W R Berkley Corp (WRB) 2002 Q3 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 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 may divest 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.

I will now turn the conference over to your host Mr. Berkley. Please go ahead, sir.

Well, welcome to our conference call and those who know us should understand that given the date of our release we have expected nothing but an excellent quarter. We are approaching the best day of the year tomorrow and we will hopefully have good news going forward.

We feel very pleased with our business, with our results. There is uniformity of improvement throughout the enterprise. There always are problems here or there, someone competes in a stupid way and run line of business for one risk or two risks, bad debt is the nature of this business, there always can be someone who does something stupid on occasions. By and large, the incidences of stupidity are declining and continue to decline. Most of the people who do substantial amount of stupid things are running out of capital. The people who in fact have done a lot of those things, have either run out of time or have been forced to raise capital as well as to the uneconomic prices. Quite like our situation in the last hard market, we are finding having the past behind us gives us an enormous opportunity and that opportunity is only getting better.

We are very excited about where things are. We are very excited about the business. And I think what I will do is let Eugene talk about the numbers and then I will try to go forth segment-by-segment of the business and give you a sense of where we are. Eugene.

Okay, thank you Bill. As we announced our operating income for the third quarter of 2002 was 42 million, which is 81 cents for a fully diluted share. That represents a 238 percent increase over last year's operating income of 24 cents per share excluding losses from the World Trade Center. The increase in operating income over the last year is a reflection of significant price increases and better terms and conditions across almost all product lines as well as a more profitable business mix. Gross premiums written for the continuing business units increased 58 percent to 789 million in the third quarter. All for the domestic business units reported substantial increases in gross premiums. Reinsurance premiums were up 86 percent in the US plus another 35 million from the new quota share reinsurance business with Lloyd. The alternative markets premiums were up 112 percent, specialty premiums up 62 percent and regional commercial lines premiums up 36 percent. All of these were driven primarily by higher prices, in fact the aggregate policy count for these three segments increased to 6 percent from September 2001 to September 2002.

The four domestic segments in total, for the four segments in total gross premiums have increased by more than 60 percent now for three consecutive comparative quarters, 66 percent in the first quarter, 66 percent again in the second quarter, and now 69 percent in the third quarter. The fifth business segment, international group, reported a decline in gross premiums of 69 percent compared to last year's quarter due to the lower exchange rates for the Argentine peso.

Our underwriting profits for the continuing business segments was 29 million in the third quarter, that represents a 44 million improvement over the 2001 underwriting loss of 15 million again excluding losses from the World Trade Center, with 45 million - 44 million increase includes improvements of 22 million for the regional segment and 19.9 for the specialty segment again as result primarily of higher prices. Third quarter weather related losses for the continuing businesses were moderate at 12 million for this year's quarter compared to 10 million for the third quarter of 2001.

On a GAAP basis we reported a loss ratio of 64.9 percent, and expense ratio of 29.8 percent and a combined ratio of 94.7 percent. The combined ratio of 94.7 is a decrease of 9.3 points from last year's combined of 104.0, again excluding World Trade Center losses. For the first three quarters of 2002, the combined ratio was under 96 percent and has been steadily improving from 95.5 in the first quarter to 95.3 in the second quarter and now 94.7 in the third quarter. Also encouraging is the improvement in our underlying claim trends for the continuing segments, the year-to-date paid loss ratio was 49 percent in 2002 compared with 66 percent last year and the year-to-date paid to incurred loss ratio was 75 percent in 2002 compared with 95 percent last year. For the first nine months loss reserves for the continuing businesses increased by 240 million. Insurance service fees increased 9 percent to 22 million and service company profits increased 93% to 6 million in the quarter. The pre-tax return on service fees was 28 percent in 2002 compared to 16 percent in the prior year quarter.

Our international segment reported a pre-tax operating loss of 2 million as a result of severance and other costs incurred in connection with restructuring pipes of the Argentine business. As of September 30, all of our investments in Argentine Securities are carried at the current market value and our total investment in Argentina at the current exchange rate is now just under 10 million dollars. The discontinued business segment reported a pre-tax operating loss of 3.2 million and that is to almost entirely to weather related losses on the remaining in force business for personal line. The remaining in force personalized business will have expired completely by the end of 2002. Third quarter investment income was 48 million which is an increase of 1.5 million over the 2001 third quarter, an increase of almost 4 million over the second quarter of this year. The investment portfolio has increased 630 million from the beginning of the year to over 4.2 billion as of September 30th as a result of strong cash flow and an increase in unrealized gains. Operating cash flow was 303 million in the third quarter and 543 million for the first nine months. And pre-tax unrealized gains on the portfolio were approximately 200 million as of September 30th, which is an increase of 135 million from the beginning of the year.

