W R Berkley Corp (WRB) 2002 Q2 法說會逐字稿

Welcome, ladies and gentlemen, to the W. R. Berkley earnings conference call. At this time, I would like to inform you that this conferences is being recorded for rebroadcast, and that all participants are in a listen only mode. At the request of the company, we will open the conference up for questions and answers after the presentation.

The speaker's 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 that procedure plans, estimates or expectations contemplated by us will in fact be achieved. Please refer to our annual report on form 10K for the year ended December 31, 2001, and our other filings, made the SEC, for a 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, future events or otherwise.

At this time, I would like to turn the conference over to Mr. Berkley. Please go ahead, sir.

Thank you, [INAUDIBLE]. Um, we, we were very pleased with, with our quarter's results. We're pleased with where things are. Um, at this point in time, uh, when, when we look ahead, uh, we, we think the market will, in fact, reflect what our expectations have been all year, which is a continuous improvement in pricing and volume. Uh, in, in conversations with some of our operating unit heads, people thought January was a great month. And, and they're finding out, in fact, July, which is the next big renewal season for many kinds of, uh, of business and many pieces, uh, show the even more dramatic price increases and the start of increases in volume.

So, we're very excited. We, we look at our business now as in sort of the second stage of price increases, which will go, we think for the next 12 months or 18 months. Or price increases will continue, uh, well into double digits. And we'll start to see volume increases as the number of policies start to grow, also. Uh, this I mainly by people suddenly realizing they can't get the bargains they thought they were going to get.

So, we would expect that the next 12 months, uh, an accident year basis will result in continued increases of price, and the beginning of the acceleration of volume. Uh, which, which means that on an operating basis for, for reported earnings, we've got at least 24 months, uh, if not more, for increasing profits. I think when we get tot he middle of 2003, uh, we're, we're likely to have a slowdown in price increases, but price increases continuing. And, uh, peak prices, uh, probably in the first or second quarter of 2004. Uh, and, which, which means peak reported earnings in 2005.

So, we think we have a good run left. Uh, I don't, I hope we don't make the mistakes we made in 1985, that by the time we got to '88 we thought gosh, we ought to stop growing, which was a terrible mistake. Because enormously profitable business, uh, occurred during '88 through '92. And, uh, we didn't take maximum advantage of that situation.

If I look at our business by segment, just a quick overview. Our regional business continued to do well. Uh, a few problems here and there that one would expect. Uh, being, uh, a broad-based company, there always are issues that you come across. But I think the business continued to show good underwriting results, a good return on capital, and excellent growth. Uh, that more than offset the decline and, in the personal lines business.

And, uh, we anticipate that business will have a great year, and we'll return to a more likely would be about 15%. Our specialty business, uh, in fact is meeting our fondest expectations. Uh, we would hope the specialty business would do over $800 million volume this year. Uh, profitability has continued to improve as prices are getting better. Uh, and especially this is one of the things that, that's a hidden benefit, and, and probably the, the most [INAUDIBLE] benefit is the change in terms and conditions. And that the negotiation, it's not sitting, sitting there on our financial statements. But in the long run, it is an enormous benefit. So terms and conditions, that hidden element, is there.

We're, we're expecting continued further and in fact an acceleration of the growth of the specialty business. Uh, it will in all likelihood be modestly larger than the regional business this year. Probably significantly larger next year. The alternative market business, which is focused on worker's comp, is growing very nicely. California piece and the excess, uh, worker's comp business, uh, continue to do terrific. And, uh, the, the fact is that all of the pieces of our comp business are doing exceedingly well. We're happy with where that's going, and see lots of upside.

Uh, our funds management business, where we're managing, uh, alternative market mechanisms for states, uh, continues to grow rapidly. And, uh, we, we expect that will result in an acceleration of profitability as the year goes along. Uh, with respect to the reinsurance business, our facultated business, which is very similar to our normal, uh, specialty business, uh, is bringing volumes up, uh, approximately 100%. And in fact, uh, July will be an all-time record month for their business. Uh, if they, if July continues, we're, we're, we're seeing an acceleration of the demand.

Uh, the new business that we're putting on in our quarter share areas, uh, the Lloyd's market business, uh, is a little over $30 million a business. Uh, and we, we think it's profitable, although we're being cautious on how we book the profits, because so much of their profitability is determined by catastrophe exposures. Uh, they'll go make money even with the wind blowing or the Earth quaking, but their level of profitability won't be determined until we get through a further period in this weather-related cycle.

