W.R. Berkley Corporation

Good day and welcome to WR Berkeley Corporation's second 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, believes, accepts, and estimates. We caution you that such forward-looking statements should not be regarded as a 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. WR Berkeley Corporation is not under any obligation and expressly disclaims Any such obligation, looking statements, whether as a result of new information, future events, we turn the call over to Mr. Rob Berkley.

Thank you, Chantal, and good afternoon all. Thank you for joining us for our Q2 call. We have on the phone, in addition to myself, Bill Berkley, Executive Chairman, and Rich Baio, Executive Vice President, Chief Financial Officer. We're going to follow a similar format to what we've done in the past. Rich is going to lead us through a summary around the numbers and the performance in the quarter. I am then going to offer a couple of thoughts on the heels of his comments, and then we will be opening it up for questions. So with that, Rich, if you want to get us started, please.

Absolutely. Thanks, Rob. Starting with our premium production, gross premiums written grew 2% to more than $2.1 billion despite a shrinking economy arising from the global pandemic. The growth was driven by an overall rate improvement and a comparable historic premium renewal retention ratio that Rob will be discussing shortly. Offsetting this improvement is a decline in exposures from the economic downturn as well as the strengthening of the U.S. dollar against certain foreign currencies. Net premiums written of approximately $1.7 billion was relatively unchanged from the prior year's quarter. The insurance segment decreased 2% to approximately $1.5 billion, primarily due to reduced exposure and rate decline in workers' compensation, as well as higher reinsurance reinstatement premiums. The reinsurance and monoline excess segment grew 16.5% to about $200 million in the quarter relating to improving markets. Pre-tax underwriting income of $23 million was adversely impacted in the quarter due to approximately $86 million of COVID-19 related losses. This compares with $100 million. In addition, we reported approximately $20 million and $40 million for severe weather-related losses to approximately $146 million in the quarter or 8.7 loss ratio points. COVID-19 related to 0.1 of these loss ratio points. The reported loss ratio was 67.7% in the current quarter compared with 62.4%. Prior year loss reserves developed favorably by $3 million or 0.2 loss ratio points. Our current accident year loss ratio excluding catastrophes was 59.2% compared with 61.4% a year ago. The improvement is driven by lower non-compact property losses and a change in the expense ratio was 31%, reflecting a decrease of 0.5% compared with a year ago and the 2019 full year. As we've seen over the recent quarters, the growth in net premiums earned has outpaced which has favorably impacted In addition, due to the global pandemic, expenses are considerably lower in travel and entertainment, writing expenses in dollar terms quarter over quarter. To this end, the impact from COVID-19 expense ratio, attributable to normalized operating costs and investments we make in the business. The ratio excluding catastrophes and COVID-19 for 2020 was 90.2%, compared with 92.9% for the prior year. Net investment income decreased to $85 million, primarily due to investment funds. As we mentioned last quarter, the net investment income for investment funds to markets due to the one-quarter lag. Accordingly, we are our second quarter results, which amounted to this decrease was evident in the energy, financial services, and transportation funds. We understand that for modeling purposes you may want some direction funds in the third quarter from the investment fund managers and accordingly are unable to provide. In addition, A combination of the low interest rate and taken to enhance our liquidity and shorten our duration to 2. Lower net investment income in the current quarter for fixed maturity securities. Cash and cash equivalent position has increased to almost $2.7 billion as of second quarter end, or 13% of net invested assets. We believe this is prudent given the uncertainty in the financial markets and the economy. The fixed maturity of cash and cash equivalents maintained a high credit quality of AA minus and reported a significant recovery in after-tax unrealized gains in the quarter. From the first quarter of 2020, the total after-tax unrealized gain in stockholder tax unrealized loss of $100,000 to the after-tax unrealized gain of $250,000. Tax net investment gains in the quarter of $78 million is primarily attributable to the change in... ...realized gains on equity securities of $62 million and a reduction in the allowance for expected $16 million. The change in fair value on equity securities... ...and Freddie preferred stock. Expected credit losses is driven by the improved prices on foreign government... bonds. Our net income in the quarter is $71 million, or $0.38 per share. Stockholders' equity was approximately $5.8 billion at the end of the quarter, an increase of more than $300 million, and dividends of $107 million. We repurchased approximately 2 million shares for $96 million at an average price per share of $49.29. As a result, book value per share increased 7.7% before share repurchase. The company had strong cash flow from operations in the quarter of $427 million, which benefited under the CARE Act from the deferral of tax payments until July 15th. The liquidity is strong at the holding company with more than $1.5 billion in cash and liquid investments. At this point, I'll turn it back to Rob. Thank you.