Investment income was again impacted by sub-par performance for the arbitrage account, income on the merger and convertible arbitrage accounts, which is just a 152,000 in this year's quarter compared with 3.3 million in the prior year quarter. The average annualized yield on the arbitrage account was 2.2 percent this quarter down from 2.9 percent in the prior year quarter. However, we have now reduced the arbitrage account balance by over 200 million from the beginning of the year to 308 million as of October 1st. Investment income on the remaining portfolio increased 4 million as a result of the increase in average invested assets. The annualized yield on the non-arbitrage portfolio was 6 percent for the quarter compared to 6.6 percent in the prior year quarter and the yield on the overall portfolio was 5.6 percent for the quarter compared with 6.1 percent in the prior year. Our operating income for the first nine months was 107.6 million and that represents an annualized return on equity of 15.4 percent. By the way, for purposes of all the calculations, we divide operating income by beginning stockholder's equity including FAS150 unrealized gains. As a result of both the operating income and the increase in unrealized gains, unrealized gains in investments, stockholder's equity increased 19 percent from the beginning of the year to 1.1 billion or 22 dollars and 12 cents per share on September 30th. Finally, I want to point out that on the basis of our current projection of year end equity, an 18 percent return for 2003 would put us right in line with the current consensus estimates for next year.

Thanks Eugene, I think that I understand that we are not a company that likes to make forecast and we try to do and let you know it. We think things are at least in line with the potential estimates for next year and we are quite enthusiastic. In the last hard market in the year between 1986 and 1990, on several years we have returns in excess of 20 percent and at this point there is nothing to indicate that those kinds of returns are not attainable; although, obviously current interest rate environment is quite different than it was then. And if interest rates continue down, obviously that is an issue whereby the duration of our portfolio which currently is just about 5 years and it has come down as our cash flows increased. It gives us a little bit more of an edge than most of our competitors.

I think couple of highlights that people should be sure they are aware. First of all, while we are having very small amount of asbestos this environmental, in the aggregate, probably 25 million dollars and that roughly 13, between 12 and 13-year life. We don't really have much, as out there it doesn't mean that some claims came from out of any problem. Sometimes you don't know about them. For a long time we haven't had that problem. That is not to say people don't try to make claims which, when they claim and there is an absolute exclusion, everything written post 86 had an exclusion itself. It has not been a problem.

In addition, we never did of lot of financial hedging and exotic financial transactions and things that lots of people who have large asset based insurance companies try to leverage up the use of the capital assets in a way that we give them returns if they thought it would not create problems simultaneously with industry problems. We don't have those kinds of issues. There shouldn't be as far as we know any surprises. Certainly not in that area, but we think all of the issues that are sitting out there and giving all of us some concern don't give us any. Our portfolio has a pre-tax gain and of in excess of 200 million dollars. The gross is 223 million and there are roughly 23 million of other portfolio assets that have losses. The only one of any consequence is probably we have one position Dynergy which is 5 million dollars is the carrying value, so it is not of consequence. But, overall, we think we did again as we did in the 85 period, step forward, put aside our problems, and it does two things. One, it lets our earnings flow through and more importantly it lets us focus on building our businesses instead of dealing with the cash problems and in times like we are facing now, it is the management resources required to deal with past problems that have a great break on whatever one does. And by us having freed up those management resources to bill in every segment of our business, we are in a position that really is exciting. And that includes even the business in Argentina where we haven't run away and we are going to try and take advantage of being there in our property casualty business. We are not going to focus resources any place except on the property casualty business in Argentina, but it is the place, we understand the business and if there are opportunities we will be there. We don't think that is ever going to be a big segment of our business. So it is almost understanding that that is just the extreme and it is a small investment. We have our specialty niches where we are putting more capital into the companies for them to be able to grow and increase their market share, as a number of people they compete with are unable to do so.

Our regional business. We have really, we got out of the personal lines business at a good time and we are able to focus our resources on the places where we can make money, where we can get price increases and we can get adequate returns with some level of consistency having limited our catastrophic exposures. For personal lines we think we have a much stronger company and we are prepared to like business. We have the capital. We will not turn business away because we don't have the capacity.

Our reinsurance business, great team of people. A number of people joined us it was facilitated, so we think we have substantially improved the scale and size of our facultated business both on a brokerage and direct basis. So we would expect our facultated business to substantially exceed 300 million dollars. We have re-staffed our treaty business. We expect that business is going to continue to grow. We now have a quota share piece of our insurance business. It is led by Tom N Kellogg, who has added substantial business and we have Berkley line partners where we are effectively doing just a few pieces of program business where the returns are exceptional and while that is a business, it is less than a 100 million dollars now we expect to grow.

