W R Berkley Corp (WRB) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's W.R. Berkley corporation first quarter 2006 earnings conference. Just as a reminder today's call is being recorded. On today's conference 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, "beliefs", "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 us will, in fact, be achieved. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2005 and our other filings made by the SEC for a description of the business environment in which we operate and our 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. William R. Berkley, CEO and Chairman of the Board. Please go ahead.

Good morning. We were very pleased with our quarter. Another quarter where our annualized return hit 25%. All of our operating units continue to do well. The Specialty Business was really the star performer along with Alternative Markets, both of which we view as our strong points. In volume while our Alternative Markets didn't grow, we had great underwriting results. Our volume in the Specialty Group grew as did our profitability. The Regional Business, which was a little sluggish in the first two months of the quarter did start to pick up in March and we think we'll do better there as far as growth goes and the combined ratio did have a little slopover from some Midwest storms. So basically, we were extremely pleased with the quarter's results. Our Reinsurance Business, which had a couple of unusual transactions that helped create the volume growth continues to do all right. We continue to be cautious in that book-of-business, having had experience with late reporting from primary companies to the degree that causes us to want to be cautious in taking a position. Certainly the past several years results would look like we are being conservative. Our International Business continues to perform well, with strong results in both the Philippines and Argentina. And our business in the U.K. and a recently started up business in Spain, have had excellent results.

Overall, we think that pricing is better in reality than people seem to feel. Our gauge on pricing is flat to down 1.5 to 2%. Some areas actually help prices increasing. For the most part, though, pricing is pretty good. Our position has not been compromised with our distribution at this point in time. No one -- I shouldn't say no one -- but for the most part people are not out there being crazy. There are people who are determined to hold market share or gain market share in individual lines of business or individual territories. And, of course, that always creates pressure on pricing, but across-the-board we see pretty good restraint. In the E&S side, California is a little more competitive than the rest of the nation. We see less competition in other places. We see a couple of large players being aggressive, but we're really pleased and we're very optimistic as to where we think the quarter and the year will take us, and we are extremely pleased about our expectations going on into next year. I think that we were reasonably positive about '07 and now where each quarter goes by, we are more positive. Because, obviously, this will represent one-eighth of the earned premiums for '07. So with that, I'm going to let Gene talk about the numbers and then I will pick up.

Okay. Thank you, Bill. Well, in last night's earnings release, we reported net operating income for the first quarter of 2006 of 160 million, which is an increase of 32% over operating income of 121 million for the first quarter of 2005. That represents $0.79 per share in this quarter, compared with $0.61 per share a year ago. On a pretax basis, our underwriting profits were up 19% to 135 million and our investment income was up 47% to 131 million. Net premiums written for the quarter were 1.28 billion, up 8% over the prior year quarter. As Bill said, we continue to find opportunities to expand premium revenue, and that means that there is somewhat more variability in our growth rates by business segment from one quarter to the next. In this quarter, net premiums for the Specialty segment were up 7.5% to 448 million, and within Specialty, our four excess and surplus line companies continue to expand and reported a combined increase in net premiums of over 12%.

For the Reinsurance segment, net premiums increased 26% to 236 million. That segment underwrote a new medical malpractice reinsurance agreement during the quarter that accounts for most of that growth. Alternative Markets premiums grew by 2.5% as a result of an increase of 12% and excess workers' compensation premiums, which were partially offset by a decline in primary workers' compensation premiums in California. Regional premiums decreased 1% as volume was unchanged but prices declined slightly. And International premiums were up 18% due to growth in both Argentina and Europe. Net premiums for the companies that we started in late 2005 were approximately $8 million in the quarter. The overall combined ratio improved to 88.2% from 89.2 in the prior year with a loss and expense ratio each declining by a half a point. The combined ratios by segment were Specialty, 85.2; Regional, 87.6; Alternative Markets, 76.6; Reinsurance, 100.0; and International, 99.2. The Alternative Markets segment combined ratio improved by approximately 12 points compared with the prior year, mostly as a result continued favorable reserve development for California workers' compensation business.

