W. R. Berkley Corporation (NYSE:WRB) Q3 2023 Earnings Call Transcript

W. R. Berkley Corporation (NYSE:WRB) Q3 2023 Earnings Call Transcript October 23, 2023

W. R. Berkley Corporation beats earnings expectations. Reported EPS is $1.35, expectations were $1.14.

Operator: Good day and welcome to W. R. Berkley Corporation’s Third 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 a 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 31st, 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.

Rob Berkley: Lisa, thank you very much, and good afternoon all, and I guess a second welcome to our Q3 call. We appreciate you dialing-in and your time and your interest today. Joining me on the call, at least on this end, is Bill Berkeley, Executive Chair, as well as Rich Baio, EVP and Chief Financial Officer. We’re going to follow on our typical agenda where momentarily I’ll be handing it over to Rich. He’s going to give us a bit of an overview and flag some highlights from the quarter. I will follow with a few comments of my own and then we’ll be pleased to open it up for Q&A. Before I do hand it to Rich, I just wanted to make a couple of quick observations and really one macro one in particular and that is on the results of the quarter.

I think by any measure, I call it a 20% return is really an outstanding result. The fact is there were no one-time this or one-time that in there, that is truly when you strip it down to its fundamentals, that is how the business is performing. And these great results are really a reflection of a team. This is a team sport, not an individual sport. So my congratulations to all of our colleagues throughout the organization on a job very well done. I have the good fortune of being their mouthpiece in these types of settings. But again, this achievement was a team achievement. To that end, obviously it was a quarter where the organization was able to demonstrate our value proposition to capital. The idea of less risk for more return. We’ve talked to you all in the past about our, we are preoccupied with a concept that we refer to as risk-adjusted return.

You can see it in moments like these that we just saw in Q3 very clearly. When as our Chairman says, the tide goes out, you get to see who’s where and what. You could see it in both aspects of our business activities, one being underwriting, the other one being investing. Our underwriting results of a combined of a 90 during a period that had meaningful cat activity is really exceptional. Additionally, on the investing activity, clearly a book yield of 4.5%, while maintaining a quality of AA minus, and additionally, a new money rate of approximately 6%, that is no accident either. These results, these achievements are a result of our colleagues, their focus, their discipline, and their expertise. This call certainly is about reviewing what happened in the third quarter, but I would suggest even more than that, it is about how the table is set, not just for the coming quarters, but the next several years.

So I think we are very well positioned. I think there is a fair amount of visibility. We will be getting into that in a bit more detail later in the call. But at this moment, let me hand it over to Rich and he’s going to walk us through some numbers. Rich, if you would please?

Rich Baio: Of course, thanks Rob, appreciate it. Net income increased 45.7% to $334 million or $1.23 per share with a return on equity of 19.8%. Operating income increased 30.1% to $367 million or $1.35 per share with an operating return on equity of 21.7%. The company’s strong performance was driven by another quarter of significant underwriting profits, bringing the nine months year-to-date to a record, despite consecutive quarters of outsized industry-wide catastrophe losses. In addition, net investment income accelerated throughout the year to yet another quarterly record. Drilling further into the underwriting results, net premiums written grew 10.5% to a record of more than $2.8 billion. We significantly grew the insurance business by approximately 17.5% in other liability, short tail lines, and commercial automobile through rate and exposure.

Decreases in workers’ compensation and certain professional lines certainly tempered the growth in net premiums written bringing the overall insurance segment growth to 12.1%. The Reinsurance & Monoline access segment was flat quarter-over-quarter with continued growth in Monoline access and property reinsurance. Pre-tax underwriting income was $259 million with the calendar year combined ratio of a 90.2%. The current accident year combined ratio, excluding catastrophe losses, was 87.9%. Current accident year catastrophe losses in the quarter were $62 million or 2.3 loss ratio points, compared with $94 million in the prior year quarter or 3.9 loss ratio points. The prior year favorable development was approximately $1 million, and the current accident year loss ratio ex-CAT was 59.6%.

The expense ratio increased 0.3 points to 28.3% from the prior year and remains in line with our nine months year-to-date. The small increase is attributable to the same items we’ve communicated during the past couple of quarters, that being the change in outward reinsurance structures impacting seating commissions and increased compensation costs along with startup operating unit expenses. We also continue to invest in technology and areas to drive operational efficiencies. Record quarterly net investment income of $271 million grew by 33.6% with the core investment portfolio increasing by 59.3%. There are two main drivers for the significant increase in the core portfolio, including the rising interest rate environment benefiting the reinvestment of fixed-maturity securities as they mature or are redeemed.

