I am Brian Meredith. I am the insurance analyst at UBS, for those of you who don't know me. What we'll do here is I've got some questions I'm going to ask Rob here, but then there's the ability for you all to ask questions. I'll ask a couple, see if anybody's got one halfway through the presentation, and then there's also the ability, I guess, to also ask them online if you want to do that, so let's start big picture, Rob. Talk about kind of key strategic priorities for 2025 for W. R. Berkley. How do we think about them? What are you kind of focused on? And maybe even take it a little bit longer, like three years, because the market's kind of in transition.
Okay. Well, Brian, thank you for the invitation to participate, and thank you to everyone for your time today. So what's on our mind? How are we thinking about things? How do we see things unfolding from here? For us, we approach the industry recognizing it's a cyclical business, and one needs to be opportunistic. We participate in different parts of the market, and at any moment in time, the opportunities in this part of the market are different from that part of the market, and we try and lean into those. But ultimately, for us, our goal is generating good risk-adjusted returns. That's where it starts, that's where it ends, and that's everything in between. We have been very focused on the loss-cost trend and making sure that we are appropriately keeping up with that.
Loss-cost trend, obviously, is driven by two particular flavors of inflation, one being economic, the other one being social, which has a greater impact on the liability lines. In addition to that, we have been very focused on interest rates and what that means for our economic model, specifically our investment portfolio. And we, for some period of time, have been taking advantage of an improved interest rate environment and leaning into that and moving our duration out a bit. Investment income is an important part of our economic model. I think when we went through an extended period of time where interest rates were somewhat lower, considerably lower, a lot of folks forgot about how that contributes to our financial results, and it's quite meaningful. So when we think about the business today, what's the punchline over the next couple of years?
I think you're going to see the underwriting income continue to grow. I think you're going to see our investment income continue to improve as we take advantage of higher interest rates, or said differently, our new money rate versus our book yield. In addition to that, from more of an operational perspective, probably a couple of areas that have been and continue to be areas of great focus and investment would be data as well as analytics. Further, that is more focused internally and how we make decisions. And then some of the technology is related to how we're delivering product both today and tomorrow. And along those lines of delivering product, our focus very much is around making sure that we are as distribution-agnostic as possible.
We are very comfortable distributing through traditional distribution, that being agents and brokers, but we are certainly open to and building platforms for alternative distribution, more of a direct model, if you will, and we've begun down that path.
Interesting. Thanks. The other thing too, Rob, I often think of W. R. Berkley as a growth company. P&C is not necessarily a growth business, but you all, I think, of as a good growth company, good compounding growth over time, good in the cycles. As we think about 2025, maybe talk about the opportunity set you have in front of you to really drive more top-line growth here. I know everybody uses this 10% number, and I get it. It can be a little bit below, but what's the opportunity set look like in 2025, given kind of the big macro landscape?
When we look at the marketplace, we are very optimistic about 2025. I think, first off, one needs to remember the need to keep up with loss trend. From our perspective, particularly on the liability lines, given the legal environment, you are going to see us continuing to push very hard on that in order to make sure that our margins are preserved, if not enhanced. That is certainly going to contribute to growth. In addition to that, there are different parts of the market where we see, quite frankly, dislocation, and that is allowing us the opportunity to grow more significantly. I think when you look out on the horizon, our ability to grow double digits should continue to be there for the foreseeable. Obviously, we are predominantly a specialty line player. In addition to that, I would highlight the E&S market.
There has been a great run for the E&S market, and we can talk about later on, if you wish, why that has come about. The point is that opportunity in the nonstandard market is somewhat shifting from property into the liability lines, which is a great focus of ours. Again, I think the opportunity for growth is there. We will be able to grow significantly organically, both through our existing operations, and more likely than not, we'll be starting some new businesses to add to the group.
Gotcha. Why don't we pivot there then and talk a little bit about the E&S opportunity here? It's been a massive growth market here for the last eight, 10 years, and what's going to keep it gaining share here and see the good growth that it's been seeing?