Thanks, Rich. A couple of quick comments from me. Clearly a challenging moment for all of us on many different levels. Everyone is appropriately varying. Having said that, I think we're all struggling with the reality that there are more questions than there will be. That will not be the case in the future. Hopefully the behavior and that will help us bring the situation more under control, and hopefully a pharmaceutical solution is not too far in that. Having said that, while, again, COVID-19 is the topic du jour, I want to give you a side of some of the other realities or factors that are impacting the industry and, by extension, our business. If one thinks back to last year, there was a growing groundswell of, you could probably see it before 2000, very much came into focus. We saw it accelerate throughout the year, and we saw it continue to accelerate into 2020, very evident in Q1. The evidence of this was demonstrated, at least in part, by business leaving the standard market, making its way to the specialty market, and in particular, the ENS market. We saw rate increases that we as an industry have not seen in some number of years. And we could see a reduction in capacity that various carriers were offering. All of these things were being driven by investors. one, being a low interest rate environment and the knock-on effect for what that means for investment income, and number two, in part driven to actually to a great extent driven by social inflation, which had been benign for an extended period of time and then, in our opinion, crept up respecting it, and it has proven to be much more of an issue. These reasons remain alive and well. And quite frankly, I would suggest if you thought during 2019 interest rates were low, then you must think that they are really low today. And if in 2019 you were worrying about lost cost trend and inflation, social inflation, then you probably should be worrying more about it today than you were then. One needs to be careful that the current circumstance stemming from COVID-19 does not overshadow the underlying issues that are driving lost cost trends. We expect that this will just be a brief hiatus. Today, we can see the standard line making its way to the specialty market overall. We continue to see a reduction in capacity being offered. And we're certainly seeing the leverage moving back towards those that are selling the product, and in part, it increases that are coming through. And as we referenced in the 13 points of rate in the quarter, increases came through without our renewal retention ratio coming unfastened. It continues to be consistent with what it's been for not just many quarters, but many years sort of hovering between, I would say, approximately 80%. In addition to that, another data point that we've shared with you all in the past is where we measure the rate that we are getting on new business compared to our renewal business. For the quarter, it came in at 1.0. What does that mean? That means we are getting 8.4% more in our renewal business, and that is something that we look for and expect because you know more about your renewal book than new business. These factors have allowed us to maintain a top line. While we have that we did in Q1 planning, we thought we would be growing in Q2. we were still able to maintain a top line. And in addition to that, we see an economy that begins to open up again and recover, which hopefully is in the foreseeable future, have a very meaningful positive effect on our top line when you combine growth in the overall economy with what we are able to along with business markets. Let me give you a little more granularity in how we see the pricing and the competitive nature. I think as it's widely understood, the property market rates continue to the account, generally speaking. The more the rates are moving up front, I would tell you that the excess and umbrella market very much stands out. And quite frankly, both of these product lines and probably more. Professional liability, I would tell you virtually all we are seeing rates moving up. Public debt continues to stand out. And we have gotten to the point where we are getting rate on rate in a meaningful way. industry needs every last penny. As it relates to workers' compensation, which has been marching to the beat of its own drum most other commercial level of rate for some number of quarters, comp has been moving in a different direction. We are that workers' compensation pricing may be in the early stages of bottoming out. And I would not be surprised as we make our way into 2021 if you started and rates actually start to move up at some point next year. Lastly, the reinsurance clearly has been waiting, give or take, I don't know, call it a decade and a half for perhaps the moment that is upon us. Things are firming. It really returns to that market. As we see that discipline return, you will see us grow our reinsurance division. It may have an impact on how much business we choose to cede to the marketplace. Always covering the loss ratio, I just want to tack on a couple of quick observations around that. With COVID, the number both that we and now in Q2 approximately 75% is sitting in IBNR or approximately our case with the lion's share of it available but not reported. I'd also make the comment widely discussed and that is what is the impact at least in in the short run of COVID-19 on loss activity. I don't think anyone would be when the dust settles, but without a doubt, there are product lines that have found themselves in a situation where frequency is given people sheltering in place and the slowdown in the economy. Having said that, it is our expectation that when the economy opens back up, you will see frequency return to a more. I should also mention on this front as a frequency, our actual versus expected continue or the actual has proved as far as loss activity in many lines. Most of those lines are longer tail in nature. Few are shorter tail. Shorter tail, for example, autophysical damage, Rich referenced in his comments. The lion's share of our business is on design loss ratios. So even when we have activity specifically stemming from a reduction in frequency, in our reported numbers. Because we again, ratio which we hold for some period of time as those reserves season out. Pivoting over to the expenses, Rich covered this well. I would just offer the observation as far as the expense ratio benefiting in the quarter, I would tell you that give or take probably 75% higher earned premium with the balance coming from, we just don't have people getting on trains, buses, planes, or staying in hotels, and obviously there's some savings associated with that. Assume that the company continues in a normalized number running somewhere between 31 and 32. I'm not going to belabor the discussion around the investment portfolio. Again, Rich covered that. But I would offer a couple of thoughts briefly. The investment portfolio is something that very clearly through a lens that we think about as risk-adjusted returns. There is a huge amount today, and from our perspective, we have reached the conclusion, I should say, that it is better to take a defensive posture. We have had a duration that has been shortening for some period of time, and we have, quite frankly, not seen much of a reason, given where rates are, to take that back out. And as far as quality goes, we have gone from what I would define as a moderate AA minus to a very strong AA minus. I was chatting with a colleague earlier today. Half of our portfolio can get reduced by an AA minus. I think this brings us to one last point that I'd like to make, and then I promise we'll get on to your questions. When we think about the business, including the investment portfolio, we think about it as owners. We don't think about it as people that collect a paycheck. We think about it with a long-term view and a sense of obligation and commitment as if we as a team, 6,500 of us, own this business. We think about risk-adjusted return. We think about the uncertainties there are in the world. And we have made an active decision that this is a moment that we are willing to pay the price for taking a defensive posture and for having flexibility given the unknown.

