W R Berkley Corp (WRB) 2002 Q4 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the W.R. Berkley fourth-quarter earnings conference call. At this time, I'd 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 up the conference 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 that the future plans, estimates, or expectations contemplated by us will, in fact, be achieved. Please refer to our annual report on Form 10-K for the year ended December 31st, 2001, and our other filings made with 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 alert its forward-looking statements, whether as a result of new information, future events, or otherwise. I will now turn the conference over to Mr. Berkley. Please go ahead, sir.

Well, I hope you all have noticed the explanation of safe harbor slowly is getting more all-inclusive, so eventually we'll say, "You shouldn't believe anything we say." But at the moment, we had a great quarter. We were very pleased. We're really pleased with the year.

For those people who we talked to 20 months ago about where we thought things were going, in fact, things have gone as we expected. We believe that the business is going to continue doing exceptionally well for the next several years. We would be surprised, given the lack of complete dealing with past loss reserve issues in the industry, that the balance sheets are clean enough for us to start to see aggressive price competition.

As always, you know, in the evolutionary marketplace, and economic free society, we have people who come in and are overly aggressive at times. We have people who compete vigorously in one market or another. But overall, we see prices continuing to rise at a slightly slower pace in 2003 than 2002, and that increase in price level to continue through 2004 and into 2005. I'm going to let Gene Ballard talk about our results for the quarter and the year, briefly, and then I'll come back in and talk about a few specifics. Gene?

Okay. Thank you, Bill. For those of you that are following along on the webcast, you should now see a chart that's titled "financial highlights," and this summarizes our earnings for both the fourth quarter and full year of 2002.

In the fourth quarter, our overall net premiums written increased 57% to 787 million, from 503 million in the prior-year period. Net premiums written for just the continuing business were up 64% in the quarter, and that's right in line with the first three quarters where the increases were 63% in the first quarter, 57 in the second quarter, and 65 in the third quarter.

As has been the case throughout 2002, the growth in the fourth quarter was driven by price increases across all of our domestic segments. The growth also reflects an increase in volume in our reinsurance segment, including 58 million of business from Lloyds and our other new underwriting unit, Berkley capital underwriters. Let me stop here for a minute to discuss the Lloyds numbers and a change that we made in the fourth quarter in the way that we present the Lloyds results.

First of all, for the full year, net premiums written from Lloyds were 171 million, of which 85 million was earned during the year. Premiums in the fourth quarter itself were 40 million. During the fourth quarter, we changed the way that we report Lloyds premiums to now reflect our proportionate share of reinsurance and brokerage costs paid by the syndicates. Previously these amounts were netted against premiums, which is how they're reported to us by the syndicates. However, after discussing this with our accountants at year end, we decided that grossing up the premiums to reflect the syndicates' cost is a better presentation. This change only affects the income statement classifications. It has no effect on underwriting profits or operating income.

Returning now to the financial highlights charts, you'll see operating income was $53 million for the quarter, or 96 cents per share, compared with an operating loss of 32 cents per share in the fourth quarter of 2001. The 2001 loss did include charges related to the Enron bankruptcy and to an increase in treaty reinsurance reserves, which together totaled 70 cents per share.

The improvement in 2002 reflects a 61% increase in earned premium, together with a 19 point decrease in the combined ratio when compared to the prior-year quarter. After-tax investment gains were $12 million, or 22 cents per share. This includes realized gains on investment sales of $18 million after tax and an after-tax charge of $6 million for impaired securities. After-tax foreign currency gains were $10 million or 17 cents per share. This gain represents gains reported by our Argentine subsidiary following the abandonment of the $1 for 1 peso exchange rate in Argentina. More specifically, the gains are the illustrates of: One, our Argentine company holding a substantial portion of its assets and liabilities in dollars and, two, the conversion of its life insurance liabilities from dollars to pesos at less than the free market exchange rates under government-imposed conversion rules.

The combination of these was a total realized gain of $23 million pretax or $10 million after taxes and minority interests. Another thing you should note is that the conversion of our Argentine subsidiary's assets back to U.S. dollars for consolidation purposes resulted in an unrealized loss of 15 million during the year, and this unrealized loss is charged directly to stockholders' equity. This treatment is in accordance with GAAP accounting rules, which require that realized gains and losses be reported on the income statement, while unrealized gains and losses are reported on the balance sheet, even though from an economic standpoint they arise from the same circumstances and one offsets the other.

