W.R. Berkley Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2022

Key Takeaways

  • W. R. Berkley reported 43% year-over-year operating income growth to $313 million in Q2 and net income of $179 million ($0.65/share), driven by strong underwriting and investment results.
  • Gross premiums written reached a record $3.1 billion (net premiums up 16.9% to $2.6 billion), with growth in every business segment—Insurance (+16.6%) and Reinsurance/Monoline (+19.1%).
  • The combined ratio improved to 88.6% (86.2% ex-catastrophes), aided by a 0.3-point accident-year loss ratio improvement, $2 million of favorable reserve development, and a lower expense ratio of 27.7%.
  • Net investment income rose 30% to $172 million on a book yield of 8.3%, with a short‐duration (2.4-year) AA-rated portfolio and strong performance from transportation, real estate, and energy funds, poised to benefit from higher rates.
  • The company emphasized its disciplined, forward-looking approach, having anticipated economic and social inflation for years through conservative underwriting, pricing, and portfolio management, leaving Berkley well positioned for ongoing volatility and growth.
AI Generated. May Contain Errors.
Earnings Conference Call
W.R. Berkley Q2 2022
00:00 / 00:00

There are 14 speakers on the call.

Operator

Good day, and welcome to W. R. Berkeley Corporation's Second Quarter 2022 Earnings Conference Call. Today's conference call is being recorded. The speakers' remarks may contain forward looking statements.

Operator

Some of the forward looking statements can be identified by the use of forward looking words, including, without limitation, believes, expects or 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 ks for the year ended December 31, 2021, 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.

Operator

Berkley Corporation is not under any obligation and expressly disclaims any such obligation to update or alter its forward looking statements, whether as a result of new information, future events or otherwise. I would now like to turn the call over to Mr. Rob Berkley. Please go ahead, sir.

Speaker 1

Josh, thank you very much, and good afternoon to all, and thank Thank you for joining our Q2 call. Co hosting with me this afternoon is Bill Berkley, our Executive Chairman as well as Rich Baio, our Executive Vice President and Chief Financial Officer. We're going to follow the usual agenda where I'm going to hand it over to Rich momentarily. He's going to Run through some highlights of the quarter. Once Rich has completed his comments, I'll receive the baton back from him, I'll offer a few thoughts of my own and then we'll be pleased to open it up for Q and A and take the conversation anywhere Participants would like to take it.

Speaker 1

Before I hand it over to Rich, there is one point or topic I don't think it's a unique observation. I'm sure everyone on the call and beyond is acutely aware of this But nevertheless, I think it easily falls off the radar screen as we can easily get consumed by Other aspects of the industry. And that is the macro observation or reality This is a very unusual industry for a variety of reasons, but one of them is this is an industry Where you do not know your costs of goods sold until oftentimes many years after the transaction has actually occurred. That creates additional complexity and how one operates the business. It's less consequential when you're operating through an extended period of time where things are quite stable.

Speaker 1

But when you're in a period of time where change is abound, volatility is material, It becomes much more consequential. Most businesses in other industries, I would suggest the way they operate is akin to how you steer a car. You turn the wheel of a car, The wheels in the front of the car turn and the car will turn quickly. Because of what we're discussing now, this reality of the Timing of cost of goods sold relative to when the transaction occurs in this industry is different from driving a car In some ways, it's more like steering a boat, where the rudder is in the back of the boat as opposed to the wheels in the front of the vehicle. The difference in this industry like a boat or a ship being steered from the back is one needs to anticipate.

Speaker 1

One needs to not just be consumed by what has occurred yesterday, not just be preoccupied with what is immediately in front of them, But one needs to anticipate what is coming their way because of the delay in response To steering the ship, one needs to be trying to figure out what is around the next corner or over the hill. This is something that we spend a huge amount of time working at, grappling with as a team. It is one of the reasons why we have been focused on certain things for a long period of time, Whether it's social inflation or economic or financial inflation, these are 2 macro topics That we have been talking about and acting upon for several years at this stage. You can see it in our underwriting and how we have selected loss picks and how we have priced our book of business. You can see it in our investment portfolio and how we have managed our duration.

