W. R. Berkley Corporation (NYSE:WRB) Q4 2023 Earnings Call Transcript

W. R. Berkley Corporation (NYSE:WRB) Q4 2023 Earnings Call Transcript January 24, 2024

W. R. Berkley Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the W. R. Berkley Corporation’s Fourth Quarter and Full Year 2023 Earnings 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, beliefs, 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, 2022 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 alter its forward-looking statements, whether as a result of the new information, future events or otherwise. I would now like to turn the call over to Mr. Rob Berkley. Please go ahead, sir.

Rob Berkley: Sarah, thank you very much, and good afternoon all and welcome to our fourth quarter call, and for that matter full year ’23 call. In addition to me, you also have Bill Berkley, Executive Chairman, on the call as well as Rich Baio, Chief Financial Officer of the Company. We’re going to follow our usual agenda where very shortly I’m going to hand it over to Rich. He’s going to walk us through some highlights from the quarter. Once he’s completed his comments, I’ll offer a couple of thoughts at my own and then we’ll be pleased to open it up for Q&A. Before I hand it over to Rich, I did just want to offer a thought or two and for some participants who is probably won’t be new to, I guess, a discussion that we’ve had in the past.

For our organization, there is without a doubt amongst all of our colleagues, a shared recognition that the goal of the exercise is value-creation. We approach this through a lens that we’ve again touched on in the past, but I’ll flag it again. A lens that we referred to is risk-adjusted return. All returns are not created equal. One needs to consider the type of risk that you’re taking on in order to achieve that return. And in contemplating that risk, one needs to consider volatility as a component of that. One is to ask themselves the question? Am I getting paid enough for that risk? And of course in considering that, what role volatility plays. In the fourth quarter of ’23, there should be many market participants that report good numbers.

But I think that one needs to look beyond just a quarter. One needs to look at the year. One needs to look at the past several years. When it comes to value creation, it’s not just about a step forward. It’s about consistently taking steps forward, and it’s about avoiding taking steps backwards. When you look at the results of our quarter, without a doubt, they are very strong, very robust by any measure. But I would encourage people to look at the full year and look at the past many years and our ability to create value, taking into account the risk that we are accepting in order to achieve those returns, is really the cornerstone why we’ve been able to build value for shareholders so successfully over many years. This quarter and this year, no exception.

So to that end, before I hand it over to Rich, I would like to thank and congratulate my colleagues throughout the organization on a really outstanding quarter, outstanding year, and yet another year of a job very well done. Also, on behalf of my colleagues. I would like to thank our shareholders for allowing us the opportunity and the privilege for managing capital on their behalf. I will pause there and Rich, over to you. What do you have for us?

Rich Baio: Thanks, Rob. Appreciate it, and, good afternoon, everyone. The Company continued to report record-setting financial results in the quarter, leading to an outstanding full year. Net income increased to $397 million or $1.47 per share compared with $382 million or $1.37 per share in the prior year quarter. Annualized return on beginning-of-year equity was 23.6%. Record operating income increased more than 21% to $392 million or $1.45 per share with an annualized return on beginning-of-year equity of 23.2%. Our extreme ownership in maximizing risk-adjusted return and everything we do contributed to our record full year underwriting income, net investment income, operating income, and net income. Our top-line growth accelerated throughout the year with the fourth quarter reflecting a 12% increase in net premiums written to more than $2.7 billion, bringing the full year to a record of almost $11 billion.

On a constant foreign currency exchange rate basis, the quarterly and full year growth was adversely impacted by approximately 50 basis points due to the weakening U.S. dollar. On a segment basis, insurance grew 12.3% to more than $2.4 billion in the quarter from rate improvement and exposure growth. The Reinsurance & Monoline Excess segment increased 10.2% to more than $300 million. This marks a record level for full year gross and net premiums written for each segment. Turning to underwriting performance. Record quarterly pre-tax underwriting income increased 8.2% to $316 million, representing a calendar year combined ratio of 88.4%. Current accident year catastrophe losses were flat at 1.2 loss ratio points for the comparable quarters with $32 million and $30 million reported in fourth quarter 2023 and 2022 respectively.

Prior year development was favorable by $1 million, bringing our current accident year loss ratio ex-cats to 58.8%. The improvement over the prior year’s quarter of 50 basis points was primarily due to business mix and lower attritional property losses. The expense ratio increased 60 basis points to 28.4% in the current quarter, flat to the 2023 full year. The increase from the prior year’s quarter is consistent with our prior communication that being lower ceding commissions resulting from business mix and reinsurance structure changes over the past year. In addition, increased compensation costs and startup operating unit expenses have also contributed to the small increase. We expect that our 2024 full year expense ratio should be comfortably below 30%, taking into consideration, investments in such things like technology and data and analytics as well as new startup operating unit expenses.