Uh, finally, our key business, uh, is still not performing as we'd like. Uh, we, we've taken the [INAUDIBLE] preserving carefully, uh, it certainly is holding down the returns in the reinsurance business overall. But we, we believe that we need to be cautious there. Uh, given the nature of how these things are reported. Until we have our companies that we reinsure reporting to us on a conservative basis, we can never know whether we're being conservative enough.

And finally, international business, uh, has been hard hit by the peso. Uh, the peso in Argentina has gone from one to one to about three and a half to one, uh, which effectively reduces our premium by more than a third. Uh, we have an excellent management team in Argentina. And we believe that we will be one of the survivors, and assuming the country, in fact, survives. And we expect it will. Uh, that will be an excellent business for us in the long run.

The property casualty business in Argentina continues to be profitable. Uh, offset by the losses in the life business. So bottom line, we're pretty enthusiastic. We think it'll be a very good year. And we believe next year will be substantially better. Based on a whole series of fact, uh, our expectation for next year, uh, is for substantial improvements. Uh, let me let Gene talk now a little about the numbers, and then I'll come back.

Thanks, Bill. Uh, for the second quarter of 2002, our operating income increased 98% to $34 million from $17 million for the prior year quarter. And after adjusting for the three for two stock split that occurred on July second of this year, operating income per share was 66 cents in the second quarter, compared with 38 cents in the second quarter of 2001. Uh, the increase in operating income is primarily attributable to increased prices, as well as improving terms and conditions, which more than offset a modest decline in our investment income.

Gross premiums written for the continuing business units increased 54% in the second quarter to $708 million. This includes increases of 64% for the specialty business, 81% for alternative markets, 125% for reinsurance and 40% for the regional business. The increases in specialty alternative markets in regional business was primarily due to the price increases over the last 18 months. As the aggregate policy count for those three segments increased by just 4% from June of 2001 to June 2002.

The increase in gross premiums for the reinsurance segment reflects approximately $32 million from the new Lloyds quota share business, and an increase of 105% for facultated reinsurance, and a slight increase in treaty business. Uh, partially offsetting the increases for those four segments was the decline in gross premiums for international business that Bill referred to, due to the low exchange rate for the Argentine peso.

Underwriting profits for continuing business segments were $23 million in the second quarter of 2002, compared with an underwriting loss of $8 million in the prior year quarter. The difference of $31 million reflects improvements of $19 million for the specialty segment, and $11 million for the regional segment, again as a result of higher prices and better terms and conditions.

Weather related losses for continuing businesses were $18 million in the second quarter of 2002, compared with $16 million in the prior year quarter. Combined ratio for the continuing business has decreased over seven points, to 95.3% this year, compared with 102.5% in the prior year.

Uh, compared with the first quarter of 2002, the combined ratio decreased by 2/10 of a point. Uh, the combined ratio, ratio for the specialty segment decreased by 8.5 points compared with the first quarter, as a greater portion of the earned premium in the second quarter was written at substantially higher prices. This was partially offset by an increase in the regional segment combined ratio, due to, uh, normal season weather related losses. And an increase in the reinsurance segments combined ratio due to an upward adjustment in the estimated loss ratio for the 2002 calendar year.

The expense ratio improved by 4.5 points to 30.7%, uh, due to higher premium levels, as well as the expense initiatives that we've undertaken over the last two years. Uh, also with the adoption of [Fasby 142], there was no good will amortization in the second quarter, compared with good will amortization of approximately one million after tax in the second quarter of 2001.

The continuing businesses reported a paid loss ratio of 49% and a paid to incurred ratio of 75% in the second quarter. In the first six months, loss reserves for the continuing businesses increased $139 million, to approximately two billion at June 30, 2002. Revenues for insurance services increased 10% to $21 million, and service fee profits increased 70% to $3.5 million. The pre-tax return on fee income was 17%, uh, this year, compared to the 11% in the prior year.

Those premiums for the discontinued business segment, personal lines and alternative markets reinsurance, decreased to under $2 million in the second quarter. The after-tax loss to this segment was, was approximately $3 million, due primarily to weather related losses for the remaining personal lines business.

Investment income was $45 million in the second quarter of 2002, compared with $50 million in the prior year quarter. Income for merger and, and convertible arbitrage accounts decreased $5 million from the prior year quarter, and income from fixed income and other securities was unchanged. We have reduced our allocation to merger a convertible arbitrage by $205 million, uh, during the second quarter from 541 at March 31, to 336 million at June 30.

