W. R. Berkley Corporation Q2 FY2025 earnings call

• Property market is becoming more competitive with a notable bifurcation; larger accounts face greater competition than smaller ones. • Commercial transportation market has MGA participants creating short-term headwinds. • Professional liability market has public D&O finding bottom and private/non-profit D&O remaining competitive. • Casualty lines have opportunity for appropriate rate. • Workers' compensation saw action in California. • MGA market has extraordinary growth with new entrants and private equity involvement. • Investment portfolio duration increased to 2.8 years, and quality remains strong at AA-

The Insurance segment's quarterly accident year loss ratio ex cat was 60.7%, bringing the accident year combined ratio before cats to 89%. The Reinsurance & Monoline Excess segment's accident year loss ratio ex cat increased to 54.1% with a strong accident year combined ratio before cats of 83.8%. Net premiums written reached a record $3.4 billion in the quarter with growth in all lines of business in both segments. Net investment income was a record $379 million, benefiting from growth in invested assets and new money rates on fixed maturity securities.

• Management adjusted growth expectation from 10%-15% to between 8%-12%. • Optimistic about continuing to grow earnings in a thoughtful and controlled manner, expecting high teens to low 20s returns in the foreseeable future.

• Tariffs are a concern with uncertainty about their impact. • Labor market changes and potential wage inflation due to administration policies. • Concerns around deficits and their effect on the economy. • MGA market with potential mismatches of interest and unquenchable reinsurance capacity thirst.

Q: Just first question on growth, just thinking about the growth potential here. I know it was a tougher quarter with the property pricing deceleration, but just curious if you all still view this as sort of a 10% to 15% growth environment? Or has the last few quarters changed that?

A: Look, I think we had come out with that band, if you will, probably, I don't know, call it, 18 months ago, maybe 24 months ago, if you're asking my best guesstimate at this stage in spite of the number that we saw in this quarter, my view is that it's probably somewhere between 8% and 12% would be my guess as opposed to 10% to 15%.

Q: You mentioned tariffs and labor costs in your opening remarks. And I just wanted to understand if you're actually seeing anything coming through if that's more of like a forward-looking statement. And obviously, it's the wider range out?

A: It is a forward-looking statement. We are not seeing it in any noteworthy way in our loss activity right now. At the same time, we are conscious of the fact that, that concept of timing that I referenced in conjunction with the point that you're flagging. And we want to make sure that we're not caught flat-footed. I think at this stage, given the -- what we're seeing coming out of the administration, it's hard to imagine that tariffs are going to prove this to be something that goes away, but we'll see. And as far as the labor piece goes from our perspective, ultimately when the day is all done, just given the position around immigration and related activities and the actions that the administration are putting into place, there is no doubt that there are certain jobs that are going to need to be filled at a different payroll point than they have been. And ultimately, that presumably will drive labor costs.

Q: My first question is actually on capital. You guys didn't buy back any shares in the quarter. Just wondering what drove that decision?

A: Look, ultimately, Elyse, when the day is all done, as we've shared with you and others in the past, we have a view as to how much capital we have and what type of surplus we have at any moment in time. We have a view as to what we see is opportunities potentially before us and want to make sure that we have a surplus of gas in the tank. And in addition to that, ultimately, there's a judgment made around to the extent there's above and beyond what is the most efficient way to return that to shareholders. As Rich flagged in his notes, it's not that we weren't returning capital to shareholders, we returned a few hundred million dollars to shareholders. It just seemed at that moment in time, the most efficient and effective way to return the money to the people that belong was through a special dividend. I would strongly encourage you and others not to lead to the assumption that we are out of the repurchase market because that is not the case. We evaluate that tool, along with other tools every day. And again, what we think is the most practical answer to the surplus of capital question. Obviously, we can do our own math as others can do their math as to what we believe real book value is as opposed to this cockamamie accountant version of math. And we also have a view on the earnings power of the business going forward, which I would add, we are quite optimistic about. So again, I would encourage you not to count the [indiscernible] of the repurchase activity.

Q: Rob, on the 15% Mitsui stake, any update on the timeframe and timeline there?

A: I know no more than anybody else or at least anybody else who bothered to read the SEC filings. Again, I think as we -- I don't know if we share it or not, if we didn't, I said that we, by design, have not been privy to sort of where they stand in their process because in no way, shape or form, perhaps back to one of Elyse's points, we don't want to be encumbered or restricted in any way and our ability to repurchase stock. So the short answer is I have no idea.

