W. R. Berkley's CEO Hosts UBS Global Financial Services Conference Call (Transcript)

May.11.12 | About: W.R. Berkley (WRB)

W. R. Berkley Corporation (NYSE:WRB)

UBS Global Financial Services Conference Call

May 8, 2012 01:40 pm ET


William R. Berkley – Chairman of the Board and Chief Executive Officer


Brian R. Meredith – UBS Securities LLC

Brian R. Meredith – UBS Securities LLC

All right, good afternoon, everybody. I think we’re going to get started, let people just kind of mosey on in. I’m Brian Meredith. I’m the Property Casualty Insurance analyst for UBS. Our next presenter, I believe, is the longest tenured CEO in the property Casualty Insurance industry, and actually has been through three cycle turns, which gives him an immense amount of experience and it’s really incredibly enjoyable listening to him.

Bill Berkley is the Chairman and CEO of W. R. Berkley. With us today also we have the President and COO, Rob Berkley. We’ve got the CFO, Gene Ballard, as well as the Head of Investor Relations, Karen Horvath.

And, with that, I’m going to turn it over to Bill.

William Berkley

Well, good morning. We think that this business is about creating long-term value. It really takes actual knowledge about how the business works. And unfortunately so many of the companies we see are staffed by people who have superficial knowledge who have no depth of thinking and no real experience other than in one bit of the business. We think that it requires a real understanding of all the lines of business to manage the exposure inherent in each line of business, because in fact, the risks and exposure inherent in each line is different. It isn’t all of the same.

You have to understand what levers you want to pull and how you move the specific pieces. You want to be sure you keep the best people. Low turnover is a certain sign of what may well be a very successful company. And you have to put it all together with a culture that leads to value creation, customer service, meeting the demands of the marketplace, all at the same time being able to compete effectively.

We think we can do that. We’ve grown at the right time in the cycle. A cyclical business is particularly interesting. You can’t just grow all the time. Growing in a down cycle is like the reverse of dollar cost averaging. It’s growing when the business is getting worse as opposed to when the business is getting better. And when you are interested in keeping the money and keeping the profits, you want to write the most business you can at the highest price and let it leave you as the prices dissipate.

We’ve been successful in doing that and we think we’re in the process of getting do that again. We’re growing now mainly through our new operating units that we’ve added since 2006. Although our older units, who in the aggregate shrank by more than 25% in the soft cycle are beginning to show some traction and growing on their own. Here you can see both contribution of our new businesses and the various pieces that contribute to our quarterly growth.

If you go back and take a look at that chart, in the center of the chart, it shows you what our growth has been. And growth is in even in every quarter. But as you can see, business continues to grow, pricing is better and better, and we’re enthusiastic about improved profitability.

But all our units don’t grow at the same pace. One of the things people worry surprisingly disappointed it was that we only grew a little over a 11% in the first quarter after having grown 18% in the prior quarter. But the nature of our business is such that various businesses grow at different paces depending on what was being competitive at what point in time. And in fact some of our businesses shrank, and we’re really pleased about that, because we don’t want businesses to growth when it’s not going to be profitable.

When you look at our growth and our individual operating business, you can see they have different characteristics. They grow at different rates, they are all different, different scale, their price increases are all different, their exposure change and each of them represents what we think is opportunity out there for all of them. And we don’t think they can all behave the same way all the time. We think what they do in fact is each seek out the right opportunity to optimize where we consider our mantra risk adjusted written and we are pretty comfortable that the people who run our businesses do that.

When we look ahead our new units build the platforms that allow them to seize the opportunity. We continue to believe that we will grow when we can and we will be able to seize those opportunities. We consistently focus on being sure that we build on the long standing relationships of our people, of our company, we take the infrastructure that Berkley has developed and build and great people can come and plug in their relationships and that growth is due not because we have an objective of growth but because they seize the opportunity for profitability.

We clearly have demonstrated and this chart will look the same no matter how far back you went. We have a loss ratio that is substantially better than the industry. And it continues to be so.