The first quarter paid loss ratio was [37.9%]. We started pointing to paid losses at the beginning of 2002, and in the four and a quarter years since then we've reported earned premiums of over $15 billion, accumulative paid loss ratio of 38%, and an increase in loss reserves of over $4 billion. In the first quarter of this year, total reserves increased 267 million and estimates of prior year reserves increased by 5 million. With respect to investment income, overall it was 131 million in the quarter, up 47%. Our average invested assets were up 2 billion over the prior year quarter, and the average annualized yield on investments increased to 5.0% from 4.3% in the prior year quarter. And March 31, 2006, 86% of the portfolio was invested in cash and bonds with the remainder invested in equity securities, including approximately 700 million in the arbitrage trading account. We increased our investment in the arbitrage account by 200 million during the first quarter as returns for that business have improved significantly. The annualized yield on all equities, including the arbitrage account was 9%, 9.0% in the first quarter of 2006, compared with 7.4% in the prior year quarter.

The average duration of the fixed income securities increased to 4.0 years at March 31st from 3.8 years at the end of 2005. That change reflects, one, the use of cash to fund the arbitrage account; and, two, the impact that higher interest rates have on the duration calculation for mortgage-backed securities. Neither of these represents a change in our overall fixed income strategy. The increase in interest rates in the quarter also resulted in a decline, a net aftertax unrealized gains and losses of about -- of approximately 28 million. Investments and tax exempt municipal bonds were 4.3 billion at March 31st, compared with 3.4 billion a year ago and that resulted in a decrease in our overall effective tax rate to 28.6%, compared to 30.3% a year earlier. All of that adds up to quarterly net income of 162 million, or $0.80 per share, and annualized return on equity of 25.2% and a book value per share at March 31st of $14.08.

Thank you, Gene. Well, we are very enthusiastic about the quarter and the year. We're very confident that this is going to be a terrific year for us and we're more confident as time goes by that '07 will be an excellent year. I will be happy to answer any questions. Sara, if you would open the line for questions.

[OPERATOR INSTRUCTIONS]. We'll go first to Charles Gates with Credit Suisse.

Hi, good morning.

Good morning, Charlie.

Two questions on the market still. One, I think in your opening remarks, you said that pricing -- I believe you said in your markets flat to down 1 or 2%. Your second comment, there were a couple of large players that are being aggressive. Could you elaborate on both of those remarks?

Well, first of all, I think if I were to describe the overall market, I would say, the tone of the market is flat to slightly down. Our average pricing is probably down 1, 1.2%. We do have some lines that actually are price increases, and there are a couple of places like D&O where prices are down more than 10%. But overall, I think that prices are generally flat.

Yes, I think that there are a couple of people who seem to be less concerned about profitability and more concerned about volume. Some of them have their own agendas. Some of them may plan to go public in the near-term. Some of them might plan to have capital rating. And when you grow this environment, it's easy to print more attractive earnings than might be appropriate because of the nature of a cyclical business you are carrying-forward positive reserve developments in most recent years. So I think that you are going to see a few companies who are being a bit more aggressive than they might otherwise be. And that's not always in their best interest or the marketplace's best interest. And no, Charlie, I'm not going to give you names on the conference call.

[Laughter]. But did I misinterpret your comment that it was a -- I believe you said, a couple of large players?

I -- yes, I mean, there are a couple -- when I say large is I would just -- my description would be there's one large and one middle-sized player and then a couple of small guys who are doing it in a narrow area. But there's one particularly big large player, yes.

You wouldn't want to give its initials? No, that was a joke. The second question, one of you inferred that there was significant gains specific to the California workers' compensation business as a result of the drawing down reserves. Did I misunderstand that?

No. We had net $5 million of adverse development in the quarter. [Inaudible-background noise]. Well, we have somebody who is talking on --.

That's not here.

Sarah, that must be you. Hello?

It has been taken care of.

That was not a good thing. I didn't have anything on video, even those dirty competitors. But --.

