We’ve been reviewing the annual reports of property/casualty insurers over the past few weeks to unearth interesting insights for executives and board chairmen.
Those two sentences appear together in a letter that starts by noting that on April 17, 2017, W.R. Berkley—the company—will celebrate its 50th anniversary in business. Fittingly, the letter from the man for whom the company is named is in part a reflection on the history of the enterprise and in part a commentary on the future.
50 years today.
I had to take a few minutes to process that. Personally, I have been involved in insurance for about three-quarters of that time, and I am hard-pressed to come up with a very long list of names in the elite group of property/casualty specialty insurers that have survived for five decades.
I have been reporting on the industry for just over two decades, and it was about four years into my journalism career that I first reached out to Mr. Berkley for an interview for an article about three P/C insurance companies that decided to restructure their operations: Frontier Insurance Group, Orion Capital Corporation and W.R. Berkley Corporation.
Mr. Berkley declined that first interview. Orion would be sold to Royal and Sun Alliance just six months later. Chair and CEO W. Marston Becker now chairs QBE Insurance Group. Frontier would go into rehabilitation within two years. Chair and CEO Harry Rhulen would leverage his experience in restructuring a public company and taking it through Chapter 11 to move on to co-found a crisis management firm (Firestorm, recently acquired by Keystone Solutions).
For years, I have joked that Berkley’s success might have been directly related to the fact that he turned down my interview request while the others did not. (Happily, he would agree to many others in later years.) In truth, I had no such power to make or break companies. That particular period in the history of the industry was littered with casualties. Executives of TIG Specialty and Kemper Specialty would join the list of those I interviewed that would see their companies disappear from the ranks of specialty insurers, while W.R. Berkley quietly reorganized some of the regional companies in place at the time—and would eventually grow to the specialty insurance giant it is today.
Reflecting on that time period in his latest letter to shareholders, Berkley gives his take on the survival of his company.
“At the turn of the century, we encountered a few bumps in all segments of our business. Through determination and focus, we managed through these issues, keeping in mind that we had a fiduciary obligation to our customers, our people and our owners.”
Numbers and People
That middle group—Berkley’s employee base—has been a key to the success that blossomed after that little hiccup in the history of the company, according to the executive chairman.
There are lots of impressive numbers in the report beyond that 50-year milestone: a current market value of $9 billion that compares to initial capital of $2,500 back in 1967; share value growth of 130,000 percent (or an 18 percent compound growth rate) over the company’s 44 years as a public company; cumulative stock price growth of 7,634 percent over the last 20 years compared to 1,239 percent for the S&P 500.
But a bar graph tracking the last two decades of stock price gains reveals that the gains really started to spike toward the end of the last one. What happened?
“This was a moment when many very capable people were looking for a new permanent home,” Berkley writes in his letter describing how his company’s appetite for starting new units rather than acquiring entire businesses lined up with some of the fallout of the financial crisis of 2008 for competitors that existed at the time. “We were able to find exceptionally talented teams of people and build extraordinary new business units that expanded our specialty core substantially. The number of operating units grew from 22 in 2001 to 40 in 2008, and we firmly established ourselves as a leading player in the specialty business.
“While declining interest rates put pressure on investment returns, strong underwriting results helped to maintain our overall profitability.
“Our relative competitive strength was being enhanced as this extraordinary talent joined us.”
A Tribute to People
It was about 10 years earlier, in 1998, that I started being invited to biannual lunch/media briefings that Mr. Berkley hosted in New York City and started receiving copies of the company’s annual reports at my office. (These days, I access it online. Times have changed.)
For the most part, the annual reports have looked the same over the years, with the image of some painting that Mr. Berkley admires gracing the cover—this year a field of flowers called Queen Anne’s Lace from a painting of the same name by American painter George Hitchcock—and ending with one of his favorite quotes from Mark Twain: “Always do right. This will gratify some people and astonish the rest.”
What is different this year is that 30 of the 56 introductory pages of the report (preceding the 10-K financial results for the Securities and Exchange Commission) are filled with photos of Berkley employees. “As of January 31, 2017, we employed 7,683 individuals. Of this number, our subsidiaries employed 7,536 persons and the remaining persons were employed at the parent company,” the 10-K states.