Q: Rob, you mentioned in the write-up rate increases were 7.6% ex workers' comp. And I know that you're kind of writing a more specialized, higher risk line. So I was just kind of curious, how is the workers' comp pricing doing in that arena? And any other color on the workers' comp in addition to your prepared remarks you might call out?

A: Well, thanks for the question, Andrew. The answer is that I think what you perhaps are referring to is some of the higher hazard stuff where we see growth opportunities from time to time, we saw, particularly in the first quarter. It was still there in the second quarter, but perhaps not to the same [ rate ]. That having been said, we do like the pricing there, and that's why we're leaning into it. And while we maintain a little bit more of a defensive posture with the Main Street stuff. What I would define as the higher hazard, more specialty in nature. We're very pleased with the opportunities that we see there.

Q: On the other liability line, the growth was just a little bit slower this quarter, you expressed some of kind of continuing optimism about Primary and Excess. At the same time, you kind of bound back your growth outlook just a little bit. Are you seeing any kind of inflection in that core GL or Excess market? Or is that still consistent with prior couple of quarters?

A: Yes, we're still encouraged by the opportunity that we see there. So my recalibrating, if you will, as far as the growth opportunity is really a couple of fold. One, on the commercial property opportunity, I think that there's going to be a bit more of a headwind. I think the -- I think the casualty piece that you just referred to, I think that opportunity very much remains there. I also think just going back to the commercial auto piece, I think that, that will prove to be a terrific opportunity, but it's going to take a little bit longer to get there. On the other hand, I think that on the reinsurance front property, in particular, has probably seen its best day for some time. And for the life of me, I don't understand why the casualty marketplace [ isn't ] getting a little more backbone.

Q: Rob, just follow-up question maybe there to Mark's question. You had mentioned the bifurcated property market between large and small or large and middle, maybe we'll call it SMID, do you see that dynamic going in the opposite direction in some of the other markets, like casualty or maybe large accounts are seeing some rate increase acceleration and that's yet to really seep down and play out in the small to middle market or just hoping to get some color there in terms of how you're thinking about the opportunity.

A: Look, I think taking half a step back, focusing on the casualty stuff, both Primary and Excess. I think the reality is that social inflation impacts the full spectrum. That having been said, without a doubt, plaintiff attorneys, tend to view limits as candy. And so the bigger the limits that are available, the more focus they get. That has been the case for some number of years at this stage. Do I think that we have seen an effort amongst the plaintiff attorney to go a little bit down market, yes, I do, but not dramatically. So when the day is all done, I think my expectation is that you're going to continue to see opportunities of the larger end of town, and that will continue to really waterfall through the whole casualty marketplace. The good news is for the smaller accounts, they tend to be a little bit more insulated and the rate environment tends to be a little bit more sticky. So similar to perhaps one of the points you were making, the property market, the larger accounts are the ones that get targeted and you get the greatest feeding frenzy around early on. Well, that applies to casualty, too. So the rates are going up on the larger accounts and casualty. But the smaller and middle market is following and it tends to be stickier.

Q: On the investment portfolio, I think, Rob, in your prepared remarks, you mentioned some moving pieces in terms of what you may do going forward. And [indiscernible] I heard you had extended duration a little bit, but is there anything else that you might be thinking about in terms of potential repositioning or other actions on the portfolio?

A: I think we generally are of the view that the fixed income portfolio is particularly well positioned. I think that our expectation is certainly, given what you hear coming out of Washington, the yield curve may steepen a little bit from here, and that may be a catalyst or an opportunity where we'll choose to take the duration out a little bit further. Perhaps answering the question with a slightly different bent consistent with messaging in the past, while we have not completely turned our back to the alternative space going forward from a new money perspective, given the opportunities in the fixed income market, it's a pretty high hurdle. So we're pretty pleased with how things are positioned today, and we think we have a lot of flexibility regardless of what tomorrow will bring.

Q: I guess just keeping it on the property discussion, Rob, is kind of a broad question, but why are we still seeing better growth in the property lines and the other liability given your assessment of things?

A: I think a lot of the property growth is really coming from -- well, a, as I said a moment ago, we still think that there's opportunity there. So just because rates are down doesn't mean you don't want to write the business. I think the other piece that is worth noting is our private client business that I referred to before or said differently, our net worth personal lines business, and that is a contributor there as well.

Q: So Rob, in your prepared remarks, it was almost like a throwaway. The last thing you mentioned was being really just pleased with the direction of trend in casualty reinsurance markets. And from my perspective, a lot of cash reinsurance is just quota share that the underlying risk sets the pricing and then you have some question about what's going to be the [ seeding ] commission. But obviously, there's so well in some facultative and other types of business that obviously have a set price. Can you go a little into what you meant about being disappointed in the trends on the cash reinsurance direction?