In any case, we've excluded both of these items from our operating income. Net losses from discontinued operations, the personal lines and alternative markets reinsurance business, were 1.8 million, or 3 cents per share, and as of January 1, 2003, all of the discontinued business policies have now expired. After these non-operating items, net income was 73 million or $1.32 per share compared with a net loss of $1.36 per share in 2001.

For the full year, net premiums written increased 62% to 2.7 billion, and full-year operating income was 161 million, or $3.04 per share. Net income was $3.31 per share, and that compares with a loss in 2001 of $2.09. The 2001 loss includes the impact of the World Trade Center, the Enron bankruptcy, and reinsurance reserve increases that we recorded in both the third and forth quarter. You should now see the next chart, which is our operating highlights for the quarter, of operating income.

First, we earned a profit of $46 million on our underwriting activities. That represents 7 points of underwriting profits on 686 million of earned premium. Our loss ratio was 64.2%, and our expense ratio was under 30 for the first time, at 29.1%. All five of our domestic -- all five of your segments reported improvement in both their combined ratios and underwriting income. Investment income for the continuing businesses increased 11% to 50 million, and overall investment income increased 7% to 51 million. Our invested assets increased a billion dollars from the beginning of the year as a result of operating cash flow in excess of 750 million. Total invested assets were 4.6 billion at December 31, 2002, and the average annualized yield on the portfolio in the fourth quarter was 5.5%, compared with 6.0% in the fourth quarter of 2001.

The arbitrage portfolio at the year end was 304 million, or 7% of the total portfolio. The annualized yield on the arbitrage account was 2% for the quarter. Service fee income increased 40% in the quarter, to 3.4 million, and service revenues were up 21% to 23 million. Interest and other expenses increased 7.5 million to 25 million as a result of higher general expenses, including occupancy and incentive accruals. And income taxes and minority interests were 22 million, which is an effective tax rate of 29% for the quarter. That adds up to total operating income of 53 million, or 96 cents per share.

And the next chart should be the capitalization for year-end 2001 and 2002. At year-end in 2002, our total capital was 1.9 billion, and our stockholders' equity increased 404 million during the year, to 1.335 billion at year end. The-- our debt plus preferred to total capital ratio is 29% at year-end, and our book value increased 29% during the year to $24.18.

Thanks, Gene. I think what's important to understand is that not only was it a great quarter, but we have built our capital base and continue to do so. If you'd look at our net premiums by quarter, you can see that, in fact, our premium growth continues. If you were to analyze that premium growth, quarter to quarter, what you'd see is a slight decline in the mix of premium pricing increase and a greater part of this increase includes volume increases. We would expect that that will continue, while price increases were very strong, probably on average over 35% for the group as a whole in the fourth quarter, the total premium growth is reflective of those price increases as well as the number of units increasing.

Taken as a whole, we're real happy. When you look at any insurance company -- when you look at any insurance company, there are several key elements, and one of the key elements is the mix of business. We show this now by segment and the enormous changes as specialty business has grown, as other areas have grown and the regional business has declined, international business has declined. But it's not only the segment business, it's the mix of business within each segment that's really important, and what makes up our regional business, for instance, today, is all commercial lines business, no personal lines business.

Our reinsurance business, which was relatively dominated by our normal treaty business is now dominated by things other than the treaty business, and the treaty business represents roughly 35% of the volume. With our facultative business representing 30%, and Lloyds business representing about 25%, and other special niches representing the balance.

So the mix of those businesses is changing. Alternative markets, the same thing. A larger percentage of the business is excess workers' compensation business, where prices have gone up threefold. So overall, we look at this business, we look at not just the segments but the mix within the segments, and we're exceptionally pleased with where we are. We think we're very well positioned to take advantage of the relationships that we've had over many years, and build a more profitable than average book of business, and we expect the differential between our book and the general market will be greater over the next several years, as opposed to less.

When you look at the next characters which is really a chart of paid losses to earned premium and reserve additions, ultimately the one thing you can tell for sure about an insurance company is what losses they've paid. Given that our book of business has been constant virtually for the past three years as far as units, paid loss ratios is a great indication of where the development of that business is, and our paid loss ratio this year was under 48%, and for the quarter it was under 44%. We're exceptionally pleased with that. Our reported incurred loss ratio was 64.2%, but what's really important is that that means we've added over 20% to our loss ratios. 20 loss ratio points to strengthen those reserves. The big number, and I think what's important, is that the numbers we're showing are being shown on a basis that makes us very comfortable with where our balance sheet stands and where things are.

When you start to look a little more carefully at our business for the quarter, you can really see some of the changes that have taken place. For the specialty line of business, we had premiums written net of $257 million, a 60% increase from the prior year, mainly driven by price increase. That's probably more than two-thirds price increase, less than one-third unit increase. The alternative market business, $89 million of net written premium up 128%. Almost exclusively driven by price increase.

