Thank you everyone for coming. It's my great pleasure to welcome Bill Berkley, Chairman and Founder of W. R. Berkley, and Rob Berkley, President and CEO of W. R. Berkley, up on the stage with us here today. The W. R. Berkley stock has been one of, if not the, best performing property and casualty companies over recent years. During today's conversation, we'll touch on some of the reasons why, with the goal of giving investors some clues as to whether the competitive environment is ripe for Berkley to continue offering double-digit book value growth in the years to come. With that brief intro, I'll kick off our fireside chat formatted conversation with a question for Bill and Rob. Matching risk with adequate returns has been one of the cornerstones of Berkley's success.
Berkley's results have been relatively boring, and I'll say that as a compliment because investors do seem to reward insurers who don't surprise them with some volatility. I'm curious whether Berkley's ability to measure and manage risk-adjusted returns has meaningfully evolved in recent years, maybe with new data, technologies, reinsurance, or are you simply just doing the same blocking and tackling that you've always done?
[inaudible] Okay. Yeah, I think sometimes boring is good, particularly when it has to do with natural catastrophes and other types of events that could be a challenge for the insurance industry. As we think about the business, risk and return go hand in hand, and one needs to recognize that all returns are not created equally. One needs to think about the risk that comes along with that. There undoubtedly are an ever-growing number of tools that are helpful, whether on the data and analytics front or other types of tools to evaluate risk, to consider what the risk return opportunity is. Having said that, I think that amongst some, there is a false sense of security or confidence that people have as it relates to the precision that these tools will actually help you operate with.
Every time there's a meaningful cat event, I think we're reminded the imperfections of the catastrophe models, as an example. We have a view that when you think about risk, one needs to appropriately take into account volatility. I think one of the issues that the industry faces is certain lines of business that present volatility without frequency are oftentimes forgotten about or people do not focus on a day-to-day basis. We take the same philosophy today that we always have in how we think about risk-adjusted return. We appropriately take into account volatility as a component of that risk. Clearly, there are tools that allow one to evaluate risk more effectively than perhaps we could in the past.
At the same time, it really starts with what is your philosophy around risk and return, and really your focus and determination to ensure that you are receiving an appropriate return for that risk that you are taking on.
We've always been a company that had an initial orientation of creating value and understanding the risks we take. It's the start of our business. The orientation as an investor-owned enterprise. The value of predictability was clear to every investor from going back into the '60s and '70s when you had the Nifty Fifty, where people really liked predictability. When we started, we had occurrence limits in all our policies. We had million-dollar policy limits. We did all kinds of things. As we've gotten bigger, we've done the kinds of things Rob was talking about with that same viewpoint. Constantly understanding risk and constantly understanding what do we need to do on a macro and a micro basis to minimize that volatility and improve our ability to predict outcomes.
Can't get it down to the dollar, we can generally reduce the level of volatility, and we think we've been more successful than most at doing it.
I think one of the things, just continuing on this topic of volatility that is oftentimes forgotten about, particularly when you've been through a period of time where the loss activity, particularly the cat loss activity, for example, has been reasonably benign, is that people forget about if the goal of the exercise is value creation over an extended period of time, when you blow up a quarter, let alone you blow up a year, even if it's only once every 10 years, that is a significant setback. Again, if the goal is long-term value creation over time and the obvious power of compounding. I think we see that perhaps most recently in a very pronounced manner in the property cat space, it exists in other parts of the business that are susceptible to volatility as well.
Along the conversation of risk versus reward, if you can talk a little about commercial auto. It's been a trouble spot for most insurers for many years now. Profitability has not hit targets for Berkley as well, is my understanding. On the most recent 4Q earnings call, I got the sense, Rob, that you kind of alluded to seeing a light at the end of the tunnel. Correct me if I'm wrong. Do you feel you're getting close to potentially growing that line of business, and what would it take to grow it?
