A dislocation in the insurance marketplace that is similar to one that developed in the wake of the global financial crisis in 2008 is creating opportunities for some carriers, the CEO of W.R. Berkley Corp. said Tuesday.

Speaking on an earnings conference call to deliver first-quarter results of $120 million in net income, a 10.4 percent return-on-equity and a 6 percent jump in net premiums, W. Robert Berkley Jr. drew the parallel when asked about his company’s ability to start up new operations—six commercial operations in 2015 and a high-net-worth personal lines operation announced already in 2016, which will be headed by Kathleen Tierney, a former Chubb executive.

“In some ways, the period that we’re going through now is somewhat reminiscent of 2008, 2009, 2010 for different reasons. There is a lot of dislocation in the market—a lot of…large organizations that for one reason or another are very inwardly focused. And that creates opportunities for organizations like ours to try and continue to…build and enhance the value of our franchise for shareholders both organically through expanding our existing business as well as starting new operations,” he said.

Berkley had referred to the dislocation earlier on the call—and on prior calls as well—without drawing the parallel to the post-crisis era at the end of the last decade. This time around it’s occurring for “different reasons,” he emphasized, attributing the current state of affairs to the level of reorganization and M&A activity occurring elsewhere in the market. “We have been talking about it for a couple of quarters…We’re starting to see it really materialize as a distraction for some and an opportunity for others,” he said.

This material change from prior quarters is one of several notable events that Berkley also outlined in an opening commentary about market conditions.

Beginning his remarks by stating that market conditions were a “natural continuation” of the second half of last year, Berkley emphasized that he did not want to paint a “business as usual” picture.

In addition to the dislocations impacting talent moves, Berkley highlighted these events impacting the competitive landscape:

  • Recent catastrophe activity that is setting up the second quarter for material industry losses.
  • Changing reinsurance buying habits of cedents, including large buyers who are re-entering the market.
  • Growing tensions between distribution and carriers.

“Ultimately, we are concerned that this is going to become more pressurized as the insurance marketplace becomes more competitive and pricing gradually erodes,” the CEO said, referring to the distribution-carrier tension.

‘A Natural Crisis’ Builds: Carriers vs. Distributors

The CEO and his father, Executive Chair William R. Berkley, were probed by analysts to elaborate on the mounting tension between producers and carriers.

Robert Berkley Jr. said: “The companies are trying to maintain or grow their margins. The distribution is trying to do the same thing. At the same time, if you look at the insurance marketplace, rates are plateaued and in all likelihood are gradually going to decrease. That creates tension and pressure.

“Ultimately, it would seem everyone is so focused on how they maintain their margins and how they keep the world happy every 90 days that that is getting in the way of distribution and carriers finding ways to work together to bring value to customers…”

But as technology and customer behaviors evolve, he said, both parties need to recognize they have one master to please—the ultimate insured, whose needs should be front and center.

William Berkley picked up on the theme of evolving technology. “The big picture is technology is moving to disintermediate the current distribution system…

“That’s a long-term problem, [but] as we’re moving in that direction, the existing distribution system, instead of working with companies to try and find ways to deliver value to the customer, is more focused on how to improve their margins.”

At the same time, insurers are seeking higher margins on underwriting as investment profits decline. “Everyone wants a bigger piece of a shrinking pie,” he said.

Continuing his assessment, the executive chairman said: “It’s unfortunate that…the very largest agencies have decided to not just make a continuing ‘nonreduction’ in their commission rates but have [also] tried to find ways to generate additional marginal commissions.” These added commissions “come directly at the expense of the final customer,” he added.

“They make it so that it seems to be an additional amount paid by the insurer. But if the insurer can afford to pay that additional amount, the amount really should go to the benefit of a reduced cost to the insured.”

“Somehow that seems to have escaped those large brokers,” he said. “So, ultimately, [we] fail to serve the customer in an open and transparent way. Disintermediation accelerates.”

One analyst wondered whether that meant W.R. Berkley Corp. will pursue alternative distribution options.

The elder Berkley reiterated a commitment to “human participation in distribution” and said the company is not rushing in the direction of direct-to-customer sales. Alternative distribution is “not what we’re suggesting.” Instead, the key point is “just that there’s a challenge going forward and we all have to get on the same team to deliver value to the customer,” he said.

