All right. I guess the time has come that we'll get ready to kick off. Pleased this morning to have the W. R. Berkley Corporation make some comments and help answer some Q&A this morning. Probably don't need to do any introductions, I will go ahead and do so anyway. To my immediate right is Rob Berkley. Rob's been the CEO of the company since 2015. Has been involved with it for, I guess, a couple decades prior to that. Has held various roles therein over the years. To my far right is Mr. Bill Berkley, founder, chairman, CEO for many years, and continues to be actively involved with the investments among other things. I probably couldn't begin to explain all the different things that each of them has seen over all the years. I thought I'd start off by sharing just a small anecdote.
When I very first started in the business back in 2000, we were picking up coverage of W. R. Berkley Corporation. It was on September 7th of 2000. The stock that day was at $26 and 3/8ths, which tells you how long ago it was because we used 3/8ths, not like 0.375. We were wise to initiate on that day with a buy rating. If I had been a little bit wiser, we would've still had that all the way through to now, because in the meantime, the stock accounting for dividends and splits is up about 15,000%. Over 1,500%. 15 times from where we initiated. The market cap in that time has gone from about $670 million to $10.2 billion. An incredible job by both of these individuals in stewarding that.
By way of comparison, that is slightly better than Microsoft over the same period of time, just for anybody keeping score at home. With that as an introduction, maybe I'll start with the first couple of questions, and we'll pass it out to the audience. For either of you, maybe Rob to start off. As you think back on 2018, it was a pretty tumultuous year on a number of fronts. What would you see as being kind of the high points of the year and maybe some of the less high points for the year?
Do you want to lead off or?
No, you.
The insurance industry, it's an interesting industry for a variety of reasons. One of the reasons is because sometimes bad news actually in the long run converts to good news. What we saw in 2018, which was really a continuation of some of the issues that we saw in 2017, clearly brought into focus for the industry a lot of the challenges that it has been facing for some period of time.
Without a doubt catastrophe activity for two years in a row was very pronounced, very meaningful, and I think it was a serious wake-up call or a reminder for the industry that catastrophe activity occurs, and when it does occur, it can be quite severe, and it can change the appearance of the economic model in a way that some folks may lose sight of when you go through an extended period of time when the catastrophe activity has been somewhat benign. I think that had put bad news that the cats occurred. Good news is that, I think it forced people to recognize the realities of what appropriate risk-adjusted return is and the type of pricing that's going to be required going forward to bring that into line. I think the other piece that is worth noting is the discussion around inflation.
Certainly, we have been through an extended period of time where both financial and social inflation has been quite benign. There certainly during 2018 was a growing amount of evidence that those two trends may not necessarily continue as they have over the past couple of years. Again, from our perspective, it is likely that when you roll the movie forward from here and you look back on 2018, that it is possible that 2018 will be a point of inflection when the industry had to grapple with some challenges but perhaps served as a catalyst to making some tough decisions and get us to a better place.
I think that I would add that from our point of view as a company, we were really clicking on seven and a half of eight cylinders. That is our investment returns again delivered realized gains. We continued to be well protected with shorter duration. We didn't get hurt badly by volatile both debt and equity markets. We continued the idea of risk-adjusted return with the word risk coming first, not just in our underwriting, but in our investments, while finding ways to deliver returns in spite of declining yields. We really tried to continue that focus on returns for our investors that realistically exceeded that risk-free rate by more than the apparent risk in our business.
Well, certainly, it was a terrific year from an investment standpoint, and we'll circle back to that one in just a minute. The question that I know that everybody's interested in because Features on every one of your earnings calls and at pretty much every one of my investor meetings, is really the pricing environment. Last year, as you know, two years in a row, we had a lot of catastrophe losses. I think last year there was a lot of expectation that we would see some acceleration in pricing. I think for most people, while there was certainly some, it was maybe not as strong as what some had expected. How do you see where it is, where it's been? How does it compare to your expectations? Any thoughts you want to give us for where it may be going?
You want to offer, Leo?
I'd like you to.
