W R Berkley Corp (WRB) 2002 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the W. R. Berkley earnings conference call. At this time I would like to inform you that this conference is being recorded for rebroadcast and that all participants are on a listen only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. The speakers' remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words, including without limitation, believes, expects or estimates. We caution you that such forward-looking statements should not be regarded as a representation by us as the future plans, estimates or expectations contemplated by this will, in fact, be achieved. Please be referred to our annual report forum, 10-K for the year ended December 31st, 2001, and our other filings made with the SEC for the description of the business environment in which we operate and the important factors that may materially affect our results. W. R. Berkley corporation is not under any obligation and expressly disclaims any such obligation. To update or alter its forward-looking statements,

whether as a result of new information, further events or otherwise, I will now turn the conference over to Mr. Berkley. Please go ahead, sir.

Well, I hope all of you noticed that we labeled this call differently. Historically we've said this is our quarterly conference call. This time we said it was our quarterly earnings conference call, which is really a pleasure to have for a change. While we're pleased with our quarter, everything is moving in line with our expectations. It is unfortunate that people look at the results and don't really look back on the past 18 or 24 months when all the things that were going on have been taking place. Things like our employee count which every quarter has continued to go down and continues to go down even in this quarter by about one percent. Things like price increases which have been taking place and continue to take place throughout our business. Change in underwriting, terms and conditions, all of which continue to help make this an excellent quarter, but what we hope will be just the beginnings of a period of time where our 15 plus percent return on capital is a reality.

I think the high points in the quarter can be sort of looked at. Growth every place, strong with

a great effort to focus on maintaining service, responsiveness to our customers. It is one of the reasons our regional business has been growing so rapidly in spite of the fact that we're getting out of personal lines business. We laid out the groundwork for what we were going to do two and-a-half years ago. We began to implement that last piece of the implementation getting out of the regional business, personal lines, and we just haven't missed a beat. The people in those companies have done terrific. Specialty business continues to be strong, premium volume is strong across-the-board, especially strong in the areas of our long-haul truck business, commercial auto, and we're real pleased with that and we're just beginning to see hit ratio get something above where it was. We've been quoted on a lot more business but the hit ratios haven't gone up. In fact, have gone down slightly. So the number of policies in force has not increased. We really expect that that will continue. So from our point of view, we think that the business will grow at an increasing rate.

The reinsurance business, there are really several pieces that created that increase in the volume in reinsurance area. The premium business grew somewhat, but it really grew because we've been cutting

back the business now for two years. But the fact that again had an excellent quarter, premium volume grew about by 120%. The new business from Berkley underwriting Partners, which is primarily the two that we did (inaudible) added about $38 million in premiums for the first quarter and Berkley underwriting Partners, which is another area we had gotten into about two years ago, which is with a couple of very specific low-level casualty business in the MGU business with just a couple of companies generated about 15 or $20 million of business. So none of which were overwhelmingly growth, but when you add them all up, it is really a tremendous increase in volume in the reinsurance area. Alternative market business, again excellent results, tremendous improvement in pricing and outstanding results. We see our fee income rising business being put in the various state funds are increasing. Overall a terrific quarter there. International business, Philippines continues to do extremely well. We continue to deal with our issues in Argentina. And while we're not generating the kinds of earnings we've had in the past, we really have terrific people there who have done an excellent job managing the enterprise and preventing us from having adverse loss developments or experiences. So overall, we look at the business, we're extremely pleased. If anything, the business is better than we expected. The loss ratio's by segment have come in and we certainly are very pleased at where we're going. I'm going to let Gene talk a little bit about the numbers and then I will come back and talk again.