On investment portfolio is primarily fixed income. We’ve shortened the duration slightly. Our yields are relatively unchanged after tax although pre-tax yield is down. And we’re seeking out opportunities where we can find unusual characteristics try to maintain our yield. There is no question of pre-tax yield is going down by probably three tenths of a percent this year, could be as much as four tenths of a percent. We think our after tax return will go down by substantially less.

We do it by giving up immediate liquidity and by basically finding our opportunities that will give us that yield. We’ve also been able to find equities that offer attractive yields in relatively stable environments. But overall, we think our investment returns will remain fairly stable, clearly, if we keep shortening our duration that’s going to be something that will come into play.

When we look at the allocation of our investment portfolio, you can see that the fixed income portion is still right up there. That average duration is down one tenth of a year. Average quality is unchanged. The only think that will probably change is slight increase in the common stock portfolio but very small.

We think that risk adjusted return is the cornerstone to what we do and it’s the risk element, that’s the first thing we think about. When you look at this chart it demonstrates how we measure our risk in what we do. The dark blue line talks about how each of our companies overseen by Berkley Corp actuaries, the actuaries at each company and then parent company oversight provided by our Chief Financial Officer by Rob and our Chief Corporate Officer. All target that risk level that probability of being write on at 60%. But when you add all those up, the accumulation of all those gives you a combined company selection that mathematically gives you a number that’s closer to 68%, it’s pure math. It’s because in the aggregate, that’s where the numbers come out.

Every quarter we review reverses completely. We want to be conservative; we don’t want to be cut short. Each company has its own level of conservatism and that is leveraged when we look at the companies in the aggregate. We are really pleased with our reserving posture and we think it’s materially better than it’s ever been.

When you look at our performance, if you go back 10 years actually 12, was when we got out of the personal lines business. Our returns went up substantially, which is why the ten year record is so much better than the 15 or 20 or the 25. We’ve striped back down gone through the difficult times of the cycle and here we are just finishing at the bottom of the cycle.

We think if we look at the next five years so those five years is added to it, it will be back up comfortably above 15%. We also think that if you look at our results compared to the S&P 500, we are comfortably beating that index for return over any measure you wish to have. While we haven’t done as well as Mr. Buffet, we’re pretty pleased with our results.

If you had invested in us, this would prove to be a pretty good time. Why it would be a pretty good time. We have a lot of leverage on the upside in a hard market. Two things happen, our returns go up dramatically and at the same time as our returns going up dramatically, the price people pay for our stock goes up anticipating those continued high returns. We think we’re right at the inflection point. We think our returns are going to move up substantially and we think the people, what people will pay for our stock will go up at the same time. So we’re quite excited. We think this is a pretty good opportunity.

There is a great correlation between tangible book value growth and total return. You can see by most measures, we are right at the top of that correlation. And we believe we will continue to be there and may be even we will be able to expand our position.

We think, this a great time for Berkley Corp. We think it’s a great time to invest in insurance stock overall and we think we represent the best opportunity within the property tax of the universe.

We think pricing is about to have its first period of significant increase on top of significant increase. We think a number of people are going to start to have adverse development, in the first quarter results you’ve seen a few. I think there are more to come.

We look at and see people beginning to retrench. We think the problems in Europe will enhance our opportunities both in the U.S. and globally as the adverse impact on company’s capital accounts will give people like us substantial opportunities to expand not just in America, but in other places where Europeans have been aggressive and we’re no longer be able to be so aggressive. They’ll lack the capital and they’ll lack the banking backing that’s required.

We think if the stars were aligned for our company, this would be the time. So we’re very excited, we think those opportunities will be greater than they’ve ever been. And we think the next three or four years likely represent a unique opportunity for our company. I would be happy to take any questions.

