W.R. Berkley: Smart Enough To Know Where to Succeed

The founder of one of the most successful insurance companies went into the insurance business because he thought it would be easier than competing in the investment business.

In 1967, when William R. Berkley was still at Harvard Business School, he opened an investment firm with $2,500 and began managing other people’s money.

“I started managing money for some insurance companies and it seemed to me by being in the investment business, I chose to compete with the very smartest people there were. And as I looked at the insurance business, there were some really smart people, but there were a lot of old people that ran backwards businesses in the ’60s and early ’70s,” he said.

That got Berkley thinking.

“So it seemed to me, why choose to compete with the very smart people who went to Harvard Business School with me? Not one — actually one person who graduated in my class from Harvard Business School went into the insurance business. So I was the second one. So it seemed that was the opportunity.”

Competing against those “old people” may not have always been as easy as a cocky Harvard Business School graduate thought it would be, but it’s fair to say Berkley has made the most of the opportunity he seized 40 years ago.

Today, his W.R. Berkley Corp. is a Fortune 500 company, a diversified insurance holding company with more than 30 commercial lines specialty and regional insurers, and revenues topping $5 billion.

Berkley, who is chairman and CEO, has built his company partly through acquisitions — including bringing Admiral, Carolina Casualty, Nautilus and Fireman’s Insurance Co. into his fold.

W.R. Berkley Corp. is known even more for its niche startups, including Acadia, Berkley Risk Administrators, Monitor Liability Managers, Vela Insurance Services, Preferred Employers (California), Berkley Underwriting Partners, Berkley Medical Excess, Berkley Technology Services and others.

In 2005, the insurer expanded overseas with companies in Hong Kong and Spain.

The first acquisition was Houston General in 1972 — although it it did not have an auspicious beginning.

“I thought it was terrifically well-managed. They had a story about how they were turning the company around and doing all right. In fact, as I found out after I bought it — and it was a highly leveraged transaction [with] $4 million of equity and $12 million of debt — that it wasn’t as well-managed as I thought,” he recalled.

The next year, he bought Traders and General in New Orleans, which wasn’t in much better shape.

“Their computer was a punch card system. They kept track of claims on Popsicle sticks, because when claims move around, you have to erase who has them. When you erased from a Popsicle stick, you wouldn’t wear out the paper. So it was a backward company. It did nothing but make money, however,” he said.

Berkley decided to merge the two acquisitions in hopes of creating a well-managed, modern company befitting a Harvard Business School graduate.

Again, he was disappointed. “I ended up with a bigger company that didn’t make money. But I was very fortunate. I figured it out. I told the management we needed to do something or we were going to have new management. And they found the Equitable Life Assurance Society of America wanted a modern, well-managed company and they ended up buying the company from us.”

That was in 1974. Today W.R. Berkley Corp. is a well-managed modern company, one any Harvard Business School alumnus could be proud of. In 2007, Forbes magazine named it the best-managed insurance company.

“I like to tell people we’re a very unique combination of a family business that’s a public company that’s run like a large company with some of the strengths of a small, autonomous unit. It’s just a very unique combination that looks so simple. But it’s the day-to-day implementation of that combination — that humanist approach — that fits common sense goals that makes it a very special place,” Berkley said.

Diversity and Decentralization

W.R. Berkley Corp. is known for its diversity within the insurance sector. The company has five business segments — specialty, regional, alternative markets, reinsurance and international. Each segment has individual operating units that serve a market defined by geography, products, services or types of customers.

Diversity can help a firm cope with mistakes.

“It lets you avoid a single mistake multiplying in a vast area, because if you have a small company, it’s not going to do the same thing over and over again in a huge size. It gives us protection and diversity, and it minimizes the cost of the inevitable mistakes.”

W.R. Berkley is also know for its decentralized management, which Berkley thinks sets his company apart in the marketplace.

“[W]e believe that you want to make as many decisions as close to the customer as possible. So every decision that we can do that is related to our customers, our service, is made locally,” he explained.

While decentralization has worked, he admitted there is at times a temptation to centralize.

“The hardest decisions are always the same, and that is when you have a problem. Especially with this decentralized issue, the tendency is always to try and take back control, and it’s very difficult to say no. Mistakes are going to happen no matter what.”

Yet Berkley admitted that, “You are better off and you make more money by empowering the people in the field. So I think that that is consistently the most difficult thing to do.”

If sticking to centralization is a tough call, so is quitting business, which Berkley did in 1999. In the case of personal lines, after determining that this arena “was going to get more and more difficult,” Berkley sold and closed its personal lines business.

Berkley called that step a “great decision” in part because it took him away from the political issues, although he said his company is not immune from political brouhaha in the surplus lines commercial property business in Florida.

“We are concerned about what we see as the uninformed decision making within the political process. It’s well-intentioned, but it’s the lack of understanding of what has to happen. We are just trying to be sure we serve our customers, but we don’t get enmeshed where we don’t have flexibility.”

His company is also known for its conservative reserving; Berkley acknowledged an “obsessions with adequate reserves.” It’s part of the formula for his success and, the executive contended, for any insurance company.

“Recognize reserves, even at their best, are just estimates of what you think you’ll have to pay out,” he said. “In the insurance business you are like a casino. As long as you’re here every day and you can set your rates, you’ll win.

“The problem is if you are not here every day,” he continued. “The only way you’re not here every day is if you run out of the ability to pay your claims. Therefore, one of the cornerstones of your enterprise risk management is having enough reserves to meet your obligations, with a little bit of a cushion just in case you’re wrong. That’s a cornerstone, because we think it’s the only way you can be sure that you are going to be here tomorrow.”