I think a lot of the growth going forward is going to flip from the property market to the liability market, and I think that's just responding to discipline that's coming into the marketplace. I think that you're seeing pressure gradually building coming out of the reinsurance market, and it's just in response to the loss-cost trend, so what do I think this all means for us? I think the property opportunity when it comes to E&S will continue, though it may not have the same level of momentum going forward, barring the unforeseen event. On the other hand, I think you're going to see a growing level of opportunity as underwriting discipline returns to the standard market.
Gotcha. Interesting. And I guess the other thing on some of the big price increases that we're seeing that I always think about is client fatigue. And how are clients kind of dealing with these massive rate increases we've seen over the last five, six, seven, eight years?
Look, when the day's all done, I'm sure people aren't happy about it. And for some, it's a struggle, but nevertheless, they can't afford to keep the risk themselves. And oftentimes, they are required for regulatory reasons or other business reasons to have insurance, and they have no choice. So our expectation is that they're not pleased, but quite frankly, our pricing is just in response to by and large market conditions and specifically loss costs. So those that are frustrated or perhaps experiencing fatigue, Brian, it's really, particularly on the liability side, just a reflection of the social environment and what's coming out of the legal system.
Gotcha. And maybe let's pivot there then to the social environment and kind of your thoughts on kind of the social inflation environment. It seems like it's been an increasingly difficult, challenging environment for social inflation for a while, continues to be. What's your view of it? What needs to get done to maybe take the curve and flatten it out a little bit here?
Maybe just taking a half a step back to make sure we're all working from the same spot. What is social inflation? It's just what is coming out of the legal system, the awards that are coming out of the legal system, and ultimately what that means for an insurance company's loss costs. That's it in a nutshell. What insurance carriers are having to grapple with is the fact that their loss costs continue to go up as the awards continue to go up. What we are doing, what the industry is doing, is responding to those realities and continuing to try and adjust. I think you're going to continue to see rates moving up in response to that, and we will be right along there. Does it create an opportunity? Yes.
In addition to that, you see the standard market, which is facing challenges as far as adjusting their rates to these new loss costs because we have a regulatory environment that is slowing that down or creating a pinch point.
Gotcha. Any green shoots on the social inflation? I mean, I know we've got some legislation in Florida that went through a year or so ago. Anything?
I think that some of what we're seeing, and this goes back to the topic of litigation funding, which has been turbocharging this trend, and there's an effort to create greater transparency around that, and hopefully, that will be coming, and then ultimately, we need some level of tort reform, and that really just comes about when society starts to recognize that in the end, it's not the insurance carrier that pays the bill or the defendant that pays the bill. In fact, it's quite to the contrary. It's everyone. It's society that pays the bill through increasing insurance costs.
Makes sense. Thanks. And let's pivot over to the margin question a little bit here. So rate continues to be in excess of loss trend on your insurance business. It's been so here for a while. In the last call, you mentioned that you expect underwriting margins to, at a minimum, stay stable to maybe improve here 2025, looking forward. Maybe you can unpack that a little bit for us. Kind of what are the key drivers? Expense ratio, loss ratio, reserve releases. How are you thinking about that going forward?
I think we have been very vigilant in trying to make sure that we are keeping up with trend for the past several years, and I think that there's some distinct possibility, given what we have been able to achieve, that assuming we keep our foot on the pedal, as I expect we'll do, you're going to see some margin enhancement in our loss ratio in particular, so we'll have to see how that unfolds. Nobody knows exactly what tomorrow will bring, but given the rate increases that we have been achieving, along with the shifts and adjustments to our book, as well as enhanced or better terms and conditions from a carrier perspective, I think that's putting us in a good place, we've been reluctant to declare victory prematurely, but I think you're going to see that coming through.
Yeah. And I guess that's another, I guess, question. Good things coming. But when I think about your core loss ratios, underlying loss ratios, the last couple of years, you've been pretty consistently holding a flat, maybe up a little bit, given this social inflation environment. So are we getting to the point, I guess, where you're significantly above that you're comfortable, that you've got it caught and everything?
I think we're getting more and more visibility on some of the old years, and the comfort is growing. And then we are extrapolating from that and what that means as far as margin in the business. I think there's a reality in that the industry was caught flat-footed sort of on the 2016 through 2019 year of underwriting and social inflation coming about. And there was some catch-up that needed to happen. And at this stage, that catch-up has occurred for some. I think not everyone's in the same place. There are others that still have some catching up to do. And we feel increasingly comfortable that we are in a good place. And through the passage of time, we will be having a higher level of confidence and will respond appropriately to that.