However, most of this reduction occurred late in the quarter, and as a result, the average investment in arbitrage securities for the quarter was approximately $450 million. With a decline in the annualized yield in that business from 5.7% in 2001 to 1.2% annualized in 2002, uh, that decrease accounts for a reduction in investment income of approximately $5 million in the quarter. Uh, the average investment in fixed income and other securities increased about $500 million during the quarter, from, uh, uh, compared to last year, from $3.3 billion, uh, in, in the second quarter, $23.3 billion in the second quarter this year, compared with $2.7 billion, uh, in the second quarter of last year.

However, this increase was offset by a decrease in the annualized yield on the fixed income and other securities to 6% in 2002, from 6.7% in the prior year. Uh, the decrease was a result of both lower interest rates on new debt securities, as well as lower returns for invested assets for, for the international segment.

Our cash balance at June 30, 2002, was approximately $530 million. Operating cash flow for the first six months of 2002 was $239 million compared to $43 million in the prior year. And the carrying value of our investment portfolio overall increased, uh, almost $300 million from the beginning of the year, to $3.9 billion.

Realized losses in the second quarter were $8 million gross and $6 million after minority interests. Uh, as a result of the reduction in the carrying value of certain sovereign bonds owned by our life insurance company in Argentina. And this realized loss was the result of a decrease in the market value of those bonds during the quarter.

Finally, investment, uh, stockholders' equity increased, uh, $84 million from the beginning of the year to $1.03, $1.13 billion. And, uh, after the stock split, there were 50.2 million shares outstanding, leaving us with a book value per share increase of 8% at $20.18 at June 30.

Uh, uh, thank you, Gene. I think that, that there are a couple of points I'd like to raise and then just open up for questions. Um, I think number one, uh, that the nature of accounting rules, especially in the case of changes that were unforeseen in Argentina, uh, created that charge-off of bonds. Uh, I'm not sure the accounting rules, uh, give the optimal picture. But, uh, they clearly state that they have to charge off those bonds. And, uh, that business continues, and it, it, the, it's something we'll just have to accept.

But, uh, we, in fact, marked down and to realize loss an item that's really not been sold. But, uh, and in, and in fact the only consequential discrepancy, the other piece is, the discontinued six cents which revolve around personal lines was primarily a focus of losses relating to Texas. Uh, and a runoff of a personal and especially homeowners business and old related claims.

So, uh, tried to exclude that, we don't' use [INAUDIBLE] ongoing business. Uh, basically, uh, we, we couldn't be more enthusiastic. We, we're real confidence, and we think the best measure of, uh, how we're doing is to look at our paid loss ratio, which is under 50%, and our paid to incur, which is right around 75%. And you combine those things with a really enormous decline in the expense ratio, and you start to see that the, these are very fundamental changes that won't turn the other way for quite some time.

And we believe, uh, will really set us up to have a truly outstanding balance of the year, and forward to several more years. Uh, it's nice to, to, to know that a one-year calendar isn't how far ahead you look. You can look ahead with some degree of certainty for several years at substantially improved [INAUDIBLE] as well as financial results.

With that [INAUDIBLE] we can have, uh, open for questions.

Thank you. The question and answer session will begin now. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press one, followed by four, on your push button phone. If you would like to withdraw your question, please press one, followed by three. Your question will be taken in the order it was received. Please stand by for your first question.

The first question comes from Charles Gates. Please state your affiliation, followed by your question.

Bill, I feel honored to be the first one. Um,.

Yeah, you, you know, I think it's the first time that Jay Cohen didn't get the first question on these phones.

He's adjusting his AIG estimate. Um, I won't, shouldn't have said that. Hey. Could you elaborate on what you see in the excess and surplus lines business today, versus, say, six months ago?

Um, the, the, the one up to the minute piece I have, which is from [INAUDIBLE] is that their volume, uh, they just can't handle all the volume. That in the month of January, uh, they, they had a record month. And in July they were 125% of what their January business was, as of the end of the third week in July. So, what you're seeing is an acceleration of pricing, uh, based on their experience.

When I talked to the people at [INAUDIBLE], you're seeing much less resistance to the price increases, and a little more, more acceptance in general. But I, I can't tell you that they're [INAUDIBLE] stay, indicating an acceleration of the price increase. But I, I would guess if, if history follows, um, we're, we're about to hit an acceleration of improving, improving volume on a policy count at these prices or slightly higher prices.

And the reason for that is people start to throw in the towel who are paying for past loss reserves. So, one company closed up in this quarter that had set up a, uh, ENS operation and then gave it up. Uh, there are others that are going to do the same thing. So we, we think that our specialty area in estimate and factory will all continue to show volume and price increases that, uh, are reflective of, uh, even better pricing and better volume than they've had in recent past.

So we had, we think that's a real cornerstone for us, and why we have a lot of leverage on the upset still, Charlie.