You had $5 million --.

5 million net adverse development and I -- we did have positive development of -- in California, something less than $15 million. And we're trying to be very cautious with California because everyone has to remember that it may look like you have a lot of redundancy in California, but they can change those regulations and you can suddenly have to look at your reserves retrospectively again because the benefits can suddenly mean all your liabilities on the books have to change. So caution is really called for when these things change. What they give, they can take away. So while they have been very successful, and I think have been rewarded in tremendous reductions in pricing, you just never know if they are not going to change benefits retroactively and then what you think on redundant reserves become necessary.

So while reserves are coming down and we think we are still very conservative, more conservative than many of our competitors, we think it's appropriate because we would hate to have a call like this and say, "Gee, they changed the rules and we are going to have to put up $23 million. So California is something that you have to be careful of. That's one of the reasons we are not bigger in California. That's why we restricted our growth. If you would look a few number of calls ago I was asked that question by somebody and I said, we didn't want California to be more than 5% of our business because of that.

Is there any way you can quantify to what extent the M&A portfolio benefited first quarter earnings?

The answer is, it gave us a slightly better return than our fixed income return. It was not an overwhelmingly better return, Charlie. Just as it gave us a slightly worse return for most of last year. It's a slightly better return. It's not a huge number.

My last question, if you were an insurance analyst, which you are, how -- what would have been the question you would have asked on the Chubb call last night when they reported an 82.9 combined ratio?

I just would have told them how brilliant they were. And then I would have asked them how were their D&O reserves. But that's up to them. I don't know.

Thank you.

And we'll now move on to Jay Cohen with Merrill Lynch.

Hi, Jay.

Hey, Bill. I've got three questions. The first is, in the Specialty Business, which was up 7.5%, you had said the E&S business was up 12%, presumably other places didn't grow as much. Was there any spot within Specialty that was a little bit weaker from a premium standpoint, Carolina Casualty or --?

Carolina Casualty didn't really grow much. And Berkley underwriting partners, which is program business, was really -- was down and also March liability was down. We just didn't follow our -- the decline in D&O pricing. We just tried to go to places where we thought it was. So our E&S business was good but several of the other non-E&S sections were just not good. I think that, -- none of which was down a lot, and it wasn't a lot of money, but overall that part of the business didn't grow.

Okay. Secondly, in my model, it looked like the corporate expenses were a little bit higher than we had modeled and maybe the recent run rate. Is there anything in those numbers, Gene, that's unusual in nature?

I think that we don't allocate any of our incentive, corporate incentive comp. So as we do better, there's more incentive comp and that all appears in the corporate line. So about 7.5 million of corporate expenses is group-wide incentive compensation, Jay.

I guess that's a good thing. And then lastly, maybe a little bit bigger picture, the changes at CV Starr, and kind of their search for new markets, do you see them having any impact at all on your business, whether it from competition or could you pick up any of this business at all?

Look, let's all understand Hank Greenberg is one of the smartest people in this business. He has done a fabulous job in building AIG. What everyone wants to say about what happen and where it is, whatever it is, he is a brilliant person in the insurance business. So CV Starr is going to be a formidable enterprise. And it doesn't impact us particularly much because their nature are large accounts and bigger business. It's not the kind of business that we write. That having been said, it's going to be a significant factor in the marketplace and there will be places where we bump into them on the edges and I would expect they will be a formidable competitor.

Okay. That's all I've got. Thank you.

Thank you, Jay.

[OPERATOR INSTRUCTIONS]. And from Sandler O'Neill we'll go to Mike Dion.

Good morning. Just a follow-up to your out -- the beginning of your comments about price competition for some -- one large player, one midsized player, and a few smaller players. Outside of the California worker's comp, excess worker's comp market, where are you seeing some of the price pressure and what lines, and if you could elaborate on a little bit that would be appreciated?