And second, the increase in the size of the portfolio, due to continuous record levels of operating cash flows. In the third quarter, we reported another record level of operating cash flow of almost $1.1 billion. To put some context around this point, the book yield has grown from 3.8% in the first quarter of 2023 to 4.2% in the second quarter to 4.5% in the current quarter on fixed maturity securities. The current nine-month year-to-date book yield of 4.2%, compares to 2.6% for the prior year period. It’s also worth noting that almost 81% of our net invested assets are in fixed maturity securities, cash, and cash equivalents. The credit quality of the fixed maturity securities remains strong at AA minus, and the duration is ticked up to 2.4 years from the consecutive quarter of 2.3 years.

Partially offsetting the increase in the core portfolio is net investment income from investment funds. You may recall this asset class is generally reported on a one-quarter lag and will more closely correlate with the broader equity markets. Accordingly, reported net investment income from investment funds was approximately $4 million, representing a marginal improvement from the first-half of 2023. We continue to proactively manage our capital position as you saw our announcement of a $0.50 special dividend per share late in third quarter in addition to our regular quarterly dividend. This brings total capital return to investors on a year-to-date basis to approximately $775 million, with stockholders’ equity increasing to more than $6.9 billion.

Book value per share before dividends and share repurchases on a year-to-date basis has increased 13.7%. And with that, I’ll turn it back to you, Rob.

Rob Berkley: Rich, thanks very much. That was great. So, I’m just going to offer a couple of other quick observations on the quarter and how we see things unfolding from here, and then again, we’ll move on to the Q&A. Rich touched on the top line, obviously, building momentum again, as promised. This is a reminder to some number of quarters ago, we agreed to disagree with a couple of partners as to what we thought was an adequate rate. They did not think that we needed that much rate and again we decided to part ways that had a meaningful impact to the negative on our top line. That pig is making its way through the python to the extent that it’s of interest, that was in the auto line. So we wish them well and we’ll see how that unfolds.

Speaking of different products, obviously the marketplace for the past 12, 18, 24 months or so has been very focused on property and with good reason. I would suggest to you, as we’ve commented in past quarters, auto liability is one that people need to continue to pay close attention to. I think as far as product lines, when it comes to social inflation, auto liability has the biggest bullseye on its chest. And by extension, that clearly spills over to excess and as well as umbrella. That having been said, just in general, social inflation continues to burn and we do not see that abating anytime soon. Quick comment on workers comp, I know we’ve touched on this in the past. We continue to be of the view that one needs to be very mindful of medical cost trend.

We went through a period of time where it was pretty benign. We think that is shifting very quickly. We’ve touched on it in the past. We think it’s going to become more and more into focus for a broader audience over the coming quarters. In addition to that, the benefit that comp was getting both as it relates to COVID and frequency and then on the heels of COVID a tight labor market and wage inflation, I think those benefits have run their course and clearly wage inflation is slowing. I mentioned a moment ago the topic of social inflation. We are very focused on it. You can see it in our rate increases. Ex-comp coming in at 8.5%. We have every intention of continuing to stay on top of it. We think the market is accepting our rate increases, and you can see that in part demonstrated by our renewal retention ratio continues to be at approximately a steady 80%.

Another number that I find useful, perhaps others do as well, is the paid loss ratio. This is a number that we flagged for you all in the past, again coming in at a very healthy 47.9% for the quarter, which obviously, given where we are booking the business, would leave one to believe that the strength of our IBNR speaks for itself and would encourage people to look at our IBNR relative to case and IBNR relative to total reserves to the extent you’re interested in the topic. As far as the investment portfolio goes, again, Rich went into some detail on this. I touched on it earlier. But without a doubt, it’s not just about the 4.5% that we’re getting on the book yield. I think the bigger story is the new money rate today of give or take 6%. You compound that with the strength of the cash flow that the business is experiencing.

I think it’s again setting a table for a very encouraging future. The duration we did bump out from Q3 to Q4, I think it’s more likely than not over time you’re going to continue to see that push out. But the fact is, having kept it short the way we have has given us greater flexibility to take advantage of the higher rates in a more immediate or over a shorter period of time. Finally, and perhaps a little bit on the forward-looking and picking up on the comments about the investment portfolio, nobody knows with certainty what tomorrow will bring, and there certainly is the potential for volatility to be around the corner. That having been said, you can see the business’s ability to weather a choppy time as far as CAT activity. You can see the rate increases that we are getting, and you can see how, quite frankly, I should say, we can see where the book yield is going.

So that all having been said, I think it’s very clear where the — how the business is positioned for the coming quarters and the coming years, and the earnings power of the business is likely to be accelerating from here. Lisa, I’m going pause there, and why don’t we go ahead and open it up for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] We’ll take our first question from Mike Zaremski with BMO. Please go ahead.

Rob Berkley: Hi, Mike. Good afternoon.

