Good afternoon, everybody. Welcome to the further endeavors of the RBC Financials Conference. Hopefully, you've already had the opportunity to sit in on several sessions this morning. This afternoon, it's my honor to have the W. R. Berkley Corporation available. Rob Berkley, CEO, as you probably all know, and he's joined by William Berkley, founder and chairman of the company. While it seems like it's a lot longer, it's only been six years since Rob took over as CEO. When I was preparing for this, I looked it up, I guess W. R. Berkley shares are up about 150% since that date, which works out to, if my math is right, about a 16% compound annual growth rate, during that period of time.
It's one more reason I wish that we were all here in person because, if we were all here together, I'd have everybody stand up and give a quick round of applause. As it is, I'll take the opportunity to thank our guests for joining us and making their time available to us today. Let me turn it over to William Berkley. Bill, and he has some opening comments to just kind of frame our discussion a little bit as we get started.
Thank you very much, Mark. It's been an interesting time. The past three years have thrown more things at us than I can ever remember. 54 years ago, when we started this company, I thought I would gain enough experience that when I turned this over to my son, there was little new I would find, and I was wrong. However, I will tell you that in the years since we started the company and went public, Rob, in his five years, has matched our compound rate of return, and now I expect he's going to do better than we did in the first 50 years. Certainly is on the road to do that. There's a lot of uncertainty, and that, in many ways, makes the operating environment more difficult, but the opportunities even greater, especially for us in our E&S business and our specialty business.
Being well-capitalized, being nimble by operating through small operating units, we're able to zig and zag and take advantage of those opportunities. Be it in cyber, be it in COVID ventures or, in fact, trying to find other things we can do. We expect that those opportunities will continue. We see them every day, and we try to take advantage of them. By starting new units, by expanding other ones. That flexibility is something that's important. We're no longer a small company. The first time in 2021, we had over $10 billion of gross written premium, and we earned more than $1 billion. Our combined ratio was comfortably under 90.
Company that's running on all cylinders. We expect this year to be better. We look ahead, taking advantage of all that we see, not only in the underwriting area, not only in new and intriguing operations, but in the investment side as well. I'm going to let Rob now talk about our business and how he sees it piece by piece. Rob?
Thank you. Before we jump into it, Mark, first off, thank you very much for the invitation and allowing us to participate, and thank you to all of your guests and their participation in tuning in. Certainly appreciate your kind words at the beginning. Let there be no misunderstanding. I have little to do with the results. This is very much a team sport, not an individual sport. We, as an organization, are very fortunate to have a lot of very capable people that have an important hand or play an important role in achieving our goals. Thank you for the kind words. I would just echo our Chairman's comments about that the business is quite well-positioned. This is an interesting moment for the world, obviously. Perhaps we'll get into that. It's an interesting moment for our country.
It's an interesting moment for the industry. We, as an organization, I think, are particularly well-positioned to try and take advantage of the opportunities that are before us. Again, we can start to get into the nooks and crannies in any manner, Mark, you and your guests would like to.
Well, I think maybe the place to start, it was three years ago at this very conference, I asked you whether we might get a hard market or not. You rather bullishly responded that you thought there were conditions that could give rise to one, which turned out to be correct. As we sit here now, again, with all the things going on in the world, economic, geopolitical, what have you, maybe talk about how you see the cycle shaping up from where we're at. What are kind of the positive forces that will continue to drive it? What are maybe some of the negative forces that might create a headwind? Just how do you see the world as you sit here today?
When we start going back in time, as you pointed out, 3 years ago, there were a lot of factors that, at least through our lens, seemed to be driving a change or a shift in the market. We know that interest rates have been low for an extended period of time, and obviously that has a meaningful impact on the economic model of a P&C business, particularly one that has any tail to it. Number two, we certainly were aware of what has been labeled by many, social inflation, which is just shorthand for loss cost trends and the driving of loss activity and the awards that continue to elevate. More recently, obviously, we are seeing some phenomenons around financial inflation, which also is a further lever from our perspective that is driving change.