Speaker 1

So while these types of topics have become very topical today and we hear people chatting about it, These are things that we anticipated and have been preparing for, for as I suggested earlier, years. It's one of the reasons why we are so well positioned. It's not easy. It requires expertise. It requires experience, it requires discipline, it requires foresight and it requires courage.

Speaker 1

Fortunately, my colleagues throughout this organization have those characteristics and traits. And that, in my opinion, is the leading reason why this organization is so well positioned today and by extension is enjoying the results that we are talking about today and anticipate we will be talking about for many, many quarters and years to come. So with that, so much for me just Let me hand it over to Rich now and I promise I'll be somewhat brief After he provides his thoughts and comments. Rich, if you would please.

Speaker 2

Of course. Thank you, Rob. I appreciate it. The company reported another strong quarter as you saw with operating income increasing 43% to $313,000,000 or 1.12 The key contributors include strong underwriting income driven by continued growth in premium volume, which I'll discuss in just a moment, Along with improving net investment income and foreign currency gains, we also reported net income of $179,000,000 or $0.65 per share. Pretax underwriting income of $268,000,000 in large part Kept pace with the record Q1, representing an increase of 32.6% over the prior year's 2nd quarter.

Speaker 2

Our year to date quarterly results of $543,000,000 increased 41% over the prior year and surpassed all prior full year results with the exception of 2021, which was a record year. Despite the heightened frequency of Catastrophes, we reported pretax cat losses of $58,000,000 in the quarter or 2.5 loss ratio points compared with $44,000,000 or 2.2 loss ratio points last year. Drilling down further into our underwriting results, Gross premiums written grew to a record level of almost $3,100,000,000 Net premiums written grew 16.9 to a record of nearly $2,600,000,000 Our decision to retain more business on a net basis can be seen by the lower session rate in the quarter and on a year to date basis. Net premiums written increased in all lines of business as we disclosed in the earnings release. The Insurance segment grew 16.6 percent to more than $2,300,000,000 while the Reinsurance and Monoline Access segment increased 19.1 The overall growth is significantly coming from increased exposure.

Speaker 2

The current accident year loss ratio excluding catastrophes improved 0.3 loss ratio points to 58.5%. Prior year loss reserves developed favorably by $2,000,000 in the current year, bringing our calendar year loss ratio to 60.9%. The expense ratio continues to benefit from scaling the business as evident by the outpaced growth in net premiums earned relative to underwriting expenses. In addition, we continue to make investments in strategic initiatives to optimize efficiency. And as such, the expense ratio improved 1 point to 27.7 percent over the prior year's quarter.

Speaker 2

In summary, the current accident year combined ratio, Excluding catastrophes, improved 1.3 loss points to 86.2% compared with the Q2 of 2021 of 87.5 The reported calendar year combined ratio was 88.6% for the current quarter compared with 89.7% for the prior year. Net investment income for the quarter was approximately $172,000,000 The rising interest rate environment is a key contributor to growth And income from the core portfolio of almost 30%. On investment funds, you may recall we report on a 1 quarter lag. Despite the decline in the equity markets in the Q1, the investment funds performed well with a book yield of 8.3%. The transportation, real estate and energy funds led the way.

Speaker 2

The overall investment portfolio also maintained the same duration of 2.4 years and a credit quality of AA-. Pretax net investment losses in the quarter of $172,000,000 In Financial Services, Energy and Metal Mining and Manufacturing, stockholders' equity was $6,500,000,000 as of June 30, 2022 year to date earnings have more than offset the change in unrealized losses on investments and currency translation adjustments, Both items being components of stockholders' equity. We returned capital to shareholders in the 1st 6 months of the year through regular and special dividends amounting to $182,000,000 of which $159,000,000 was in the 2nd quarter. The annualized operating return on beginning of year equity was 18.8% for the quarter and 10.8% on a net income basis. Rob, I'll turn it back to you.

Speaker 1

Okay, great. Rich, thanks very much. That was great As always. Okay. So a couple of quick sound bites from me and again as promised then we'll open it up for the Q and A.