Mike Zaremski: Hey, good afternoon. Maybe to your comments about the table being set and kind of a bit more visibility, you know, is it — I just want to just make sure that, you know, this visibility is increasing coming from the investment income, whereas, kind of, you do talk about there being still continued uncertainty on social inflation and medical cost trends, et cetera. Just curious to the latter comments. Has Berkley changed its, kind of, view at all materially over the last couple months or a few months on loss costs, trends?

Rob Berkley: I think social inflation continues to be a challenge. But if you look at the rate increases that we’re achieving ex-comp of 8.5%, I think that we’re in a comfortable position to be able to more likely than not absorb whatever that inflation trend is sending our way. So do I think there’s opportunity for the underwriting result to show improvement over time? Yes, I do. That having been said, when we’re generating a 20% return, there is no need to push the envelope. I think if you look at the paid loss ratio and how it’s been running for some number of quarters, that should be a pretty good leading indicator. As far as the investment portfolio goes to the point that you raised, Mike, I think it’s pretty straightforward.

You know, you can see what the new money rate is, you know what the duration is, and you can just — it’s not that hard to calculate the upside from here. And as, you know, time goes by, we’re just locking in every day, higher and higher rates and pushing that to reach out. So, from my perspective, certainly there’s a lot of upside on the investment portfolio, but I would encourage people not to discount the opportunity on the underwriting side either.

Mike Zaremski: Okay, understood and maybe as a follow-up on the top line growth and you mentioned there were some partners you know part away with that might have led to some of the diesel, I don’t know if that was last year, but you know this year we’re seeing some momentum in the top line and PW just like pricing let’s say being flattish? Any story underlying that you’d like to share a trend line?

Rob Berkley: I think it’s just at least what I was trying to articulate to make a long story short. The momentum is returning on the top line, because those relationships that we’re in the process of parting ways with are getting towards the tail end. And the impact on the top line is diminishing with every passing quarter. As a result of that, it’s impacting the overall less and less. In addition to that, the other piece that I should mention is there are parts of the professional liability market that are really, really competitive and we’re just not going to follow things down the drain. If it doesn’t make sense, we’re not going to do it. And it’s a similar story with workers comp. Fortunately, there’s lots of opportunities in other parts of the marketplace and you know we are going after those and that’s what’s driving the growth that you see and I think you’re like — more likely than not to see more of that.

Sure is the rate increase a component of it? Yes, but it’s certainly not the whole story.

Mike Zaremski: Thank you.

Rob Berkley: Yes.

Operator: We’ll take our next question from Elyse Greenspan with Wells Fargo.

Elyse Greenspan: Hi, thanks, good evening. My first question is I guess, you know, building upon the growth conversation, you know, as you guys had alluded to rate growth within the insurance book did pick up in the quarter, obviously, pushes and pulls across the different business lines. Rob, just based off of your overall outlook, you know, how would you expect, I guess, premium growth within that book to trend not only in the fourth quarter but also in 2024 as well?

Rob Berkley: Obviously, at least nobody knows exactly what tomorrow will bring, but as you would see over the past several quarters there has been the momentum that’s building and there’s nothing that I see today that’s going to take the wind out of that sale.

Elyse Greenspan: Okay. And then in terms of the prior year development, so $1 million overall favorable, was there any noise in either insurance or reinsurance within that $1 million or any noise within different accident years that you want to call out? I know you typically wait for the 10-Q, but anything worth flagging tonight?

Rob Berkley: Yes, I don’t think there was anything particularly noteworthy. Rich, did you have anything that he wanted to flag on the call?

Rich Baio: I would agree with your comment, Rob, I don’t think there’s much, you know, in terms of from a segment perspective, pretty benign, you know, in each of the segments, so I think that’s all I would comment before the queue.

Elyse Greenspan: Okay. Thank you.

Rob Berkley: Thanks, Elyse.

Operator: We’ll take our next question from Mark Hughes with Truist.

Rob Berkley: Hi, Mark, good afternoon.

Mark Hughes: Yes, thank you. Good afternoon, Rob, Rich. General liability, you had another acceleration this quarter, anything going on there are you seeing some sort of rehardening perhaps in GL?

Rob Berkley: I think that it’s a combination of things, one is rate, and two, certainly our E&S businesses in particular are benefiting from that as well, and our Specialty businesses overall. I think there’s a recognition, two things; one, there’s discipline, people are taking the rate, and two, I think that there is a growing percentage of the audience that is looking to do business with carriers that they can have confidence in and that’s not just about ratings and in the eyes of the insured, I think it’s also distribution partners, where they are trying to narrow the number of relationships they have and have those relationships the more important and really focusing on partners that they know will be there tomorrow in a predictable and consistent manner.