You want me to comment and then you're going to correct me in front of the audience? I think for starters, one needs to recognize that once upon a time, the insurance industry, the cycle across product lines tended to move somewhat in lockstep. Over the past decade or so, it's becoming ever more apparent that different components of the insurance reinsurance space are moving, yes, still in a cyclical manner, but they are no longer moving in lockstep. There can be product lines that are hardening. There can be product lines that are softening. It's not all happening and moving in the same direction at the same time. If we talk about the insurance market for starters, focused particularly on commercial lines, clearly workers' compensation for the past several years has been the place to be.
There have been a lot of factors that have driven that. Long story short, the margins in the business have proven to be more robust than anyone had expected. There are a couple of different reasons for that. Probably the biggest reason is loss cost trend, particularly frequency as it relates to workers' compensation loss activity has been particularly negative or negative in the sense that it's coming down and has inured to the benefit of the industry. Lots of different reasons we could all speculate as to why that is the case. The state rating bureaus have caught up with this. Now they are driving certain activity that is bringing rates down. We'll have to see how that unfolds.
Clearly, comp has been the place to be. There is a growing amount of pressure in that line. I would suspect that while there's still, from our perspective, a green light as far as opportunity to write business, it is moving in the wrong direction. I think just one last comment on comp. One needs to use a pretty fine brush. I think that one can speak about comp in the broad sense. When we think about the business, we think it varies based on exposure, based on territory. Being a specialist like parts of our organization allows us to bob and weave. Again, use that fine brush and identify those opportunities and squeeze margin out of the business in a positive way to our benefit and know where to, again, to bob and to weave. A couple other comments on product lines.
Commercial auto, probably one of the worst places to be for the past few years, probably several years at this stage. Moving in the right direction, as we've suggested in the past, continues to be challenged. You can see that in the results of many in the industry. I think the real question for many is going to be, when do you get back in? Casualty and general liability in particular and some of the excess lines, I think without a doubt, one needs to be thinking about some of the comments earlier, particularly the social inflation piece and what does that mean for loss costs going forward. It's certainly something that's on our mind. Professional liability is one of the areas that we are the most concerned about at this stage on behalf of the industry, particularly D&O.
We think that the marketplace is ripe for some type of change as some of the perhaps overaggressive behavior on the underwriting side is going to come home to roost. Again, that will change the behavior. A quick soundbite on the reinsurance market. While there are some that have a greater participation than we do, we have been in the reinsurance space for an extended period of time. We have, over the past few years, found it to be ridiculously competitive, which is one of the reasons why you've seen our reinsurance activities, particularly in the U.S., shrink dramatically. There certainly are early signs that that has bottomed out and there is a degree of firming. We'll have to see with time whether that really proves to be a great opportunity again or whether it just bumps along the bottom.
Certainly, if you look at the economic model, and if you think about risk and return, there is action that is required by the reinsurance marketplace. I don't know if you want to.
No, I think that one of the things that lots of people in the industry point out is disruption can happen for short periods of time because of one idiot. We've had one idiot. By the way, before I ever come to these, our General Counsel comes into my office and says, "Remember, don't say any names." We're doing well so far.
So far, I've managed to get it in 10 minutes into this. In fact, companies always pay the price. It's when they pay the price that matters, either after a reorganization, after they go private, after they go bankrupt.
Maybe all of the above.
Right. They may go bankrupt more than once. The fact is that there are players in every one of those lines of business who are mispricing their product. The customers don't all feel that bite because if they don't get stuck with issues in having difficulty collecting claims or where claims are assigned to a non-traditional payer, a runoff enterprise, everything seems fine. The fact is the business has evolved where many players in the industry don't take their fiduciary obligations to policyholders as seriously as one might like for the business to go along and prosper. That's a problem frequently that we see with runoff companies paying claims. It's a problem frequently with companies who have short-term views. That's going to continue for a long time, and on every one of these lines of business, there's always someone who's out there cutting price.
More and more, the pressures being brought about by agents who think they are best serving their customer with the lowest possible price is an issue that good agents are facing and saying the best price isn't what's most important. Regularly, we have agents who are prepared to say, "You're buying something other than the lowest price." Now you can't have the differential price of an enormous amount. Agents are becoming more and more conscious of that service differential. There are good signs in the business. People are understanding what they have to do. I'm pretty optimistic that we're about to go into a phase where there's more agency consciousness about getting delivery of what you want when you sell a policy.