Ultimately, when the day is all done, it's a combination of social inflation, cat activity, if you will, low investment income, and more recently, financial inflation that has been putting pressure on the economic model. From our perspective, it was just a matter of time until the industry was going to have to respond to that. I think that it always takes longer than you'd expect it to, but we finally got there as an industry, and I think that there's a fair amount of momentum. I think one of the interesting things, or a few of the interesting things about the cycle today, maybe a couple of fold.
One, I think it's important to recognize that the commercial lines marketplace, all products do not march through the cycle in lockstep, or in other words, we have some product lines that are at a different point of the cycle than other product lines. That is somewhat of a departure from what we had historically seen. If you go back to 2001 into 2002, followed by 2003, you saw all product lines in some stage of firming together. Similar back in 1986, but not the case today. That is clearly, in my opinion, a meaningful difference between then and now. A lot of the drivers continue to persist. This is clearly as far as keeping up with loss cost. It's a moving target.
The idea that you can just raise your rates and catch up by raising your rate 10%, and then you're there, that really does not apply the same way it has, again, in moments in the past, and it's because of what is driving those loss costs, and again, they continue to drive it forward. Long story short, Mark, from my perspective, I think a lot of the things that we anticipated came together, forced a shift in the market, and a lot of those realities persist, and from our perspective, likely will continue to put pressure on a marketplace that needs to continue to firm from here.
Let me just ask a couple follow-up questions related to some of those points. One is just from the standpoint of your customers. Are we reaching any kind of stage where customers are starting to say, "Look, this is three years in a row you've pushed some rate on us. No more. We can't handle it anymore." Second, just from a competitive standpoint, are you seeing any of your competitors, I'll say, start to get cold feet and say, "You know what? Maybe this is good enough. We don't need to push any harder." The so-called cheating phase of the market where some people start to play for share rather than play for profits.
I think anytime you see meaningful rate increases coming through year after year, at some point, particularly with larger accounts, the customer starts to pause and scratch their head. Oftentimes, they don't remember years ago, the year after year rate decreases that they were experiencing, and this is in part just a response to that. As far as the firmness of the market, as I suggested a couple of moments ago, a lot of the drivers are still there. Social inflation is not abating. Financial inflation certainly is a new reality that needs to be grappled with. We'll see what CAT activity is for the year. Overall, pressure on loss cost continues. Arguably, perhaps we'll get onto this a little bit later, perhaps interest rates will be moving up.
Certainly, it's been our expectation, though we did not foresee the conflict in Eastern Europe and between the Ukraine and Russia and what that will mean for interest rates. Putting that aside, we still believe rates will be moving up. That will provide a little bit of lift on the investment income front, but it's going to be, in our opinion, incremental, and it's not going to save the challenges that the economic model faces. Again, that's just one person's perspective on the situation.
I appreciate it.
As far as competitors go, we do see announcements of new entrants coming into the specialty space. From our perspective, to the extent that they're up and running, it's not very visible. There may be a fair number of announcements, but if you look at the presence or market share that they have, at this stage, at least, it's rounding. The big question is for an organization like ours that focuses on the specialty market is, to what extent is the standard market's appetite going to ebb and flow? The big opportunity for a specialty market is things that fall outside of the standard market appetite, and as they contract their appetite, more falls off their table, more opportunity for us. We obviously watch very carefully as to what their appetite is and try and make sure that we are well positioned to respond appropriately.
I would tell you that by and large, the standard market, I think, is not through contracting their appetite. Again, we will see with time.
That's great perspective. Maybe continuing, last year was, as you both pointed out in your opening comments, last year was a terrific year for top-line growth for the company. We know pricing was a factor. We know some exposure unit growth was a factor. Maybe you can talk about just some of the other areas, product initiatives, market initiatives, anything you might be doing kind of new that's expanding out the franchise, sort of true organic growth, if you will, that isn't just price and volume on the customer side.
We are really at this stage growing on all fronts. As you point out, certainly we're getting a lift because our rates are going up and we're collecting more premium with that. In addition to that, the health and wellbeing of our insureds, we're seeing their payrolls, their receipts, their revenue increasing, and that inures to our benefit from a premium perspective as well. I would tell you at this stage, in addition to that, much of the organization outside of workers' compensation, we are adding to policy count, if you will, as well. Beyond the, if I can bifurcate organic growth between businesses that are already in existence versus businesses that we are starting now, we have seen, again, healthy growth with the existing businesses or same-store sales, if you like.
