All right. So why don't we go ahead and get started? The first session here. First, I'd like to say, you know, thanks for being here. We've got Rob Berkley, W. R. Berkley, CEO with us. And I wanted to first start with a more broad strategy update. Excuse me. Maybe if you could take us through some of your strategic objectives and, you know, just at a high level, what, what are the most important things that you're focused on over the next, you know, 12-18 months?
For us, Alex, yeah, I would sort of bifurcate that between what I would define as day-to-day operational activities, our desire to make sure that we are maximizing the opportunity. We are an organization that is in the specialty business, which inherently would suggest you're focused on, you're all about maximizing the opportunity in an opportunistic way. So it's been a very dynamic environment with inflation, both social and economic, and we have been trying to fully capitalize on that. In addition to that, perhaps a slightly different nature would be data technology. Certainly very much a flavor of the day that everyone's talking about, everyone's reading about, and we, as an organization, are no exception, where we are actively trying to build out tools that are going to allow us to make better decisions in a more timely way.
And a lot of people tend to think about that through a lens of, oh, it's for the actuaries, and they're using it to sort of refine their analysis. But from our perspective, the applicability is far broader than that. It applies to pricing, risk selection, claims, distribution management, and so on. The last piece that I would touch on, that we have been working on, we continue to work on, and will be working on in the future, is what I would define as being somewhat more distribution agnostic. From our perspective, the customer being the insured is king, or queen. Our view is that we want to meet them anywhere they wish to be met, so whether that's wholesale, whether that's retail, or whether that's direct.
So we are well on our way to a long journey, but we're well down the path of offering a variety of different products through different platforms, and again, different platforms engaging at different points of the marketplace from a distribution perspective.
So next, I wanted to go ahead and move right into the pricing conversation, if that's all right. I'd say in 2023, companies seemed to remain fairly disciplined despite net investment income picking up. And, you know, if we maybe set aside workers' comp and financial lines, which maybe I'll come back to, but bit of a different animal, how do you see that developing as we move into 2024? You know, will companies continue to stay disciplined? Like, we've had this tailwind from exposure to top line that, you know, I can't tell if, like, maybe that's what's kept people disciplined, but what's your perspective on all that?
I think we all have a shared appreciation that a business like ours, the P&C space and the industry in general, there are two components to the economic model. There's the underwriting activity, and there's the investment activity. And ultimately, the two of them come together, hopefully both viewed through a lens that we'd call risk-adjusted return, and that generates the ultimate return. Obviously, as one component may be struggling, that would put more pressure on the other to deliver. So perhaps more specifically to your question, as you see investment income accelerating, is that potentially going to undermine the underwriting discipline and the need to generate underwriting margin? And history would suggest the answer is yes. That having been said, even if it's yes, I don't see that happening anytime soon.
So really unpacking that a little bit more, why is it not going to happen tomorrow? It's not going to happen tomorrow because if you go back over an extended period of time as to how companies have positioned their fixed income portfolios during that extended period of lower interest rates, you saw companies not just compromising on quality, but pushing out that duration. As a result of that, they're somewhat stuck. So are they benefiting on a new money rate being higher today than it was yesterday? Yes, clearly, that's the case. That having been said, unless they're willing to take a very large hit to book value, they have to work through that longer duration that they had signed up for.
So directionally, your point, phrased as a question, yes, I agree with it, but I think it's going to take an extended period of time for us to get there.
Got it. That's very helpful. So the other thing I wanted to ask you about as we think through, you know, 2024 and, margins in particular, I think you have benefited to some degree over, from unit exposure over the past year. Different products, maybe to different degrees. A little hard from the outside to tell just how much, you know, that helps. Is that potentially decelerates with inflation beginning to come down? You know, what kind of impact does that have for the industry, for W.R. Berkley?