Speaker 1

The top line continues to be very healthy. I would tell you that In the specialty space, in particular E and S, but specialty in general, we are seeing continued strength in submissions, And we're feeling particularly good about that. We're also seeing finally some resilience in the reinsurance market. You saw the growth in that segment as well. On the insurance front, just jumping around here, other liability was particularly strong, Shorter Tail was strong as well and Commercial Auto was reasonably robust.

Speaker 1

As far as what the contribution to the disc drive 17 points of growth. Rate was a meaningful contributor. Ex comp, we were at 6.8% or so. I think it's important that people keep in mind And not confuse or decouple rate versus exposure growth. And one of the things that we've been very focused John and I worry that some industry participants may not be as focused on is a change in exposure Particularly in an inflationary environment.

Speaker 1

It's something that we pay a lot of attention to. Obviously, there's an opportunity to At the time of the underwriting and inception, but making sure that one does not fall behind is an important thing. And approximately 2 thirds of our policies are adjustable based on So that's a really important piece to make sure that we can keep up with inflation. As far as strength of economy, certainly there is a lot of sensitivity and concern, but I would tell you as far as audit premiums at this stage, We are seeing considerable momentum on that front. Our audit premiums during the quarter were up 45% relative to the same period last year.

Speaker 1

And just on the retention front, something that I know we've discussed in the past and we're very sensitive to not churning the book and making Sure that the quality and the integrity of the book is intact as we continue to push for rate and make sure that we're getting the appropriate exposure. Long story short, renewal retention remained just north of 80%. Loss ratio obviously Rich covered a bit of noise coming out of the cats. I would characterize it as Frequency of modest severity, and that was probably the big story behind the 2.5 points. From my perspective and we've heard this and we think we've talked about it in past calls, we've heard it from some people when they look at all the rate that we've gotten.

Speaker 1

Why is it that we're not seeing the loss ratio drop even more on the current accident year? And the simple answer is there's a lot of unknown And there's a lot of volatility and there are a lot of very leveraged assumptions that we want to make sure we are appropriately thoughtful and measured and we don't respond too Some people would say cautious. We would say that we're just being thoughtful and measured given the inflationary environment both social as well as Economic. In addition to that and we may have touched on this last quarter, we're sensitive to the backlog in the legal System and our best estimate which is nothing more than an estimate is that due to COVID there's still probably an 18 month backlog in the court system. One other piece on the loss ratio and I think I shared this with all last quarter and for us it's Just one of many data points that we pay attention to and perhaps it's of interest to you all and that's the paid loss ratio.

Speaker 1

From our perspective, it is an important data point. It's not the whole story, but an important data point. So here's a little bit of Historical perspective for you again on Q2. And I'm going to give you what the paid loss ratio was going back to 2017 for Q2. That creates as much of an apples to apples basis as we can at least using shorthand.

Speaker 1

The paid loss ratio Q2 in 2017 was a In 2020, it was a 52.9 percent. In 2021, it was a 44.3 percent. And in 2022, it was a 41 So obviously an attractive trend doesn't necessarily tell the whole story, but again from our perspective, A meaningful data point and an encouraging indicator. Expense ratio, again Rich touched on this. We continue See improvement for a whole host of reasons.

Speaker 1

Certainly, lots of folks are focused on it and trying to be more efficient. But the big needle mover is just The growth in the earned premium and as you can see how it lags are written, there's likely more opportunity there over time. That having been said, we do have a few new operations. We'll have to see how they scale again over time. So 88.6 percent reported, if you back out the cats and you do the but for it's an 86.2 On an operating basis, obviously, a pretty attractive return by virtually any measure.

Speaker 1

Couple of quick comments on the investment portfolio and again I think Rich summarized it well, so I'm not going to belabor the point too much here. But Obviously, the duration remains notably short of where our liabilities are at 2.4 years compared to the liabilities give or Take 4 years. I think it's also worth noting, you're just in the early stages of seeing the opportunity For this company and its earnings power when you saw the book yield climb from in the last quarter, last quarter being Q1 2.2 up to 2.6 in just a period of 90 days. And new money rate for us these days is Certainly, north of 4, probably 4.25, give or take. We talked at the beginning of the call about Foresight and discipline and a variety of other behaviors or traits and the importance of it.

