W. R. Berkley Corporation (NYSE:WRB) Q2 2023 Earnings Call Transcript

W. R. Berkley Corporation (NYSE:WRB) Q2 2023 Earnings Call Transcript July 20, 2023

W. R. Berkley Corporation beats earnings expectations. Reported EPS is $1.14, expectations were $1.1.

Operator: Good day and welcome to W. R. Berkley Corporation’s Second Quarter 2023 Earnings Conference Call. Today’s conference call is being recorded. The speakers’ remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words, including, without limitation, beliefs, expects or estimates. We caution you that such forward-looking statements should not be regarded as representation by us that the future plans, estimates or expectations contemplated by us will, in fact, be achieved. Please refer to our annual report on Form 10-K for the year ended December 31, 2022 and our other filings made with the SEC for a description of the business environment in which we operate and the important factors that may materially affect our results.

W. R. Berkley Corporation is not under any obligation and expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of the new information, future events or otherwise. I would now like to turn the call over to Mr. Rob Berkley. Please go ahead, sir.

Robert Berkley: Breanna, thank you very much and good afternoon, all. And again, welcome to our second quarter call. Along with me on this end of the phone, we also have our Executive Chairman, Bill Berkley, as well as Chief Financial Officer, Rich Baio. And we’re going to follow our typical agenda where momentarily, I’m going to hand it over to Rich, who will walk us through some highlights from the quarter. I will follow up with a few observations after Rich makes his comments and then we will be opening it up for Q&A. Before I hand it over to Rich, a few comments from me. Based on everything, I can see — it would look as though the stage is being set for what one might call yet another but-for quarter for the industry. It would seem as though cat losses don’t make a difference.

And bizarrely, from our perspective, people seem very quick to back out cat losses as though it’s not real money. But ironically, they don’t seem to back out the premium associated with the exposure that just had the losses. So again, from our perspective, it’s no wonder why the industry struggles oftentimes to make good risk-adjusted returns. In order to do that, one needs to recognize the exposure taking on and not pretend that it doesn’t exist, particularly when it occurs. Through our lens, we are in the capital management business. We are focused on risk-adjusted returns and around here, cat losses count. In our opinion, it is not Monopoly money. It is real money. And when we measure how we are doing, we do not back out cat losses. Perhaps we are a bit of an exception to the industry but ultimately, we think it is an economic reality and that’s not something we shy away from.

So with that, Rich, if you would, please.

Richard Baio: Of course. Thanks, Rob. Net income doubled from the prior year quarter, resulting in $356 million or $1.30 per share. Annualized return on beginning of year equity was 21.1%, driven by strong underwriting and record investment income results. Operating return on equity was excellent at 18.4% and the heightened industry-wide catastrophe activity in the quarter enabled us to once again demonstrate our underwriting discipline in challenging environments. Simultaneously, our decision to maintain a short duration, high credit quality investment portfolio has enabled us to benefit from higher interest rates. Net investment income increased almost 43% to a record $245 million. The core investment portfolio grew 71.6%, driven by a higher book yield at 4.2% in the quarter compared with the preceding consecutive quarter of 3.8% and second quarter of 2022 of 2.6%.

Second quarter operating cash flows of $709 million, combined with the first quarter, brings us to a first half year record of almost $1.2 billion and strengthens our ability to grow investable assets at higher interest rates. A duration of 2.3 years also positions us well to reinvest assets at a higher new money rate on fixed maturity securities compared to the roll-off of existing investments while maintaining our high credit quality of AA-. The investment funds reflected a loss of $1 million, driven by a decline in market values in certain funds in the consumer goods, real estate and financial services sectors. Please keep in mind that we report our investment funds on a 1-quarter lag. Pretax net investment gains in the quarter of $59 million is comprised of net realized gains on investments of $47 million and an improvement in unrealized gains on equity securities of $21 million, partially offset by an increase in current expected credit losses of $10 million.

Turning to underwriting results. Underwriting income was $265 million, representing a calendar year combined ratio of 89.6%. Current accident year catastrophe losses were $54 million or 2.1 loss ratio points compared with the prior year of $58 million or 2.5 loss ratio points. Prior year development was favorable by $3 million or 0.1 loss ratio points, bringing our current accident year combined ratio ex cats to 87.6%. Current accident year loss ratio ex cats was 59.5%. The expense ratio ticked up 0.4 points to 28.1% in the quarter, consistent with the expectations we previously communicated. The 2 main contributors include the change in reinsurance structures as well as increased compensation costs and start-up operating unit expenses. We’re working hard to identify and implement innovative strategies to drive operating efficiencies and leverage technology in order to reduce operating expenses across the entire organization.