Yeah. The light at the end of the tunnel hopefully isn't a truck that's coming at us. Our perception is, as you suggested, commercial auto has had a pretty tough go for several years at this stage. I think there are lots of theories around it. Some would suggest it's as a result of distracted driving and texting, so on and so forth. Others would say it's a resurgence in the plaintiff bar and large trucks going down the road are a bit of a target for them. We can all come up with our theories. I think unfortunately, particularly on the auto liability front, there is a delayed reaction, if you like, to the industry recognizing how there was a shift in loss cost. Not only recognizing the shift as the loss cost moved up, but fully appreciating how severe that shift is.
I think the industry has brought that into focus, and I think they are actively grappling with it. I think some carriers are ahead of others, quite frankly, in assessing where they need to be from a selection and pricing perspective. I think things are clearly moving in the right direction. I think it would be premature to say that the auto liability market is a hard market. I would say that it is fair to suggest that it is a hardening market. How hard will it get? How long it will last? We will see with time, but it's certainly something that we are paying attention to.
It's a function of pricing continues in the right direction, even though you're not sure about what's driving the increased loss trend, you feel pricing could kind of get us over the hump then?
I think there has been enough data over an extended period of time to clearly support there has been a change in the risk. Consequently, again, that has come through on the loss activity, which is requiring carriers to respond. I think the industry overall was slow to respond. I think at this stage it is responding, though some carriers, I think are ahead of others in responding. There's certainly no evidence that we see at this stage that would suggest that direction will shift, at least for the moment.
Okay. If we switch gears to the homeowners initiative. When I think about one of your, Berkley's not-so-secret sauces to success, it's that it's focused largely in specialty lines where clients need and can pay for intellectual capital, the term you use. If you agree with that statement, does Berkley's foray into high-net-worth home, does it fit into that categorization?
I think we absolutely agree with the statement, one might pause. Do you want to comment then?
No, I think we've looked at this space for a long time, and we've considered it, you have to be opportunistic about every kind of startup you look at and every time you get into a business. The right enterprise is for sale or the right team of people is available. Rob and I talked about these things and have for more than 10 years about finding opportunities. Rob came in and said, "Hey, I think we have this opportunity, why don't we take it from there?
Mike, to your point, yes, again, we are very much an organization focused on specialty business because we think the specialty lines, again, as you suggest, allow us to differentiate ourselves based on intellectual capital or expertise. There is a reality that we need to accept, and that is we as an organization will probably never have the cheapest cost of capital. It's possible while we care about efficiency, we may never have the most efficient factory floor, if you like. We need to think about how are we going to play the game, how are we going to differentiate what is going to be our competitive advantage? We have concluded our competitive advantage is going to be, again, our intellectual capital and expertise that are housed within the organization, ultimately, which are the people with those skill sets.
Personal lines, in general, is clearly moving more and more in the direction of being a commodity with every passing day. From our perspective, the high net worth space, which is the space that we are focused on, is a space as suggested earlier, that we have been examining for more than a decade. We believe is a part of the consumer or the personal line space that is a specialty line. It is a specialty line because you have a customer base that is certainly conscious of cost and price, but they are willing to spend more for what they perceive as value. The nature of the risk, the nature of the assets that they have oftentimes lends themselves particularly well for expertise to be brought to bear, both on the underwriting side and certainly as much, if not more so, on the claims side.
When we began to look at the space a decade ago plus, we came at it very much from the perspective that this is a specialty business that we would like to be in, that we think fits in very well with our general
Market we elect to participate in. Sticking to home for a minute, can you talk about Berkley's distribution strategy in homeowners? Certain competitors that focus on the high net worth space have talked about an immense opportunity that resides within some of the home insurers that do not, I guess, cater to the high net worth space. It doesn't seem like those insurers have been able to figure out how to actually get those clients to transfer over to their portfolio. Is there anything in distribution strategy we could learn about?
I think that the issue you face are customers want a differentiated service. They don't want the same service. They want to know that we're going to take care of their problems. They don't want to hear about what's not covered, what is covered. They don't want to hear about, well, the molding is not covered because it's 2 inches off the floor. They don't want to hear about those things. They want to know they have a claim, and it's covered, and someone's going to take care of it. They don't want to hear about, well, you want this kind of paint, but we don't cover that kind of paint because it's more expensive.