So let me pause there. Could you please open it up for questions?

As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Our first question comes from Phil Stefano with Deutsche Bank. Your line is open. Yeah, thanks.

Personal loss ratio, particularly on the insurance business side, felt like it had a nice improvement. In my mind, part of the rationale may have been the slower frequency that we've seen on the heels of the economic slowdown given COVID. And it feels like, Robin, in your prepared remarks, that wasn't the case.

And it feels like most of the... The way I would characterize it, that there certainly was some benefit as a result of the slowdown. But please, again, understand that much of the difference in actual versus expected or the reduction in frequency does not come through in our reported numbers. So you will see the impact on the auto, fewer cars, trucks, et cetera, on the road, but you're not gonna see that on the auto liability. You will see that, again, on the property but you're not going to see that on the comp or the GL, et cetera. So in Rich's comments, he referenced that one of the contributing factors was non-cap property. And it was, quite frankly, in my opinion, there are a couple of different reasons within the non-cap property that we had this result. One of them has to do with some re-underwriting that we've been doing over some period of time, and that has come through. But I would tell you that...

Is there any way you can help us kind of conceptualize the frequency benefit versus I think the third metric that you mentioned was mix of business.

So I would tell you that there are a couple of things at work here. First of all, I think we all have a sense that frequency for many product lines is down considerably given the environment. Number two, I think the other piece that should not go unnoticed is that the rate increases that we have been getting for some period of time now, but are hitting our earned, are meaningful. And I think if you look at our mix of business, which we disclose in lots of public information, and you can get a bit of a a glimpse into that in the release. I forget which page it is, but where we show the mix of business. You can see the different product lines and how much of our portfolio would fall under shorter tail products where that would be coming through in our P&L now versus longer tail that would be on a design loss ratio where you would not see an impact of any consequence on a reported basis.

