Good morning, all. Thank you very much for joining us. This is a session with W. R. Berkley Corporation, and we are very fortunate to have Bill Berkley, the Executive Chairman, Rob Berkley, President and CEO. We also have Rich Baio, who is the CFO, and Karen Horvath, who heads Investor Relations. A solid team from a company that I think is legitimately and appropriately viewed as one of the thought leaders in the insurance industry, just in terms of intellectual capabilities. I want to start off in that vein. Obviously, I do want to encourage as much participation from the audience as possible. If you have a question, let me know. I would ask that you wait for the microphone to get to you, but when you've got a question, don't hesitate to reach out.
One of the peculiarities of P&C is that rates don't always rise when they need to. In other words, you can make a solid argument at many points in time in the industry's history that rates do need to go up, but that doesn't mean that they will, because it takes a lot of time for some companies to recognize, and then publicly admit, that underlying profitability is not what it needs to be. Berkley has been saying for a while both that rates needed to go up and that they would at some point in time turn. What I wanted to start off with is for you to describe your expectations in terms of how pricing would start to improve, expectations that were and haven't necessarily been met so far, and what you see as the next phase of this pricing trend.
Do you want to lead off?
The only thing I would say-
You have more history than I do.
The only thing I would say is this is a business where there are so many assumptions. There was a key one that has always been lacking, and that is the presumption that people knew what the right price should be for the risk they took on. They knew the differential based on the particular risk they selected to underwrite. All risks are not the same just because they're automobile or workers' compensation or general liability or professional liability. Everyone doesn't deserve the same price, so pricing differentials are the cornerstone of success. Being good underwriters is the start of the process. Understanding the timing of how that information gets processed by your company, and knowing that just because you set up a reserve doesn't mean that's going to be your true loss cost.
There's a lot of mistakes that happen. Some by accident, some not so much by accident with people who choose to write business in order to get cash to invest. Each time we see a cycle of cash flow investing, we always say that won't happen. Those cycles tend to take place with high interest rates.
Right.
There's a lot of things that bring about the issues you raise, and we've seen in the recent past, a number of companies who've paid the price for that, and some were fortunate to sell, and some are not so fortunate, and they're suffering, trying to find ways of surviving or shrinking. With that, I'll let Rob talk about our business and where we are.
Maybe just to, before we get into the details of our business, I would just add that, and it's a comment that we've shared with folks in the past, this is an industry that struggles with some of the issues, Meyer, that you're referencing. One, because of the time that it takes for the consequences or the reality of one's actions to really come into focus. Many would refer to it as the tail. It takes time for people to understand what the result is, and then it takes time for them to recognize it and change their behavior. In spite of all the data and all of the analytics, the industry is still driven by a couple of human emotions that we've also referenced in the past: fear and greed.
From our perspective, you've been through a period of time where many have been fooling themselves as to what the results are going to be. More recently, you're starting to see an environment or a situation where you have people that are starting to acknowledge the outcomes are different than what they expected and are taking action from particularly an underwriting perspective. They are acknowledging the fact that rate adequacy is not what they chose to believe it to be. From our perspective, the cycle has changed from what it once was. Once upon a time, the market tended to harden and soften across product lines somewhat in lockstep. At this stage, you are seeing it not the case at all. You are seeing major product lines marching to the beat of their own drum.
The realities of a cyclical business remain, by example, workers' compensation, the largest component of the commercial lines marketplace by premium, well, that is a softening market. While on the other hand, you see property, professional liability as examples of where you're seeing meaningful hardening and at an accelerating pace. Commercial auto should be added to that list. There is a fair amount of visibility, there is a fair amount of predictability as to what lines are going to harden. It's just not perfectly clear how quickly it is going to happen. I am reasonably confident, we as an organization are reasonably confident, that you are going to see the GL line over the next 12 to 24 months begin to harden. Just as two years ago, we were beating the drum about what was going to happen with commercial auto.
A year ago, we were talking about what needed to happen with professional liability, in particular, D&O. Directionally, you can see where it's going. The level of precision of trying to figure out is it this quarter versus that quarter is not always so clear.
