Berkley: More Concerned with Reinvestment Rate, Inflation Risk Than Market Cycle

NU Online News Service, July 25, 2:47 p.m. EDT

The cyclical change in the marketplace no longer tops the list of concerns for W.R. Berkley Chairman and Chief Executive Officer William R. Berkley, who says that while economic activity may have slowed the pace of the market turn, the cycle is indeed changing and prices are rising.

Now, Berkley says in a conference call with investors, his top-two concerns are the reinvestment rate on the company's portfolio and the risk of inflation. 

Berkley says, “When we look at our reinvestment rate for our portfolio, in spite of finding niches, we're just not able to re-invest at as high of a rate as we got before.”

He cites this as his biggest concern, and notes that while after-tax returns have not been impacted much due to better municipal returns and the purchase of a “fair-sized portfolio of high-quality, dividend-paying common stocks, the fact is, our yield has come down by probably 40 basis points or so, and is probably going to come down by another 15 or 20 points by the end of the year, because cash flow is coming in and reinvestment rates are not as attractive.”

Berkley says the risk of inflation is second on his list of concerns, and the company has responded by making conservative assumptions in its loss costs, and also by investing with “a relatively short duration.”

Berkley explains, “That is because we believe the risk of ultimately having to face inflation is still there. We don't want to have a big charge in our portfolio where we mark to market and we are not able to get out of our own way.”

He adds, “Therefore, we are being cautious on both sides: cautious in our picks for our losses, and our expectation there, and cautious in keeping our portfolio shorter than we might.” He notes that this strategy costs the company money in the short term, but in the long run, he says “it's beneficial in our risk-adjusted criteria that we put forward for our shareholders.”

Berkley declares, “We are happy with where we're going. We think our returns could continue this way for a while.”

But he cautions that assumptions could change without a turnaround in the economy and a rise in interest rates.

For the second quarter, W.R. Berkley Corp. reports net income of $108.8 million, up from $82.2 million a year ago. The company's combined ratio dropped to 98.2 compared to 101.2 a year ago, and net premiums written rose over 12 percent to $1.2 billion.

On pricing, Berkley says in a statement, “We still see pricing momentum throughout the balance of the year. Many companies are beginning to recognize their weakening loss-reserve position, which will continue to put further upward pressure on the current pricing environment.”

W. Robert Berkley, the company's president and chief operating officer, says in the conference call that the excess market continues to resist the change in the pricing environment, operating under the “misperception that losses in the primary market won't climb up the ladder.” The silver lining, he says, is that areas in the marketplace that get the softest tend to offer the best opportunities when the market hardens.