Got it. Okay. And just one more for me. It felt like if we think back a couple years ago, interest rates were heading lower, there was reinvestment pressures for the portfolios, but it didn't have an impact of pricing. Does it feel like reinvestment rates, has something changed? Has rates just dropped below a point where they are now a lever to pricing?

Well, I think clearly rates are notably lower now than they were after the financial crisis or the Great Recession or whatever you'd like to label it. They're extraordinarily low. In addition to that, we clearly have a Federal Reserve and counterparts around the world that seem very determined to manage interest rates for at least the moment. at least as long as they can. Remember that an insurance company, ultimately, it takes time for that book yield to come down as the new money gets invested at lower rates. So from my perspective, I think we're hitting new lows as far as interest rates. And I think ultimately... it will take a little bit of time, but we're starting to see the early stages of it actually having an impact where it's going to hit investment income. But that takes time because it hits the new money.

Understood. Thank you, sir.

Thank you very much.

Our next question comes from Mike.

Hi, Mike. Good afternoon. Hey, Rob and Rich. Thanks. First question is, Regarding the COVID-related losses, and I appreciate the stat on 75% IBNR, I'm just curious if there's any more color you can offer on the newly available information or legal developments that arose so we can kind of better understand whether there's potential for that to persist in a meaningful way in the back half of the year.

So the work that we have done, and obviously we're in a much better position to try and get our arms around it now than we were when we were talking to you. But given the work we have done, by and large, we are assuming that this is going to be, call it the end of this year, early next year. And As far as the activity, again, there hasn't been a huge amount. There's not a lot paid, or for that matter, in case reserves. The lion's share of it is just sitting there in IBNR, and it's just our best estimates as to what we think the impact could be. From our perspective so far, workers' compensation has not proven to be a big issue, and neither has casualty. The challenge has more been in the shorter tail lines and probably some, I don't have the numbers in front of me, but I would say that the biggest component of that is event cancellation.

Okay, I understood that's helpful. Moving to the top line growth conversation, It feels like what you're trying to say is that, you know, clearly your fortunes will be tied to the economy, hopefully improves. Although there seems to be some other variables, comp declined by 20% year over year. So anything else we should be thinking about, you know, in terms of 2Q being the nadir versus, you know, ongoing choppiness?

Yeah, so the way we think about it is, that the opportunity to make sure that we have rate adequacy continues to be there, and you can see that in the rate that we are getting. We are an underwriting shop, and rate adequacy is the be-all and end-all when we see it in certain product lines where the rate is not what we think it needs to be, i.e., in certain parts of the workers' comp markets. we're prepared to let the business go with the understanding it'll be back someday when we find the rates to be more acceptable. The broad point that I was trying to suggest earlier in the call was, you know, we're able to maintain our top line because we're seeing the flow of business coming in the market. We're able to maintain our top line because we are getting meaningful rate increases and in spite of the challenges that everyone faces, including us, none of us are completely insulated from what's going on in the economy and society in general, those factors are helping to offset those challenges. And in addition to that, if you subscribe as we do, that this will be over time brought under control a lot of the fundamentals will remain in place, the economy will recover, and it is likely to bode very well for how this business could grow. In addition to that, what it may mean for margins.

Okay, understood. And I guess finally, continue to buy back some stock during the quarter. Any thoughts on the stock's somewhat recovered? Any thoughts on whether you still view the stock as being attractive from a buyback perspective?

So I appreciate the question, but you know we're not going to answer that the way you want us to. But I'm happy to pause. My boss is on the phone. He... He's the one who's more focused on that than me here. Are you there?

I'm here. And, of course, we always think the stock is attractive. It's attractive today. However, we are always looking at uses of our capital, what we can do with it, how buying back stock impacts everything having to do with our shareholders. We don't have a single rule. Our average price in the first quarter was different than in the second quarter. It's the judgments we make and how we see the opportunities. So we don't really have a single rule, and if there's an opportunity, we think at that moment in time is to buy stock at an attractive price, we'll do so. But we don't really have a rule per se.