At the same time, we've made a few announcements over the past several months about new businesses, both in the professional liability space as well as the construction space, and finally, in the small business space. Of those businesses, two of the three are very operational. The third one will be operational as we make our way through the year.
Great. That's helpful. Well, let me take one second, just remind the audience, if you have any questions, you can enter those into the dialogue box on the side of your screen. Those get passed on through to me, and I'm certainly happy to relay those on to the team here as we go along. While we wait to accumulate, see if we get any questions from that avenue, let me change gears just a little bit. One of the things that you guys did back in 2020 took what at the time, I suppose, seemed like a little bit of a bold approach to investments and said, "All right. We're going to smarten up and focus on shortening the duration. Focus on keeping the credit quality high.
Sacrifice a little bit of current investment income in exchange for the opportunity to invest on a longer-term basis later on." As we sit now with the Fed perhaps getting ready to change gears a little bit, where do you stand at this point, and how are you thinking about things going forward?
Clearly, we made those shifts. We brought our duration of our portfolio down from somewhat over three years down to just a little over two years, two and a quarter years. We also shifted into non-traditional investing. We shifted into some real estate and private equity and a few other things, which has been rewarding. Some of our real estate we've gotten out of give us again to go back to that more flexible mode. We think that clearly we didn't anticipate the Ukraine war, and that sort of has an impact on interest rates. We sit and look and say, "Okay." Without that, I think interest rates would move up faster than they will. Right now, America is one of the safe places to put your money, and I think the world is going to be sending money here.
We don't think interest rates in the short side will move up as much as we thought three months ago. Three months ago, we would've said, "Eh, the 10-year will be three and a quarter by the end of the year." Today, we would say more like two and a quarter, maybe two and a half. We're a little more cautious. We think there's still opportunities, and we're searching for special niches where we can invest our money. We'll probably move our duration up a little bit, but not much.
I would just add to that, Mark. If you think about what was just shared and you think about what, extrapolate from there, what does that mean for, I don't know, an A-plus rated corporate and the type of yield that would be available on that, we think is going to be quite accretive to our economic model. If you look at what our book yield is today, you look at where rates are going, we think that it'll be helpful.
I think that definitely makes sense. I'll put words in your mouth, but maybe we've moved from a phase where the top line is the featured part of the story to really where the bottom line with the combination of maybe a bump in investment income as well as the earned premium and all the great premium that you've written over the last couple of years, it really starts to energize the bottom line. Not that it wasn't good last year, just that there's a pipeline.
I think what you just flagged is perhaps one of the things that is not fully contemplated by some observers. I think people are looking at our top-line growth. People are pleased to see the health, if you will, and the underwriting results. I'm not sure if people fully appreciate, you add another 100 basis points plus on top of our book yield, the leverage for our economic model in that is quite consequential.
Maybe with that in mind, a couple of questions related to loss cost trends and inflation and social inflation.
We've certainly seen a lot or heard a lot of discussion about just regular financial inflation. Can you talk about what are areas of your business are most directly impacted by, I'll say, ordinary financial inflation. Obviously, your book is more liability oriented, which is more of a social inflation kind of a feature. Where are you most directly impacted by regular financial inflation, Mark?
On the underwriting side, I think the investment side speaks for itself. On the underwriting side of the business, as you pointed out, it's going to be more the shorter tail lines of business, if you will. It's going to be very much property, auto physical damage, products of that nature.
Okay.
The liability, yeah, I should have added to the property. It's not just construction. You got to remember business interruption as well. On the liability side, as you pointed out, and I share your view, Mark, certainly it's applicable, but less applicable. You can see it potentially on the professional liability front to a certain extent as well.
Do you get much feed through from wage inflation, maybe in the workers' comp book or just in general liability awards?
Most visible in, you see it across the board as far as inflation goes. You're going to see it, again, going back to a comment earlier, in the payrolls, when it comes to workers' comp. You're going to see it in a GL policy, if you will, because a lot of that is priced off of receipts or revenue of an establishment. Of course, property, I think it speaks for itself. I think one of the challenges in a financial inflationary environment for property versus liability. Workers' compensation or GL or anything where there is an audit component, we have an estimate as to, for example, what the exposure or the revenue will be for that entity when we're pricing up GL.