So in summary, our current accident year combined ratio, excluding catastrophes of the quarter was 87.2%. Record quarterly pre-tax net investment income increased more than 35% to $313 million, bringing the full year to more than $1 billion for the first time in the Company’s history. The combination of our short-duration and record level operating cash flow of more than $2.9 billion in the full year has positioned us well to invest in securities with higher interest rates. The book yield on the fixed maturity portfolio continued to advance throughout the year to 4.4% on a 12-month basis. Our net invested assets increased approximately 10% in the past year to almost $27 billion. The credit quality of the portfolio remains very strong at AA minus with a duration on our fixed maturity portfolio including cash and cash equivalents of 2.4 years.

The investment funds improved from the consecutive quarter to $11 million although declined from the prior year in large part due to market value adjustments in the real estate fund area. As a reminder, the investment funds are generally reported on a one-quarter lag. Foreign currency losses in the quarter related to the U.S. dollar weakening relative to most other currencies. It’s worth noting, however, that the net effect to stockholders’ equity is negligible since the improvement in our currency translation adjustment more than offset the amount reflected in the income statement. Stockholders’ equity increased to a record of almost $7.5 billion. Careful capital management throughout the year resulted in three special dividends of $0.50 each per share plus regular quarterly dividends totaling $501 million.

In addition, share repurchases in the quarter of almost 1.6 million shares contributed to a total of more than 8.7 million shares repurchased during the year, amounting to $537 million or $61.69 per share. So our capital management during 2023 aggregated to more than $1 billion, the most we’ve returned to shareholders in one year while growing shareholders’ equity more than 10% and maintaining more than adequate capital to support ongoing growth in the business. Book value per share increased to 11.6% and 25.5% in the quarter and full year before dividends and share repurchases. And Rob, with that, I’ll turn it back to you.

Rob Berkley: Rich, thank you very much. Pretty attractive picture and even a conservative CPA couldn’t make it sound anything other than encouraging. So a couple of observations on my end. Obviously, the top-line growth, we’re pleased with the progress that we’re making relative to the past few quarters. I think this is unfolding exactly as we suggested. Just calling out a few pieces of that puzzle, clearly some of the things that we had talked about as far as portfolios that we were separating from, much of that pig is through the Python. The specialty market in general continues to be particularly attractive. I would highlight E&S especially, furthermore, I don’t think that party is over. When we’re looking at the submission flow, we continue to be quite encouraged.

On the other hand, certainly, within the professional liability space and I’ll call out public D&O as perhaps one of this extreme examples, I think it is delicate and treacherous and as you can see in the numbers in our release, we are treading thoughtfully as you’d expect. Rich touched on the rate coming in at 8%, which based on our assessment is pretty clear that we are comfortably exceeding any reasonable assumption around loss cost trend. And we are encouraged by that. I know that there are couple of chicken littles out there that are sort of hanging on the rate number that we share on a quarterly basis and some might say, well, geez, this is down below where it was in the third quarter and that is a factually correct statement. That having been said, I would caution people to please understand that is really driven by mix of business and not just product line, but we have more than 60 different businesses under the Group umbrella and at any moment in time, some are growing more than others and rate opportunity is not equal amongst all the businesses in the Group, and obviously our product lines as well.

And just as a point of reference, you’ll recall this time or fourth quarter ’22, we got 6.9 points of rate ex-comp. So again, we are comfortably above where we were a year ago and we are confident again that we are exceeding trend by a meaningful margin. Again, Richie talked about the losses. I’m not going to get into that. The only thing that I will flag is that the paid loss ratio for the quarter came in at 48 and change, and for – I don’t know how many quarters it is at this at this stage, it’s just sort of floating between 46 and 49, which I think is really just a reflection of the rate action along with the underwriting discipline and focus of our colleagues that are allowing us to be arguably writing business at a pretty healthy margin, to say the least.

Again, Rich touched on the expense piece. So I’m not going to rehash that other than I will make the one comment that for purposes of ’24, we have some businesses that we started prior. And those are going to be impacting our expense ratio, though, even with those coming into the expense ratio, as they are in business for a full year, the fact of the matter is, that’s going to be a relatively modest drag. Going the other way as far as benefit goes, you’ll see what happen with our written premium in Q3 and certainly in Q4 and we all know how that’s going to travel through and impact the earned in ’24, which will clearly be a positive. Last comment on the investment portfolio. Rich touched on that. As far as the book yield, as far as we’re concerned, the new money rate for us still today, even with all the humming and honking about where interest rates are going, we still can put money to work at 5%-plus.

