate risk selection. It’s what people in the field, underwriters, understand their mission to be, so we don’t mess with it lightly. We leave it as is because it takes so long to get the DNA of an organization to reflect these strategic initiatives.”

PC insurance less cyclical

“We’ve been talking about much less amplitude in the cyclicality of our business for a lot more than three to five years. I think you can go back almost 10, certainly 8 where it began to get increasingly clear to us that the factors that we thought had contributed to that remarkable cyclicality were being moderated.”

Better data

“They were much better data. I know that we led that effort because of our history, but we’re not unique in the sense of one and only in that regard – better data, better analytics broadly across the business and the industry, particularly amongst the best competitors.”

Sarbanes Oxley helped mitigate the cyclicality too

“I think that Sarbanes Oxley actually had a meaningful impact on our business. It brought boards of directors into the discussions of reserve setting and the controls and procedures behind it. Those were really good things not because they changed bad behavior, because you can presume that in my comment – I don’t mean it that way – but it improved the processes.”

If you sacrifice margins for growth, you end up sacrificing returns on capital

“We also don’t believe that you can on the margin grow your business by cutting price marginally. I think – we think that’s just a fool’s approach to the business. If you really want to use price as that type of a competitive approach, you’ve got to cut it to the point where you’ll accept materially lower returns than anybody else. That will change it, and my guess is it will be at a level of profit that is simply unsupportable for the long term. So we at least, we reject the notion that you can moderate pricing to grow your business.”

Don’t grow by cutting price, grow by identifying where you have a competitive advantage

“We try really hard to grow our businesses, and in many cases we’ve been extremely successful. It’s not been based on price; it’s been based on risk selection – importantly, identifying the competitive advantages that you have in your business and applying them more broadly to business opportunities that arise. “

Chubb 4Q13 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Combined ratio sitting at a healthy 85.5

“Our combined ratio for the quarter was 85.5 compared to 111.2 in the fourth quarter of 2012. The impact of catastrophe losses in the 2013 fourth quarter was 2.1 points compared to 29.7 points in the fourth quarter a year ago due to Storm Sandy. On an x cat basis, our combined ratio was 83.4 compared to 81.5 in the fourth quarter of 2012.”

Seeing slightly more competition on rates. Increases to slow

“As our book approaches rate adequacy, we’d expect the size of rate increases to decline. That said, during the fourth quarter, we did see signs in the U.S. of increased competition in certain lines, most notably, large commercial property programs”

Sever winter weather classified as catastrophe

“To date, weather has resulted in 2 declared catastrophes related to the freezing and winter storms that occurred in 19 states between January 3 and January 8. Both cats entailed freezing, ice, snow and wind, with the majority of our losses related to water damage from frozen burst pipes”

14% ROE

“We generated annualized GAAP and operating ROE in the quarter of 14.4% and enjoyed very strong book value growth of 4% from the prior quarter.”

What constitutes a large client

“what we mean by large when we’re talking about accounts. And by that, we’re talking about premiums basically in excess of $1 million for the standard commercial lines. That portion of our portfolio is about 6% to 7%. Now that 6% to 7% includes for CCI property. It includes casualty, workers’ comp, umbrella/excess, et cetera.”

Really just a slight change in competitive environment

“when I said we saw a tad bit more competition and a bit of retention drop, it was just that. We’re talking just small incremental amounts. And yes, there’s been 1 or 2 new players that has entered that market. They brought in some additional capacity. I think that we have seen the prices go down on a magnitude of anywhere from, say 5% to 15% on the deals.”

A rational environment

“post-9/11, the type of increases that we were seeing, they were accelerating and they decelerated. This is a much different marketplace. People have very good metrics in their — our competitors are trying to be very rational. I don’t think reinsurance is driving it to the same degree that it had in the past. People’s primary carriers, our primary competitors, have very strong balance sheets. I think they’ve got a lot better analytics as we do today, and people are trying to find niches where they have competitive advantages and compete there.”

Low potential investment returns keeping everyone in check

“don’t forget, we are in a much different investment income and interest rate environment today as well. So that also comes into play.”

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.”