Circling back to the comments about added commissions, another analyst suggested that brokers would argue that these are in line with “value-added services” they provide for that revenue.

Robert Berkley responded. “I don’t think we’re necessarily commenting on the value that they bring…to their clients. [But] ultimately, when the day is all done, there is a bit of tension there [and] in what seems to be looking like a softening insurance market,…It is likely that tension may increase.”

The relationship between distribution and carrier is a partnership, he said. “There are moments in time when the carrier is senior partner and moments when distribution is senior,” he said, attributing the analysis to his father. “In the long run, for us all to survive, [both sides need] to be conscious of their obligations to the partnership and the need to survive as well,” he concluded.

Re Market Improving; Workers Comp Opportunities

As to the softening insurance market, the younger Berkley began the conference by noting that the insurance side of the market “continues to become incrementally more competitive” while he sees reinsurance becoming gradually “a little less competitive.” This too is “a very incremental change,” he said. “If there was ever a part of the industry that deserved a break, it would be reinsurance,” he added.

Buyers who have increased retentions in recent years have since seen loss activity come onto their books, and they’re re-entering the marketplace as customers, he noted. “I don’t think that is a silver bullet for the reinsurance market, but [it] may be helpful in the balance between supply and demand.”

At his company, part of the 6 percent growth in net premiums overall in the first quarter is attributable to a 16 percent jump in reinsurance premiums. Chief Financial Officer Eugene Ballard explained that the increase to $175 million related to growth in treaty reinsurance and more specifically to “structured property reinsurance” deals in the U.S. These structured contracts have limited catastrophe exposure and lower-than-average expected loss ratios, partly offset by higher profit commissions, he said.

On the insurance side, W.R. Berkley Group’s net premiums rose 4.5 percent to $1.5 billion, with the largest jump coming in the workers compensation line—21 percent to $458.3 million. In contrast, commercial auto premiums declined 7 percent to $159.0 million.

Opportunities in workers comp vary by account size and region, Robert Berkley said. Without revealing which parts of either space the company finds particularly attractive—”we’re not looking to increase the crowd around the watering hole”—he said there are niches with reasonable return prospects in commercial auto as well. Those, however, are seemingly few and far between based on his further comments that the insurer is getting “meaningful rate” but still shrinking the commercial auto book.

Opportunity Knocks: In Personal Lines?

During the conference call, the two Berkleys spent a lot of time responding to questions about distribution-carrier tensions and an expectation for $100 million a year in non-fixed-income investment earnings disclosed in the earnings announcement. Beyond that, another popular topic for analyst scrutiny was the recent foray into the personal lines high-net-worth market.

The CEO said he’s gotten questions about why the company is entering personal lines since the initial announcement hit the wires earlier this month. “Ultimately, our view is that this piece of the personal lines space is no different than much of our strategic plan—that is to focus on specialty products” where knowledge and expertise are differentiators, with a customer base that is willing to pay for services and expertise, he said.

Probed further during the call about the need to have scale in this market and infrastructure in order to have an efficient operation while providing good service, about the time it will take to build this, and about the possibility of making a technology play to gain efficiency, Berkley Jr. said, “It’s going to take some time for us to get the critical mass where we’re able to be as efficient as some others.” However, he declined to provide a lot of details into the strategy.

“Clearly, any time someone is starting a new business in a mature space and will be competing primarily against mature players that have a legacy, there are pluses and minuses,” he said. Among the pluses, “we’re in the process of putting together a team of people that are very knowledgeable about the subject matter but are very bright and are open-minded as to [whether] there [is] a better way to do what has been done in the past,” he said.

“We think the team of people that will be managing the capital on behalf of the shareholders in this space are very seasoned and thoughtful, and we’re thoroughly convinced that this is a great opportunity to allow for value to be created for shareholders,” he said.

Separately on Wednesday, the company announced three new hires for the specialty personal lines team reporting to Tierney:

  • Kevin G. Hogan, who will be senior vice president and chief operating officer.
  • Susan M. Vella, joining as senior vice president of customer experience.
  • Christoph Ritterson, coming on as senior vice president of marketing.

Topics Carriers Profit Loss Workers' Compensation Reinsurance Market