By the way, everyone knew with workers' compensation, it was incredibly possible. It wasn't brilliance that said it's going to slow down and prices are going to come down because that level of profitability was attracting people, regulated pricing was going to change. It was a rational behavior. It wasn't irrational. Many lines of business see that irrationality you were talking about. In the case of prices coming down in workers' compensation, totally rational behavior.
True. I think we both agree at some point, history would suggest the industry will overshoot that mark again.
I was only talking about the start of prices coming down.
Correct.
I think the way I would describe the industry when I'm doing introductory meetings is, say it's a rational industry, it's just not forward-thinking. The industry has a very hard time anticipating inflection points. Behavior in both directions will overshoot the mark, and then that provides the opportunity for companies to distinguish themselves by not doing that.
Meyer, is driven by the delay in how long it takes for the ultimate results to come into focus. Some of that is driven by people just not wanting to acknowledge or accept the realities of situation and denying that for a period of time, which I think is a meaningful component why we as an industry overall, oftentimes it ends in tears.
I want to drill a little bit more into workers' compensation. I'm going to pose basically a thought experiment, and I want to get your thoughts on that. Workers' compensation has been phenomenally profitable, and we're seeing the rational initial response, which is to say if it's excessively profitable for company X, then company Y can undercut pricing by 2% and still generate adequate returns. For the first year or two, that's probably rational. There has been, I think, an element of better than expected claim frequency. While that's not bad news, it still depicts a situation where the actual prospects didn't match up with expectations. I was hoping you could talk about, one, what do you think has driven that? Two, more specifically, at Berkley, what do you do?
How do you strategically respond to this divergence of expectations and reality, even though it's in your favor?
From our perspective, actual versus expected is a very important metric to track. It's a balance because one does not want to get overly consumed by what the data may tell you in one quarter, and it's trying to figure out where is the balance between is this a trend or is it a one-off, if you will. As far as comp goes, without a doubt, it has been remarkably benign relative to what people had expected. I think that, as you referenced earlier, it's primarily driven by a lack of frequency. There's a countless number of theories as to why this has proven to be the case. Certainly, many would suggest that it had to do with the period of time coming out of the financial crisis, when you had relatively high unemployment. People were eager to get back to work.
They valued their jobs. In addition to that, you had a surplus of labor, so you did not have some of the issues that we may be facing today, where you have a shortage of labor or a tight labor market, where you have people oftentimes working a great deal of overtime, oftentimes having people in jobs that they are not as well trained for, and that can lead to a shift in frequency or greater exposure to accident or injury. Your comment, I agree about rate and competition within the marketplace, but one should not underestimate the influence that state rating bureaus have on the ultimate rates. I think that's an important component for when people think about where the market is going. That is a meaningful factor that needs to be considered. In addition to that, just to stay on that point for a moment.
Inflation is something that is in some ways less clear when it comes to workers' compensation. You have, yes, the complexity of medical inflation, which on average is more than $0.50 on every dollar of indemnity, if you will, in the comp space. That is a big piece, and we pay close attention to that. Then, of course, you have the other piece as far as payrolls, which is how the product is priced, and that typically does help offset certain types of inflation trend. To your question about when we look in the rearview mirror and stare at our A versus E and how right we got it, more often than not, I think everyone in the industry gets it wrong. It's a matter of how much of a margin you miss it by and which way you miss it.
From our perspective, we have deliberately decided that if we're going to get it wrong, we'd rather err on the side of caution. Having said that, we try and use our data and look at it in a timely way in pursuit of the overarching goal of really understanding your loss costs.
Great. I'm going to be switching topics, but if there are questions in the room on pricing, then please let me know.
It's not directly related to pricing.
Even so.
Two questions, actually. One, I was wondering what you're seeing in terms of E&S submission growth. The other one was on reviver statutes and the New York Child Victims Act. What impact are you seeing, if either in terms of pricing or also maybe upfront costs?