Speaker 1

I think it is certainly been exercised on the underwriting side, but it is important to recognize how it has been also exercised The earnings power of this economic model going forward In a raising or increasing rate environment should not be underestimated. It's something we've discussed in the past. I think it's something that people have an understanding for when we have the discussion, but I'm not sure if it's fully appreciated What this means for our economic model and again the earnings power of the business as you see interest rates continue to move up. So again, when we look forward, given the opportunities that we have before us, The flow of business coming our way continues to have significant momentum. The opportunity to make sure that we are getting The rate that we want and need continues to be there as well.

Speaker 1

And of course, the leverage that we have that is very much coming our way On the investment income side, I think all these things position us well for Not just the coming quarters, but the coming years in all likelihood. So let me pause there. Josh, if we could please open it up for questions.

Operator

Your first question comes from Elyse Greenspan with Wells Fargo. Your line is open.

Speaker 1

Hi Elyse, good afternoon.

Speaker 3

Hi, thanks. My first question, you guys just spoke pretty positively about just submissions within, I think you said, the Specialty in the E and S market. You guys have kind of flagged this 15% to 25% growth Target, you obviously were there through the first half of the year. Is this something that you think is sustainable, I mean, for the rest of this year and Kind of if you have any thoughts on 2023 as well?

Speaker 1

So we don't have A perfect crystal ball. All I can share with you is that there is nothing that leads us to believe That the opportunity to continue to grow the business both based on policy count, growth and exposure in our insureds Along with additional rate, we don't see that being derailed in the immediate term. So how long will it go on for? I don't know for sure. I think one of the things, Elyse, I know we've talked about in the past and I think it is worth noting Is that we're all very sort of conditioned to think about the cycle as one across product lines.

Speaker 1

And while the realities of a cycle certainly apply to all product lines, we need to remember The product lines are not marching in lockstep these days. So for example, it is our view that over the next 12 months to 24 months, you are going to see the workers' comp market likely bottoming out and beginning to firm. And obviously, that's the one of the, if not the largest component of the commercial lines marketplace. So undoubtedly, there will be a moment where some commercial lines don't have the same The lines don't have the same buoyancy or resilience, but I would expect that you'll see other product lines Firming as they are perhaps peaking or softening. So long story short, as far as Specialty and E and S, There's nothing that we see in the short term derailing it.

Speaker 1

And I think that there are going to be other things such as comp that are in somewhat of an on deck circle.

Speaker 3

And then just one on the capital side, you guys are trading above 2.5 times book. You just mentioned again, right, that you're focusing on exposure growth. I know in the past, Berkeley has shied away from acquisitions. Can you just give us an update thought there and would you guys consider a scalable acquisition to drive further top line growth?

Speaker 1

So I think as you've heard my father comment in the past and I'll echo his words that we are Open to anything, but we are some people would say cautious and cheap, others might call it disciplined. And from our perspective, one of the cornerstones of operating in the insurance industry is controlling the business. And when you buy someone else's business, you are buying somebody else's headaches and the seller typically knows more than the buyer. We have done the occasional acquisition, but we are very careful about that. So Most deals that occur, we hear about them before they are announced because we are showing the opportunity.

Speaker 1

But again, ultimately, We have a long term view. We are focused on risk adjusted return and controlling the business is an important part of that. And most insurance deals, quite frankly, when people look back on them, by and large, They probably wouldn't do them all over again if they could and we're not looking for that experience.

Speaker 3

Great. Thanks for the color.

Speaker 4

Thank you for the questions.

Operator

Your next question comes from the line of Michael Phillips with Morgan Stanley. Your line is open.

Speaker 1

Hi, Michael. Good afternoon.

Speaker 5

Hey, good afternoon. Thanks. First question is on the expense ratio. You talked about obviously the lag between written and earned. So that's going to help in the near term, but it feels like we're that part of the cycle for everybody.

Speaker 5

So I guess I'm just kind of wondering, Especially with your talk on emphasis on exposure growth, is kind of where we are today with that 27.7% is that about the peak of improvement Longer term, near term maybe a little bit more given the premium growth, but just kind of comment on that if you could?