Thanks, Bill. Like Bill said, I'm also very pleased to be able to report on the results of the first quarter which set a record for us in terms of both premiums and operating income. I think Bill managed to present some of my report but I will continue with the details. Our operating income excluding realized gains and discontinued operations was 32 million or 90 cents per diluted share in the first quarter of 2002. This compares with 2001 operating income which we restated to exclude the discontinued business of 10 million or 36 cents per share. Net income was 99 cents per share in the first quarter of 2002 compared with 36 cents per share last year. Gross premiums written continued to increase at an accelerating rate for the continued business units for the growth and premiums for the last five quarters starting with the first quarter of 2001 was 14%, 22%, 28%, 46% and now 62% in

the first quarter of this year. Total gross premiums for continuing business was 749 million including approximately 38 million from the Lloyd syndicates that Bill mentioned that are managed by K. P. L. C. and Premium Capital. All of our segments (inaudible). Overall premium growth was primarily due to price increases with only a 3% increase in policy counts for our ongoing business units. The individual business units with the largest increase in gross premiums for the quarter were Facultative Reinsurance with 120%, excess workers' compensation company with an increase of 110% and our specialty long-haul truck company with an increase of 164%. Underwriting results for the active businesses improved by 42 million to an underwriting profit of approximately 20 million in the first quarter of 2002 compared with an underlying loss of 22 million last year. The combined ratio improved by 11 points to 95.5% as a result of a six point improvement in the loss ratio and a five point decrease in the expense ratio. The improvement in the loss ratio was driven by a significantly lower level of paid losses for the continuing businesses, the paid loss ratio decreased 20 points to 51.5% in the first quarter of 2002 from 71.8% last year with an increase of 59 million in net loss reserves, that converts to a paid

to incurred ratio of 79.8%. The improvement in the expense ratio reflects the impact of price increases as well as the expense initiatives undertaken over the last two years. Also as a result of adopting FASBE 142 there was no good will amortization in the first quarter of 2002 compared with good will amortization with slightly less than $1 million after tax last year. Revenues from insurance services increased 15% to just over 20 million and service fee income increased 48% to 3.5 million. The pretax return on fee revenue for that business was 17%, up four points from last year. The runoff of our discontinued personal lines and alternative markets reinsurance businesses continues to be on schedule. These inactive units reported only 3 million in written premiums and just 22 million in earned premiums in the quarter. The underwriting loss was 1.9 million and there was no change in prior year reserve estimates. The net reserves for the discontinued businesses decreased by 30 million to just under 200 million as the claims are continuing to run you have off. Our investment income was 44 million in the first quarter of 2002, down six million from last year. Although invested assets were higher this year, our interest income was impacted by three key factors. First, income from our merger arbitrage business was down approximately 3 million, from 7 million in 2001 to 4 million in the first quarter of 2002. The annualized yield on the merger arbitrage account was 3.2% this year versus 6.1% last year. After the end of the quarter we did reduce our allocation to the merger arbitrage business by 150 million and the total portfolio for both merger arbitrage managers is now approximately 350 million (inaudible). The lower yields on invested cash resulted in a decrease of another 3 million. The lower yields were compounded by the fact that we had a higher than normal cash balances following our stock offerings in November and our decision not to commit to longer term securities at interest rates that were available in late 2001. As it turned out interest rates have increased about 90 bases points since we closed the offering from around 4.2% at that time to 5.1% today. So it was the right decision to wait but it did impact our earnings in the short run. The third factor was we stopped accruing our interest on Argentine bonds until the economic situation in Argentina is clarified, and this reduced our investment income by approximately 2 million. Operating cash flow was 94 million in the first quarter and the carrying value of our investment portfolio increased approximately 100 million to 3.7 billion. The average annualized yield on the overall portfolio was 5.4% this year compared with 6.7% last year. Finally stockholders equity increased to 948 million and book value per share at March 2002 was $28.40.

Thanks, Gene. The bottom line is we're very pleased where things are. A couple of points you should all be heard and that is we've reduced our arbitrage account in the aggregate from what was about $465 million down to a shade over $300 million. That will have a significant improvement in our returns. We also have invested substantial amount of our short-term cash which will also generate some significant improvement in our investment income. So we think our investment income will be back on track by the end of the quarter. We're quite optimistic about that. Overall, we think it was a good quarter. We think that the quarter will get better. I would be glad to have any questions that anyone has.