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

Hi, KBW. I had just a couple. First, can you talk about the tax rate, and maybe why it was higher this quarter and what should we assume going forward?

Yeah, most of the reason for that, uh, was due to the non-deductibility of the charge off of the, uh, Argentine realized losses. So going, going forward, we should assume back to our, our, uh, more normal, uh, effective rate.

That, that was my comment on gaps that doesn't make sense. The IRS says you don't lose it, you don't lose it. Gap says, charge it off. So, we're, we're stuck in, in the situation where we make a charge-off but don't take a tax deduction for it, because it's not been realized. And whether we think there should be a charge off at all is another issue that's subject to debate. But that, that was the whole problem, or that was virtually the whole problem.

Okay, so your tax rate on investment income is still around 30%?

[INAUDIBLE]

[INAUDIBLE]

Let me, uh, yeah, let me get back and we [INAUDIBLE]. I, I think it's a shade under that.

Okay. And, um, different question. Was there anything unusual impacting the net-earned premium growth this quarter? It seemed a little light.

Net earned premium growth.

Um, what was the question again? I'm sorry, I, I [INAUDIBLE] the, the investment income rate, uh, the effective rate is about 32%, because the less portion of our, uh, portfolios is in MUNIs, uh, and it had been in a, a year ago. But the question on earned premium?

It just seemed a little light, based on how I usually model and what to expect for the company. I don't know if it was because of reinsurance, or the, if there was anything unusual.

No, I, I don't know. Maybe if you want to give me a call, like, and try to [INAUDIBLE].

I, I think that, that when you look at your premium, part, part of it is that the, uh, quarter share from Lloyd's is earned more slowly. So that could be a, a small part. Um, but I, I, I can't think of any other reason.

Okay, and then just as a final question, can you comment on loss trends and, uh, uh, certain lines? I'm, I'm thinking DNO, surety and worker's comp. Maybe what you're seeing and what you expect?

Um, in DNO area, the place where were are the market, which is, uh, small to middle size companies, generally below the Fortune 1000, um, our, our DNO experience is very good. Uh, our results have been excellent, and we haven't had the same problems that most, or many large companies have faced. Um, as, as respect to our worker's comp, uh, worker's comp pricing has improved. I don't think claims [INAUDIBLE] in particular have changed, but pricing is improved which, which as made the results [INAUDIBLE]. But I haven't seen any change in, uh, in claims at all. Uh, what was your last one, Jeff?

Uh, just surety.

Surety business is crappy business lately. Um, it, it really has been disappointing. Uh.

Are you, are you talking more about the, uh, construction side?

Um, I'm, I'm really making a general statement. Uh, there's some debates about whether or not some of the surety was written with the correct, the view of buying reinsurance in our maturity reinsurance side, and clearly, there's a lot more stress, uh, in, in the overall surety business. So I think that, uh.

Okay, so you're including some of that more hybrid surety products, then, in your comments?

Uh, yes.

Okay. Thanks.

I, but I think, Jeff, the, the, the financial environment we're in now can always have an impact on the surety business. The kind of surety we write in our direct side are not very much impacted by [INAUDIBLE] smaller stuff. And the reinsurance side, we've had some, uh, various pieces which we've reported about [INAUDIBLE] and, uh, I think that, that vision, we've really stopped writing the big surety and reinsurance treaties to avoid that, that kind of environment.

The next question comes from [Alice Schrodeder]. Please state your affiliation, followed by your question.

[Alice Schroeder]: Hi, good morning. Morgan Stanley. I have a couple of questions. Bill, one for you and one for Gene. For you, Bill, um, this quarter so far, in the standard commercial lines, we've actually kind of seen mixed things anecdotally and from the CIAAB survey, we've seen accelerating rate increases and some companies, um, like you, are reporting premium growth that's consistent with that, whereas a couple of the others are not. And for example are even cutting back on new business. And I wonder if you could shed any light on what's going on in the market that might be causing this divergence. And then, um, that might even have some implications for your specialty lines, too. So, whatever, however you can respond to that.

And then, Gene, I think you said something about for the reinsurance, you, that you adjusted the estimated loss ratio for 2002 upwards for the calendar year? And I wanted to clarify whether I understood that correctly, and did you mean to say calendar or accident, and if so, what did you mean, were you talking about reserving?

I, I think, let me, let me answer. I think what, what a lot of the standard [INAUDIBLE] companies are doing is, in, in the softer markets, they started, they could earn anything. There wasn't a risk that an underwriter didn't like. So I think you're seeing two things. The people who aren't growing are getting out of broad segments of the market that they shouldn't have been in in the first place. Which is, which is why, uh, uh, I said that I think in the second half of the year, you'll see our policy count start to grow.