Speaker 1

Look, when we think about Spending every dollar, every penny, we're looking at what kind of value we get for it. Can it improve from here? I guess it's possible, but for a specialty business, I think an expense ratio of 27.7% is pretty attractive. And you got to remember a significant percentage of that is going for acquisition costs along with boards, bureaus, taxes, etcetera, etcetera. So a limited amount of that is in our, if you will, direct internal controls.

Speaker 1

So do I think we can do better? Well, we'll have to see how it unfolds, I think we're very pleased with the progress that we've made and ultimately we'll see where underwriting conditions go. Is it possible someday down the road if We get into a very soft market that number could tick up. Yes. That having been said to your point earlier, we have a lot of growth still like That will be coming through in the earned premium and that will in part benefit the expense ratio.

Speaker 1

So I don't have a number of basis points that we're going to be able to improve From here, but I can assure you, Michael, we are very focused on it, just like we are focused on every nook and cranny of what we all do as a team every day.

Speaker 5

Okay, perfect. Thank you. Second question, you touched on this a little bit a second ago with comp kind of bottoming out at some point and charming. I guess thinking about the venture you launched pretty recently in California, is that a sign of just Optimism in that specific market or is that just more in general? I don't know if you plan maybe you could speak to that enterprise.

Speaker 5

Is that just a comp, A California business or is that going to be maybe expanded out beyond that eventually?

Speaker 1

Initially, the focus will be California within a particular part of the market. And certainly, over time, we are open to considering broader opportunities. For us, long term, we like comp. For us, we like this part of the market and we think the team of people that have joined us are exceptionally capable.

Speaker 5

Perfect. Okay. Thanks for that. I'll take a wrap on that. Thank you.

Speaker 4

Thank you for the questions.

Operator

Your next question comes from the line of Yaron Kinar with Jefferies. Your line is open.

Speaker 6

Thank you. Good afternoon.

Speaker 1

Good afternoon.

Speaker 6

I want to start with going to comment in the press release, the earnings release, where you say that most of our businesses are achieving or Our target return on equity and we're placing greater emphasis on exposure growth. So should we take that to mean that with growth shifting to exposure, there's maybe less room

Speaker 1

No, I don't think that's how I at least that's not how we intended it I think what we were suggesting is that if you look at our portfolio, a growing percentage of it Exposure growth and rate may be refined. That having been said, parts of the business that are below our targeted returns, We are still again very focused on making sure that the rate is adequate. So I think it would be a mistake in my opinion to assume that The underwriting margin is not going to does not have the opportunity to improve from here. I think it's just what we're trying to message is the balance between Rate and growth in many product lines, rate is not the primary target for us. In addition to that, when you think about our economic model, just going back to the comments earlier, I think that you're going to find that, again, There is tremendous upside leverage for us with the investment portfolio.

Speaker 7

Okay.

Speaker 6

And then in your opening comments, Rob, you talked about your interest in being thoughtful As you look at the loss specs and the loss ratios, and I recognize you're also playing a long game here and not necessarily playing for the quarter. I think what has created some confusion for at least some of us on the outside is, we also at the same time hear you and others talk about Hundreds of basis points of potential margin that has not yet shown up in results. So I guess from my See, my question would be why can't we find more of a middle ground where if there are if there is a confidence Around 100 of basis points of margin and one wants to be prudent and thoughtful at the same time, why can't there be a 100 basis point of margin improvement or 150 basis point of loss ratio improvement, and kind of achieve both

Speaker 7

ends of this?

Speaker 1

Well, I think at least from our perspective and obviously everyone's entitled to their own view, but from our perspective, Loss cost trend and if you choose to unpack that particularly economic inflation as well as social inflation are exceptionally leveraged. And if you get those wrong by not a lot, it can be a real problem. We are not interested in trying to push the business. We are not interested in trying to take any unnecessary risks. On an operating basis, we're generating a high teens return Without, at least as we think about it, being aggressive or optimistic, we're able to do that by being measured.