So we think there’s opportunity there. As Rich mentioned, the duration, 2.4 years. We are looking for the window of opportunity to nudge that out. We are not in a rush. We have a slightly different view than much of the world as to where interest rates are going. And when the window of opportunity presents itself, you will likely see that 2.4 moving out from here. So again, I think it’s exciting that we had a good quarter. It’s rewarding and encouraging that we had a good year and top of – a good year in ’22 and so on, but I think the most encouraging thing is when you look at where, I should say, how the table is set for ’24 and beyond, we are in a very good place and not only on the underwriting side but on the investment side. So I believe in ’24 and likely beyond, you are going to continue to see this economic model firing on all cylinders.

So that probably wasn’t as brief as I promised, but it was relatively brief for me, and I’m going to pause there and Sarah, we would be very pleased to open it up for questions. Thank you.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Elyse Greenspan with Wells Fargo. Your line is open.

Rob Berkley: Hi, Elyse.

Elyse Greenspan: Hi.

Rob Berkley: Good afternoon.

Elyse Greenspan: Hi, thanks. Good afternoon as well. My first question, Rob, probably picking up kind of where you were ending with your comments. Premium growth picked up right in the third and the fourth quarter ending at 12% in the fourth quarter. So as you think out to ’24. Is that kind of the baseline would you expect the quarters of ’24 to all be 12% or greater, just given the momentum that you’ve been highlighting on the call?

Rob Berkley: Yes, no, Elyse, I appreciate that you and other colleagues are trying to build models and making certain assumptions. But the truth of the matter is that, tell me what market conditions are going to be. And I can give you a thoughtful answer to your question. There is nothing that I see today that leads me to believe that there isn’t meaningful opportunity before us. And again, do I think the 12% number is a reasonable number to use? Yes. Do I think it’s possible to be better than that? It certainly is possible. But again tell me what the market conditions will be and then I can give you a more thoughtful answer as opposed to fumbling around on this end.

Elyse Greenspan: Maybe sticking with that market thought, right? We’ve heard a lot of conjecture about whether we start to see a broader strengthening of the casualty market. And so where are you on that? Do you think we’ll start to see more broad-based pricing momentum within casualty lines as we go through 2024?

Rob Berkley: I think you should. From our perspective, obviously, one of the big drivers there is social inflation and as far as we’re concerned, it’s alive and well. In addition to that, as far as another pressure point, I think you’re starting to see the reinsurance marketplace, particularly on the treaty side, but across-the-board starting to wake up and really recognize some of the challenges that the liability market faces. And the kind of pressure that you saw, the reinsurance marketplace, but on the property line, I think, while it may not be to the same extent, I think you’re going to see them start to really focus on the – some of the liability lines and I think that will perhaps introduce further discipline into the casualty market.

Quite frankly, if you go back in time, we’ve sort of been standing on our head and jumping up and down, talking about social inflation for many years. And we started pushing on rate pretty early and it’s been good to see more recently people showing up to the party and recognizing what that loss trend is, recognizing what that means for this loss cost and taking action. So long story short, I think that there is some more legs to the liability market, particularly umbrella, auto liability, GL, and there’s a lot of the excess market overall.

Elyse Greenspan: And then one more. You guys said $1 million. I think a favorable development in the quarter. I know, we typically get more color when the K is filed. But any movements within lines or accident years that were more significant – the more significant nature in the fourth quarter.

Rob Berkley: Nothing that’s particularly earth-shattering. I would say it’s kind of more of the same. But if you’re looking for more detail, I’d encourage you just give Karen or Rich a call and if you can’t get one of them, just give me a buzz.

Elyse Greenspan: Okay, thank you.

Rob Berkley: Thanks.

Operator: Your next question comes from the line of Mark Hughes with Truist. Your line is open.

Rob Berkley: Hi, Mark, good afternoon.

Mark Hughes: Hello, Rob, good afternoon to you. Hello, Rich. How – what are you seeing in terms of loss development on some of those older accident years, particularly in the casualty lines, any change in trajectory this year compared to prior years?

Rob Berkley: I would suggest that some of the older years are beginning to show signs of petering out and I think some of the more recent years that look particularly encouraging. As they season out more, we will be more inclined to recognize the good news. But I think at this stage, if you look at the average duration of our loss reserves or an average life of our loss reserve, which is 3.5 plus years, just shy of four years at this stage, we have our arms around, I think a lot of the years that we’re particularly frustrating where I think the industry may have gotten caught a little flat-footed, and ourselves are not completely insulated from that with social inflation. I think we may have gotten on top of it a little quicker than some.

But nevertheless, ’16 through ’19 is not without its challenges. That having been said, I think some of the more recent years are encouraging, but I think ’16 through ’19 are slowing considerably and certainly the earlier of that Group, I think have – maybe not fully played out but are pretty darn close.

Mark Hughes: Yes, very good. How about on workers comp, you had some growth in premiums written this quarter. How are you thinking about that?

Rob Berkley: Yes, that was primarily due to payroll, if you will. Just wage or – wage inflation, if you like.

Mark Hughes: Yes. Anything, any update on….