Look, there is no question that the insurance industry is not insulated from the health and well-being of the economy. Ultimately, the condition of our clients has an impact on us. Much of the industry prices its products off of payrolls, workers' comp, or receipts, and so on, or appraised values. That having been said, there's nothing that leads me to believe that the momentum is going to hit a wall. I think what's really been driving the pricing cycle as of late has been, and ultimately, much of the premium growth, not all, but much of it, has been loss activity. The cycle, if you will, is really driven by fear and greed, and that's what has, is, and in all likelihood, will continue to drive the cycle.
The insurance industry went through a period of time where loss cost trend was relatively benign. Then we had an extended period of time, as of late, where we are finding ourselves with frequency of severity on the shorter tail lines, particularly property. And on the liability side, we have this phenomenon called social inflation, which is essentially just larger awards coming out of the legal system. As a result of that, those two factors have driven, quite frankly, the fear factor, where all of a sudden, companies are waking up, both insurers and reinsurers, and saying, "This is not sustainable." And that is what introduced discipline, and ultimately, the concern or the fear started to overshadow the greed.
In my opinion, when you talk about top line, yes, the health and well-being of the economy has an impact, but ultimately, what has really driven the firming of the marketplace has been loss activity and the industry adapting to those new realities.
Very helpful. And, you know, this may be in the same vein of all this conversation, but I guess when we think about E&S markets and maybe the more specialized areas of admitted, it feels like that's grown a ton. There's a ton of momentum there, and there's a lot of things you can point to that, you know, are structural about it. But there's also, you know, people that do the historical look around, you know, loss ratios, and at some point it tilts back, right? And what's your perspective on the structural aspects and the, you know, potential for that to persist, you know, more indefinitely?
Just to make sure I understand, when you say structural, I just want to make sure I understand what you're referring to.
Sure. I'd say there's an argument that, you know, many of these specialty underwriters have much better expertise in the more complex risks that are increasingly coming to market.
Okay.
You know, that there's aspects of that, that won't shift back towards the admitted markets.
I think the reality is that the world is becoming a more complicated place. Risks are becoming more complicated as an extension, and there's an ever more important place for a specialty writer because of that reality. The standard markets have very fixed appetites that, yes, from time to time, ebb and flow a bit, but it is much more, if you will, black box underwriting. From our perspective, will appetites of the standard market, yes, ebb and flow? Without a doubt. But when the day is all done, given the pace of change in the world and how there are new risks rearing their head every day, the specialty market is a good place to be.
I think that you are going to likely, more likely than not, see growing concern within the standard market around particularly some of the liability lines that would fall under the specialty category. I think that there's a lot of pain that's still gonna come through stemming from the 2016 through 2019 period, and I think that's coming more and more into sharp focus for many market participants. In particular, I would say some of the reinsurers, I think, are starting to learn about something called social inflation that many of us have been grappling with for five years.
I want to come back to that point on some of the casualty reinsurance later. You know, first, before we leave some of the pricing commentary, I did want to ask you about property. I know there was a more specific process you were going through on some of the property exposure and specifically, like, some of the non-cat property. Can you provide an update on just, you know, sort of where we are? I think we-- you, you've phrased it as the, you know, the pig moving through the python.
Yeah.
How far is that pig now?
I would say we're pretty far through the snake at this stage. Obviously, it takes a little bit of time because it's not just on a written basis, then you have to earn that through. But I think much of the refinement that we have made is taking hold, and it's my hope that you would have seen a little bit of that in Q3. And it's you know, still early, but I'm hopeful you'll see more of that in Q4, and that will continue, those benefits will continue to present themselves going forward as well. So I think the long story short is, I think we're well on our way.
I think there are some other realities, and that is there, there's been a change in the weather pattern, and I'm not interested in getting into a whole discussion about, climate change, global warming, temporary, permanent. I think there's a reality. There's something different today than what we saw yesterday... and how that instructs one to think about exposures, is important. You know, once upon a time, we sort of primarily worried about things such as hurricanes or earthquakes. Now there are parts of the country where you need to think about SCS, tornado, hail, straight-line wind, wildfire, other types of perils, flood, in a different way than you had to. Clearly, there's growing evidence that would suggest the hail belt has moved north and east from where it historically has been, and the industry moves slowly, to be very frank.