The question and answer session will begin now. If you are using speaker phone please press the handset before you ask any questions. Please press one follow by four on your push button phone. If

you wish to withdraw please press one followed by three. They will be taken in the order they are received. Please stand by for the first question. First question comes from Jay Cohen. Please state your affiliation followed by your question.

Jay Cohen from Merrill Lynch.

How do you always get the first question?

You are the only conference I do that. Fast fingers Cohen. The first is paid loss ratio coming down quite a bit. Do you see that being somewhat unusual with the low level of payments in the quarter, and I guess along with that, I'm assuming there is not much in the way of trades interpayments?

We developed as we're speaking we have relative small amounts of trade exposure I think we probably paid half of our trade center claims already but we paid a lot. The high aggregate for trade center is really quite small. Secondly, we think that to the pay loss ratio is sort of in line with where we saw it during the mid-'80s where we were running sort of 80%, 85%, 78% but below 85%.

So not particularly unusual?

Not for times where pricing is adequate.

Right. Second question. Obviously the growth in the long-haul trucking side has been significant. What do you see from a claims standpoint there. That was obviously an issue several years ago. Are you getting better pricing? Can you also say that the claims environment is better as well?

As we said basically 18 months ago it was like a switch went off when Frontier and Alliance got off the business, prices went up dramatically beginning in October of 2000. We have continuing price increases. We've been able to effectively reduce credits and improve terms and conditions modestly. The paid loss ratio was 47%. We're really quite pleased with where that line of business is. Honestly, we could make the business grow even faster if we weren't trying to be as disciplined as possible about where we're going, what we do. I think that the current prices roughly is $5,000 a power unit, which is almost double where it was 18 months ago and by almost every standard we can use as profitable.

It is a line of business where people are appreciative of the long-standing players in the business and in times like we're in now, when everyone is charging higher prices you tend to believe that the people who have been in the business a long time are more likely to stay in the business if things get a little more difficult. So we think it is a good part of our business. It is a good area. We think we've improved the company dramatically with a pool of talent that's given us a lot of opportunities and hopefully we'll have a better level of discipline if and when prices start to move downward.

Thanks, Bill.

Our next question comes from Nicholas Graves. Please state your affiliation followed by your question.

After capital I don't know how I beat all of these Wall Street analysts here either. Hi, bill. Could you talk a little bit about the loss picks that you have established for your current business and how does that sort of decision evolve given what the environment has been?

Our loss picks we start by looking the our past year's loss ratios and what are the embedded price increases that have gone on. Those

numbers frequently, like they are a little too aggressive so we back off those numbers somewhat. It is not really as precise. I think a got named Chesterfield once said about numbers that they seem so precise and accurate, and unfortunately somewhere in that precise and accurate calculation, there's an error in assumption and you find out they are wrong. Our loss picks are substantially higher than what our price increases would indicate would be called for. So our current loss picks are really quite conservative.

Thank you very much.

I think that we also have tried (inaudible) inflation and all kinds of things. The history tells you, Nick, when prices are going up, you are conservative. When prices are going down you are optimistic just because of the nature of price change and its impact.

Thanks, Bill.

Our next question comes from Alice Schroeder, please state your affiliation followed by your question.

Good morning, Morgan Stanley. Bill, a apologize this was partially covered in your opening remarks but the conference

center kept putting me into the Saber conference call so it took me a little bit to get into your call. You may have covered this but how much of the growth in the reinsurance came from the new treaty facility you have got.

Let me go through the pieces of that. Facultative group by roughly 30 million dollars. Then treaty business, standard treaty only grew by about $5 million. Fidelity and surety went down. Then $38 million came from London.

Okay.

Six million of the growth came from Berkley Underwriting Partners, and that is we have two pieces of MGU business with low limits and that's basically the total.