The reinsurance division, $222 million of that premium written, up 217%, written by the addition of Lloyds, written by the dramatic increase in facultative reinsurance, and a 30% increase in standard treaty business. Sowe're really excited about that, and our regional business, with $201 million in net premium written, up 22%, that's 90% price driven, 10% unit count.

International, that's down to $14 million from 42 million. That decline is primarily a result of the revaluation of the Argentine peso. That business is basically flat, other than that. But overall, that means our net written premium grew by 64%. Certainly numbers we're very pleased with. When we look out at the year we just went through, we examined the decisions we've made in our regional business. 2002 was the third year of price increases. It was a little more than two years for some segments of our regional -- of our specialty business, and two years for the bulk of our regional -- of our specialty business. Our reinsurance business has totally been repositioned.

New leadership at various levels except at FAC RE where Jim make query has been with us forever, and in fact, FAC RE has continued to grow and our treaty business continues to expand now and it's narrower focused and then we've added specialty niches. Our alternative market business, the excess workers' comp business, great growth, great premium growth. California comp business, which we started five years ago, is now finally coming into his own. It had a great year and we expect it will have a better year. And overall, every segment of our business is doing exceedingly well and we're very pleased.

We see 2003 only getting better, as the earned premiums that were written in 2002, and null written premium, comes through at higher prices. We would be very surprised if the results weren't substantially better. With that, I'd be happy to open up the call to questions.

Thank you, gentlemen. The question-and-answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star 1 on your push-button telephone at this time. If you'd like to withdraw your question, please press star 2. Your questions will be taken in the order they are received. Please stand by for your first question. Our first question comes from Tony (inaudible) with John Hancock. Please state your question.

Yes. Thank you. I have a few quick questions. One, just in terms of the rating agencies' concern historically have been double leverage and financial leverage. Could you quickly go over, on the 500 -- whatever -- eighty, whatever amount of debt, the maturity profile of that, and I understand, I guess, you're in the market with a new deal, and what is the double leverage and dividend capacity of your insurance subsidiaries?

The -- yeah, we were going to wait till the end of the call to comment on it, but we did -- we did announce this morning that we were going to do a $200,000,000 ,10-year note deal. Let me let Gene answer that.

Okay. We have -- in 2003, we had 61 million of notes maturing. We paid off 36 million in January, and we have another 25 million that's maturing in March. So that's 61 million that will be paid this year, and we're offering -- issuing 200 million of new debt this year. The balance of our debt, we've got 40 million maturing in 2005, a hundred million in 2006, 89 million in 2008 and 76 million in 2022. And then we've got truss preferred securities that run out to 2045.

And the double leverage from the holding company to the subsidiaries? I mean, that's another Moody's bugaboo.

Yeah. I mean, it's one of the calculations they look at. I mean, I think they're more focused on our -- really on our debt leverage ratios and our debt coverage ratios, which the coverage ratio is over 6, in 2002, and will be higher than that in 2003. And then, of course, the -- the available cash flow from the holding company, which will -- from dividends from subsidiaries, which in our case generally runs about 10% of our statutory surplus. We've got statutory surplus at the end of the year of a billion two fifty. So our dividend capacity for '03 will be in the neighborhood of 125 million, which is about double or a little bit more, after tax, of our holding company cash flow requirements.

And in terms of the specialty segments, obviously you're getting tremendous increases. However, there's a lot of concern is this a one-time shot for a few years, and the type of businesses that you certainly underwrite, and especially in the specialty niche areas, they're very unique. A lot of folks don't write them, and there's obviously question about the long-term frequency and severity of those businesses, especially in the upper layers. Could you comment on that?

First of all, we don't write in the upper layers. We write down and dirty. We write the first dec set, by and large, right above primary, and secondly, if you'd look back historically, our specialty lines of business, even in difficult markets, have been exceptionally profitable. So that -- that's a cornerstone of our business, and has had better consistency of profitability. That's why it's very important that we get as big a market share as we can. In fact, if people ask me the biggest mistake we made in 1988 we stopped growing our specialty business because we had the misguided view that that would turn down harder than the standard business, and, in fact, the specialty business continued to perform better than standard markets throughout the cycle.

And did you do any buybacks in 2002, and what are the expectations in '03?

No.

Thank you.

Thank you. Our next question comes from Alice Schroeder with Morgan Stanley. Please state your question.