But I think that it is finally adjusting and adapting to these new realities.
So I wanted to return to the conversation of social inflation. You said something on your last earnings call I thought was interesting. I think you referred to an elongated tail associated with social inflation. I just wanted to see if you'd unpack that a little bit. Is there something that's incremental that's been developing that you're seeing that caused you to say that or am I-
Yeah, I think it's just I offered the comment then, but it wasn't necessarily something that we had just seen in the 90 days prior. It's something that we've been seeing percolating over time. You know, we've for some number of years have been talking about this concept of social inflation, which again is really just a legal system that is handing down awards that are considerably higher than what they would have been at moments in time in the past. What I was referring to with specifically as far as the elongation of the tail was really more as far as the incurred tail goes, not so much necessarily the paid tail, though there's incremental impact on the paid. It's really much more the incurred.
It's really, it's being driven by a plaintiff bar that are taking new tactics where, you know, the latest or one of the latest approaches they take is that they will effectively lie in the weeds until the eleventh hour and then come forth with some extraordinary demand. So as opposed to once upon a time, there was some type of claim event and you would get notice, oftentimes you get notice at the eleventh hour. So that does not allow that issue to come into focus in as timely a manner as it once would have. So it creates a bit of noise, but ultimately, what, excuse me, what it does is it instructs us as to how we need to be thinking about IBNR and how we're setting up reserves initially to anticipate this slight change in the incurred pattern.
Next, I wanted to ask you about reserves. You know, I think prior year development, in general, has been pretty benign for you all in aggregate. There's been, you know, some conversation around, well, you know, you're not totally immune to some of the things that happened on the older casualty reserves, but, you know, the way you've booked more recent accident years has obviously offset some of that. You know, just wanted to get your perspective on that dynamic and, you know, maybe in particular, if you have any way for us to think through, you know, how seasoned we're getting on some of the older stuff and, you know, at what point that's gonna die down relative to, you know, I think what looks like pretty strong reserving on the recent accident years.
So, as opposed to sitting here and trying to put lipstick on the pig, that everyone can see it's still a pig just wearing lipstick, here, here's the reality. The reality is that this is an industry where you sell your product oftentimes many years before you know your cost of goods sold. During the 2016 through 2019 period, the industry did not appreciate how things were starting to percolate and the legal environment was starting to shift. By the way, ourselves included. And it was sort of 2018, 2019, when it started to come into clear focus for us, that this business that we had been writing, ultimately, there's this phenomenon called social inflation that was gonna have a dramatic impact on our loss costs. That business had already been written. It was in the oven baking.
So ultimately, the question was: What do we do to try and catch up to what loss costs are in as timely a manner as possible and look to address that? The 2016 through 2019 year, in my opinion, I believe the view is shared by others, has proven to be challenging for the reasons that I just described for the industry. I think some market participants saw it earlier. Some who saw it earlier actually chose to respond. And then there are others that are having to play catch up more, or later in the game, I should say. So when I think about those realities, then ultimately the question is: What do you do going forward? And as you would have, those of you that follow the company, we publish the information on a quarterly basis, what our rate increases are.
We started to take serious underwriting action. Yes, certainly, how it instructed us from a selection perspective, a terms and conditions perspective, but also from a pricing perspective, and the rate increases that we've gotten over the past couple of years are quite significant, again, to try and and play a bit of catch up at this stage. So today, where are we? I think we're in a pretty good place. As far as the 2016 through 2019 year, how baked is that? Well, I can't give you a silver bullet answer, but Alex, what I would share with you is this: that the average life of our loss reserves is approximately three and a half years.
If you believe that we started to get our arms appropriately around things, sort of 2019-2020, somewhere in there, and you then take that mile marker and you apply three and a half years, that could arguably give you a good indicator as to how far along we are in getting that sorted. As far as some of the more recent years, yeah, I think that we're in a pretty good place. But I think after the reminder that we got coming out of the 2016-2019 year, of that reality of, you know, you never know exactly what tomorrow will bring, we're just not gonna declare victory prematurely on those years. Having said that, I expect, in my personal opinion, more likely than not, there's gonna be good news coming out of those more recent years.