Good to hear from you, Bill, and best of luck next quarter. Thank you.

Thank you. Our next question comes from . Hi.

Thank you. Good afternoon, everybody. My first question just goes to better understanding ID&R. What I did not realize in the first quarter was that there are some definitional differences there. I just want to make sure I understand how you're thinking about it. When we talk about incurred but not reported, do you also include losses or events that have not yet occurred but you think have a high probability of occurring?

We have looked at – so I appreciate the question, and let me try and clarify it. We look at our portfolio. We look at our exposures. We think – and that's how we came up with our number. So some of it is events or losses out there, and we think that there's a possibility that there could be a loss associated with the exposure.

Okay. And is that mainly for short-tail lines? Is that also for longer-tail lines?

We have looked at the full portfolio.

Okay. Okay. And then my second question, a bit more broad, conceptual, on social inflation. Can you maybe talk about how it's manifesting itself today? It doesn't seem like it's COVID-related, given that you're short tail lines there. So where or how is it playing out?

In some ways, it is COVID-related. And I think you're going to see it potentially in the professional liability space. An example of that would be with EPLI. would be certainly one specific example. I think that there's a reality that we have an emboldened plaintiff bar and we have an environment in society overall that is more empathetic for the moment to the plaintiff bar. That is a reality, whether one likes it or not, and the insurance industry needs to recognize that and adapt appropriately.

So does that also reflect, for example, business interruption claims?

Well, I think that we have an aggressive plaintiff bar, and as I think we may have touched on in the last call, certainly they have viewed business interruption claims as an opportunity. I think while perhaps it's a plaintiff-friendly environment overall, I don't think that judges are willing to just completely turn their back on the words in a contract or a policy, which is why you have seen many of the rulings, though it is still early, come out suggesting that physical damage is required. in order to trigger business interruption. And in spite of the efforts so far to suggest the presence or possible presence of COVID-19 being physical damage, most of the judges that I'm aware of have not subscribed to that view.

Got it. Thank you for the answers.

Yep. Our next question comes from Meyer Shields with Keith Burriott and Woods. Your line is open.

Great, thanks, and good evening, everyone. Rob, I want to go a little bit deeper into what you just talked about with the exposure for lines like EPLI to increase COVID-related losses. I appreciate the fact that you're not booking lower loss picks for lines of business where claim counts were down, frequency was down in the second quarter. Are there any reality has changed and maybe social inflation, et cetera, makes things worse?

We, every 90 days, we look at our lost picks and we look at the data and we try and assess whether we feel as though we're in a good place. Our general philosophy is that we want to try and err a little bit on the side of caution, recognize, try and err a little bit on the side of caution, recognizing all the unknowns, and as those reserves season out, we will tighten up that pick. We don't always get it right, but we certainly try, and when we get it wrong, we're not shy about acknowledging it and trying to address it. So as far as the specifics of what we're doing with our PICS byproduct line, that's generally speaking just not something that we get into at that level of granularity.

Okay, fair enough. Maybe a different question. In the past, I think we've worked or I've worked under the premise that economic inflection points take three, six months actually impact written premium volumes. Does that make sense? Does that make sense in the current environment? Can we expect maybe if what we're seeing is recovery continues right now that exposure units have already bottomed?

You know, I think one of the tricky parts is that really have things bottomed out as far as the recovery? If you talk to people in New York, they might say yes. If you talk to people in Florida or Texas or Arizona or parts of California, I don't think that they would say yes. Ultimately, we in the New York area, we had our experience. Hopefully, we won't have another, but we should not lose sight of what the recent circumstances in other regions of the country are facing, and for that matter, parts of the world. So my opinion is that it would seem as we saw things looking better in June than they did in May, and May was maybe less ugly than April. And certainly early returns for July were encouraging, but we'll have to see. So I'm a little bit guarded to suggest that things are recovering. As far as the lead time, it can be a couple of months, yes.

Okay, that's very helpful. Thank you so much.

Again, if you would like to ask a question, press star 1 on your telephone. Our next question comes from Brian Meredith with UBS. Your line is open.