As far as what we're seeing in the E&S market, there are clear signs that business is beginning to flow out of the standard market into the non-standard market. I don't have specific submission count numbers to share with you. The combination of the standard market beginning to grapple with maybe appetite sprawl that has occurred over the past several years, combined with some of the larger players limiting or curtailing their appetite, oftentimes reducing the amount of capacity that they're willing to offer, is driving opportunity. I would suggest to you that this is not yet 2002, 2003 or 1986, if you really want to take a trip down memory lane. I would tell you that there is a growing amount of evidence that this market is going through a period of meaningful transition.
While perhaps for some it is more pronounced or visible on some of the shorter tail lines, such as property, I would tell you that the casualty and professional market is likely to turn as much or more, though it is a more gradual build, it will also perhaps be more long-lasting. As far as the change in statute of limitations related to the issues that you were referencing. For us as an organization, I would never say that we have no exposure because we have a big enough, complicated enough business that you never know with that degree of certainty. Based on the work that we have done, we are confident that it is very limited.
We think that while obviously the events that lead to the claims are horrible, to say the least, from our perspective, purely thinking about the industry and the economics, it is likely to drive significant trend and hardening because there are some meaningful players in this space that are having to actively change their approach. I think that many have meaningful exposure on a historical basis as well.
Great. Chad, did you have a question?
Sure. Just to build on that question, thinking about the broader tort environment, it seems there's just a higher frequency and severity of awards and settlements and thinking about some of the headline litigation out there, glyphosate, talc, opioids, maybe just some general comments on that. Is that playing through in your GL comment earlier? Or is that
I think that clearly it's what we have and others have labeled social inflation, where you're seeing awards coming out of juries where not only are they looking to compensate the affected or the injured, but they're also looking to punish. We are conscious of that. Are we completely immune to those realities? No. You need to keep in mind that the average profile of our exposure is not these type of headlines by and large. Do we have some? Yeah, sure, we have some. But if you think about our organization, here's one data point for you. Approximately 90% of our policies where you can statutorily have a limit, has a limit of $2 million or less. Do we write some excess? Do we write some large accounts? Yeah.
The lion's share of what this organization does is focused on businesses that you don't read about in the newspaper, by and large. I don't want to suggest that we don't have exposure because sure, we can have exposure just like others in the industry, but it's not going to be a huge piece of our puzzle. I do think the overall legal environment is pointed in a more challenging direction. I'm reminded of that every time I get on the treadmill and try and get the 35 minutes to pass as quickly as possible, and I see all the ads for the plaintiff firms where I just don't recall seeing that number of ads five years ago. Clearly, there's a resurgence in effort and resource and aggression coming from the plaintiff bar.
Clearly, you have the residual from eight years of a White House being controlled by the Democratic Party and a lot of appointments that were made under that president, and that trickles through, though there's a delay. Just like you will see that going, I suspect, the other way as a result of four years with our current leadership. I guess we'll have to see if it's four more.
The fascinating thing is that there is such a strong delay. It's in multiple years. This phenomenon that Rob is talking about is very true, and we've written extensively about it, how tendencies in the, I should say, litigation environment, they don't change when there's a change in administration. They change four or five years later.
It's a delay.
I want to focus a little bit on the expense ratio because Berkley's had a lot of success in reducing its expense ratio. I was hoping you could take us through what you've done so far, what the next plans are, or the plan's next stages.
We're trying to spend less money, write more business. Look, we are no different than others. There are really two drivers. One is operationally we've been very focused on trying to figure out how can we preserve our decentralized model but make sure that places where we will get benefit and synergy and economies of scale by doing things together, we want to take advantage of that. We've been doing that more and more, and that certainly is inuring to our benefit. Some of that is driven by shared services, some of it's driven by technology. Some of it, technology is enabling us to have certain shared services. The other piece is that the business is growing. Our earned premium is growing.
We have several handful of businesses that are great franchises, but quite frankly, they have operated with appropriate underwriting discipline until we started to see the market line up and the planets and the stars line up. Those businesses just haven't grown, we're starting to see some growth in our insurance business. More recently, we're starting to see some growth in our reinsurance business. It's really a combination of a growing written, which converts to earned premium over time, along with efforts to make sure that we are as efficient as possible in how we operate the business. As far as our expectation goes, our view is that there's opportunity to do better on the expense ratio. I think you'll likely see the improvement, particularly in the reinsurance segment, but you'll see some improvement in the insurance segment as well.