Very helpful. Next topic on reinsurance. I guess, first, maybe just be interested in your view of the pricing environment headed into next year. You know, I think you guys looked at it as, you know, an opportunity, but didn't really leg into it, sort of some maybe thought you might at the beginning of this year. Are you seeing anything incremental, getting you more excited about property catastrophe at this point?
Well, I think we wrote a fair amount of cat-exposed property on the reinsurance front, both a bit of treaty and a bit on the facultative side. So more than we had, did we turn into RenRe overnight? Absolutely not, and we have no intention to do so, but we're pleased to participate. I think it's not just about how much premium you write per se, it's also about what type of exposure that you're taking on. So I would tell you that there are parts of our portfolio where you know, we're maybe writing a similar amount of premium, but we have half the exposure. So there's a limit to how much volatility we want to introduce to our business.
The amount that we're willing to entertain, obviously, is, to a great extent, driven by rate adequacy. So are we doing more today than we did yesterday? Yeah. We'll have to see how things unfold at 1/1. I expect we'll probably do a bit more again. If we go through the 2024 year, and it's relatively clean, I think there's a reasonable chance that you're gonna see CAT pricing start to erode, and then we'll have to assess how quickly that's eroding and how quickly we go from having a foot in the water back to having a toe in the water.
Got it. And then maybe similar question, but on the casualty side, you mentioned, you know, some of the reinsurers are having to rationalize what, what's gone on in, in some of the reserve and social inflation impacts there. Are you seeing impacts of that in pricing that, that are beginning to make that any more attractive, or is it still a place that you gotta be careful?
I think it's on the reinsurance front, it's still a little bit early. I was at a conference in the fall, where a lot of industry participants get together, and it was shocking to me to hear several very large reinsurers coming and sharing with us their observations and talking about this new phenomenon called social inflation, and how concerned they were about it. And, you know, we couldn't help but pause and scratch our head and politely ask what, you know, what planet they've been on for the past five years or so, because it's nothing new. Ultimately, I think that as far as the broader liability lines for reinsurance, I think you're more likely to see discipline returning to that part of the market over the next 12, 18, 24 months.
And simultaneously, unless we see a lot of CAT activity or a meaningful amount of CAT activity, I think you're gonna see that eroding.
Understood. Maybe, you know, reinsurance question, but, you know, maybe from the perspective of a buyer from your primary side. You know, with, you know, it becoming more difficult to get coverage on some of these secondary perils and, and the, the shifting, you know, alley, alley that hailstorms come through and everything, how, how are you managing that risk on the primary side? You know, any changes to the way you're buying reinsurance that, that we should think through?
I think that we as an organization have somewhat of a luxury, and it's by design, where we are not a large limits player. If you look at our portfolio of the policies where you're legally allowed to have policy limits, approximately 90% of our policy count has a limit of $2 million or less. So inherently, that means we are less captive to the reinsurance marketplace, and again, that's by design. We don't wanna find ourselves in a situation where the tail is wagging the dog. And by extension, we have the ability to be a little bit more of an opportunistic buyer. Essentially, reinsurance is just renting somebody else's capital, and we have a choice as to whether we're using ours or we're renting someone else's, and we look at the economics.
That having been said, the reinsurance marketplace, which once upon a time, the relationship between reinsurers and cedants, was very much a partnership. For us, we bifurcate it. There are some reinsurers that are truly our partners throughout the cycle and there are others where it's very much of a opportunistic transactional relationship. And we have a we draw a clear distinction between the two. I think the last piece as far as our reinsurance buying, and I think some people have picked up on this, others, perhaps less so, is we created a vehicle a few years ago, which I think makes sense at any point throughout the cycle, but part of the catalyst was we could see that the reinsurance marketplace was likely gonna be shifting.