Hi. Good morning. Could you give us the accident year combined ratio for 2002, and also, do you have any outlook at this point for what you think the peak combined ratio would be, and when you would be there? "peak" meaning the best, not the highest.

Well, first of all, we don't have a publishable accident year combined ratio at the moment.

Okay.

Iwe have rushedwe've put in new general ledger systems so we can slowly move up the date. This is two weeks earlier than we've ever released earnings. And we're just -- you know, our convention blanks aren't done at the moment, so we just don't have that in a way that I would feel happy --

If I could just add one other thing to that. Most of our companies, especially companies in the reinsurance companies, manage their loss reserves and their business on an underwriting year/policy year basis, and it's we convert it to an accident year basis for annual statement purposes after the end of the year, but we manage it on an underwriting policy year basis, so actually your numbers are not something that we focus on in terms of that process.

Well, if I could ask that a different way, how far is this quarter's 94% from your current pricing assumptions and your expected report year, underwriting year, result for '03? And at what point do you feel that that will peak out? What are you targeting?

Alice, we target to make as much money as we can every day.

The fact is that we put 20 points in the fourth quarter into loss reserves. (inaudible) if you look, we had an incurred loss ratio of 64.2% every quarter of 2002, and our paid loss ratio continued going down till it was 43.5% in the fourth quarter.

We believe that we're trying to adjust for pricing somewhat, and at this moment, it's very hard to adjust for improved terms and conditions. We would expect a financial statement year, the best year that we'll have will be 2005. We think our loss ratio and our underwriting year results will continue improving through at least 2004.

Okay. Thank you.

Thank you. Our next question comes from Jeff Thompson with KBW, Incorporated. Please state your question.

Thanks. I guess first, if you could just talk about in the regional business, that combined ratio was much better. Was there something going on as far as a, you know, prior-year reserve true-up or is that something we can look forward to in the future?

We -- we -- we believe we've dealt with our reserve issues in the past for our regional business. I think what you're really seeing is a greater focus on commercial lines, not the diversion that personal lines took away from that focus. I think the second thing is, our regional business got started with price increases sooner because their results were worse.

So when we consolidated those businesses and we started to look at prices, we -- we really ended up with our very best people leading those companies, with a real focus on profitability. So this is -- 2000 was a, almost in every case, the third year of price increases. So we believe that the result of that is -- you know -- that combined ratio. In addition, we make much more aggressive efforts at settling losses, not letting losses drag on, and that's been a rewarding strategy. I think the last -- the last piece of that is our regional companies have had more of their competitors facing difficulty, and that's been very advantageous.

Okay. Secondly, can you talk about your professional liability book, and maybe, you know, what the combined ratio was in 2002 and what you are expecting?

The -- overall, our professional liability book, you know, I don't -- I don't think we -- we get spread amongst a lot of companies. If you're talking about our D&O book, our D&O book is relatively small. It's only $41 million for 2002. We -- every year, we've had adverse development there in our reserves. It's run through our statement. We think at this point, we're pretty well reserved. We think that, you know, probably it represents, you know, 35% of our business that monitor liability, that write professional liability, and a couple other areas. They write for the lawyers and other things. But professional liability, taken as a whole, is probably six or seven percent of our total business. And the only one, I assume, you're really talking about particularly is D&O and we write small-company D&O with relatively modest limits and we -- we've had -- we've had all the same problems of everybody else. The only difference is, we've dealt with the reserves every year as we've gone along. So I can only tell you that the business has still been profitable in spite of those adverse developments.

Okay. And then one final question. You were just talking about a peak -- a peak profitability, but in listening to your opening comments, you were referring to the growth even beyond the pricing cycle and an understanding -- trying to understand your comments, it seems to me that your book value growth could continue to be strong even well beyond 2005. Is that a decent assumption?

Absolutely. We made the mistake -- in 1988 (ph), prices came down a little bit, but returns were still, you know, in the 18 to 20% area, and our mistake was we contracted our specialty business, especially, or didn't grow it, and that was a big mistake because returns were still available in the high double digits. Or I shouldn't say in the high -- in the 18 to 20% area. So, yeah, I would expect profitability will continue for at least another four or five years, giving us returns above our 15% target.

Great. Thanks a lot.

Thank you. Our next question comes from Jay Cohen with Merrill Lynch. Please state your question.

Actually, it's Allison, but thank you. The question was just answered.

It was not meant to be sexist, Allison. (Laughter)

I just wanted to make sure you heard Jay's name. I know how upset you get. (Laughter)

Our next question comes from Larry Greenberg with Langen McAlenney. Please state your question.