Those aren't the things they want, and that really means the claims department, the underwriting department, all the people that work on standard lines, homeowners standard line, automobile coverage, are either going to have to change their behavior, or you're going to have to have new people do it. Much harder to do that than just have a group that only focus on those high-end homeowners that deliver that top-quality service. Those people are willing to pay for it. It's not they want to argue. They want the service, and they understand it costs more. We think we're in a particularly good position to deliver that. The team we've put together is used to delivering that kind of service. It's what they grew up on, and therefore we think it's a great opportunity.
Mike, it was touched on a moment ago, but just to clarify, for us, this is a high net worth personal lines play, not just a homeowners, though obviously homeowners is a meaningful piece of it. As far as some of the customer base that perhaps is buried in mainstream personal lines and how are they going to be extracted into the high net worth space, I think there are a couple of pieces to that. One, you need to look at the existing distribution. When you get west of the Mississippi, particularly when you make your way to the West Coast, that the direct market has particularly high penetration there compared to the East Coast. I think this is going to be an evolution over time.
I think it's primarily going to, well, in the short run, it may be driven by agents desiring to find a better solution, a better fit for their clients as they recognize they're looking for a higher level of service, and they move them into the high net worth space. I think ultimately, like many things in this industry, it's going to be driven by the consumer. I think over time, you are going to see the consumer being far more proactive in making these types of decisions as to who is their provider, what is the coverage that they want, what are the types of services.
While I think clearly there is an important place for intermediaries in the future, at the same time, I think you're going to see the consumer, particularly in the personal line space, be far more proactive in deciding who is their provider and what is it they're looking for. I believe, I think we believe, that goes hand in hand with the consumer being more knowledgeable and informed about the services that they want and how they want to be treated.
Just to clarify, that's an interesting commentary. Will Berkley One offer the ability for consumers to purchase directly from Berkley One, or will it?
At this stage, Berkley One is solely distributing through traditional distribution.
Okay.
At some point in the future, is it possible that they would reconsider? I guess it's possible, but the Berkley One management team will make that decision over time, no different than the 52 other businesses that make up our group. Each one of those businesses is making decisions around distribution as they see fit.
If there was one line of business where great agents can make a difference to that customer, Berkley One is it. Knowing your customer, knowing about their art collection, and their libraries, and their cars, that knowledge really delivers value to the customer. Berkley One, we think, speaks well for an agent that's knowledgeable doing a good job.
Let me switch gears to the investment portfolio. Berkley's investment returns levels have handily outpaced peers over most historical time frames. Can you discuss whether investment management is a skill set you believe to be a core competitive advantage? If the answer is yes, perhaps you can shed more light on Berkley's investment operations.
I think that from our point of view, investment management is a skill set every insurance company needs to put a development of how you invest. The core of our portfolio. We think we have lots of people within our group, not lots, but a number of people who do an outstanding job. We do some other things, too. We think most of the people we compete with do those things also. We invest in real estate, we invest in private equity, we invest in all kinds of other opportunities that come our way. I think that just like the insurance business, we're disciplined about it. When we couldn't get returns in our bond portfolio, we looked and said, "Hey, we can't get returns here. What can we do to get returns?" We bought multi-family housing, which could give us a 5% return.
We bought other kinds of securities, other kinds of opportunities. It's a more flexible approach. I think it's great capabilities, but flexibility with understanding that what we are is we're not locked in a particular grid. We're constantly looking for what can we do, how can we do it, what are the opportunities? Those change, and the risk parameters change. I think the same risk-return strategy that helps our insurance business helps our investment business.
Maybe we can talk about insurance margins. Rob, you've made comments about the power of the potential for margin improvement coming from the potential to refine the portfolio. Some of us, at least in my seat, see focus a little too much on pricing versus loss cost. Maybe you can shed some light on how the process works of refining the portfolio.
Well, I think in fairness to you and others, you make these observations based on the information that is available to you other than the comments that we share. It's hard to really have an appreciation for the constant refinement that's going on within our underwriting portfolio. At any moment in time, there are parts of the business that we are de-emphasizing. There are other parts of the business that we are emphasizing, and in some cases, there are parts of the business where we are, on a rare occasion, exiting the line of business altogether. Simultaneously, there are new product lines.