Gotcha. Great. Another one I wanted to ask a little bit about is businesses you've been starting. You're always starting new businesses, and you're, I think, somewhat unique in the industry. And then you do a lot of organic growth in businesses rather than acquiring them. Maybe you can talk about some areas of interest that you've kind of started businesses recently. Where are you investing right now in your business?
So just for those that are less familiar with the organization that I work for, we are a collection of specialty businesses. In fact, we have 59 of them. Of those, 47 of them are businesses that we started from scratch, saw a niche in the marketplace, found some people who had expertise in that niche, and we start the business. As far as more recent opportunities, we have expanded in the E&S space, particularly around excess and environmental. We have also expanded in the comp space because we see that market turning over the next couple of years, which will create an opportunity as well. We tend to find teams of people and identify market opportunities at all times, but particularly when there's dislocation in the marketplace, that creates a particular opportunity for us to try and fill that gap and capitalize on that dislocation.
Great. Thank you. I want to see. Does the audience have any questions before I keep asking them? No? Keep going. Oh, there's one back here.
Would you say that the area that you're interested in, that it's starting to mature more? Sorry. Did you hear that? Would cyber be an area you would look at as a specialty, or does it just come across other parts of the business?
So cyber is a market that we participate in, but we control it very tightly because of our concerns or sensitivity around systemic exposure. I do view, my colleagues do view cyber as a specialty product, meaning that you really need to have true expertise in that. Unfortunately, whether it be cyber or some other parts of the market, at times you see people coming into the marketplace, exposing capital that don't have the expertise, and that can create some upheaval in the market in the short run. Ultimately, that corrects itself because those people will have the experience and the results that they perhaps deserve, and then you'll see the pendulum come back the other way. So for us, cyber is an interesting marketplace. We do believe that it does require specialized skills in both the underwriting as well as the claims side of the business.
And we're pleased to participate. But again, for us, we have a great focus on making sure, as always, we're controlling the risk. And with cyber, there certainly is the potential for a systemic exposure that could be challenging.
Right. Why don't we pivot over to Berkley One? It's something that you hear more and more about in the press, and you're getting a lot of good press as far as the product goes. It's your mass affluent homeowners insurance product. Can you talk about kind of the growth prospects there? Is that going to be a more and more relevant part of the overall kind of profit and growth story here for Berkley?
The short answer is yes. We have been looking at what we would define or we've labeled the private client space for an extended period of time. Even before we started Berkley One about seven years ago, we were very much focused on the space. Why? Because we view it as a specialty line. We view it as a line of business where you can bring value to both individuals/consumers or insureds as well as capital through the utilization of knowledge and expertise. And that is really fundamental for our business. When we think about Berkley One and the opportunity, we think it's tremendous. We think that some of the traditional players have taken their eye a little bit off the ball. I'm not going to mention names, but there are some that have taken their eye off the ball because of mergers.
There are others that have taken their eye off the ball because, quite frankly, they were big but weren't necessarily very skilled at doing it. This has created really a unique opportunity in the marketplace to be that valued player who is able to use knowledge and expertise to deliver and to deliver in a way that people are willing to pay more because they see that value. So we're very enthusiastic about the business. It has grown considerably. It was a meaningful investment on behalf of our shareholders, and we believe that they are already being rewarded for it and will likely be rewarded that much more. Scale-wise, Brian, yes, I think it is going to become a more meaningful part of our business over time. Today, it's less than 5% of what we do, but it is growing.
Just last point on Berkley One, we are not in the state of California. That is not a coincidence. That is by design.
Great. And then maybe adding on to that. So obviously, when we think of homeowners insurance, you think of catastrophe losses, hurricanes, et cetera, volatility. And you don't think of W. R. Berkley as a company that has volatile earnings. So how do you control that? How do you balance it? How are you thinking about that with this business?
Really, it's twofold. One is you always need to think about, am I getting paid enough for the risk and volatility being a component of that? And then, of course, number two, we have reinsurance partners. And they are very happy to support us and to participate. And we use that as a tool to make sure that we are controlling the volatility in keeping with our approach to the market. So maybe to say it a little differently, does Berkley One add volatility to our book? A little bit, but we control it very tightly. And it has not created a sea change in our risk profile. And we do not see that happening.
