W R Berkley Corp (WRB) 2015 Q3 法說會逐字稿

Good day, and welcome to W. R. Berkley Corporation's third-quarter 2015 earnings conference call. Today's conference call is being recorded. 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 31, 2014 and our other filings made with the SEC for a description of the business environment 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 would now like to turn the call over to Mr. William R. Berkley. These go ahead, sir.

Good afternoon. We were pleased with our year, our quarter, and we are looking forward to an excellent year. I think that I would like to start with Rob, our very soon-to-be Chief Executive, and he's going to talk about our operations.

Okay. Thank you very much, and good afternoon, everyone. The market conditions during the third quarter were by and large a continuation of what we had seen in the second quarter. Yes, competition is modestly on the rise, but it truly is at an incremental rate. And in spite of some of the recent headlines that we heard about, cat or cat-like events occurring and affecting the industry, the impact has really been quite modest. And one is hard-pressed to find any type of catalyst out on the horizon that is going to shift the direction -- or I should say the overall market climate.

As far as the domestic insurance market goes, as we've said over the past couple of quarters, worker's compensation, general liability and many of the professional lines remain very attractive, and we think there are sensible places to be deploying additional capital. On the other hand, aviation, much of the marine market, cat-exposed property, as well as offshore energy are product lines that we are increasingly concerned about and do not see a lot of rational behavior in those parts of the market.

Another large product line that we have been talking to you about -- or I'd say at this stage it probably goes back to 2013 or so, maybe even earlier -- is commercial auto, particularly long-haul truck. We have had our reservations about this product line for a very, very long time -- it feels like at least at this stage -- and the lack of rational behavior that existed in the marketplace.

While we have not come out of the woods as an industry when it comes to this product line, I think the fact is that it is beginning to get the attention that is required. And we are beginning to scratch the surface as far as the needed action that one needs to take in order to get this line to return to meaningful profitability.

Moving on to the international market, it is a bit more competitive; no different than it's been in the past few quarters. One of the things that we've seen over the past few years has been many organizations have been looking to increase their footprint. And some of the international markets that we have been operating in have become more and more crowded.

This is not unique. We've seen this happen in the past, and what tends to happen is that it ebbs and flows. Folks develop an appetite to expand their footprint. And over time they realize that it is not so easy to get the critical mass that they need in order to make their economic model work. They begin to revisit their business plan and, in many cases, ultimately retreat. Our sense is, quite frankly, that we may be over the next couple of years approaching a point of inflection with some of the international markets.

In addition to that, we'll be getting on to a couple of comments regarding the reinsurance business shortly, but we all know how competitive it's been. And the international insurance markets tend to be a bit more dependent on the reinsurance market, and that is due to the fact that much of the international market uses much larger limits on a day-to-day basis than we typically see in the middle and small commercial market in this country. So consequently, cheap reinsurance has perhaps empowered less responsible behavior. And to that point, both domestically and internationally, we have seen an increasing correlation between areas of the industries that are under the greatest pressure and those that are most dependent on reinsurance.

On the topic of reinsurance, certainly, again, a topic we've discussed with you all in the past. The marketplace remains exceptionally competitive. Having said that, it would seem as though the pace of competition seems to be not moving or increasing as quickly as it has over the past several quarters. I don't think that we have necessarily touched bottom, but it would seem as though we continue to get closer as, again, the pace of erosion is slowing.

When we look at the reinsurance market, quite frankly, we are convinced that it is unlikely that the market tomorrow will look like it did yesterday. At the same time, we are hopeful that it will not look like what it appears to be today. Having said that, we do believe that capacity is becoming an increasing -- is becoming more and more commodity with every passing day. And ultimately it boils down to the expertise that you can bring from a value perspective to your clients and focusing on clients that actually do value expertise and don't just view you as a commodity.

Turning to our quarter -- and I've promised Gene I would keep this on a very high level and I wouldn't steal his thunder. But I do want to tuck in a couple of quick comments here. Top line came in at $1.57 billion. This is up about 3%. The growth was led by our domestic insurance business, which was up about 6%. Of that 6 points of growth, roughly one point of it was associated with rate. The top-line growth was somewhat offset by our international as well as our reinsurance segments, which were both off, and that was primarily driven by FX. And I will leave the rest of that for Gene to touch on.