Before we go to the audience questions, I want to bring together a couple of strands that you've picked on in the course of a couple of your comments. You've talked a little bit about the social inflation. You've talked about some particular lines of business, D&O and commercial auto, workers' comp. To me, the thing that maybe marries a lot of those lines of business together is just the array of terms and conditions and policy language and so forth. Are all of those things, is that's what's working together to create the social inflation? Is it just bad underwriting that's creating the pressure in some of these lines? Is it where the underwriting is okay, but we're giving away the farm in the policy form? Not necessarily you, broadly.
I think there are different drivers impacting different components. I think that there has been, one of the leading factors would be the social inflation piece as it relates to some of the casualty and professional lines, where again, we've been through a period of time where the legal environment has been somewhat benign. From our perspective, we are seeing a growing amount of evidence that would suggest that that pendulum has begun to swing in a different direction. Again, one can speculate around this all day long as to what's driving it. Some might suggest that it was eight years of Washington, by and large, being controlled by the Democratic Party and judges that were appointed during that period of time. You get a waterfall effect, just as it's possible, again, if you look forward, that you'll see that pendulum moving back the other way.
I think the big piece is, one, a change in the legal system. I think overall, the environment is more litigious. I think in addition to that, there has been ridiculously cheap reinsurance capacity that has been willing to subsidize what I would define as irresponsible primary carrier behavior, and I think that's drying up as well. This is an industry that responds to pain. There is a lot of speculation that, oh, we have better data and better analytics, and that's going to lead to better decision-making. By the way, I think that's true. It's still an industry that is driven by human emotion, as we like to say, fear and greed.
They might just have better aspirin now.
At this stage, I think just as you saw what drove the change in the commercial auto space, losses. You are going to see a similar phenomenon as to what's going to change the behavior in some of the professional liability lines, specifically D&O. Losses. To the extent that The insurance carriers are facing the losses, facing an increase in cost of capacity because reinsurance costs are going up. I think that that is going to drive a change in behavior. In addition to that, I think there is more pressure around people generating risk-adjusted returns. When we look at our portfolio and we look at the opportunity for rate, again, putting the workers' comp line aside for a moment, we are quite bullish as to where rates are going to go.
We think it's primarily going to be driven by the things that I was referring to. In addition to that, it's probably worth mentioning that there are some market participants whose parent company may be based outside of the United States, and the tax benefit that they once enjoyed, which has been diminished from what it once was, they're needing to think about their economic model. As a result of that, I think that is going to force them to think about more underwriting margin as well. Again, from our perspective, do I think that this is going to be 2002, 2003 all over again, or 1986, 1987 all over again? No. Do I think that rates, by and large, are moving up? Without a doubt.
Again, I put comp to the side, but I don't think people should overreact to the comp comment either, because the reality is that comp prices off of payrolls, and as long as you believe that the payrolls are keeping up with inflation, then the rate charged should or the premium charge, excuse me, should be keeping up to a great extent with inflation as well.
Okay. Let's see if anybody in the crowd has any questions. I've got a million of them, but maybe somebody out here has something they want to ask one of these guys. Anybody? Anybody? Bueller. Right here.
In your opinion, of the lines that you are involved in, which ones do you feel are the most profitable these years?
The question was, which lines do you, of the lines that you write, do you feel are most profitable or least risky?
We certainly spend a good deal of time thinking about risk-adjusted return, and we look at it at a macro level as well as a very granular level. That is taken into account in how we allocate capital and the type of return that we're targeting. Having said that, I don't think it's probably in our shareholders' best interest for us to advertise to the world where we think the best opportunity is. We're not looking for the watering hole to get any more crowded. I appreciate the question, but that was a polite way of saying I can't answer it, sorry.
Anybody else out here? All right. Right here.
How do you think about competing with newer upstarts that have some, in many cases, lower expense ratio advantage and excitement, better parallel operating systems or advantage? How do you compete with those players who are less expensive?
That question was, how do you compete with some of the upstart companies that maybe have some technology or lower expense ratio advantages?
Yeah, I think that there's a bit of an assumption in there that our business is somewhat stagnant or not evolving, and certainly how we operate, I think is certainly evolving at a pretty rapid pace. The idea of disruption, sure, the insurance industry, no doubt, is primed or ripe for disruption. If you look at our industry, particularly commercial lines today, the industry is not radically different from what our parents' or grandparents' industry was, though it's beginning to wake up. When we look at our internal expenses, we find them to be quite competitive with virtually all the data points that we are able to come up with. Probably the delta, if you will, between our economic model, and again, I don't know specific examples that you may have in mind, but some other models out there would perhaps be the acquisition cost.