Did you say six million?

Six million.

Then my second question was on the alternative market business of very strong growth that you reported there, I'm at the Alliance for American Insurers right now. One of the agents thing that the agents and brokers are talking about is more than half of the business in the market that they are seeing, especially in the large accounts

is actually going into alternative markets in state pools and they are basically saying that I'm not sure it is ever going to come back.

Alternative market segment of our business, a large part of it is fee income. So you don't see the volume of business going in. Our fees, let's just say are anywhere from 8 to 15% of the premium going in. So I think the place to start is understand, for example, the Minnesota assigned risk plan for workers' compensation went down from 220 million to something like $20 million over a period of four years, four and-a-half years. So that -- those kinds of pools just virtually disappeared. In fact, it became uneconomic for people like us. Those pools are starting to grow back very quickly, but even today they are less than half the size they were five years ago. So there's a lot more space in those pools. They do just what they are supposed to do in markets like this. They act as a buffer where people can't buy insurance because of the various dysfunctions of the insurance marketplace. The alternative market workers' comp business just all of a sudden people got rational and some of the people started to say hey, you can't buy it for this price. They are not giving it away any

more. There is a whole lot of things happening there. We think our market is going to grow more but it is not only growing. You have got a lot of people who are players in the market who never gave good service, who never priced particularly well and that business is now saying hey, wait a minute. We need to find a real relationship because self-insurance is about not paying on extra margin. It is not about trying to get a bargain at a certain point in the marketplace. So I think what you are saying is people who should have self-insured but to get a bargain in the marketplace are now moving back to self-insurance. We had several clients who left the self-insurance marketplace because they could buy it so cheap in the market. I think normally what you are seeing, I think the alternative market is going to grow quite a bit. We think it will be more and more important segment of our business and in fact, we're looking for opportunities to expand there because it is a very noncapital intensive business, so Red Langford who runs that for us is out beating the hills for those we can do where we can expand that business.

Okay. Great. Thank you.

Once again should you have a

question, please press one, followed by four at this time. Our next question comes from Charles Gates. Please state your affiliation followed by your question.

Hi, I work for Credit Suites, First Boston. Good morning, hey, congratulations on knocking the cover off the ball. Nice going.

Two questions. Question No. 1. It appears that you experienced 42% growth in gross premiums written in regional, 32% growth in net. So you retained less. Could you elaborate on what's going on there one, and two, the auto is out of this book now, or personal lines is out of this book now, isn't it?

Yeah.

Can you elaborate on the personality of what's going on there, sir.

First of all, we created a first layer of excess reinsurance that effectively is a layer where the underwriting profit will eventually inure back to us over time subject to certain risk characteristics and to ensure that we weren't in this environment being optimistic about our reserve picks for those higher retentions, we increased our internal reinsurance costs by 20% for those lower

layers which in essence allows us to put money in. We also reinsured the personal lines business that was at Acadia with Patriot Mutual Insurance Company. I think that was around $20 million, give or take. So that sort of distorted it because the other companies we let the personal lines business run off. In Acadia we reinsured the business, so that sort of distorted it for that quarter. So I think those two things. We're out of the personal lines business other than the runoff in the other three companies. And frankly, we're -- we're happy to be out of it. We don't think that's a place where we brought a competitive advantage.

The net of the points that you made reference to, Bill would served to have exaggerated your gross sales and the net would be a better?

No, quite the other way around. It would exaggerate the reinsurance seated out and the gross is a better indication, 42% is a better indication.

What kind of rate increases are you getting in that book?

Let's just say a range of 15 to 20.

What kind -- would you elaborate briefly on the personality, how large are the risks that you are writing in that book?

I would say our average risk, if you said 15 to $50,000 as a range, but what we would call middle market is the 25 to 50,000. We'll have -- we're probably moving up more toward $100,000 because of price increases. So what was 40 or $50,000 risk has now become $100,000 risk. But I would say the number of accounts that we write over 250,000 is extremely small.