Question-and-Answer Session

Brian R. Meredith – UBS Securities LLC

Great. So we’re going to open up for questions. I would like to start off with the first question and then we will open up to the audience. Bill you talked about high teens ROEs and obviously a great outlook here for the company. I guess my question there is when we think about how high teens ROE, how much is that predicated among improving investment returns versus simply just improving the combined ratio, as well as perhaps leveraging the capital base a little bit more?

William Berkley

Obviously, Brian, it requires all of those things and as impact will. We’re impacted more than anything by underwriting results, so underwriting results are the biggest factor. The second biggest factor is how much leverage, how much business we can write? With high underwriting margins and if we can increase to write at 1.2 to 1, it starts to happen very quickly. How long will investment returns stay where they are? I can’t predict. There is still a lot of opportunities to invest that probably 3.5% or 4%.

We’re not going to buy, well, there are no AAAs anymore I don’t think, but we’re not going to get AA yields that would be quite that high. But there are opportunities. You can buy Johnson & Johnson common stocks to yield over 3% and as adjusted for us, it’s just shy of 5% yield compared to Johnson & Johnson sort of 2%.

So there are opportunities to get yield. I think that the longer out you go the more risky that yield is, but I haven’t been aggressive when I said in the team, the comparable period in the cycle we were in the mid to high 20s with those higher yields. So I think that the high teens is very sustainable even with interest rates where they are.

Brian R. Meredith – UBS Securities LLC


William Berkley

Yes. Your microphone, go ahead.

Unidentified Analyst

(Question Inaudible)

William Berkley

I think that there were fewer pools at the beginning of the quarter and people were bit more aggressive in price increases. And as we got them at the end of the quarter, it was clear people were concerned about their volume and they were a bit more price competitive. So I think that it was nothing that is not normal in a cyclical period of change. So I think that when we look out and we saw what was going on, that cyclical period of change sort of normal, but I wanted to get across the idea that this is not a straight up thing where everything is going to go up and we’re going to see 15% and 20% price increases.

We think the price increases for the year will be sort of 8% maybe little better. And we think that’s great. And by the end of the year that means it’s 8% on top of what was sort of 4% at the end of last year. So we think that’s pretty good and we think that we’re going to be looking at price increases that we’re going into in 2013 and probably 10%, 12%, 14%, so I think we will have higher price increases next year.

We’re pretty happy about that and so we just wanted to give everybody an indication that this wasn’t rocketing price increases just everybody raising prices as much they could. It was an improving pricing environment, prices were definitively going up 6.5% and the quarter was not bad, we were okay with that, we expected it to be more as we move through the year.

So many people have this vision that when you say prices are going up that it’s a hockey stick, that things are going to go straight up and that we’re going to have this tremendously profitable instantly. That’s not what happens unless there is some particular event that dramatically changes where things are. Are there questions?

Unidentified Analyst

I’ve got one Bill. I’m just curious, what area of your business are you most excited about right now about the prospects at your regional, specialty, international anything in particular that you say, gosh this is, I know you’re in good shape, but really good shape here?

William Berkley

I think there are several areas that are exciting, I think that our international businesses are very exciting, because of the upheaval in the EU, there is some opportunities throughout the world where the European companies dominate. So that also means in Asia there are some opportunities because the European companies have a dominant role there. So we think those are some of the opportunities we think in our energy related business and mining businesses, again substantial opportunity.

And when we look ahead, although it’s not here yet, we think the excess in surplus lines business is going to start to show more dramatic improvements, because that’s the place where people start to cut when they realize that just raising prices is not going to be enough. The terms and conditions are really the cornerstone of people getting out of the way of that business.

So lots of people write business that they have no idea what it’s about, so it’s not only wrong price, it’s wrong terms and conditions. We hear about this tanning salon thing in New Jersey is in the news. And in fact, lots and lots of companies excited to write health spas and used to be you’d write a health spas as long as it didn’t have a tanning salon adjoining it. And all of a sudden, the market got soft and the exclusion of tanning salons was crossed out. What you can’t protect yourself either have to write it or if you have a tanning salon not write it. So all of a sudden, you are going to start to see people write health spas, that had tanning salons, just prolong them out. We are not writing them, it doesn’t matter what out of this. So those are the kind of thing start to happen.