Speaker 1

And given that we think about the business through a risk adjusted return lens, we think we are generating how through returns So we're quite comfortable with where we stand. We have a healthy respect for the unknown And it's certainly something that we pay attention to. Obviously, as the reserves season out, We will be in a position to tighten up those picks as we have historically, we will continue to do that. But in the early years, We are just not going to want to run the risk of moving prematurely. Understood.

Speaker 1

But in spite of that caution, we are still very proud of the results.

Speaker 6

Thanks.

Operator

Your next question comes from the line of David Motemaden with Evercore. Your line is

Speaker 1

open. Good afternoon, David.

Speaker 8

Good afternoon. Just a question, Rob, on the 58.5 Accident year loss ratio ex cat. Is there anything in there one off in nature? I know that In the Q2 of last year, I believe there were a few large fire losses. Just wondering if there was anything in there, One off, whether that's positive or negative that impacted the loss ratio this quarter?

Speaker 1

We did have some property risk Losses which were frustrating. The good news is we had less than we've had in the past. I think the work that colleagues are doing on that front Hasn't fully taken hold, but the progress is clearly visible. But I think the 58.5 Is a reasonable number for you guys to be focused on. Rich, I don't know, do you have a different view?

Speaker 2

I don't, Rob, that's I think spot on. I would agree.

Speaker 8

Got it. Okay. That's clear. And then my follow-up question just on the pricing change, The move down this quarter versus last quarter. I'm wondering if you could just drill down maybe and just talk about different parts of the market, maybe Where competition is picking up, and also where it might be on the other side, maybe the market Hardening a little bit as we sort of enter into or as the inflationary environment continues.

Speaker 1

Yes. So probably at this stage, not enthusiastic about unpacking where we see The best opportunities and advertising that to a broader audience. I would tell you that the rate Ticking down what I would define as incrementally is one I would encourage people not to read too much into it in A 90 day period, but number 2 and more importantly going back to an earlier point and what we at least Attempted to articulate in the release is when you are writing business where your returns are particularly attractive, The way you think about the balance between rate versus growth is perhaps different than it was When you didn't find the returns as attractive and rate was the priority. So each one of the businesses in the group or by product line, by territory Is thinking about the balance, and it's multidimensional, but included in that is the balance between rate versus exposure growth. And I think a big piece of what you're seeing there, again, as we tried to flag earlier is, There's a lot in the marketplace that we participate in that we like the rates.

Speaker 1

We like the margin that is available. We feel as though that through how we capture exposure change, we are effectively keeping up with economic inflation. And the rate that we are getting is more than adequate to keep up with any social inflation or stub of economic inflation. And We like it and we're going to chase it and continue to optimize that balance.

Speaker 8

Got it. That makes sense. If I could just follow-up on that point, I just noticed professional liability growth, If I just look at net premiums written growth that decelerated a bit. Was there anything in particular going on in that line or just

Speaker 1

Yes, there's really there's one I think there's one piece in particular that is worth noting on the professional front. The market for professional overall, We find to be very robust, the one outlier would be public D and O, And it's still healthy there. But what has happened, it's less about new competition coming in and more about a Slow down in the capital markets, particularly around IPOs and specs. And that's just a reality. So that would be one of the parts of the marketplace that we participate in Where you're seeing a response to the environment and there has been less activity on that front.

Speaker 1

And Again, that's probably what's really noteworthy on the professional front. Other than that, outside of public D and We're seeing a lot of opportunity.

Speaker 8

Great. Thank you.

Speaker 1

Yes.

Operator

Your next question comes from the line of Mark Hughes with Truist. Your line is open.

Speaker 1

Mark, good afternoon.

Speaker 9

Yes, good afternoon. On the economy, you mentioned that the audit premiums are looking quite strong. It doesn't sound like you're seeing any sort of issues. Why is that relative to a lot of the chatter out there about the looming recession and slowdowns in end markets? Is it Just your positioning, will you see it later than others?

Speaker 9

Just a little comment there would be helpful.