Gotcha. And the other one I just questioned for you, do you have E&S capabilities at Berkley One? Because that seems like an area that a lot of.
We do have E&S capabilities at Berkley One. And at this stage, approximately 10% of our portfolio is non-admitted. And just as an additional data point, we only really actively started using it during 2024 or last year. So it's ramped quickly.
Great. Audience, anything? Yep. Another one over here.
I'm more on the social inflation side on what's happening in 2016, 2019, a bit within the catch-up, and then maybe a little more detail on what gives you confidence that social inflation is, I guess, understood from a reserve standpoint at this point.
I think that we went through an extended period of time where social inflation was somewhat benign. I think it wasn't so much that the environment necessarily changed in 2016 through 2019 as far as the underwriting as much as it was those claims when they were getting settled. We started to see a very different legal environment. At this stage, why do I have comfort that we've caught up? I think the reality is it came into very sharp focus. If you look at the amount of rate that we've taken, along with how it's affected how we think about terms and conditions as well as attachment point, from our perspective, we have caught up. Quite frankly, at this stage, we think we're comfortably keeping up with trend, if not perhaps in some cases above trend.
So I think that there were a lot of tough lessons that the industry learned. I think some people learned them more early than others. I think for better or for worse, we were on the front end of that where we responded more quickly. I think the insurance marketplace has focused on it more quickly than the reinsurance marketplace and is likely farther down the path of having its head wrapped around it than the reinsurance marketplace. So today, why am I comfortable? Because we are laser-focused on it. And we have been laser-focused on it for several years at this stage. And ultimately, if you think about the average life of our reserves is a little less than four years, at this stage, the pig is somewhat through the python.
Good. Maybe on that topic, talk a little bit about the growth you're seeing in commercial auto rate. Is there any exposure growth there? How do you find this business from a risk perspective given the current loss trend environment?
I think commercial auto is one of the tougher product lines as far as industry experience, both recently as well as, quite frankly, over history. I think there are few barriers to entry. I think a lot of people can come into the business very easily. The average premium is high, so it tends to be attractive, and there are a lot of folks that when they're coming in don't fully appreciate the importance of expertise. There is arguably no product line that is more exposed to social inflation than commercial auto, maybe med mal, and I think that that has proven to be particularly challenging. Our book of business today, the growth that we're experiencing, Brian, to your point, is really all or almost all due to rate. We are very preoccupied with making sure we are keeping up with trend, and we think trend is moving quickly.
One of the mistakes that some people make in this industry is when they think that they need to catch up, they'll have this view of a target of where they need to get to on the rate front, and to make a long story short, what they make a mistake on is they don't realize that, in fact, it's not just a matter of catching up, but that target is moving, so they'll think they need to get X points of rate, and they probably do at that moment in time, but the fact is they need to get that, but then they need to follow the target as it continues to move and continue to get rate.
That's one of the reasons why every quarter we talk to people about the amount of rate we've got because we want people to understand what we're doing to keep up with that trend.
Gotcha. Interesting. On that topic too, you had this interesting chart that you showed and encouraged everybody. I'm sure it can be on your website. There's some great slides that they put out, and they've got the cycle turn. Where are we with commercial auto? It looks like you're getting close to, you think, maybe a growth opportunity here on that kind of chart.
Yeah. Look, usually some would say that the uglier it gets, that usually is a leading indicator as to where the opportunity is going to be and how great that opportunity will be. From my perspective, commercial auto is in a tough spot, and it's likely going to get tougher from here for the next, call it, 12 months. But inevitably, that will be followed by a great opportunity. So what are we doing now? We're doing the best we can to maintain the discipline and keep a toe in the water with the idea that there will be an opportunity for us to lean into it.
Gotcha. Great. And then I thought maybe we could talk a little bit right now about your investment portfolio. You've tended duration a little bit here in the fourth quarter.
Yep.
You think that's going to continue here? Kind of what's your outlook on the duration?