Because standard companies are going to get out of the market. A great example would be access comp. Um, the new people constantly go into access comp because they can't believe the [INAUDIBLE]. Which is, you know, 35, 37 years. So, people get in the business 'cause it looks so attractive, and then they have huge losses. Frontier would have been a good example of that, but, but even today, there are a few people who are getting in the business who have no understanding of what they're doing.

There's a lot of people thought they knew about the business that had no understand about what they're doing who are now getting out of the business. Um, I think that, that, that's probably true of commercial transportation. And we'll, we'll expect to start to see people leave that business also. And lots of areas in, uh, our specialty group will benefit. Probably one of the most interesting things is we saw product liability flow into the standard markets over the past five years.

It used to be Admiral's really main business. Tough products. And we found people in the products liability market who just didn't understand their risks. So we think it will have a dramatic benefit on our policy count for our specialty lines business, as the standard markets withdraw. I think some of the withdrawing the most aggressively are the big, global companies who, who didn't really start out in that specialty area.

So my own, my own view is, we'll start to see further increases in premium volume, and improved profitability, especially in the specialty area.

Alice, I did say calendar year. What I mean by that is we're being more conservative in our reserving for the business that, uh, is being earned in 2002 from underwriting years 2001 and 2002.

[Alice Schroeder]: Okay, so you didn't and you were adding to reserves for prior years.

No.

[Alice Schroeder]: Okay, great. Just wanted to clarify. Thanks.

The next question comes from Jay Cohen, please state your affiliation, followed by your question.

Jay Cohen, Merrill Lynch. I've got a couple of questions. I guess first is related to capital. Given the growth, uh, that you're experiencing and should continue to experience, how do you feel about your capital position? Second question is, um, World Trade Center was not a big loss for you. Uh, just give us an update on how you feel about your estimate. And then finally, just a brief update on, uh, what's happening in the commercial transportation business.

Okay. First of all, capital we're at, at 2.25 to one. Uh, we think as long as it's mainly price increase, um, we're okay. Uh, I think that if we start seeing acceleration of a volume increase, we'll have to decide what we'll do or how we'll do it. We have, we have plenty of options to, to deal with that, including simple things like $75 million, $85 million of unrealized gains. Uh, which would, which would increase our stated capital from a statutory point of view.

So, we have that, and we have access to, to capital in lots of ways. So, uh, we're, we're not particularly concerned about that. Uh, we'll be adding a lot to our capital [INAUDIBLE] this year, internally at the same time. So, uh, we're, we're, we're okay. Clearly, if the growth accelerates, um, by the first quarter of next year, we'll have to look at what we want to do. Whether we want to try and buy certain kinds of reinsurances ourselves, or raise capital, depending on how the market views our stock. Uh, the, and obviously, we have the alternative of cutting back someplace.

Uh, I think that if, if, uh, Gene, you want to answer that other question?

Jay, the World Trade Center losses, uh, we have not, uh, changed our estimate of the World Trade Center losses. However, we've, you know, the, the actual claims that we've seen to date are substantially less than, uh, than we had expected. And, uh, you know, we feel very comfortable with, with our reserve position. And over time, I think we'll see it, we'll see it trend down some.

Was there another question, Jay?

Commercial transportation.

Oh, commercial transportation. Commercial transportation is amazingly good. We're, we're pleased. We've got substantial rate increases. Volume is very strong. Uh, in this quarter. Uh, Carolina Casualty is benefiting from other people leaving the business. And, uh, we, we think that, that positive results will continue. Uh, commercial transportation is one of the things we do in some of our other companies. Uh, on a local basis, as opposed to long haul.

And they're also seeing, uh, good results, and, and pricing increasement. Uh, my guess is that you'll see only modest price increases from here going forward, as it is such a large line of business, lots of people watch it for an opportunity to get in or out. But at this moment, it's extremely profitable, and a lot of customers are a little more interested in longevity in the business than they are change insurers. Because we're in a marketplace that for the first six months, there were people who had really desperate times obtaining insurance.

So, it's a better market, it's a better environment. Terms and conditions have gotten better. Price increases will be, you're really getting your [INAUDIBLE] price increases already. But I think [INAUDIBLE] prices up, let's just say 50%, 60%, uh, in the first round. And we've all seen prices up 10 or 15%. Okay, Jay? Jay?

Ladies and gentlemen, once again, if you do have a question, please press one, followed by four, on your pushbutton phone at this time. Gentlemen, at this time, I'm showing no further questions in queue.

Thank you very much.

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