As far as the loss ratio goes, coming in at 60.5%, by and large in line with our expectations. The reinsurance and the international segments both had good quarters or certainly improving some quarters when compared with the corresponding period last year. And the domestic business moved slightly in the wrong direction, and that was primarily driven by non-cat-related property losses.

Moving on to the expense ratio, which is certainly something that we have discussed several times in the past. First off, the 33.2% was by and large in line with our expectation. We continue to be pleased with the progress that we make on the domestic front. The reinsurance segment -- the internals are flat. The rise that you see in the quarter is due to permissions and related. And Gene, I guess you will be going into some of that in some more detail.

And then finally on the international front, the tick-up, I think, is in keeping with what we have suggested you would see when we had the discussion about 90 days ago with some one-time expenses associated with some of our operations in the UK.

So when you put it all together, the Company achieved a 93.7%, which by and large is right in line with our expectation. We think that the performance of the business is reasonably good at this stage. Having said that, we think some of the obstacles that we have been wrestling with, to date we are getting those behind us. And we are optimistic as to how we are positioned going forward for the fourth quarter, but particularly for 2016. Thank you.

Thanks, Rob. Gene, do you want to take us through the numbers?

Okay. Thank you. For the quarter, we reported operating income of $118 million, or $0.91 per share. That's up from $0.80 and $0.81 that we reported in the first and second quarters of this year but below the $1.06 that we reported in the third quarter of 2014, which included significantly higher than average earnings from investment fund.

For the quarter, our premiums -- our net premiums increased $46 million, or 3%, from a year ago to almost $1.6 billion. As Rob said, domestic premiums grew by 6% to $1.25 billion. That was led by 11% growth in worker's compensation business and 8% for other liability business.

International premiums declined 5% to $164 million due to the strengthening of the US dollar against the pound, the Canadian and Australian dollar and the Brazilian real, in our case. In local currency terms, international premiums actually grew 7%. That was led by growth in Canada, Germany and South America.

Reinsurance premiums declined 7% to $171 million due to the continuing soft market conditions in both the US and overseas. Without the impact of FX changes, they would've declined as well, but by 5% instead of 7%.

Our overall pre-tax underwriting profits were up 2% in the quarter to $96 million. The third-quarter accident year loss ratio before cash was 61%; that's unchanged from a year ago. In fact, if you look back for each of the past seven quarters, our accident year loss ratio has been between 60% and 61% throughout that period as pricing and loss-cost trends have generally offset one another.

Our cat losses were relatively light again this quarter at $6 million, or 0.4 loss ratio points, down from $15 million in the third quarter of 2014. And on a year-to-date basis, our cat losses were $46 million, or one loss ratio point.

We reported favorable deserve development of $15 million in the quarter with modest favorable development in all three business segments. That $15 million is in line with our year-to-date favorable development, which is $49 million. That gives us a calendar year loss ratio after cash and reserve releases of $60.5 million, slightly below the $60.7 million a year ago.

Our overall expense ratio for the third quarter was 33.2%. That's down 6/10 of a point from the third quarter of 2014. The domestic expense ratio declined to 30.8%, 3/10 of a point below the third quarter of last year and almost a full point below the full year 2014.

On the other hand, the international expense ratio increased 2.5 points to 43.4%. The increase was due to both the decline in premium volume as well as continuing costs relating to Solvency II and the integration of our UK company with our Lloyd's syndicate. And we do expect those costs to decline beginning in the fourth quarter of this year.

Reinsurance expense ratio increased by 5 points to 39.0%. The increase is attributable to the structured treaties that incepted earlier in the year. I mentioned those in the second-quarter call. These treaties have higher than average commissions, including profit commissions that are more than offset by lower loss ratios. And if you look at the expense ratio, the noncommissioned portion of the reinsurance expense ratio, it was unchanged from a year ago at roughly 10 percentage points.

That gives us an underwriting profit of $96 million for the quarter and a GAAP combined ratio of 93.7%.

Turning to investment income, our investment income was $133 million this year -- this quarter, compared with $179 million in the third quarter of 2014. Earnings from our core portfolio, including arbitrage trading, declined 8% to $110 million due primarily to lower reinvestment rates available for maturing bonds. The average bond yield for the first nine months of 2015 was 3.3%, down 2/10 from 3.5% in 2014.