The answer is yes. Just as a reminder, in the fourth quarter, we nudged the duration out to 2.6 years. From a matching perspective, the average life of our loss reserves is just inside of four years. So we have quite a bit of runway. We're just watching the yield curve. We're not in a rush to nudge that out. But from our perspective, we think deficits are going to continue to be a challenge. And in spite of the commentary coming out of the Treasury as well as the president and their view around the 10-year, we think that spending will continue. And ultimately, there will be an opportunity over time to continue to nudge that duration out.
That's great. And then maybe pivot on the investment portfolio over to your investment funds. It's something I think is a little unique with y'all. You have a great performance historically with the investment funds. Maybe talk a little bit about the strategies in that investment fund and kind of where you put new money. Where are the attractive opportunities there?
So as far as the investment funds, in the quarter, we had a little bit of noise. As far as contribution goes, our expectation is that you should see somewhere between $10 million and $20 million a quarter. But there can be some volatility there. As far as opportunity going forward with the investment funds, Brian, I don't think that given where interest rates are, the fixed income market is a pretty compelling opportunity. And there's alternatives in general. While we're not opposed to them, I think at this stage you're going to see us leaning more towards public fixed income alternatives.
Makes sense. And let's talk a little bit more. I know Berkley One sits in the short-tail lines. But maybe you talk a little bit about the other short-tail lines that you've got in your portfolio, right? That's been a really fast-growing area. The attractiveness, how do we think about the rest of that short-tail lines?
So beyond Berkley One, which again, to your point, is obviously a big part of the short-tail line growth. In addition to that, we do write commercial property. And we also have an A&H book, which has been a great contributor as well. But those are the big other two pieces, if you will.
Gotcha.
I would just remind you, on the A&H front, a fair amount of it is medical stop loss. But the line, a huge percentage of that, we write, actually, right on a captive basis. So there's a notable delta between the gross and the net. And we like it for a whole host of reasons, including the alignment of interests with the captive participants and ourselves.
Gotcha. Well, that's been a hot topic recently, medical stop loss. I'm sure you've seen a couple of.
Yeah. We haven't had the noise that some of our peers have had, probably because we've stayed up on top of trend more aggressively than some of them. So we are aware of what's been going on out there. And we think it is likely going to create a great opportunity for us as some of the giant players revisit their appetite and their pricing.
Interesting. Great. Anything else from the audience?
On the E&S side, you were talking about the transition of property to liability. Can you talk a little more detail around the drivers behind that? And then what do you think the duration of growth opportunity is on the liability side? Thank you.
Sure. So I think many of us are aware of what's happened in the property market over the past couple of years. There was an extended period of time of what I would call and others have as well, frequency and severity. And that created a great deal of pain, particularly for the property cat reinsurance marketplace. They got discipline. And that waterfall through to the insurance marketplace. And that raised rates and also brought a discipline that we hadn't seen in some time. Ultimately, the E&S market, it eats the crumbs that fall off the standard market table. And the discipline that the reinsurance marketplace brought to the primary market forced people to revisit their appetites in the standard insurance market. And that pushed business into the E&S market.
In addition to that, we've been for some number of years coping with a regulatory environment that is very slow to respond. So that also creates a pinch point for the standard market to respond to market conditions and raise rates and adjust filings. So that's what created the opportunity in the property market. We're seeing a reinsurance market that has clearly peaked, barring what happened in California, and if, for example, reinsurance rates, I think for most folks, property cat reinsurance rates at 1/1 were down somewhere between 5%-15%. That will trickle through to the property market and will impact the flow into the E&S market over time. On the other hand, I think the reinsurance market has been very slow on the uptick when it comes to liability trend.
And I think you are going to see the reinsurance market responding with greater discipline when it comes to liability, some of the liability markets that will put more pressure on the standard market and ultimately will create an opportunity for the E&S liability market. The short answer is I think you're going to see property E&S continue to have an opportunity, but it is going to erode. And simultaneously, you're going to see the liability opportunity accelerate.
What do you see as the duration of that liability?
I think the liability opportunity will be measured in a few years. It's not going to go. One of the things about the liability market is the realities don't come into focus as quickly because of the tail and whether the reality is very happy news or sad news. So it's much more of a lag.