Closing out the underwriting discussion with premium production. We increased gross premiums written by 9.3% to a record $3.3 billion and net premiums written increased 8.7% to a record $2.8 billion. All lines of business grew in the Insurance segment, with the exception of professional liability and workers’ compensation, while property reinsurance grew in the Reinsurance & Monoline Excess segment. Stockholders’ equity remained strong at almost $6.9 billion after returning more than $320 million of capital to shareholders in the quarter. We repurchased almost 5.1 million shares for $292.5 million at an average price per share in the quarter of $57.79. In addition, we paid regular dividends of $28.3 million. The combination of these capital-related actions for the first quarter including the special dividend translates to $614.5 million returned to investors on a year-to-date basis or 9.1% of the beginning of year stockholders’ equity.

Rob, I’ll turn it back to you. Thanks.

Robert Berkley: Rich, thank you very much. Very helpful. So look, I think the market continues to not operate in any type of lockstep where major lines, as we’ve discussed in the past, continue to somewhat march to the beat of their own drum. In addition to that, we continue to see the marketplace struggling with trying to strike the balance between rate need and keeping up with loss cost trend, on the other hand, a desire to grow. This is an industry where you can, practically speaking, grow as quickly as you want to. It really becomes a much more challenging exercise, though, when you were looking to achieve a certain loss ratio which will deliver a return that is acceptable in the end. For us, rate adequacy to support a reasonable loss ratio and deliver an acceptable return has, is and will remain a priority for us.

I believe that this has been demonstrated over time through our results and, obviously, our continued focus on making sure that we are keeping up with trend comfortably. A couple of soundbites on the marketplace and major product lines. And I would hope it will dovetail in with some of Rich’s comments and where we have been growing and parts of the marketplace that we find less attractive and we’re playing a bit more defense. For starters, speaking of defense, I think public D&O within the professional line space is clearly a place that one needs to pause and tread carefully. We are seeing the pricing erode at a very rapid pace. Clearly, there has been good margin in the business but that seems to be whittling away quite quickly. As far as liability lines and maybe under the umbrella of social inflation, we continue, particularly in the auto space or especially commercial auto, to see great challenge.

That’s also spilling over into GL and, ultimately, umbrella. And what I mean by that is the plaintiffs’ bar is very aggressive and they are taking a variety of new tactics. We think that we are able to keep up with it appropriately through terms, conditions, attachment points and, of course, pricing. But it is not lost on us that it is a challenging moment and requires one pay close attention. In addition to that, there is growing evidence that the tail associated with some of these product lines maybe extending a little bit, particularly on the claims — excuse me, on the occurrence front and to a certain extent, on certain aspects of the claims made upfront. Property, I think it has finally come into focus what needed to happen as it relates to cat-exposed properties and that seems to be spilling over into the non-cat or risk property account where additional rate is required.

The other piece that’s worth mentioning, at least through, in my opinion, is Tier 2 cat which I would define as severe convective storm, wildfire, winter storm, etcetera. These are things that were a bit of an afterthought. And I think after the past several years, they are becoming much more front of mind. Last comment as it relates to market conditions would be workers’ compensation, certainly a topic we have discussed on these calls in the past. There was a period of time during COVID, where clearly, there was a break that was caught on the frequency front for the industry. Frequency has returned to a more traditional norm but one of the things that we’ve been waiting for and we’re starting to finally see rear its head is medical inflation.

It is our expectation that you are going to see more medical inflation coming through to all payers, including the workers’ comp space. And as a reminder, slightly over 50% of every claims dollar associated with workers’ compensation stems from medical. So again, we can get into more details on that to the extent people are interested later on. Last comment on the marketplace. There continues to be this bifurcation between where the standard market, particularly national carriers, have an appetite. They seem to be very aggressive. But where they don’t have an appetite, that is creating great opportunity for the specialty, in particular, the E&S space. The submission flow that we continue to see remains robust and we are very encouraged with what the balance of the year likely holds and beyond.

