W.R. Berkley Corporation

Good day and welcome to WR Berkeley Corporation's first quarter 2020 earnings conference call. Today's conference call is being recorded. The speaker's remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words including, without limitation, beliefs, expects, or estimates. We caution you that such forward-looking statements should not be regarded as representation by us that the future plans, estimates, or expectations contemplated by us will in fact be achieved. Please refer to our annual report on Form 10-K for the year ended December 31, 2019, and our other filings made with the SEC for a description of the business environment in which we operate and the important factors that may materially affect our results. W.R. Berkeley Corporation is not under any obligation and expressly disclaims any such obligation to update or alter its formal linking statements, whether as a result of new information, future events, or otherwise. I would now like to turn the call over to Mr. Rob Berkeley. Please go ahead, sir.

Thank you, Jenny, and good afternoon, everyone. Thank you for joining us on our first quarter call. In addition to me on this end, you also have Bill Berkley, our executive chairman, and Rich Baio, CFO. We're gonna follow a similar agenda to what we've used in the past. In short order, I'm gonna be handing it off to Rich. He's gonna walk through some highlights of the quarter. Then I'll be offering a few comments And then we'll be opening it up for Q&A, and we'll be happy to take the conversation anywhere that participants would like to take it. But before I hand it over to Rich, let me just offer one or two quick thoughts. We have been living through a period of time and continue to live through a moment in time which I think could be described as unimaginable. And I am not going to consume any of your valuable time by reciting what you read in the newspaper or whatever your source of news and information is. But I did not want the opportunity to pass without on behalf of my colleagues and myself expressing our heartfelt concern for all those that have been affected by this horrific situation stemming from COVID-19. In particular, it's worth noting the first responders and the medical workers who are giving of themselves in a manner that few of us could even imagine. And in some cases, they are actually giving in a way that is the ultimate sacrifice. Beyond that, obviously, there are many members of society that are trying to do their part to get our lives back on their feet and to move things forward. Included in that would be the 6,560 colleagues of ours that have the same challenges every day in their personal lives and managing through the situations that we're all managing through. But in spite of those challenges, they are still doing their part to ensure that this business continues to function and function well. We are issuing policies. We are paying claims. We are doing our part to ensure that society moves forward. And I wanted to thank them as well. So with that, I'm going to hand it over to Rich. And Rich, if you would walk us through your thoughts on the quarter.

Certainly. Thank you, Rob. Starting with our premium production, which was favorable in the quarter, was growth in gross and net written premiums of 9% and 8%, respectively. Overall net premiums written was $1.85 billion in the current quarter. The insurance segment was about $1.6 billion, representing an increase of 5.7%. Growth in the quarter was led by other liability of 14.7%. followed by 11.5% in professional liability and 10.4% in short-tail lines. The workers' compensation and commercial auto liability lines decreased 7.6% and 3.5% respectively. The reinsurance and monoline excess segment grew 23.7% to $263 million, led by an increase in casualty reinsurance of 37.3%, Monoline excess of 11%, and property reinsurance of 9.7%. Pre-tax underwriting income of $52 million was adversely impacted in the quarter due to a provision of $66.5 million for COVID-19-related losses. This compares with $90 million for the prior year underwriting income. The reported combined ratio was 96.9%. in 2020 compared with 94.3% in 2019. Catastrophe losses contributed largely to this increase with 5.2 and 0.8 loss ratio points in comparable periods. COVID-19 contributed 3.9 loss ratio points to the first quarter 2020 catastrophe losses. Finally, prior year loss reserves developed favorably by $4 million representing approximately 0.2 loss ratio points. Accordingly, our current accident year loss ratio excluding catastrophes was 60.5% in the current quarter compared with 61.7% in the prior year. The expense ratio was 31.4%, reflecting a decrease of 0.9% from a year ago and relatively flat to the 2019 full year. As the growth in net premiums written earns through the income statement, our expense ratio benefits from higher net earned premium. In addition, efficiencies from our operations allowed us to grow the business without increasing our compensation costs at the same pace of growth and premium. Other underwriting costs also decreased in the quarter due to lower professional fees and less travel. As we've indicated on prior earnings calls, our expense ratio may experience some variability as we continue to make investments in the business. In addition, the uncertainty surrounding the COVID pandemic could impact our 2020 expected expense ratio of 31% to 32% referenced on our last earnings call. The accident year combined ratio excluding catastrophes and COVID-19 for 2020 was 91.9% compared with 94% for the prior period. Net investment income increased 10.4% to $175 million. Income from the core portfolio was largely unchanged from the prior year, despite a lower interest rate environment. Our book yield for the quarter for the fixed maturity portfolio was 3.4%. Investment funds reported an above-average quarterly result of $41 million compared with $11 million in the prior year. Please remember that we report our investment funds on a quarterly lag, and accordingly, the results in the first quarter are reflecting the fund's performance from fourth quarter 2019. To that end, it's important to note that the effects of the market downturn during the first quarter of 2020 will be reflected in our second quarter results. We do anticipate a meaningful decline in energy and transportation funds in next quarter's results. The investment portfolio is well positioned to deal with market downturns that we've seen in the first quarter of 2020 due to the high credit quality of AA- and the average duration of 2.7 years for fixed maturity securities, including cash and cash equivalents. Foreign currency gains were $22 million in the quarter compared with $7 million in the prior year. The U.S. dollar strengthened relative to the U.K. sterling and Argentine peso, which contributed to these gains in the quarter. This brings our operating earnings to approximately $133 million or 69 cents per share, compared with $129 million or 67 cents per share in the prior year. Pre-tax income was impacted by pre-tax net investment losses in the quarter of $177 million, comprised of three components, including Realized gains of $11 million, largely due to the sale of a private equity investment. A reduction in unrealized gains in equity securities of $154 million, primarily driven by Fannie and Freddie preferred stock. And an increase in allowance for credit loss of $34 million. You may recall effective January 1, 2020, new accounting rules applied. addressing current expected credit losses, otherwise known as CECL, on financial instruments. As a result, we've established an initial cumulative effect adjustment to opening stockholders' equity with the change in allowance for credit loss to be reflected in net investment losses. The change from adoption is the $34 million I just referenced a moment ago. Finally, our net loss for the quarter after reflecting the impact of the net investment losses is approximately $4 million. Stockholders' equity was approximately $5.5 billion, or $30.55 per share. The company repurchased approximately 3.7 million shares for $203 million in the quarter and returned capital to shareholders through an ordinary dividend of approximately $20 million. We had cash flow from operations in the quarter of $153 million, and maintain strong liquidity throughout the organization, including more than $1.3 billion in cash and liquid investments at the holding company. Thanks, Rob. Liz, thank you very much.