When we look at our portfolio today and we look at the actions that we have been taking over the past 18 months or so, both from a selection as well as a terms and conditions perspective, we think that there is more leverage in that that will be coming more visible over the coming quarters than just the math when you think about loss cost trend and rate. We think that's meaningful on its own, but there's more leverage in the change in the portfolio itself.
Just to clarify, so you feel that in the next 12 months, based on not holding you to this, but looking forward, there's more opportunity to cull and refine versus if we were speaking here a year ago?
I think that it is an ongoing process, over the next 12 months, you will start to see it come through in our reported results. Obviously, it takes time when you make certain changes for that premium to earn through and for that book to season. Again, I think that you will see a benefit that is coming through in our loss ratios over, again, the next 12 months or so, plus or minus.
Maybe we switch gears to Insurtech. I'll be honest, it makes my head spin. I've gone for an Insurtech conference, there's hundreds of companies to meet with. I really don't know who to meet with. If we step back, most new companies are formed in order to solve a problem. I'd be curious if you guys feel there are any challenges in particular you feel are ripe for startups in the Insurtech land to tackle in the coming years, and separately, how is Berkley involved in the world of Insurtech?
I think the Insurtech clearly has a role in helping the industry move forward and bring more value to all stakeholders. Having said that, when you go to an Insurtech conference in Las Vegas and there are 6,000 entities all running around thinking they have the best idea in the world and they're going to solve the industry's problems, I think we have a lot of challenges as an industry, I'm not sure if we have that many needs for solutions. For us, we tend to look at where is the greatest inefficiency as an obvious place for where Insurtech can help bring value, whether that be in the moving information around, whether that be in the transfer of information in general, whether that be in understanding risk.
Wherever there is the greatest inefficiency, both on the cost front as well as the information flow front, I think are two areas where there's particularly low-hanging fruit. That would be my thought. I don't know if you have.
I think, by and large, technology has been around, artificial intelligence has been around. People have used various types of mathematical forecasting, and the most used place has been the weather, but the weather forecasting has not gotten better. The reason for that is while the large scale forecasting for weather has gotten better, the large scale forecasting doesn't tell you in your micro neighborhood what's going to happen. Insurance is a lot like that. The detailed knowledge and expertise you need for what you're doing and what decisions you're making is just beginning to come into its own. I think that technology is going to help the insurance business, but it's the handling and the work with data and how you get to use it, and what you can use it for that's going to change it.
It's always looking in the rear view mirror, and the world is changing ever so quickly. I think it's going to help. I think it's going to change things, but not nearly so fast as most people think, except in the administrative area. In the administrative area, the systems, accounting, all those things will get better. We'll speed up, and you'll lower the costs of doing business. That's still a small amount of the total cost of insurance.
I'll ask one more question, and I'll see if anyone in the audience has a question. My question's on M&A. A good deal of insurance carriers that have engaged in M&A have cited "increasing their relevance" as one of the justifications for doing the deal. Reinsurance carriers in particular, but primary insurance carriers as well. Berkley has been in the reinsurance business for decades, but it's a much smaller piece of the business today, given risk-adjusted returns haven't been what they used to be. Can you elaborate on whether relevance is something that Berkley thinks about?
Certainly relevance is something. It's a phrase that we've heard in the past, not necessarily as it relates to just reinsurance. I think it relates to a variety of different businesses, and it's something that, in my opinion, it's almost oftentimes an excuse that people use to justify deploying capital at times when the available risk-adjusted return does not warrant the deployment of that capital. When we look at the reinsurance business, we think that clearly there is a future for it. Has it evolved from what it once was? Yes. Will it continue to evolve? Yes. We continue to be pleased to participate in the reinsurance market, but we are going to continue to participate in a way that we think makes sense for our shareholders. Ultimately, we are in the market every day at terms, conditions, and pricing that we think is appropriate.
