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W.R. Berkley posts impressive growth Selective growth is the cornerstone of their strategy By Phil Zinkewicz Weather forecasters are predicting another active hurricane season for 2006, property insurance rate inadequacy in catastrophe-prone areas of the country needs to be addressed, and the property/casualty insurance industry regulatory environment might be on the verge of major changes. These are just some of the subjects touched upon at an annual press luncheon hosted in New York earlier this year by W.R. Berkley Corporation. Founded in 1967, W. R. Berkley is a holding company that owns a large selection of property/casualty insurance and reinsurance providers. Each of the 31 operating units in the Berkley Group participates in a niche market determined by territory or product. Among W.R. Berkley’s regional subsidiaries are: Acadia Insurance Co., Berkley Mid Atlantic Group, Continental Western Insurance Co., Monitor Surety Managers, Inc., and Union Standard Insurance Group. W.R. Berkley also has international and reinsurance operations. William R. Berkley, chairman and chief executive officer, opened the luncheon by reporting on the holding company’s impressive earnings for the first quarter. He said the company reported net income of $162 million, or 80 cents per share, a 34% increase from $121 million, or 61 cents per share, for the first quarter of 2005. Net operating income for the first quarter of 2006 increased 32% to $160 million, or 79 cents per share, compared with $121 million, or 61 cents per share, for the corresponding quarter of 2005. Berkley also reported the following first-quarter results: Return on equity was 25.2% on an annualized basis; the GAAP combined ratio improved to 88.24% over the prior year period; net investment income grew 47% to $131 million; net premiums written increased 8% to $1.3 billion; and the paid loss ratio was 38%. Commenting on the company’s activities, Berkley said: “We are pleased that we have achieved a 25% annualized after-tax return for our shareholders this quarter. The first quarter of 2006 represents our 21st consecutive quarter with a year-over-year increase in net premiums written, demonstrating our focus on improving revenue when adequate insurance pricing is available. Selective growth, both internally and through new strategic directions, continues to be a cornerstone of our competitive strategy. Our outstanding underwriting results have continued, and we expect reported underwriting results in 2006 will at least match 2005. Increasing short-term interest rates and our strong cash flow resulted in a dramatic increase in investment income. Once again, our paid loss ratio is under 40%, and we are confident in the overall strength of our balance sheet. We expect to exceed a 20% return in 2006, and we continue to feel positive about 2007,” he said. Berkley then opened up the proceedings to the invited media. He was asked to comment on the tolls recent hurricane seasons have taken on the property/casualty market and on predictions that future hurricane seasons will be as volatile. Recently, the National Oceanic and Atmospheric Administration (NOAA) said that the 2006 Atlantic hurricane season will be “very active,” with up to 10 hurricanes, although not as busy as record-breaking 2005, when Hurricane Katrina and several monster storms slammed into the United States. NOAA is predicting 13 to 15 named storms, with eight to 10 becoming hurricanes, of which four to six could become “major” hurricanes of Category 3 strength or higher. U.S. hurricane experts say a sharp rise in Atlantic storm activity since about 1995 is related to a natural shift in climactic conditions and sea surface temperatures in the Atlantic that is expected to last from 15 to 40 years. Berkley said that his firm’s subsidiaries are not heavily involved in property risks in the Gulf Coast area, where they concentrate on the commercial side of the business. “That does not mean to say that we wouldn’t write property business there if conditions were right,” he added. “The problem is rate adequacy. Insurance is not a charity, nor should it be. If a risk is particularly volatile, for whatever reason, the rates must be allowed to reflect that volatility. I understand that regulators want to keep rates down for their residents, but if people want to live on the shorefronts and build on fault lines, then insurance rates have to reflect that additional risk.” Berkley also said that building guidelines need to be improved. “Some areas in catastrophe-prone areas have lax building codes or no codes at all. That must be taken into consideration when deciding how to rate a risk or whether to underwrite it at all.” Berkley was then asked about the current regulatory climate for the property/casualty business in the United States. Specifically, he was asked to comment on a new proposal for an optional federal charter. Berkley referred to a proposal by U.S. Senators John Sununu (R-N.H.) and Tim Johnson (D-S.D.), called the National Insurance Act of 2006. The proposed legislation would allow life and property/casualty insurers to choose federal rather than state charters under an “optional federal charter” regulatory system. Berkley said that he has discussed this subject with various insurance industry interests. “The agents associations are against the federal charter,” he said. “So is the National Association of Insurance Commissioners. Companies are split on this issue. Some are in favor of an optional charter; others are opposed and would like to retain state regulations. As for our organization, we are in favor of the optional charter. If it were passed, we would sign on for the federal option. We believe it would make for a more competitive environment, with greater ease of operation.” Berkley said he thought the chances of the Sununu-Johnson bill passing are “just under 50%.” However, he added, “This (the federal option) will inevitably come to pass.” Finally, Berkley was asked if he anticipated that his firm would be considering any merger or acquisition opportunities. “Not really,” he said. “We’re not big on acquisition for growth’s sake. If something comes along that looks right, of course we’ll consider it. But our new businesses are started when opportunities are identified and, most important, when the right talent is found to lead a business. Of our company’s 31 units, 23 were developed internally and only eight were acquired,” he said. * |
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