W. Robert Berkley, Jr.
President and Chief Executive Officer at W. R. Berkley
Richard, thank you very much. That was great. So I have a little bit of a list here of topics that I made notes to myself on, because I think there is a lot going on in the marketplace, a lot of moving pieces. And obviously, we as a market participant are navigating through that. So maybe a place to start would be a macro observation.
And I know we've touched on this in the past, but I think it's very important to keep top-of-mind. It's certainly something that we are as an organization are focused on. And that is the reality that yes, this is still a cyclical industry, and the cyclical nature is driven, as we've discussed in the past by two human emotions, fear and greed. And for those that want to drill down into that more we can do that offline.
But the simple reality is that this is an industry that is splintered. And what I mean by that is, once upon a time, most P&C product lines marched throughout the cycle, somewhat in lockstep. And what we are seeing more and more is major product lines, yes, still operating and behaving in a cyclical manner, but they are very different points in the cycle. And we're just seeing that in a more and more pronounced way. And when people talk about where is the marketplace, I don't think that there is one answer anymore.
It needs to be more granular. It needs to be where is the property market, where is the comp market, where is GL, et-cetera. And one can even get more granular than that. So I want to spend a couple of minutes talking about, through our lens, how we're thinking about major product lines and where those product lines stand in the cycle, and what are some of the realities stemming from that.
So perhaps a place to start would be property. Clearly has gotten a lot of headlines over the past couple of years. I think many have been waiting for discipline to finally turn up. And it seems like it is arriving. We have seen it in a much more pronounced manner in the reinsurance marketplace. And we've seen it begin to sprout some green shoots of discipline in the insurance marketplace with undoubtedly more to come.
As far as the property insurance marketplace, we were a little bit disappointed by the lack of discipline that appeared in the fourth quarter. We are convinced, we're going to see it more and more as we make our way through '23. But the simple fact is, it wasn't there. And we've been scratching our head trying to figure out why, when everybody knows reinsurance costs are going up, both cat and risks. And you would think that as soon as that becomes apparent, one needs to start to factor that into how you price your product. The cost of that capacity is going up.
And one also needs to remember that these reinsurance covers are not with traction. They are losses occurring. So as you're writing business in the fourth quarter to the extent you're able to, you really need to be not just contemplating but incorporating into your pricing, what that new reinsurance capacity is going to cost, even if it doesn't take effect till 1/1 because that capacity is going to be supporting the risks for part of the year that you wrote in the fourth quarter or even the third quarter and earlier.
The property market from our perspective is poised for material hardening. We, I think are thought of by some as a not a property market. And quite frankly, while we have been and are having more of a liability bend, it would be a mistake to think that we do not have the skills and the appetite for property, when we think it makes sense, when we believe it is a good risk adjusted return. And there is a better than average chance from our perspective, the marketplace is moving in that direction. Clearly, it's getting there on the reinsurance front and more to come again, in our opinion on the insurance front.
Maybe pivoting over to workers' compensation, I think there was either a poem or a song or something that went something along the lines of waiting for the world to change. So this is one that I clearly have missed the timing on. I had thought that the world would have figured it out by now as far as where things are going and what people need to be doing from a loss cost perspective. Clearly. I was mistaken.
From my perspective, based on what I see, and I believe my colleagues' perspective is that comp is likely going to continue to bump along the bottom throughout '23 and we can look forward to '24 and beyond hopefully for some considerable firming, which again is something to look-forward to. But in the meantime, clearly requires thought and discipline, and quite frankly from our perspective, it's a little bit unnerving that some rating bureaus seem to not be appropriately taking into account or adjusting for the frequency benefit that occurred during the COVID.
Additionally we think one needs to be very thoughtful about severity trend as well, and what that could mean in the future, especially on the medical front. Auto is another product-line that we think requires thought and judgment. From my perspective I don't think that there is a product line today that is more susceptible than auto to social inflation, if you like. And the good news is there is rates to be had if you go after it. The challenging news is you better make sure you're getting it otherwise it's very easy these days to fall behind loss costs.