And this, this platform is called Lifson Re, and it's effectively a, an internal platform or, or almost sidecar that takes a 30% quota share on everything that we buy with-- that has more than one participant in the treaty. Why does this matter? Why am I flagging it now? Because the fact that 30% of a treaty is placed on day one, puts us in a much better negotiating position with the reinsurance marketplace, just because of the simple realities of supply and demand. We have less to place, and, that puts us on firmer footing for the negotiation.
So I wanted to circle back on workers' compensation. I know you've sort of been vocal over time on the severity trends there, and it seems that, you know, it's getting louder, some of the, you know, potential issues that could arise around loss trend. What's the latest view from you on that? What do you think about some of these higher loss trend indications that we've heard from, you know, one broker in particular I can think of? And, I mean, is there gonna be any relief from the NCCI anytime soon?
Well, NCCI, which I think is a great organization, and I had the good fortune of serving on the board twice, has a really exceptional history and a consistent one of maybe getting it right, but always being late. So I think that NCCI has a lot of data, but they tend to be late in making the call, and I think, again, history would support that. As far as the marketplace goes, I think the COVID period and the benefits that stemmed from the frequency trend sort of threw things a little bit of a curveball. In addition to that, I think the bigger driver around severity trend in particular is the questions around medical costs.
From our perspective, when you look at a claims dollar within the workers' comp space, over half of it is associated with medical. If we just sort of put that to the side for a moment and think about the situation that most healthcare providers find themselves in, large health systems, they are in a terrible pickle. Their economic condition is very challenged, and while there continues to be demand for their product and service, their economic model, to a great extent, is, quite frankly, broken. They had many of the challenges that came as a result of inflation, economic inflation, including payroll, but much of their revenue is locked in through multiyear contracts. If you are a large healthcare system, you were stuck as far as repricing your product because of the multiyear agreement that you had with payers.
But your costs and what you had to pay for labor, among other things, kept going up. So as a result of that, I think there's been a pinch point in the cost around medical, and I think that pinch point is just being relieved right now as those multiyear deals between payers and providers are being renegotiated. And I think medical inflation in general, you're gonna see more and more pressure on that front. And workers' compensation, just going full circle to a comment or two before, you know, medical is a big part of every claims dollar within the comp space, and I think that's gonna be a reality. The other overarching reality is, you know, rates have come down dramatically across the country. Eventually, you hit bottom.
And from our perspective, between the rate cuts, which tend to be driven by what people see in the rearview mirror, along with healthcare costs and where they're going, we think that can set the table for a challenging time for comp in the future. But it takes time.
Yep, understood. Shifting gears a little bit on the investment portfolio, just be interested if you have any update on, you know, any allocation shifts. I know the duration's been a little on the lower side. Any views on what's going on in the real estate market and if that's an opportunity?
Yeah. So, you know, as far as the investment portfolio goes, I think at a high level, we've been rewarded for the position that we took on duration. I think as a result of that, the impact of book value for us was far more modest than the impact that many of our peers have seen. And in addition to that, going back to part of the conversation earlier, our ability to benefit from higher rates and, you know, has been turbocharged compared to many of our peers because of the duration. And obviously, our growth and our cash flow has been very strong as well. So there's a lot of momentum there.
As far as the portfolio and overall, I think given where fixed income rates are, there's less of a catalyst to feel like you need to seek out alternatives. So when we think about risk-adjusted return, not just on the underwriting side, but when we think about it on the investment side, you know, we think the fixed income space is an interesting place to be. As far as real estate goes, I think the decision to sell a large asset that we had in London was proved to be a good one. And as far as what we currently have, you know, we feel comfortable with that. I think as far as real estate goes, the world is gradually coming back to work. Maybe it's not five days a week, but people still need space. But it is, I wouldn't say, a slow walk.
It's been a little bit of a crawl, which seems to be accelerating, and for those that are in the space, I think it's turning into a world of haves and have-nots. If you're in A markets with, you know, A buildings, I think you're in a pretty good place. If you're in a B market, or especially even if you're in an A market with a B building, I think that's a tough road to hoe, and fortunately, we're not—that's not a place we are. We're in a good place.