I think D&O is probably significant price pressure. There's some areas in professional liability where we see some. I think that non-catastrophe sort of prone property business has some exposure that we're seeing. But I don't think it's really generally speaking a huge amount of stuff. I think that -- the competition, when I was talking about a large player and a intermediate-sized player was really mainly in the regional areas where you have big companies trying to take market share from more nimble, regional companies and they are just trying to do it across-the-board cut in price. We have one specialty company, went in and offered a 20% cut in all of a particular class of business, that one of our company writes because they think we are good underwriters. Well, you laugh and say, we let our worst business go to them and our best business, we match their pricing.

So you see all that here and there but as I say, with a 1.2% average cut in price, knowing that in a few sections you have got something worse, and a few segments you've got consequential price increases, it's not anything that I'm concerned about. You'll always have to be concerned about people being responsible. There is a concern with Sarbanes-Oxley and signing financial statements to keep everyone honest and I think for the most part it has, but there are a few people that don't seem to be concerned about Sarbanes-Oxley.

Okay. And just a follow-up, if I can. One thing that Charlie mentioned was the Chubb call and one thing management talked about last night was their expectation for an increase in pricing in the second half of the year in commercial lines. Would you concur with that view?

A lot -- inflation is really the issue we have to be concerned about. I don't see significant price increases. I think prices may move up slightly. I don't think you are going to see a great decline in pricing, but I think prices may move up a little bit. But I'm very happy. I think that with our paid loss ratio in all likelihood we have a little bit of a cushion in our pricing now, and modest increases in pricing keeping up with inflation would be great from our point of view. And I think that's a slightly optimistic statement. And I certainly would hope that would be the case.

Okay, that's helpful. Thank you.

We'll now move on to Stephan Peterson with Citadel Investments.

Good morning. I just wanted to revisit the numbers that you mentioned to Jay. Did I hear correctly that you had about 15 million of positive development in the California comp book?

Yes.

And then so to get to a net adverse development of about five in the quarter we had 20 million of adverse development?

Right.

And where did that generally come from when accidents yield your lines of business?

That's just not something we generally give out.

Okay. Thank you.

We'll now move on to Ron Bobman with Capital Returns.

Hi, thanks for taking my call. And congrats on great results again. Bill, you last quarter made the same cautious comment about basically sort of how the rules so to speak can be rewritten in California, I guess as they can be in any state. And to caution that everyone needs to take with respect to bring down reserves. And I'm wondering if there's anything that as you watch the political and legislative actions in California, that makes that statement more real now than it was 90 days ago, where that's just -- whatever, we always have to be cautious.

I think you have to be cautious all the time. And obviously, if we were more concerned than less concerned we wouldn't be bringing down anything. I think as time goes by the exposures that are on your book that are subject to retrospective changing in liability, responsibility diminish. So with time, you start to get more and more comfortable because old cases are getting closed down and new cases are coming on. So I think time is the thing that gives you the comfort for settling it. So I think by the time we have a new governor in California, or a re-election of the existing governor, we'll be able to be better informed. At this moment, we just think you need to keep a cushion in those reserves and I think that over time you can have that cushion come down slowly.

Okay, understood. And on a related subject inside of workers' comp, could you talk about your workers' comp catastrophe reinsurance purchases? And in a general sense, how do we get comfort -- not just with respect to Berkley -- that people who write workers' comp are buying adequate amounts of CAT cover for that line of business? Is it possible for us as being an outsider to really make an estimation as to whether the people are sort of prudently protecting their CAT risk for that line of business?

Well, I think if you go -- on our website are some of the speeches that I've given at various firms, and I think there are slides in almost all cases about our CAT exposure and what it is and how much cover it is and what is our worst projected forecast. I don't know what other people do, but I think what it shows you is that in the worst scenario we can project that it doesn't have a great consequential impact on our business. We certainly could lose 100 or $200 million in a terrible event. We buy catastrophe protection that we think will take care of any accident that we foresee and keep it within, probably less than a quarter's earnings; under a California earthquake kind of scenario. And our P&L would be much, much, much less than that.