Our goal is, over some period of time, to try and not just push through the 31, but over time, perhaps see if we can start to push through the 30.
Excellent. Again, if there are questions in the room, please let me know. I want to follow up on one point you made, which is the emphasis of the decentralized strategy that Berkley has. I was hoping you could drill down a little bit more on that balance of maintaining the expertise and the inherent flexibility on the one hand, and then capturing the benefits, whether it's data or maybe even more mundane attributes that are better off either centralized or shared.
I think that this takes you back to when we started the business. The business started when the cornerstone was being close to the customer. Having smaller units that specialized by territory or by product line gave you a competitive advantage. That slowly has evolved where we tried to put some things together, technology, some other things. It also became clear that some of those very basic issues were not only not an advantage, but a disadvantage to big companies that had data mining, data facilities where we needed to do things. I think that we've tried to strike the right balance between still staying close to the customer, having all customer-related things, claims, underwriting, close to the customer, and as regional and autonomous specialty units as we could have.
We're trying to pull other things to become more efficient, from technology to accounting, and what can we do to save money. I think that it was trying to look at the whole process, and that's one of the things that Rob started to look at early on when he became President and Chief Operating Officer. What can we do to become more efficient? It's a slow process because you don't change how you do your administrative functioning in one day. You change it over time. I think that has started a few years ago and is continuing. Now the benefits will really be seen as we grow and don't have to add to expenses because we've restructured how we do all those things. I think that's when Rob's talking about this continuing lowering of our expense ratio.
I think it's been a big focus of his to position ourselves to get bigger without having to add marginal expenses.
Just on the data piece, we view it as an opportunity to have the best of both worlds. We will have a data warehouse, based at a local level, if you will, for each one of the operating units. Then we have a group data warehouse, which allows us to be able to look at the data and use it to make better analytical decisions. From our perspective, the opportunity is both broad and deep. I think once upon a time, people thought of data as a tool for actuaries. Certainly, that is true, but from our perspective, the applicability goes far beyond that. We think it's a tool in the broad sense of underwriting, certainly claims. We're, in some cases, even using the tool for distribution management.
I'm trying to think of the right way to phrase this question. Is there training involved when Obviously, so actuaries are used to digesting and disgorging data. When you introduce that into claims and into underwriting, does that require training the Berkley people to do things differently?
Certainly, we're not just throwing tons and tons of data at people and saying, "Here, figure it out." Fortunately, we have some very capable people on the data front that do a great job partnering with other people within the business and trying to figure out, okay, what are we trying to solve for here? How do we think about the use of data, and where do we start digging, trying to find correlations, relationships, diamonds in the rough that can help us understand our business more thoughtfully.
In 1969, I met Peter Lewis.
Peter Lewis and I became good friends. In one of our conversations, he said, "We're not going to insure any red cars anymore." I then said, "What is wrong with you?" He said, "Well, I looked at the numbers. Red cars have a lot more accidents." I said, "What are you talking about?" The answer is, the data show that red cars have more accidents. It had nothing to do with the red cars. It had to do with the kind of people who bought red cars. He worked for three years to persuade his underwriters that he didn't care what they thought. He didn't want to underwrite red cars. He finally failed, and then he extrapolated the data from what it was, the kinds of people who bought red cars.
He put new underwriting rules in, and he stopped writing most red cars. It's a hard process to get people to understand what data is telling you and implement it. It's why artificial intelligence and all that goes with it is not so easy to implement in places that you might think it's obvious. I think that when you say, does it take training, it not only takes training, it takes a culture that's open to change and to implement improved results. I think that's a really important thing. I think that that culture really exists. Does it?
What color car do you drive?
Blue.
I should point out, back when I was in the industry, I was competing with Progressive. I can't emphasize how significant it is that they knew the experience of red cars in the 1960s.
Right.
I was heading a motorcycle unit at one of their competitors, and literally every make and model that we had in our database was motorcycle. That's why under my leadership, we went to number two from number one in market share. I want to drill into a couple of Berkley lines of business just to make sure that people understand some of the specifics. The first one is accident and health, because I got a fair amount of concern, I guess, when you talked about pricing trends in the second quarter and the number was lower than in the first quarter. People said, "Well, does that mean the pricing is slowing down?" The answer is no, it didn't mean that. It meant that there are different lines of business that renew at different points over the year.