We get to the end, and we have the ability to go back and audit and say, "Well, you said you were going to have $100 of revenue, and you had $115 of revenue." We then get to go back and charge more. Property, generally speaking, they come up with an appraised value at the inception of the policy, and you live with that for the life of the policy.
Okay
because you don't have the same opportunity to go back and adjust for inflation.
Yeah. The matching isn't quite as real time. You have to wait for the next renewal to size it up again.
Right. There's not the opportunity for the true up, if you will.
Yeah. Okay. That makes sense. I've got a question from the audience. It's actually a two-part question. I'll say they're both vaguely topical. One was, a little over a year ago, everybody was worried about COVID and business interruption lawsuits. Is there any notable litigation still outstanding related to that? And then secondly, and I guess really unrelated, is do you have any particular exposure to either Ukraine or Russia?
Okay. Question number one, as far as where do we stand as an industry in resolving the question around business interruption as a component of a property cover stemming from COVID. While I think there are still some loose ends, if you will, and I don't mean to gloss over them, but I think at this stage it's fair to say just some loose ends as far as still outstanding challenging the position. That having been said, I think for the most part, it's pretty well established that COVID does not trigger, or the possible presence of the virus does not trigger business interruption as a component of a property policy.
Right. Okay.
As far as our exposure to Russia and Ukraine, those are not consequential markets for us. Based on our ability to look at our book to the extent we have exposure, or direct exposure I should say, it's going to be de minimis. When I say direct, it's because indirect exposure, we could have an insured that sends products to Ukraine or so on and so forth. Obviously, as a result of globalization, it's a reasonably tangled web. As far as direct exposure, very modest.
Yeah.
Quite frankly, I would suggest it's closer to rounding based on everything we can see right now in the relative to over $2 billion of earned premium we have running through every quarter.
That's what I would've guessed based on the disclosures that I tried to look up in the filings and whatnot. It seemed like it would be.
Yeah, there are some of the obvious product lines that have exposure. Property, by and large, we're not a big property market, as you suggested, clearly war exclusions will apply. We are not a player. By design, we do not write trade credit insurance, so on and so forth. It's just not our appetite.
Okay. Just jumping back again to kind of the prior line of question. We were talking, and you had mentioned, I was talking about the wage inflation. I guess one of the biggest laggards in the pricing environment has been workers' comp. You hypothesized, I've hypothesized, everybody's hypothesized reasons why that market never really saw the pricing trends. Every now and then it seems to show signs of bottoming. What are you seeing now? Are the returns there still very good? Does it need rate or is it a line that is doing well enough, particularly in the current environment?
Well, let me bifurcate that answer, if I may, between reflections on our own business versus how we see the industry. Quickly on our own business, we see clearly a challenging market, but due to the great expertise of our colleagues, we think we're still generating healthy returns. There is no doubt there is a meaningful amount of discipline. You would have seen us earlier in 2021, and in 2020, shrinking that line of business, and we were just shedding the count. Later in 2021, you started to see that product line grow for us. It wasn't that we were writing a lot of new accounts. It was these payrolls that had gotten compressed. As the economy opened back up, people came back to work and the payroll started to go back up again.
In addition to that, obviously, wage inflation is driving increases in premium as well. That all having been said, we think that while there were many challenges that came with COVID, as far as frequency trends for the industry overall, comp included, it was a positive. As COVID goes away and we see frequency return to a more traditional norm, I think the industry needs to be mindful of that. The other piece that has really gotten quite a bit of our own attention internally is severity trend. We as an organization have been paying attention to the data and what we see around severity trend, and we are, I wouldn't say concerned about it, but it has our attention. I'm not quite sure that the industry overall is paying enough attention to severity trend.
I think you're going to hear people over the next 12 months start to talk about that more and more. I would also draw your attention just to demonstrate that we're not always sort of Chicken Little in the room. We are now hearing commentary coming out of California, WCIRB in particular, starting to offer comments about severity trends.