As we look at the international result, the negative impact on earnings during the period as a result of turmoil in Argentina was approximately $2 million you made reference to.

Right. We did not accrue investment income on the government bonds that we own.

Would there be other items as you look at the income statement for international other than that?

Well, I mean the answer is that in the past we had underwriting profit. There are issues, life insurance, there are a whole array of pluses and minuses in international. The Philippines has done well and Argentina has lots of turmoil, and everyone is working hard to minimize our exposure. And honestly, relative to the world, we think we've done a very good job minimizing the exposure, but we're focusing now not on money, we're focusing that we still have our capital, which we think we've done a good job at.

My final question. Could you speak to pricing in excessing surplus lines, say now versus 12 months ago? That's my last question.

You can ask more, Charlie. It is all right. I would say in general pricing is somewhat better than 12 months ago, but I think that what's really happening at this point is the number of quotes that were being requested are high, our hit ratio is just beginning to creep up a little bit. In the small size excess of surplus lines, Nautilus area prices are getting better in a more significant way, probably a year ago it was probably 10 or 12%, I would tell you now it is between 15 and 20%, more like 20. So you are seeing that accelerating. I think in Admiral you are going to begin to see it accelerating more. But more important in Admiral is based on our experience in the mid-'80s, I think you

are going to start to see the hit ratio pick up as more and more people find how difficult the business is and people try and focus more on getting their business focused to where they understand what's going on. That really is what's beginning to happen in the trucking business, price increases are sticking it now. All of a sudden we're starting to get a higher hit ratio and that's why the tremendous volume increases are carried forward in the trucking business.

I didn't understand the hit ratio to the specific E and S area.

What's happening we're getting a lot of submissions and we're not getting -- we're getting a decrease in our hit ratio, in other words, the brokers are accepting less of our business. So our premium volume is growing but primarily through price increase, not much through increased volume, although we're being asked to quote on a lot more business. That really is what takes place at exactly this time in the market, as everything is in turmoil and all these changes are coming about. You normally, based on our most recent experience, which is '85, '86, '87, you will start to see that hit ratio go up. And in fact, your volume in that business will start to accelerate its growth.

Thank you.

Our next question comes from Jeff Thompson. Please state your affiliation followed by your question.

Good morning, JBW. My question if on your expense ratio it was 31% in quarter. Is that sustainable, is it anything unusual?

It is a little high.

It is down from last year. Do you think it can be lower as the year progresses?

We all expect it to be lower. Everyone's bonus depends on it.

Second question. Can you talk about the kind of claims activity you are seeing in the professional liability market?

You know, I don't think there's really been a lot of change. I think one of the things you are going to see, and I think you started to see is that as terms and conditions from business written in 2001 and going forward take place, you are going to see a decline in number of claims because there is more exclusions because that's a function of your terms and conditions. But as of now, I think what you are really seeing is the claims

activities relatively the same and premium volumes going up. But I think that you are going to start to see a decline in claims activities, especially in the areas like that because there are consequential changes in terms and conditions that have been put in in the past 12 months.

Great, one final question unrelated. What kind of reinvestment rates are you getting right now, pretax?

6.25 to 6.3.

Thanks.

Mr. Berkley, at this time we are showing no further questions.

Okay. Let me just give a quick windup and to say that we're pleased with the quarter would be an understatement. We're exceptionally pleased with the underwriting results. This has been a business where when times are difficult, you work the hardest and results never seem to appear. Everybody in this company has broken their ass to get things fixed and to work extraordinarily hard on trying to get where this business needs to be. I think that we're just beginning to see those results. And for those of you who notice the little words, we added in at least the 15% return. We're really

extraordinarily optimistic. That combined ratio is really a reflection of the work and effort of all the people in the field who have just really worked exceedingly hard to deliver these results. This company's results, I expect, will continue to be or exceed everyone's expectations. Have a great day.

Thank you, ladies and gentlemen. That concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.