Speaker 1

Well, I think a lot of people are when they talk about the economy and weakness in the economy, I'm not sure it's necessarily here and now. I think it's people anticipating what the interest rate environment is going to Due to the economy, so while so from our perspective, our insureds, They seem to be doing quite well. Businesses are growing, sales are robust, Payrolls are going up and quite frankly inflation seems to be driving a lot of it too. So if you Think about workers' comp just as an example, payrolls are going up because of wage inflation. If you think about the local store on Main Street, maybe they're selling more, but part of that is being driven by they're charging more for So again, from our perspective on the audit front, we're not seeing our insureds, at least at this stage, in any type of Financial Apparel and we are seeing their businesses grow partly due to health in the economy, but probably even more so As of late, due to inflation and prices and wages going up and values.

Speaker 9

Understood. And then the ceded premium has been declining. Will that continue and how low can that go?

Speaker 1

Well, ultimately, We have a view as to how our business will perform. We have some reinsurers that are Clearly, our partner throughout the cycle and there are other reinsurers where they look to try and arbitrage us. From our perspective, we understand cost of capital and we We understand the margin that's in our business and we will operate accordingly. As far as we're somewhat uniquely positioned Because we are not a heavy cat player, we generally speaking do not write Large limits business, while we do write some, but just as a data point that we have shared with some folks in the past, Insurance types of insurance where you can legally have a limit, 90% of our policies have a limit of 2 dollars or less. So as a result of that, we're just not as dependent on the reinsurance market because we're relatively Cat light and we're not a big limits player.

Speaker 1

So we will partner with people that are true partners and We are not inclined to be arbitraged by those that are looking to do such. Appreciate

Operator

that. Your next question comes from the line of Alex Scott with Goldman Sachs. Your line is

Speaker 1

open. Good afternoon, Alex.

Speaker 7

Hey, how

Speaker 10

are you guys? Good.

Speaker 1

How are you?

Speaker 10

Good. So the first question I had is Just on capacity to grow and just thinking through premium growth has been really strong in 2021, it's continued to be strong. I mean, what you're saying about exposure growth and when we think about rates still positive and There's a lot of things driving pretty heavy premium growth here. I mean, is there any way we should be thinking about the underwriting leverage The business and how much higher can that go? What kind of capital capacity do you have here to take growth To the next level, just given that that seems to be the focus.

Speaker 1

So I would tell you that we are very We are very pleased with our capital position and our ability to continue to write all of the well priced business that we see out there. So we do not See today or anticipate tomorrow capital being a constraint. In addition to that, and I probably should have mentioned it earlier, Alex, One of the benefits to the approach that we have taken with the investment portfolio As well, we are not completely insulated on the book value front from What has happened with interest rates and by extension what's happened to book value, we are far more well positioned than many of our peers. And the rating agencies, certainly one of the ways they look at capital strength is on a relative basis. So when you see some of our peers facing challenges with their bond portfolio perhaps, Those are not the type of severe challenges that we have to deal with fortunately for us.

Speaker 1

So again, just overall capital, we feel like we're in a pretty good place. In general, we feel like it's not going to constrain our growth and we think The health and soundness of our capital is really well positioned given the duration of the portfolio and the quality of the portfolio.

Speaker 10

Got it. And that actually leads into sort of the next question I was going to ask you, which is about the duration of that portfolio. I mean, any updated Views on sort of the mismatch you're running a little bit between assets and liabilities and how you think about that going forward?

Speaker 1

So my $0.02 and then I'm going to flip it over to my boss to comment on. Obviously, we are short of where our liabilities are. That was a deliberate decision and it's proven at least at this stage to be a very good one. As we continue to see rates move up, I think you'll see us look at taking the duration out. I don't think it's going to happen overnight, But I think you're going to see us gradually step into the water.

Speaker 1

I think the faster rates move up, The more aggressively you'll see us step into the water. So that would be my $0.02 Mr. Chairman, did you want to offer an additional view?

Speaker 7

My only additional comment would be, in spite of where the world is, where interest rates are, The Fed has no choice but to raise rates to deal with inflation. We're going to see rates higher. I don't know if it's going to be 300 basis points higher, 200 basis points higher or 500 basis points higher, but substantially higher. And we think in our sweet spot, which is the duration we ought to have, we'll get more than our fair share of that. So we would expect That will give us at least several $100,000,000 on a comparable basis of additional investment income.

Speaker 7

So we're quite optimistic. We're not in a rush to push our duration out further.