But we don't write great concentrations of workers' compensation where we don't have reinsurance. And our primary companies buy reinsurance, and our own California -- our own workers' compensation reinsurance company is the only place where I have any worry about exposure and there we really spread the risk dramatically. So for Berkley Corp. not an overwhelming worry. It could cause a quarter's hic-up, but that's about all and a quarter's hiccup would be a real shocking loss.

Got you.

But we just -- we manage our business to look at what we would call "AML," absolute maximum loss. So nothing that we can at least foresee could happen that could have an impact that would impact us more than one quarter's earnings.

All right. Thanks a lot. That's all for me.

Thanks.

[OPERATOR INSTRUCTIONS]. We'll go next to Meyer Shields with Stifel Nicolaus.

Thanks, good morning. I know you don't write a lot of property business as a proportion of your overall portfolio, but I'm sure you're monitoring it and I wanted to get your thoughts on how you see pricing developing in the coastal and non-coastal areas?

Overall property business -- it's not so much coastal, non-coastal, it's catastrophe exposed business and non-catastrophe exposed business. Because you have the new [inaudible] fault, you have California quake, as well as coastal exposures, all are sort of looked at the same with their aggregate CAT exposures. Pricing on aggregate CAT exposures is such that the prices are -- the primary prices are just too low by a lot. People just don't have their mind around the kind of prices you need for those kinds of exposure. And primary prices and that stuff is going to have to move up where an E&S risk in California -- in Florida might be a 3%, 4% rate online he's going to have to move up to a 6 or 8% rate. Or people aren't going to be able to buy retrocessional reinsurance protection, and the capacity is not there at the capitalization rates people need. So I think you are going to see a substantial increase in catastrophe exposed areas, especially in hurricane exposed areas, but I think the same thing is going to be true of earthquake exposures. Non-catastrophe exposed areas, prices have been easier, but I think that that is probably going to change as we start to better understand all of the things that are going on in the climate and we start to see aberrational weather patterns. So I think overall property rates probably are going to move up and not down, but dramatically change in catastrophe exposed areas. And I think that for personal line writers we're going to have a real political issue as the cost of insurance from homeowners in coastal areas and along fault lines will get to where living in houses in those areas will be prohibitive.

Okay. And if I can follow-up, what proportion of the Reinsurance segment business is property?

None.

Okay.

Well, I shouldn't say none. We had -- our participation in Lloyd's has some property. But none of our direct and probably 10 million of our facultative is -- and then some of our participation in Lloyd's is. But it's not a very big amount.

All right that's very helpful. Thank you.

We'll now move on to Mark Dwelle with Ferris Baker Watts.

Yes, good morning. I had just a couple of clarifications. Gene, did you mention what the margin was on the Service Business?

No, I didn't.

[inaudible] can you get back to Karen and she'll have those numbers for you?

Sure thing. Same question, as you commented about the -- a new Med-Mal agreement related to the Reinsurance segment, can you just expand upon that a little bit? Give us a sense of how large that was and what sort of class of exposure it represents?

It was really just one particular treaty that was a very, very low risk transfer issue and it was not of consequence and it's just one particular treaty. It represented a significant amount of gross premium, but not a consequential to our bottom line.

Okay. Then I guess my last question is, your -- again, this is a clarification. You commented that comp premiums were up in California or overall comp premiums were up about 12% and then you said that that was offset by something, I missed that?

Yes, I think that California comp was down. And MECC, our excess comp was up.

Okay. That's the only question I had. Thank you.

[OPERATOR INSTRUCTIONS]. We will take a follow-up from Charlie Gates.

The yield on the 10-year government security is up nine basis points this morning. I guess it's up 70 basis points year-to-date. Wearing your insurance analyst hat, what do you think are the greatest implications of that for this industry?