Anybody else? Why don't we pivot over to another line of business that's been dreadfully inadequate for a long time, professional lines? Maybe give us your kind of thoughts on where we are. Are we getting close to a bottom on pricing? I mean, I see M&A activity and stuff picking up, which can cause professional liability claims. Where do you think we are? How far below price adequacy are we?
Brian, maybe just to use a slightly finer brush, are we talking mainly about D&O?
Yeah. Yeah. Let's talk D&O, preferably.
Okay, so D&O, I think we are in the process of bottoming out. I think you'll see us, give or take, touch bottom this year in all likelihood. We're seeing an uptick in SEC lawsuits, and I think that's going to give people a little bit of a reason to pause. I don't think that we're going to see it spike going the other way and all of a sudden explode off the page with great rate increases, but I think the erosion has been slowing and again, is likely to subside as we make our way towards the end of this year into next year.
Great. Is that an area that you all are likely to lean into if we start to see them going that way?
If we see it go the other way in a meaningful way, you will see us grow that business. So we are very focused on cycle management. And to that end, you'll see one of our businesses that is focused on D&O, that will swing from peak to valley by 50% when it comes to premium. And that's okay with us.
Great. Maybe we can pivot over also to workers' comp. I know you're investing in some specialty comp. But let's just talk generally about workers' comp pricing. What do we see happening in 2025? We've talked about frequency. It seems like it's starting to normalize.
I think comp trend is driven by frequency and severity, like many other product lines. It's been surprising to us how comp has enjoyed a negative frequency trend for an extended period of time that is slowing clearly, but simultaneously, we are very much focused on the challenges around medical costs, particularly severity. Brian, we were talking earlier just in passing about medical stop loss. And there are some of our peers who have had some challenging results. I think ultimately that is going to be impacting the comp market as well. Medical cost trend, the comp market is not insulated from. I think the impact is not as quick because of how medical cost reimbursement is billed off of Medicare and Medicaid. But ultimately, in the end, you will see that come home to roost.
Gotcha. And when comp turns around, maybe you can talk about it a little bit because it is a regulated line of business, right? Is it harder to catch that trend from a pricing perspective because it's regulated versus other commercial lines?
It certainly, there's a delay because of the need to get rates filed. But historically, when it gets it wrong, it gets it wrong badly. And the evidence is pretty compelling.
Great. Anybody else knowledge?
You've got a couple others here.
Okay. One bigger picture one I wanted to ask about. There's been a lot of talk about tariffs, right? And what could potentially happen here going forward? Maybe give us perspective on what does tariffs mean to the P&C insurance industry? Does it matter?
I think it clearly matters. It matters on a couple of fronts. First off, it matters as it relates to the health and well-being of our insureds. A lot of what we do is priced off of payrolls, receipts, and a variety of end values. In addition to that, when it comes to claims, particularly on shorter tail lines like property or auto physical damage, the costs of those materials, what does that mean as well and how that will unfold, and then finally, we have an investment portfolio, which can be impacted by that as well, so while we may not have the same type of exposure that a manufacturing industry might have, as an example, we are not by any means completely insulated. We'll be impacted somewhat less.
Interesting. Do you think that could cause the property markets to maybe firm up a little bit more again?
I don't think it's going to be enough to shift the direction.
Direction?
Yeah. Not likely.
Too probable.
Wishful thinking, Brian.
Great. Anybody else? All right. So one last one here that I wanted to ask. I tried to ask at the end. So elevator pitch, 60 seconds or less. Tell the audience why they should own W. R. Berkley stock for the next 12 months. To two, three years, whatever.
I think the answer is we make great risk-adjusted returns. We make more return for less risk. And we have a long history of doing that. We are structured the business in a way that we're able to be nimble and agile and opportunistic. And because of our structure and how we operate and our focus that we're in business to make money, not to issue insurance policies, that we're able to deliver better returns with, again, taking on less risk. And that kind of sounds like motherhood and apple pie. But we have several decades of doing that. And it requires, particularly in a cyclical industry, but any industry, knowledge, expertise, and discipline. And we are very fortunate that we have great people that understand how to do that.
Great. Let's see if anyone else has questions. I think we'll wrap it up there then. Thank you, Rob. That was really helpful.
Thanks, Brian.
Appreciate it.
Thank you.