Hey, Rob. Hey, good, good, good. A couple questions for you. Just one, could you talk a little bit about what's going on with terms and conditions right now and what the industry is doing? And related to that specifically, is there anything you're doing to protect yourself from, call it, you know, third-party liability claims and you mentioned EPLI stuff as we kind of look forward and people go back to work, economy, those kind of things?

Yeah, so...

As far as what are we doing to protect ourselves, we are actively looking at our policy wordings and we are looking to make sure that the policy wordings appropriately address things such as communicable disease and related types of exposures. There are some exposures where we're very focused on making sure that communicable disease is excluded. There are some situations where we use a much finer brush than that. But we've actually been a bit surprised that the broader market has not been more active in trying to make sure that they are managing their exposure to communicable disease in general and in particular COVID. I think people were so consumed by what was going on with business interruption, they haven't thought through what does it mean for the liability market, both casualty as well as professional. And I think that that's something that the industry needs to be more actively grappling with because there is real exposure there, to your point, as things open back up. As far as what do we see happening with wordings, certainly we are seeing policy wordings tighten up. Just the mere fact that business is making its way from the standard market to the specialty or the ENS market I think is a leading indicator that policy wordings are tightening up and coverage that is being provided is contracting a bit. So I hope I answered your question.

Yeah, that's very helpful. And then my second question, Rob, just conceptually thinking about this, you know, double-A corporate bond yields, you're kind of looking at double-A corporate bond yields as kind of your new money yield right now that you're looking at. It's the lowest it's been since I've been working, right? So as I look at where we are right now, is the pricing environment adequate enough to, I guess, one, earn a double-digit return on equity, or even two, just earn your equity cost of capital at this point?

We think with the rate increases that we are getting today, and again, I can't speak for others. I don't know their business, their portfolio. But for us, with the rate increases that we're getting today, we certainly think we are comfortably above our cost of capital. And based on my math, we are comfortably in the double-digit space as far as return goes. But There is no doubt, you know, we need that rate. The comments that I made earlier about the impact of this low interest rate environment and what it means for investment income and what it means for the industry's economic model, you know, that is real, and we are very focused on it.

Great. Thank you.

Thank you.

Your next question comes from Josh Shanker with Bank of America. Your line is open.

Yeah, thank you very much. Thank you very much for taking my call. Apologies. So just a couple of questions more investment related than insurance related, I guess. I see that you're moving the money to cash and you're shortening the portfolio. Should we expect that the 2Q traditional investment portfolio result is a good indicator of where the future is going to be until you decide to redeploy that cash again?

Sorry, Josh, could you ask the second part of the question again? You broke up a little bit. I beg your pardon.

I'm sorry. Should we assume that the 2Q result for traditional investment income is sort of a good guidepost to think about until you decide to redeploy the cash that you're stockholding right now?

Yes. Obviously, putting aside funds as far as the core portfolio.

Yep. And can you just talk a little bit about the results in the arbitrage portfolio for the quarter?

They had a particularly strong quarter. Part of it was some of their traditional activities. Part of it had to do with some activities they participate in surrounding SPACs.

That's as one time in nature as the $58 million loss in LP. You shouldn't expect there's a change in how you're deploying, and that could continue into the future.

As much as I wish it was a new normal, I don't think you should assume that's the case.

Okay. Ann, we don't get the number. Can we know what the reinsurance recoverable was for the quarter?

Honestly, I don't have that in front of me, but either Rich or Karen will make that available. We'll follow up with you if you don't mind.

No problem. Fantastic. Thank you very much, and good luck, and be safe. Thanks, Josh. You too. Be well.

There are no further questions at this time. I'll now turn the call back over to Mr. Rob Berkley. Your closing remarks.

Okay, thank you, Chantal, and thank you all for dialing in. Obviously, challenging times and a fair amount of uncertainty, but hopefully from our discussion today, you have a sense for how the business is well-positioned. From our perspective, we are well-positioned in order to weather the circumstances that we are navigating through. Even more so, we are well-positioned take advantage of a market when we come out the other side of the tunnel. So I think that is all for us. We will look forward to speaking with you in 90 days. Thank you again, Chantal. Have a good night.

This concludes today's conference call. You may now disconnect.