Good morning. Just two questions. One on the investment portfolio. Can you give us some idea on the magnitude of maturities coming due in '03 and what maybe the average yield is on that? And also what you're doing with new money and what rates you're putting that out on. And secondly, just a numbers question. The -- the minority interests cost in the quarter, was that -- was that related to the FX?

Yes. It was foreign exchange and it was Northwestern Mutual's, our partner in the financial business. 150million, give or take -- give me a little leeway, but 150 million is coming due, and it will probably be about 6% is the yield coming off. We're generally -- our duration has come down almost a year. We're probably around a 4-and-a-half year duration of our portfolio as a whole. It's going to continue to come down because cash flow is so strong.

We're, by and large, investing at this moment in I would say a mixture of 20-year municipals where -- which is probably taking a third of our cash flow. We're very under-weighted in municipals. And we're paying a lot of tax, or at least accruing a lot of tax. And we're looking at other kinds of vehicles where we might give up a little liquidity but get -- get a higher yield, which range from buying buildings that are triple net leased to other things we can find. But by and large, our short-term cash portfolio is increasing substantially.

And I know it's impossible to forecast Milton, but are you looking for another relatively modest year from that?

By and large, you're starting to see a little more activity in the M&A area. We believe, and Milton believes, that, you know, the returns will move up into the three to four percent area, still not where we'd like them to be, but sort of in line with a five-year rate of return.

Thank you.

As a reminder, ladies and gentlemen, if you do have a question, please press star 1 on your push-button telephone at this time. Our next question comes from Jeff Thompson with KBW, Incorporated. Please state your question.

Thanks. If no one is going to ask, I'll just ask a couple more. On the Lloyds business, can you talk about specifically what kind of growth you're seeing there, what -- you know, what are the different lines of businesses. And can you also touch on the excess workers' comp? You know, where that's heading and what percent of the business it is today.

Sure. The excess comp business, just to give you a picture, in '98, it was 42.6 million of premium. In '99, it was 41 million of premium. In 2000, it was 54. In 2001, it was 70. And 2002, it was 143 million. That's all price increase from 2000 on. We're very comfortable with that. If you look back for the past eight or nine years, we've had net positive development. It was run by a guy named Mike Foley (ph), who now has started up our medical excess business, and it's now run by a female actuary named Melody Saunders, who is just outstanding. It's a very actuarially driven business, and while on occasion we've had one -- one issue or another that's come up, if you look at the development from -- I don't have it in front of me -- from '96 on, it's net been positive, and every year has been significantly positive but one.

I think that as to the issue with Lloyds, Kohn (ph) was about 125 million. As you know, we own a little over 20% of Kohn (ph). We have a 25% quota share. It's, by and large, short-tail lines of business, a small amount, net to us, probably, $10 million of malpractice business, but I don't think any of the other business has long tail. We get the benefits of their protections. And then we are at 50 million with MAP, and a quota share, and, you know, that's by and large short-tail business and we're pretty happy with the business and we're pleased with how our partners over there are doing.

Okay. Thanks.

Our next question comes from Sam Kiston (ph) with Black Rock. Please state your question.

Yeah. I apologize if I missed this. Could you guys just talk about any potential capital-raising activities this year?

We -- no one asked us, but the last thing we were planning, the only thing we're planning is we're going -- we're doing are, literally at the moment, a $200 million 10-year note and we would expect that will be the end of our capital-raising for the cycle.

Thank you very much.

If there are any further questions at this time, please press star 1 on your push-button telephone. Our next question comes from Mark with Dreyfuss. Please state your question.

Good morning. It's actually Steven Gadios. Bill, I was just wondering if as you've talked to your part areas at Kohn (ph) and MAP, what kind of outlook have they given you for '03?

They're very enthusiastic. They think '03 is going to be a great year, and they have a very positive view. You know, I think they see some -- some increased competition from Bermuda, but the increased demand is such that they're pretty comfortable.

Great. Thanks.

Once again, ladies and gentlemen, the floor is open for questions. If you do have a question, please press star 1 on your push-button telephone at this time. If there are no further questions, I will turn the conference back to Mr. Berkley to conclude.

Well, I thank you all very much. We had a great year. We expect 2003 will be substantially better, and as was commented earlier, we're having a 10-year note offering that's being underwritten by Morgan Stanley and Merrill Lynch, and that we expect to do today or tomorrow, and anyone who buys notes, we'd like to sell you some. Have a great day. Thanks.

Ladies and gentlemen, if you'd like to access a replay for this conference call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 283921. This concludes our conference call for today. Thank you all for participating and have a wonderful day. All participants may now disconnect