The long-awaited turn in the property/casualty market has arrived, said William R. Berkley, chairman and chief executive officer of W.R. Berkley Corp.
As the company posted a 14% increase in third-quarter net premiums written, Berkley said it was the third quarter in a row of increasing rates.
"The environment continues to be competitive, but nothing like it was a year ago," Berkley said in a conference call. He said earlier, he had been expecting rates to rise 5% to 8% by year end, but thought based on conditions today, rate increases would be closer to the lower end of that range.
"There's no question that the market turn is definitive. It is here," Berkley said.
He said workers' compensation rates are showing double-digit increases, although the increase across all lines was 3.5% for September.
The company posted net income of $77.3 million, down from $93.6 million from the same quarter a year ago. Catastrophe losses were $51 million, compared with $22 million for the quarter a year ago. Including catastrophes, the company posted a combined ratio of 99.1.
Berkley said unlike some competitors, the company would not lower the quality of its investment portfolio to gain yield.
"We don't think the world is as wonderful as it might be. We believe the economy will get better, and are optimistic, but we take risk in the insurance business, not in our investment portfolio," Berkley said. "We're not going down in quality."
Asked if this market turn is similar to the turn in 2000 when Reliance and Frontier went out of business, Berkley said, "Every cycle has its own qualities."
"Today is so different from any cycle we've had before because of the financial debacle that we've seen in the prior several years, and the volatility of the markets," Berkley said. "There was no place to hide."
Companies with aggressive investment portfolios ran into problems, he said.
"This is a bit different than the 2000 cycle," Berkley said. "If you look at pricing, standard line pricing is down between 15% and 18% from the peak. Speciality lines are probably down 25%. Pricing at its peak gave great returns and great underwriting results, but along with that, investment returns were down. You're looking at an industry that's probably not making money."
What drives the market turn is "always the same: fear of total loss of profitability," Berkley said. Sometimes it's individual events that bring about that fear, and sometimes it's an examination of trends, he said. Today, some companies are relying on data that isn't as accurate as they think it is, Berkley said.
"What it is right now is the loss of redundancies in peoples' reserves...one of the things that happens and is always a keystone of change in the cycle is [when] the data you relied on didn't prove to be accurate," Berkley said.
For instance, he estimated the current accident year for workers' compensation is probably running a 110 combined ratio. "I think few people are putting up anything like those numbers," Berkley said.
However, "for those companies who adequately reserved, the opportunities will be fabulous," he said.
Earlier this month, W.R. Berkley Corp. estimated third-quarter catastrophe losses would be between $50 million to $60 million, before tax. The loss estimate is net of reinsurance recoveries and is inclusive of reinstatement premiums.
Earlier this week, A.M. Best Co. affirmed the Best's Financial Strength Ratings of A+ (Superior) of Berkley Insurance Group, Admiral Insurance Group, Berkley Regional Group and Nautilus Insurance Group and their respective property/casualty members.
"A.M. Best believes the excellent performances of Berkley Insurance and Berkley Regional are largely owed to their successfully executed, well-developed business strategies, which feature individual operating units focused on specific niche markets, primarily defined by geography and product orientation. Their demonstrated market expertise has led to favorable operating results, which has helped foster long-term stability and ultimately has resulted in their above average retentions. Based on these factors, A.M. Best believes these favorable operating results will continue, as both groups maintain their established market positions despite persisting competitive pressures," A.M. Best said in affirming the ratings.
"While weather-related losses suffered during the first three quarters of 2011 and the persisting competitive property/casualty operating environment is still likely to place some pressure on 2011 underwriting results, W. R. Berkley's earnings are expected to remain solid and both its cash coverage ratios and its financial leverage, should remain supportive of its ratings".