And certainly, the early returns on July are positive. Rich talked about the top line. Obviously, we benefited from the rate increases that we continue to get, the ex comp rate increase during the quarter was 8.2% which was reasonably consistent with what we saw earlier this year. I think the loss ratio demonstrates, yet again, our strategy around how we manage exposure, how we have balance in the portfolio and how we think about risk and return. And certainly volatility is folded into that and, in our opinion, is a key component in building book value. As far as the expenses go, Rich touched on that as well. We remain very focused on making sure we’re thoughtful about the dollars that we spend and there’s nothing that leads us to believe that, that number won’t remain comfortably below 30.

And pivoting over to the investment portfolio, we remain — we continue, I should say, excuse me, to be rewarded for the position that we took as it relates to duration. Obviously, as we’ve discussed in the past, we benefited in having less of an adverse impact on our book value as rates moved up. And in addition to that, we were able to put money to work at higher rates more quickly than many of our peers. The new money rate in the quarter was probably around 5.25%-plus and as you would gather, relative to the book yield at 4.2%, that would suggest we still have significant upside and that will come into focus over some period of time. Rich mentioned the duration at 2.3, I think it was at 2.4 last quarter. Just to clarify that, that was really as much as anything, just rounding.

That having been said, we are paying close attention, as you would expect, for the window of opportunity; and when it presents itself, likely you’ll see that duration start to push out again. So all things being equal, I think a very solid quarter for us on virtually every front. I think when you take into account the cat activity that the industry faced, we fared particularly well. And in spite of that, our ability to generate a 21% return, I think, is really a great positive and a tribute to our colleagues and to our strategy and how effectively they are executing. When the day is all done, the goal of the exercise is to build book value. There is no question that is the goal. Ultimately, it’s when building book value, it is not just about the steps you take forward.

It is also about the steps you take — that you avoid taking backwards. So with that, Breanna, we’d be very pleased to open it up for questions. Thank you.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Elyse Greenspan with Wells Fargo.

Elyse Greenspan: My first question, Rob, is on the underlying combined ratio, the 87.6% in the quarter. I was just curious if there was anything one-off in that number. I know the last couple of quarters, we’ve seen some elevated non-cat fire losses that you guys have called out. Was there — were there any similar losses in the quarter or anything within that 87.6% we think about the level of margin we could see in the balance of the year?

Robert Berkley: That pig is still making its way through the python. I don’t have a specific number for how much it contributed but it is reducing, if you will but it did play a role. I think the other piece is just general mix as well in the portfolio. As you can see, it shifts a little bit every day as far as the underwriting portfolio. But yes, there was a little bit of non-cat property in there but it is diminishing.

Elyse Greenspan: And then in terms of the mix, right? So your rate ex comp in the quarter was 8.2, right? We can call that stable with the 8.3 last quarter. And I would have thought, like given we’ve heard of a lot of strength within property in the quarter that you might have seen the rates move up a little bit. Is that just a function of mix?

Robert Berkley: Yes. I think it’s a function of mix. And certainly, we are benefiting as much as anyone on the property front. At the same time, there are clearly challenges for workers’ compensation. And you can see that and, quite frankly, how much we are growing or not there. And on the professional liability side, as Rich flagged as well, D&O is very competitive. So the number that we give you is an aggregate, obviously but I can promise you that we are getting good traction on the property front. And the more cat exposed it is, the more traction we are getting and it’s significant.

Elyse Greenspan: And then one last one. The PYD, you guys said was favorable $3 million. I know you guys typically wait for the Q to give insurance versus reinsurance. But could you give us a sense of the magnitude in one segment versus the other?

Robert Berkley: Honestly, relative to the reserve position in both, it was de minimis. I think one — I don’t have the number exactly in front of me but one was a little bit positive and one was a little, I think, modestly negative, if bad [ph].

Operator: Your next question comes from Alex Scott with Goldman Sachs.

Alex Scott: First one I had is on the reserve sort of a follow-up on the PYD question. In your commentary, you mentioned occurrence and the tail potential yet extended. You mentioned plaintiffs’ bar and medical inflation and so forth. I mean I would think all of these things would potentially put pressure on some of those reserves. Can you talk about why you didn’t feel like you needed to make adjustments, sort of confidence in those reserves despite some of those headwinds that you see?

Robert Berkley: The answer is because a lot of what you — I was referencing and you just referenced are things that we have been anticipating. And when people have been asking us, why aren’t you dropping your current accident year? Why aren’t you dropping your loss ratios? Because there’s a lot of uncertainty out there. So we feel very comfortable about where we sit at this stage. We revisit and look at our loss ratios by product line at a very granular level with some regularity, that being every 90 days. And we think we are in a good place to be able to absorb what we are seeing.