I'm going to lump GL, excess and umbrella into one part, which is kind of inappropriate, but in the interest of time, I'm going to do it. I think those are amongst the brighter opportunities at this stage. Clearly, again, one needs to be mindful of social inflation. But the rate is there to be had. I would tell you of that universe that I'm referring to the only one area that is -- I wouldn't say concerning, but is on the watch list is the large account excess business, the large sort of Fortune 5,000 towers. There has been a huge amount of rate that's been achieved in that marketplace. But one needs to be very mindful as to how quickly that could potentially erode. Other than that, I think there's a lot of opportunity there.
Pivoting over to professional liability, I would suggest that it's very much two stories there. I would say, on one hand you have D&O and then on the other hand, you have, by and large, everything else. The D&O market few years ago, took off like a rocket ship with massive rate increases to say the least. And at this stage it is gradually coming down to earth. I would suggest that the parachute may have a couple of small holes in it, but it requires monitoring. That is clearly becoming a more competitive marketplace.
Other than D&O, professional liability, we think offers a great deal of opportunity, and we view that as a place for us to continue to lean into. I would suggest, smaller part of the marketplace, hospital professional liability is also an area that requires thought and caution.
Finally, reinsurance with all due respect to my friends and colleagues in the reinsurance space, I think the -- perhaps the expression that even a broken clock is right twice a day, well, this is one of those moments when the clock is right. And we will see with time how much discipline really is in the market and how long it remains or what the staying power is. I know that there was a lot of attention put towards property cat and what 1/1 was going to hold. Clearly, it was a firming marketplace. We did participate in that.
I would tell you that the US market was, at least at 1/1 considerably more attractive than what, I would define as the international market or ex-US.
So what does this all mean for us, as we sort of pivot to the mirror and talk about our quarter, before we get into few follow-up on Richard's comments. I think what it means for us is there is still great opportunity. I think what it does also mean is that we need to continue to be focused, disciplined and prepared to pivot, as opportunities present themselves and as they diminish and other opportunities present themselves.
It's one of the great things about our organization and the breadth of our offering and our structure. We are a collection of specialty companies where we have teams of people with great expertise focused on their niche. These teams of people understand cycle management and they understand their loss costs and how to deploy and manage capital.
So long story short, we think we're in a pretty good place. As always, you're going to see parts of the business growing, other parts of the business perhaps shrinking, as we capitalize on opportunities.
Pivoting to the quarter, again I'm not going to belabor this, because I think Rich, as always, did a great job. But a couple of observations on the top line. He talked about the FX impact. I would also suggest rate and rate adequacy continue to be and will always be our priority. As we see new opportunities presenting themselves, I flagged property earlier on, our presence within the E&S space, I think is going to create meaningful opportunity for us, certainly over somewhere between the next 12 to 36 months depending on cat activity, quite frankly. But again, we will see with time.
As far as rate goes, as you would have seen from the release we got just shy of 7 points of rate and we think that that comfortably helps us keep up with trend and more likely than not perhaps we are exceeding trend. One of the things, just on the topic of rate, and I apologize if you find this repetitive, but it's something that does come up from time to time is, confusion that exists between renewal premium versus renewal rate increase. Our definition and our true North, in our effort to make sure we understand loss cost and margin, is the number of dollars that we are collecting per unit of exposure. It's not about the amount of premium that we happen to collect.
If I'm running a trucking company, and I have five trucks. And at the renewal, it turns out that my number of trucks has gone from 5 to 10 and I end up collecting twice as much premium, that's not a rate increase. That means I've got twice as much premium, but I got twice as much exposure. And in theory I need to get more than that to keep up with trend.
So when we talk about rate increase, let there be misunderstanding. We're not talking about increase in premium, even though ultimately, it may have nurtured that. Our focus is on the amount of money we collect per unit of exposure. And we work very hard to make sure that when we are comparing unit of exposure to unit of exposure over corresponding period that we have unpacked that, so it is as close to apples-to-apples as one can establish.