Income from investment fund were $23 million a quarter, which is an annualized rate of return of 8%. That compares with $59 million in investment income a year ago to well above averages that quarter from our aviation and real estate funds.

Realized investment gains were $54 million in the quarter and were primarily due to a sale of a portion of our investment in health equity.

At September 30, 2015, the average credit rating for the fixed-income security portfolio was AA minus. And the average duration was 3.2 years, which is a full year shorter than the duration of our loss reserves.

Aggregate unrealized after-tax investment gains were $227 million at September 30, 2015.

Our overall effective tax rate for the quarter increased by one point from a year ago to 33.3%, and that's due to higher taxes in certain US states as well as a couple of non-US jurisdictions.

Cash flow from operations was $620 million for the first nine months of 2015, compared with $646 million in 2014. And in the first nine months, we purchased 4.5 million shares of our stock for an aggregate cost of $224 million. All in, that gets us to net income of $153 million and after-tax ROE of 13.3% and an ending book value per share of $37.18.

Thanks, Gene. Well, these are especially interesting times. We really do focus on risk-adjusted returns. It means we do some things that some of our competitors don't do. We don't focus purely on accounting results because we are focused on creating shareholder value more than reported earnings, per se. That means we start businesses instead of buying them because it's a better economic return. It's not a better accounting statement return. We are maintaining the quality of our investment portfolio and keeping a short duration because the risks of an insurance company are doubling down if inflation comes. You get hurt with your loss reserves. And if you extend the maturity and duration of your investment portfolio, you are effectively are doubling down. So we've chosen to reduce that risk, the one that we can control. We haven't lowered the quality of our investment portfolio because the risk of an adverse economic turn will have a general adverse view on our business. Therefore, we've chosen not to take the risk.

So we're constantly looking at the risk side of how we manage our business because all of our employees are owners. It's the biggest single element of our profit-sharing plan. Clearly, the management of the Company views that as how they bet on their future. We continue to look out and see lots of volatility and uncertainty in the future, but we have a lot of confidence in the things that we see. For every problem, for every change, it creates new opportunities. And we think having the smartest people and the best underwriters and the best teams of people continues to give us a competitive advantage.

Rob spends a substantial amount of his time out talking to new teams, constantly trying to find the best teams to do particular things, whatever they may be. They can be small niches or big chunks of opportunity, but we are constantly out there looking. And what we really are is a large group of small niches. And we do it in a way that we can compete administratively and cost-wise. We don't look like the people we compete with even though the numbers claim to be the same.

So we're very excited. We think the future is coming along today, and we think that the numbers are moving in the direction we like. Clearly, it's a cyclical business, but we think we are well-positioned. And we're constantly investing in that future. It probably costs us $20 million a quarter each year for the new things we've been investing in. Things we invested in three years ago give us a positive return; the new things that we are spending money on cost us money. We think that's how you build the business for the future. We think we're going to have a better business in the future than we have today, and today's business is better than yesterday.

So I'm happy to answer any questions. Patricia, we'll take questions.

(Operator Instructions) Ryan Tunis, Credit Suisse.

Hi. This is Crystal Lu in for Ryan Tunis. Our first question is just do you have any fourth-quarter visibility into the investment fund returns, given the move in energy?

Well, we know that the energy prices are down and that we're going to probably have a small loss there, but we haven't released that number yet. We normally put that in our 10-Q filing.

And our net position in our energy fund as it relates to our overall fund has continued to diminish as a percentage of our funds. So it's a smaller and smaller number. But when we file our Q, we'll announce those funds that we know already.

Okay. Great. And how should we think about the level of share repurchase this quarter? What kind of considerations are there?

It's the same considerations we always give. We consider how to best use the capital owned by our shareholders, which is either buying back stock, paying special dividends or expanding the business. And we are always looking at the balance of those things and the cost to balance -- of the balances, the price of the shares, the availability of the shares and opportunities that we see.

Okay. Thank you so much.

(Operator Instructions) I'm showing no further questions at this time.

Okay. I thank Mike [McDevitt] for that. Have a wonderful day.

Ladies and gentlemen, that does conclude today's program. You may all disconnect. Everyone have a great day.