Berkley 2Q Up 15 Percent Despite Crazy Foreign Competitors

W.R. Berkley Corporation reported a 15 percent jump in second-quarter net income yesterday, with strong underwriting results and growth in investment income contributing to the result.

The company's chairman and chief executive officer, William R. Berkley, however, said the quarter saw some "lunatic" foreign competitors start to behave in a manner that may shorten the cycle, making underwriting profits increasingly difficult to achieve for everyone.

For second-quarter 2007, the Greenwich-based company reported net income of 190.6 million, or 93 cents per share, compared to $165.5 million, or 82 cents per share for second-quarter 2006.

Investment income grew 17 percent to $169 million, while underwriting income remained relatively flat with the combined ratio falling just one point to 87.9, compared to 88.9 in second-quarter 2006.

Underwriting results got a bit of a boost from $32 million of favorable development compared to $7 million of unfavorable development in last year's second quarter, while gross premiums written fell roughly 6 percent to $1.3 billion in the quarter.

Mr. Berkley said he expects the company to continue to report returns "comfortably over 20 percent" for the balance of the year during a conference call yesterday, noting that the annualized return-on-equity was 22.9 percent.

"I am optimistic that we can do as well next year," he said.

In spite of repeatedly asserting that his view was an optimistic one, he also predicted that underwriting profitability will decline going forward and sounded several alarms about what he termed "lunacy" in certain sectors, including the reinsurance sector, large account specialty business and excess workers compensation business.

Overall, "we continue to see new opportunities [in the market], but they are fewer and harder to find," Mr. Berkley said.

Focusing on treaty reinsurance business, he said, "Insanity has moved to that area quite quickly. People have lost their minds," noting that some competitors are willing to sign onto treaties without seeing loss runs.

That is "the kind of thing that tells me maybe the cycle is going to be shorter and there will be more death," he said.

Mr. Berkley also said that the competition for specialty insurance business heated up more than he previously anticipated, pointing to competition from new entrants--"Lloyd's vehicles coming through Bermuda and other foreign companies...as well as standard markets [that are] discounting prices substantially."

He said large specialty accounts are now under attack. "In one of our companies, we lost every single one of our 10 largest renewals" to competitors that undercut Berkley's prices by 20, 30 or 40 percent, he said, declining to identify which of Berkley company this was. He did say, however, that the accounts lost were not a significant portion of aggregate writings for this company and they were not giant accounts, but simply accounts that had premiums of $100,000 or more.

In spite of his negative comments about "crazy" behavior in some market segments, Mr. Berkley, in response to a final question on the call, asserted that the majority of the insurance marketplace is still behaving rationally.

He also noted that with a growing asset base, W.R. Berkley's investment income is growing at 15-20 percent or more per quarter, offsetting any deterioration that may occur in the company's "conservatively stated" underwriting profits over the next 36 months.