Another comment that I did want to make is on renewal retention ratio. Obviously, different product lines, different parts of the business, we target different levels of renewal retention. When we look at our portfolio, overall we look through the renewal retention to sort of float somewhere between 77 and 80, maybe 81 depending on the mix. When we see that renewal retention ratio ticking up above that, from our perspective, it is an invitation to be pushing rate harder.
We want to be in the market at a granular level, testing it every day to be getting as much rate as we can to ensure that we are at a minimum at rate adequacy. That's a very important thing. That is a priority for us as an organization.
One last quick comment on the top line that we've talked about in the past, which again. I think speaks to the quality and integrity. Our new business relativity for the year was above 100 or above 1, if you will, which means we are charging a bit more for new business than renewal again for the year.
Moving on to the losses, Rich covered that. I know there may be some folks, maybe at a high level okay, 60.6 for those of you that subscribe to the [Indecipherable] you maybe looking at the 59.3. What you may not realize, and I'm about to share with you, is that we had some fire losses in the quarter and it wasn't in any particular operating unit. It was pretty widespread. And that added somewhere between a point, maybe a 1.25 point to the loss ratio. We saw both in the insurance business amongst various operating units, and we saw it in the reinsurance business too.
So we are focused on that, trying to make sure that there's not something that we're missing here. And to the extent there is, we want to be tending to it quickly. One last data point, which again I've qualified in the past and I'm going to qualify now is not the whole story. But we believe it is a relevant data point is the paid loss ratio. A couple of historical data points that I'm going to give it to you for the -- these are going to be for the full year. That way you don't need to worry about seasonality or anything along those lines. Paid loss ratio for 2017, 57; '18, 57; '19, 55; '20, 52; '21, 45; '22 45.
You can interpret that and extrapolate anywhere you want. I view it as a data point that doesn't tell the whole story. Nevertheless a valuable data point. Rich talked about the expense ratio 27.8. Certainly the whole team on this end, we continue to try and make sure that we are getting good value for the money that is spent. Obviously as it relates to compensation we are trying to make sure that we have done a reasonable job on behalf of our colleagues, keeping up with cost of living and I think we've done a good job staying on top of that.
And as Rich also mentioned, we have ongoing investments on the technology front, which we think are very important for the future. Could it tick-up a little bit from here? Yes. Do I think that we are focused, as Rich said in keeping it below 30 and remaining competitive? Absolutely. And we are constantly making sure that our acquisition cost is thoughtful.
Maybe just spending a couple of moments, following Rich's comments on the investment front, as he flagged duration sitting at 2.4, the book yield 3.6% and I think as Rich flagged I will flag again, the new money rate these days is north of 4.5%. We're flirting with 5%. So I will leave it to others to fill in the blanks as to what this means for our economic model. But obviously, when you think about the spread between the book yield and the new money rate, and what we're able to achieve and you extrapolate that for what it means for our economic model, I think it's very encouraging.
One last quick comment on the investment front. While we are not in a rush, and we are going to do it in a very thoughtful way, we certainly are considering beginning to push that duration out towards 2.6 maybe more towards 2 ways over time. But again we are not in a rush. We're going to do that in an opportunistic way of windows open and close.
So since I am on to most of you folks that as soon as the Q&A is over, everyone starts hanging up, I'm going to just offer a couple of quick summary comments and then we will move on to the Q&A. I think we had, by any measure, a very strong year. And I think that when you look at how the business is positioned, while nobody knows exactly with certainty what tomorrow will bring, we have a lot of pieces laid out in good position for the coming years to be very attractive for the business.
I think that is both the case on the investment side as well as on the underwriting side. As I suggested a few moments ago, you can see where the book yield is and where the new money rate is and what that means. In addition to that you can see the rate increases that are earning through and what that is going to mean for the business. I know that there are some that are wondering why is it that we have not dropped our loss picks more quickly. And it is certainly something that we look at and we visit and we revisit. But you need to please understand that we are acutely aware to some -- of some of the unknowns and how leveraged the model is. And we want to make sure that we do not take the cake out of the oven prematurely.
So with that, I think people have probably had more than enough of me. Bo, why don't we please open it up for questions please? Thank you.