Well, I think that as you can see from our quarterly mark-to-market, we have a pretty good position in our portfolio given that municipal bonds have not suffered as much as the bond market overall. So we did not get very much adverse impact, you can look at our book value change, in spite of the bond market. But I do think as yields creep up, in the short-run it's going to put pressure on people who are carrying bond portfolios mark-to-market which are most public companies now, and I think that that will impact them and I think that from the point of view of actively traded portfolios you're going to see people taking capital losses as the capital -- if their capital accounts are strong enough to basically get new higher yields. But I think in the short-run it won't have a lot of effect, Charlie. In the longer run, I think it makes people willing to be more competitive.

On the ROI conference call 10 days ago, I believe that they implied that they saw increased competition on the West Coast in contractor's liability programs. Could you make any comment to that?

Well, first of all, we're not big California writers except in contractors, and we have not seen dramatic competition at this point in time. I think the issues with contractors, it's attractive to people because it's a big ticket item. It is still, while it's a long tail line of business, the laws and rules in California haven't changed, so it's a very high risk line. And those people who are going there without an understanding of what they are doing, are -- they are designed to bet at the roulette wheel and they are not the House. So we think that -- we haven't seen terrific competition. It has gotten to where there were only a few markets and you can get any price you wanted to where there is a few more entrants in the marketplace but I would say that it's still a rational thoughtful business for the most part.

My final question, sir, what do you mean by a big ticket item?

Big premium. In other words, a premium -- something that is in the premiums in the hundreds of thousands or millions of dollars, it gets everyone's attention when they are searching for volume.

Thank you.

And we'll move on to Kenneth Billingsley with BB&T Capital.

Good morning. Just one question on premiums. In the past, I know you said that how you felt during other market cycles, you didn't apparently grow enough, even as the pricing was getting weaker from the peaks that you wish you would may have grown a little bit more. And given your comments on pricing and paid loss ratio, is it likely that we may see more growth come out of here?

We would sure like to grow more than we are. We think prices are still good. It's very hard to get people's psychology to say it's good to grow with prices, today are 5% less than they were yesterday. And that's a really important issue. So where it's a constant issue in managing an enterprise with 4 or 5,000 people and persuading people to do what you want. So, yes, we would like to grow more. We think there are opportunities to grow and as -- I have to convince people and then they have to convince people and so it's a chain of people and you have to persuade them. And you also have to persuade them at what point you don't want to write business. So it's a complicated task.

When prices are going up, you want to write all the business you can and now you want to write all the business you can, except. And it's getting across all the business you can with the except that makes it a more complicated task. So, yes, we think prices are still okay and we would like to grow. We don't think you can write business at 15% less than the current market. We think if people do that they will find they are losing money. On the other hand, if you write business at 3, 4, 5% less than the current market we think it's going to give you a great return on your capital, at least in some lines. And I might add that there are other lines that will become newly attractive and hopefully we'll be ready to take advantage of them.

And so you're saying that it seems like the problem -- you would like to grow more but you are having a problem getting that message across internally?

No, I won't say getting the message across, getting it implemented is easy. I have no problem getting it across. It is getting it implemented. And it's a hard -- but it's true with any real large enterprise now. And it's not as easy to get people to do it because you tell -- you don't tell them just behind the business, you tell them behind the business except and they are very concerned about making an "except" mistake. So it's convincing them to have confidence in their judgment. But that's what we're supposed to do, that's why we get paid. That's what management is supposed to do.

And back in the '90s, it seemed that it was easy to get the message across to --.

Yes, well, it was maybe a little too easy at some points in that cycle.

So are you guys just being a little bit more reserved so you can control it when you need to pull the plug on growth as pricing comes down too far? Is that what you are wrestling with?

No. I'm just trying -- I'm trying to get a more precise message across.

Very good. Thank you.

And Mr. Berkley, there are no further questions at this time.

Okay, well, thank you all very much. We are pleased -- I think that -- we're very excited. We think it's going to be a terrific year. We think that the results so far have met or exceeded our expectation. We think that we will do better than we had originally anticipated for the year, and we're optimistic about '07. Everything looks in a row to have at least this year and next year with outstanding returns. So thank you all very much.

Ladies and gentlemen, that does conclude our conference. On behalf of W.R. Berkley Corporation, we appreciate your participation today. Have a great day.