We believe it's important to offer the market continuity. To the extent that there are others that are willing to take on the exposures or the risk at what we believe is an unreasonably low price, yes, the business will move away from us, and it will move to them. That will not go on forever. History would certainly suggest there is growing evidence that the momentum is about to shift. The pendulum is going to start to swing back in the other direction, our willingness to keep our powder dry but keep a foot in the water will be rewarded. What we've done in the reinsurance space is perhaps a little bit more visible than when we have taken similar action in other parts of our organization.
Our commitment to underwriting discipline is something that we believe in greatly, and we take this similar approach in other product lines as well. Reinsurance is not unique for us. I expect over time you will see the reinsurance business within our group grow. Certainly, we are benefiting from some of the changes in the reinsurance market outside of the United States, and there are early signs that you'll start to see that occur in the U.S. as well. Again, I think we will be rewarded for the discipline and the patience.
Anyone in the audience have a question? Hey, Rita, the mic will come to you in a second.
Based on your comments about personal becoming more commoditized, personal lines over time, would we expect over the next, say, five or 10 or 15 years of some long period of time to see more commercial exposure than personal outside of the initiative you just went through, the Berkley One? What would be your views there?
Sorry, to make sure I understand the question, do we see what's happened in the personal line space spilling over to the commercial line space as far as commoditization? Is that the question?
Well, I'm trying to reconcile your comments about the personal lines being commoditized.
Yes, sir.
The Berkley One initiative. Just trying to think through like-
Yeah, I think what we're trying to articulate, and perhaps we haven't succeeded but let's try again, is
If you are buying insurance from, I guess I can use names, why not? From GEICO or Progressive, or Allstate or State Farm, or other household names like those, the product you are buying and the experience that you will receive is notably different from the experience you will have if you go to a carrier that is in the high net worth space. We are interested in participating and are in the process of building out an operation that will participate in the high net worth space. It's no different than, at least in theory, I don't know if in practice, if you go to buy a Chevrolet, it is going to be a different experience perhaps than if you go to buy a Mercedes-Benz. The product is different, the experience is supposed to be different as well.
We deliberately try and avoid products or parts of the industry that are more easily commoditized. We do not want to play in the space where a GEICO or a Progressive or a State Farm or an Allstate has elected to participate, because that is a scale business, that is a commodity business, and they do that very well. We are much more interested in focusing on parts of the industry, like the high net worth space, where you differentiate yourself and you de-commoditize the product through the service and the expertise you bring to bear. We view, yes, it is all under the consumer umbrella or the personal lines umbrella, but the actual product offering and the service that goes along with that product is really like day and night between the mainstream personal lines and high net worth space.
Any other questions from the audience? I'll sneak one last one in. We have a couple of minutes. Cyber insurance is the topic. It seems like corporations. It seems like there's more demand than supply in the marketplace. The brokers would like to increase supply. There's been many insurers, some very successful insurers that have vocally said that they do not want to make it a meaningful line of business due to just a lack of ability to price the risk. What are Berkley's thoughts about that small but fast-growing line?
Look, clearly, cyber is a tremendous opportunity, but cyber insurance, from the perspective of a carrier, it's kind of like fire. You can cook your dinner with it, and it can keep you warm, but if you're not careful with it can burn your house down. Clearly, cyber exposure is a growing need that society is grappling with, and it is the opportunity and the role for the insurance industry to help society manage that risk. We do have a participation in the space. We have elected to be what I would define as very measured, recognizing, again, Mike, the point that you alluded to, that there is a very limited amount of historical data that is available to help one understand what the loss costs will be and to predict the future.
In addition to that, the further complication is that it is the exposure itself is evolving and changing so quickly that historical data is helpful, but it is not as telling as it would be in other types of perils or exposures. When we look at the product, we are very pleased to participate and to offer it to our customers. We are very selective in how we participate. We acknowledge the fact that there is truly imperfect information available from an underwriting perspective for the reasons that I just referenced. We think clearly it is an opportunity to bring value, and we are focused on doing it, again, with a keen eye towards risk-adjusted return.
Our approach that we talked about earlier as it relates to property cat or investments, that we take that approach in underwriting across the board and cyber would be included in that. We are trying to be very thoughtful and measured.
Okay. Well, let's thank Bill and Rob for their insights. Thank you very much.