So terms and conditions change and whole lines of business get thrown out from the standard market. That’s what really going to give guts got to the excess in surplus lines businesses.

Unidentified Analyst

One question quickly lot of growth opportunities, can you kind of give us a sense of capital position and how much growth you could probably put on, given your current capital position?

William Berkley

Well, we think it’s certainly we write that we could earn more than 15% and we think we can write it probably 1.35 to 1.52, one of our business was continued to be very profitable that would probably mean, we could grow from the next two years if we could add 60% to our business. So we think we have lots of capacities rollout without any additional capital.

Unidentified Analyst


William Berkley

And maybe even a little more.

Unidentified Analyst


William Berkley

And I think generally speaking, rating agencies are tolerant and they measure based on exposure not on premium. So we could demonstrate that this mainly was from price increase, they are not concerned. So in the first quarter 6.5% of our growth came from price increases. Only 4.5% came from additional exposure. So that’s going to be approximate idea.

Unidentified Analyst

Bill, one other quick one, when we think about capital management, you’ve historically done a lot with share buyback, I’m wondering it’s in the current environment whether there is any thought about increasing potentially the payout from a dividend perspective?

William Berkley

Historically, we’ve modified, we modestly increased our dividend we don’t make a decision until the board meeting. I think it will have to do with two things, our view of taxes and taxes or dividends still have favorable tax treatment and there is also rate of growth. If we are growing at 18% or 20%, we might be very cautious about our increases, if we grow slower than that, we might have more leeway. I will absolutely build the relationship between return on capital and our growth rate.

Brian R. Meredith – UBS Securities LLC

Anything else from the audience?

Unidentified Analyst

You’d mentioned that you think there will be more adverse development with some of you competitors. I guess can you flush out what areas if any you were thinking about or anything else from that that sort of topic?

William Berkley

I think it will especially be in worker’s compensation. I think a lot of people have not addressed that. I think a number of people haven’t adequately reserved for last year’s CAT and we’ll have more of that deal with. So I think that if you look at the numbers, people have reserved in disproportionate ways so some people have adequately reserved and some people haven’t.

And my guess is that in a number of other areas such as products liability, you’re going to see people who have been aggressive out there and professional. And in professional areas when people price the business at half of the right price what they think is historic loss ratio, but the historic loss ratio needed to double, when you’re selling the product enhance the price.

So I think those are the particular areas, so far would be professional liability, worker’s comp number one, professional liability two, I think number three is carry over from the CATs of last year. And I think it will be concentrated in the few companies where as they really want to pay much attention.

Brian R. Meredith – UBS Securities LLC

Bill on that topic could you give us your views of loss trend, I know you’ve talked, do you think it’s right now are in 2% to 3%, what your thoughts are going forward on inflation?

William Berkley

We wouldn’t change our view of 2% to 3% and clearly economic activity is more uncertain today than it was three months ago, people were more optimistic. I would doubt that loss trends would accelerate much I think we’re pretty much in that same spot. I think that we have to worry about government policy. And there is something people haven’t thought much about and that is changing economic theory it was built around a single government’s behavior and it’s been sort of modified because when the U.S. ran a big deficit, China funded the deficit, so we didn’t have inflation.

But we may be approaching a point where a lot of countries are going to run deficits which would cause somewhat of global inflation. That global inflation could in fact create issues for insurance companies. I’ll take one step back and then I say if you’d look however at the track record of insurance property, causality insurance businesses do better in an inflationary environment than in non-inflationary environment contrary to what the general thinking is those are the statistics.

Brian R. Meredith – UBS Securities LLC

It’s kind of interesting. Great, well, if we don’t have anymore questions, we get a breakout session right now up in Louis the XVI East on the fourth floor. I want to thank Bill for his presentation. Thank you.

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