All of those employees are pictured in the annual report, Berkley’s letter reveals.
“We believe that every person in the organization is important and every task they accomplish makes a difference in our results,” says a callout on page 19 introducing the pages of photos to come, followed by a trademarked statement: “Everything Counts, Everyone Matters.”
Berkley’s letter ends in a similar vein. “Our Company can only be as good as the sum of the people who work within the enterprise. We strive to be the very best, and if we get there, it is a function of the efforts of this team of people. Thank you all for the first 50 years,” he writes.
Expressing confidence that his son Rob, the CEO of W.R. Berkley since October 2015, will continue to “carry on the enterprise with the same character and culture” that shareholders have come to expect, the elder Berkley, who prefers to be called Bill, includes some other thank-yous in his letter. He expressly identifies other members of his family who have been tolerant of the demands of the business, as well as two longtime company directors. His first thank-you, however, to Edward “Ned” Johnson, the former chair of Fidelity Investments, is delivered with specific memory of Berkley’s earliest days in the business and a special takeaway from Berkley coming from his experience with Johnson: “If you want to do what you promised, there almost always is a way.”
In short, Berkley reveals that a summer consulting job that he landed at Fidelity Management and Research between his first and second year at Harvard Business School had him spending a lot of time with Johnson, then president of the mutual fund giant, who promised to buy 33 percent of the HBS student’s new company for $25,000. “His lawyers explained why Fidelity could not do that,” Berkley recalls in the letter, going on to report that when the executive delivered the bad news, he also handed Berkley a Fidelity check for $25,000. “He said he knew I was counting on the money, so I should consider it a consulting fee,” finding a way to deliver on his promise in spite of the obstacle.
Berkley calls himself fortunate to have had similar experiences “with important and influential people who always chose the helping hand approach to life.”
And Berkley is himself an important and influential man with the same approach. An aging journalist who he once turned down for an interview can attest to his eagerness to help in later years—responding to every question about the industry, his career or his company with brutal honesty, and even insisting that this shy actuary-turned-reporter serve as moderator of a panel he participated on at an industry conference to further her career.
Looking Back—and Ahead
There is a lot more detail about W.R. Berkley Corporation’s first 50 years in the annual report letter, starting with the founder’s first moves to transition from being an investment manager of “other people’s money” to an insurance enterprise by acquiring two insurers: Houston General Insurance Company and Traders & General Insurance.
What Berkley doesn’t dwell on in the letter is one of the learnings from those early acquisitions that he shared with reporters during that very first briefing I attended. “Houston General was a fabulously well-managed, highly automated company. They knew exactly what they were doing. Unfortunately, they were losing money,” he told us back in 1998. “At Traders & General, they literally wore green eyeshades [and] kept track of claims on Popsicle sticks, [but] that damn backward company made unbelievable amounts of money.”
When the young entrepreneur decided to combine the two insurers that he had acquired for the money management firm he started as a Harvard Business School student, he learned his lesson about mergers. “I ended up with a bigger company that didn’t make any money,” he said, explaining his rationale for starting up niche businesses with talented teams of specialists instead of engaging in mergers in later years.
It seems strange to be reflecting on the past—part of my journey, and part of Berkley’s—when my usual charge these days is writing about emerging InsurTech disrupters and their potential impact in the near future. Berkley’s letter has some useful insights on the future and exactly how his company fits in. Perfectly, he believes.
“Each day new products and methods of distribution are developed. New technology makes pricing and risk management more subject to automated analytical tools, attaining greater accuracy. It is just such a world where our Company, which is large enough to have resources but small enough to be nimble, can prosper.
The world is no longer based only on the laws of large numbers and mass markets, but it is more focused on predictive models and better data analytics. Products are designed to meet the specialized coverage needs of specialized risks and types of businesses that have unique exposures. The exposures that come about in this ever more complex world require more expertise, as well as distribution that provides real customer knowledge.
The pace of change is accelerating. The value of knowledge is increasing. Customized service and products—not the old one-size-fits-all—is the current world.”