Got it. Next on capital. You know, we've seen sort of premiums to surplus, which is the very high level metric that the outsiders can kind of look at, go ticking up, and a lot of that's because of rates and but also unit exposure going up. At what point does that need to be worked down for the industry? How do you all look at capital? Do you have runway to keep pursuing the growth?
Well, at this stage, as of late, we've been generating capital more quickly than we can use it, hence the returning capital to its owners, whether that be through repurchase or dividends, which have been the two tools that we've been primarily using. As far as our position with capital goes, we feel very comfortable where we are. The way we think about it is we have a view as to how much we need, what we think our growth prospects are, and then how much cushion we wanna have above and beyond that. And then that will instruct us what type of surplus we may have, which then leads to the question, what is the most efficient way to return it to the owners?
In a perfect world, we'll use all the capital and then some that we have. I think you would have seen our growth ticking up as we made our way through the year, and our hope is that, you know, we will be able to continue to take advantage of market opportunities and grow the business. But as far as excess capital goes, I think you will see us, to the extent we have it, continue to look to return it to the shareholders. The only other piece on that is, as some, perhaps all are aware, the rating agencies, particularly S&P, are in the final stages of refining their model, and ultimately, we'll see how that plays out. But our expectation is that it will be a positive thing for us.
One quick one on homeowners insurance. I know it's not really, you know, much of a business that you dig into, but you did have this, or you have this Berkley One-
We do.
product, and so you've sort of approached it, I think, more from the E&S side. And just interested on what, what you think of what's going on in that market right now with the catastrophe changes and the pricing challenges with regulators, and is that an opportunity for you?
As far as personal lines goes, you know, maybe taking half a step back, Alex, in the final 37-
Yes.
36 seconds that we have here. We, as an organization, have zero interest in participating in commodity activities. We have a great interest in participating in product lines where we can differentiate ourselves based on intellectual capital and expertise. We, as an organization, in all likelihood, will never have the cheapest cost of capital, and quite frankly, we will, in all likelihood, never have the most efficient factory floor. So ultimately, as opposed to trying to play the game the way others do, the question is, how do we play the game in a manner that makes sense and plays to our strengths? Specialty lines, people, knowledge, expertise, et cetera. The homeowners marketplace is, like much of personal lines, a commodity business. Cost to capital, efficient factory floor, those are the big drivers.
We, when we talk about the consumer or personal line space, have elected to play in a particular niche, that being the high net worth or private client space, where customers are willing to pay more because they recognize the value proposition that you bring to the table. So for us, I think, yes, we do play in the space, but in the broad sense, but if you peel a few layers back, it's really a very different activity, addressing a very different audience that has a very different set of priorities. As far as the marketplace goes and some of the challenges that we see in places like a South Florida or a California, or even places like Texas or perhaps in Illinois, and quite frankly, in the broader sense, across the country, this is just the reality of people starting to accept loss costs.
And the industry has an uncanny ability when there's been a lot of loss activity, to try and discount that and say, "Yeah, it was just a one-off." But ultimately, when you see that pattern year over year, and you're seeing the destruction of capital, eventually people will say, "No more." And when you have a regulatory environment, which we all know is challenging for the insurance industry, that is, has oftentimes, not always, but oftentimes, a political bent to it, that can lead a bad decision, a bad situation, excuse me, to a worse place. And effectively, that's what we're seeing in many of these markets, where people can't buy insurance because carriers are saying, "I don't wanna play the game anymore, because you won't allow me to charge what I need to charge, given the exposure." And then all of a sudden, you get a vacuum.
That's the simple reality of it, and ultimately, hopefully, between regulators and consumers and carriers and everyone, all, all other stakeholders, we can find a, a better point of equilibrium.
Got it. Well, thank you very much for being with us today.
Thank you for the invitation.
Mm-hmm.
Appreciate everyone's time.
Thank you, everybody.
Have a good holiday.