Our goal is not to have 300 accounts for that business but to have 10 or 15 where we think we can do too well if we understand our partners. So, business is good. We see it getting substantially better. Action and year-to-date tells us that our pricing is good and we are very enthusiastic and the last issue of our business, sure to mention is alternative market business. It is extremely higher profit margin business where we can see the margin increase dramatically this year over the last year, because the increase, the revenue grows substantially to the bottom line because there is no capital required. So that piece of our business and our excess workman's comp California workman's comp business. Everything is moving in the right direction. So we are very satisfied about this year, 2003 and we are much more certain at this moment about 2004.With that, Alice, would you like to open the floor to questions?

Thank you. The question and answer session will begin at this time. If you are using a speakerphone please pick up the handset before pressing any number. If you do have a question, please press one four on your touchtone telephone at this time. If you wish to withdraw your question please press one three. Questions will be taken in the order it is received, please standby for the first question. Our first question comes from Charles Gates. Please state your question.

Good morning.

Good morning Charles.

Two questions, what was surplus of the company at 930?

Yeah, we now until the blanks are put together we don't have a final number but our estimates will be right around a billion 70 million.

Okay, the second could you elaborate on the excess and surplus lines business today and perhaps compare and contrast it as how it's evolved over the last year?

I think that first of all excess and surplus lines business is a key product of our specialty businesses, we have large specialty that is the nautilus. I think what's really happening is that we are just now at the point where capital constraints are beginning to force more business into the ENS market. So up to this point you have had prices going up. So prices are up 50, 60 percent and there are a few lines of business that are really being forced in the ENS market especially things like contractors and I would like to add Vela, which is actually part of factory is also an ENS company that writes another 65 million dollars or so of the ENS business. But what you were just seeing for the most part is prices are going up and a few areas especially contractors are being forced almost completely into the ENS market. What's going to - what's just beginning to happen is you are starting to have classes of business forced out of the standard markets where the results are just terrible and people are having a hard time getting rate increases through. So we just stopping writing the business. Because what we really happens is a standard market company goes to get a rate increase and when I go to get the rate increase I think it turned down but the state where the state gives them a hard time and I decide not to write it and then the business goes into the excess or surplus lines market. It is just starting to get into that phase now Charlie.

So I think, you are going to start to see price increases in my view we have 15 to 20 percent range in the next 12 to 18 months, maybe 25 percent in addition to this 50 or 60 percent where you are going to start seeing more business flow into that market.

Two forward questions. Question number one, what is the problem with contractors or why do you think contractors basically headed in this direction?

Because people have lost a lot of money on a full array of claims that were not meant to be covered in the form in the policy that was written. So you know a person gets a leaky pipe they make claims the plumbers out of business, it goes to the general contractors. It is the same legal concept that is brought all this to bear on damages contractors are made more complex by the mild issue even on mold exclusions you can't get it approved. There is a whole array of issues that relate to the definition of whose liability is for what and it is just with fundamental avenue of courts of redefining the contractors liabilities in ways that the original policies didn't mean to include.

My only other question to what extent does the state get involved in commercial lines rate increases?

In some states, they get involved. In other states they don't involve. I think that it varies state by state. In general, commercial lines rate increases are not a critical issue for most states in most lines, but this active states try to act as buffer overall to restrict our regional business - for the first time had no states turn us down, but they have asked for justification, they have asked for what, but every state has been ultimately receptive to dealing with this as to be appropriate. But big companies will get turned down by states frequently so forget it. We don't have the capacity let's hope for something else and just don't do it.

Thank you.

Thank you. Once again should you have question please press one four at this time. If there are no further questions I will now turn the conference back to Mr. Berkley to conclude.

Thank you. Jay Cohen, this is a disappointment. You are usually the first one to push the button. Thank you all very much, I appreciate, if anyone has any doubt about our enthusiasm to the business, I will spell that out there is no one in this office whose isn't smiling every day, fighting the battle that occur in any complex enterprise that involves being an advisory to the lowest but other than that business is hard to imagine that it would get a lot better although we are hoping. Thanks a lot.

Ladies and gentlemen, if you wish to access the replay of today's call you may do so by dialing 800-428-6051 or 973-709-2089 with ID number of 265122. This concludes our conference for today, thank you all for participating and have a wonderful day. All parties may now disconnect.