A: Yes, absolutely, Josh. Thanks for flagging that. So long story short, and I should have been more specific about it, the thorn in the side is primarily the seeding commissions where we just think that the reinsurance marketplace when we're planning the assumed game, should be looking for better terms. Obviously, we have a different view when we're seeding the business, but that is what I was referring to. In addition to that, just less consequential as far as percent of the marketplace or for that matter, percent of our portfolio, we found that the [indiscernible] market is one where we would have hoped to have seen a bit more discipline at this stage. By the way, mapping back to some of the other comments, particularly around the commercial auto space.

Q: So Rob, I wondered if you could talk a little bit about what the competitive dynamics are like right now in the private client business. Are there more opportunities there because maybe some players are pulling back? Or are we seeing any more competition in that marketplace?

A: I think that certainly, there are some -- the obvious names participating in the space. I think each organization or a competitor as their own approach to the business. I think there are some that are primarily riding the coattails of a brand that they have. And I think there are others like ourselves that are really through the expertise of people and our team bringing value that's very visible to both distribution and insured. So when the day is all done, why are we getting the traction we are because we certainly are not the cheapest, but I would argue we're the best value.

Q: Two, I think, quick questions. First of all, on your clients, are you seeing increasing demand for higher limits on the various casualty line policies?

A: Are we seeing increasing demand from our clients? I think that ultimate -- are we talking about larger or smaller accounts, just to make sure I'm following there, sorry.

Q: I was thinking of the smaller ones.

A: You were thinking of the smaller ones. Not consequentially. They are still looking to buy the typical primary and oftentimes, if they're looking to buy the same umbrella. So said differently, I'm not sure that the insureds or for that matter, their distribution, is directing them to think about their exposure in a materially different manner than they did yesterday in spite of social inflation. It's just not something that the smaller accounts are thinking about as much as the larger accounts are. I think for -- given the rate increases that have come about in response to social inflation amongst other things, I think you have a lot of insurers out there trying to think about not just what do they need, but also what can they afford? And I know you're talking about this sort of main street casualty, but I would suggest to你 that, that is perhaps particularly visible in the commercial auto space where a product line where you're seeing perhaps or arguably the greatest level of social inflation, consequently, significant rate need being pushed and more probably to come, and you have insurers sitting there saying, I don't know if I can afford this. I don't know how I make my economic model work. And sometimes, you have insurers that are sitting there saying, I'll buy the Primary, but the Excess that I used to buy, maybe I'll buy less or maybe I'll have to fix self-insure, which sadly is a big rolling of the dice.

Q: Maybe just on the D&O market, can you remind us, do you guys focus more on the public or the private and I guess where I'm going with this is, does kind of a rebounding M&A and IPO market provide some upside for premium growth here?

A: So the answer是 all of the above. And certainly, IPO activity would be well-received. And I guess all we need to do is get the SPAC market going again and then we can have a party.

Q: I was curious about your thoughts about risk-adjusted return. You mentioned it a couple of times, you always do. But the question is, how often and when and how do you change your view about risk as -- by line. And therefore, how does that affect the return? You know what I mean is it a monthly, daily annual thing because the world is changing fairly rapidly today. And therefore, I would assume that the underlying risks are changing as well.

A: The way I would articulate it, and then others on my end of the phone might have a view because this is -- well, Rich may have a thought, but -- my boss might have a thought as well because this is very much a philosophical thing that goes back to day 1 when we got two sticks together to make fire. But long story short is that we are very preoccupied with this and colleagues throughout the organization are talking about it daily. We have a fair amount of visibility every 30 days, and we have a painfully granular discussion about it by business, by product line every 90 days. Now just because we have the formality of monthly and quarterly that in no way, shape or form inhibits the discussion. And if appropriate, the taking action between those mile markers. Did you want to add to that?

A: I would only have one case that goes in a way you never imagined could make you change your mind about a line of business. It's a continuous process for watching how things are going and seeing, is there something you didn't expect. Is there something that causes you to reevaluate? Otherwise, it's a continuous process of examining the risks you see in the courtroom in the underwriting, whatever, but there was a bad malpractice case in Philadelphia that was decided last week in obstetrician had a terribly bad decision. Well, that makes you think about what happens about malpractice and obstetrics and all those things. Just it brings it to your attention. So I think it's a continuous process of staying on top of what's happening and how our decision is going. And you're looking at those things on a continuous basis.