Accident and health was a big driver of first quarter renewal pricing. Can you talk about what it is that you're targeting within accident and health?
Sure. The lion's share of the business is medical stop loss, where there will be a small to mid-size business that will self-insure, and we will come in above. Effectively, it's almost reinsurance, if you will, for a self-insurer. The big component there, obviously, is medical trend. Since it's excess, it's that much more leverage. From that book of business in the scheme of just shy of what will be probably about $7 billion of premium, that's probably about $300 million. I wouldn't get overly consumed by it, but it's a nice portfolio. We've done well with it. It's primarily medical stop loss with a bit of more traditional accident in there.
As far as the rates go, I think with all due respect, people have a tendency to get disproportionately consumed by the basis points, if you will, particularly when it comes to things such as rate. We try and give people visibility with where we see rates, where our rate looks like, so you get a sense of directionally, where are you going? Where is the market going? Are you gaining altitude or losing altitude as far as your margin goes relative to loss cost trend? When things move around by 50 basis points over a 90-day period, while I appreciate you paying such close attention, I would caution you not to get overly exercised about it.
When we look at, just to maybe extrapolate a little bit, the marketplace in the broad sense overall, and we look at where it was the end of last year and where it is today, whether it be the submission flow that we are getting, particularly coming out of the standard market into the specialty market, even more so in the E&S market. When we see the firming and the change in behavior of many of the large market participants, when we see the trend that we see rates moving in, when we see the renewal retention ratio, when we see our hit ratios. There is a growing amount of evidence that would lead us to believe that the momentum is building. Again, any quarter when we share with you a number, yeah, there's mix, there's a whole host of different things.
I would encourage you to pay attention to that comment because I think it can be helpful directionally. It's one of our ways of trying to message to you certain things, but at the same time, don't get consumed by the basis points.
That's helpful. I think to some extent, people would rather see me put out a chart of numbers than rely on my own navel-gazing. Maybe that's where the importance comes from. I take your point, and I think it is really important, and the disproportionate contribution of accident and health to first quarter numbers was something that people had.
One was a big day for the-
Right
particularly the stop loss book.
Yes. Heather, go ahead. Do you have the microphone?
High-level question. Given what's going on in the market now, how are you thinking about your capital allocation between organic business writing, M&A, and share buybacks?
There's nothing that's off the table. We have more capital than we need, we're always looking at opportunities. The problem about M&A is we don't want to diminish the quality of our business. The quality of business is something that we always wonder about. The market doesn't always differentiate because there's a very wide quality differential amongst insurance companies. We're always looking. We don't see many that we'd like to own. M&A, while possible, if it happens, it'll probably be smaller enterprises that we think offer opportunities to maintain the quality of our enterprise. As far as share buyback, again, our view is how do we get money most effectively to our shareholders? Special dividends seem to be the best alternative at the moment. If our stock were to trade down consequentially, we might change that view.
We're a company that truly is always behaving as though we own the whole thing, we should do exactly what we think is best for our shareholders. We do that every day, every decision we make has that in mind. If we do well for our shareholders, our employees do better, our customers do better, everybody does better. It's a win for everyone.
I would just add that as far as capital allocation goes within the business, we are going to allocate whatever capital is needed to parts of the business that can deliver us what we believe is a reasonable risk-adjusted return. To the extent they can't, we're very happy to shrink that part of the business, we have a long history of doing that. The only other piece that I would tag on to the comments earlier is there's a lot of change going on in the industry right now, it comes in a variety of different flavors. Some of it data and analytics, some of it how the business is transacted, some of it how it's distributed, so on and so forth. Just with this hardening in the market overall, I think that it's likely whether it be teams of people or things of that nature.
I would be surprised if between now and the end of the year, we did not have some opportunities that we would be trying to take advantage of, obviously, we will at that time share it with a broader audience.
With that, a little sign here tells us that the time is over. Please join me in thanking Bill and Robert.