Acquisition cost for this industry is clearly very significant. Going back to the comment that was made earlier, I think it's incumbent on both carriers and distribution to figure out how we are going to make sure that we are bringing value to customers. To the extent that all we are is capacity, and all distribution is access to capacity, then the world will probably marginalize us over some period of time. When we look at our economic model, we think that we are still able to bring value. While there are different models out there, we have and there are certainly things to be learned, and we are running experiments within our organization as well.
There is no particular operation that when we look at their expense ratio and we look at their economic model, that we think that they have the silver bullet, if you will. Certainly things that we can learn from it, and certainly there are opportunities for us as an organization to find ways to be more efficient, which is one of the reasons why we are investing, and you're starting to see the incremental benefits come through in our expense ratio. We'll continue to do that. The greatest challenge, the greatest opportunity, the greatest competition is us competing with ourselves as to how we improve our business. We do not feel particularly threatened, if you will, by any of the initiatives that I'm aware of today. Certainly, it is a good catalyst to force us to continue to try and improve.
Anybody? I've got one that I definitely want to ask. We just spent a lot of time talking about the right-hand side of the balance sheet. Over time, it's the left-hand side of the balance sheet that often really drives total return over a long period of time. Maybe you could talk, your approach to investing has always been a little different than some of your peers, a little more successful than a lot of your peers. Maybe just talk about the total return approach, the success you've had with real estate, some of the other ventures, how that all fits together with the overall Berkley approach to running the company.
I think that we target our returns based on return you get with a risk-free rate of return. When the highly liquid securities markets don't give you adequate returns, we start to look elsewhere. We look in private equity. We look in partnerships. We look in real estate. We look in all kinds of things, always focusing on risk and liquidity. We have been very successful. Originally, I did most of that investing personally and did well. In the past couple of years, we invested in HealthEquity, Inc. and made, I think, probably close to maybe $900 million on an $18 million investment. We have been a successful investor in private equity. We continue to look for opportunities. We've done the same thing in real estate. We've searched for opportunities and
Can I ask
Yeah, go ahead.
Can I slip a question in there? When you have done a terrific job on some of these HealthEquity, Inc. and so on. When you think about those types of investments, is it the management? Is it the product? What turns you on?
It's always the opportunity and the management. It takes both. You find good opportunity, you only invest in a good opportunity if there's good management in place. You need both. We don't do lots of transactions. We invest only in a very few things, and it's proven to be worthwhile. The same is true in real estate. We find real estate opportunities that we think are with great partners, and we generally invest either with great partners in diverse locations or in very specific locations. Basically, New York, Washington being the cornerstone ones, where the real estate markets are limited, where we've been able to do quite well. We really are limited in what we do. We search for good opportunities. Again, we want to always be prepared to own them forever, even though that's not our plan.
We're always prepared to, and that's one of the good things about our business. We never will run out of time because we can hold them as long as we make good fundamental decisions. We continue to work on that and continue to look for opportunities, and convert some to cash as they mature, and continue always looking for other special opportunities.
Anything else from the crowd? We got time for one last question. Otherwise, I'll pitch it out there. Lightning round question. Everybody likes to talk about M&A. W. R. Berkley company has done a few, that's really not your bread and butter. Maybe share some of your philosophy or thinking on that.
By and large, the sellers always know more than the buyers. The insurance business is fraught with problems and issues and loss reserves and pricing and all kinds of things. You have to have a lot of confidence that you understand why the business is for sale, you understand what to do, and you have the talent to carry it forward successfully. There aren't many times where that criteria is filled, and we find it better to get great people and start afresh. It isn't as good accounting wise, but it is much better on a cash basis.
It's really consistent with all the long-run, big picture, time is on your side approach that you've answered for most of these questions, to be fully blunt about it. I think that's pretty much the end of our time. I don't want to be the guy that messes up all the rest of your meetings. Please join me in thanking Bill and Rob for their time today. I think some of you may be seeing them. There's some group sessions shortly after this session. Thanks very much.