Speaker 10

All right. Thank you.

Speaker 4

Thanks for the questions.

Operator

Your next question comes from the line of Ryan Tunis with Autonomous Research. Your line is open.

Speaker 1

Hi, Ryan. Good afternoon.

Speaker 7

Hey, good afternoon.

Speaker 11

My first question was just, I guess, when we think about your Headline rate number and I guess trying to compare them to others. To what extent Is your relatively lower exposure to short tail lines perhaps at this point a reason why you might have A lower headline rate number?

Speaker 1

Well, I mean, clearly property cat is one of the product lines that is getting the most Robust amount of rate. And I would suggest to you, it's probably one of the product lines, whether it's insurance or reinsurance that has been Most underpriced for an extended period of time and I think that there's a lot of industry results to support that. Again, I think a lot of it really and I think I'm not sure I've articulated it particularly well, Ryan, but a lot of it has to do with rate adequacy. And once you believe that you're rate adequate or better, then it turns into how do you think about the balance between Pushing harder on rate versus growing the iceberg. So I agree with your point that because we are not a giant Property cat, Ryder, and I think we need to draw the distinction between cat exposed property and this traditional risk.

Speaker 1

You're maybe not seeing the same level of rate increase, but you're also in a lot of the market that we participate in. To begin with, you didn't see the same level of inadequacy in rates. I mean, you got to remember, we've been pushing for a rate For several years now at this stage, I think we were earlier than some and we paid the price for them on the volume front. But I mean, it's several years now where we're getting rate on rate. Rich, it's got to be what, 3 years?

Speaker 2

Yes, I think back to 2018, Rob.

Speaker 1

So a little bit more.

Speaker 11

Yes. Got you. And then on, I guess, the calling, calling the bottom on the workers' comp market, that's interesting. Is that A little more detail on that. Is that loss cost driven or is that just from the erosion of pricing over time?

Speaker 1

Well, I think loss, I think it's both to be perfectly frank. I think the Pricing has been eroding for an extended period of time. And in addition to that, I think you're going Start to see severity become more and more of an issue. And I think the realities Medical inflation, which have been somewhat benign for some period of time, I think that's going to change. I think you're going to be seeing medical inflation take off and a lot of it has been sort of historically focused around pharma And I think it's not just going to be pharma, I think it's going to be other aspects of medical inflation.

Speaker 1

I mean if you look at healthcare providers, Big hospital systems or large groups, they are bleeding out of their ears, many of them. And something is going to have to change. So when the day is all done, there is going to be a moment of reckoning between the providers and the payers. And ultimately the workers' comp market is not completely insulated from that. I think that there's early signs If you chat with the people at NCCI that they are starting to see in the more recent years Issues around severity trend and they are starting to recognize the current accident years can only be supported So much by positive development coming out of prior years.

Speaker 1

In addition to that, my understanding is that the WCE IRB out on the West Coast had a view that rates should be moving up give or take call it I think it was 7% or so and that got shot down by the insurance department out there. So there's growing tension there as well. So Ryan, I can't call it to the day, the week, the month or even the quarter, But there is a growing level of evidence that the music is slowing, that Party is going to come to an end. It was likely prolonged by COVID because of the holiday around frequency And that has sort of allowed it to continue on for some time. But I think 24 months or so, maybe less, People are going to have to start to wake up and address it.

Speaker 1

I think the industry is probably running well over 100 at this stage As far as comps. Thank you. Thanks. Thanks for the question.

Operator

Your next question comes from the line of Brian Meredith with UBS. Your line is open.

Speaker 1

Hey, Brian. Good afternoon.

Speaker 12

Hey, afternoon. A couple of ones here and I think some for Bill here. First, I'm just curious on the investment fund, obviously, terrific results This quarter, you seem pretty optimistic about some good performance here through remainder of 2022 Despite what many would consider a very challenging investment environment, just curious if you

Speaker 5

can kind of give us

Speaker 12

a little breakdown as to why that is, why you're pretty optimistic

Speaker 1

Are you talking about specifically the funds or are you

Speaker 12

Investment funds, exactly, the funds.

Speaker 1

The funds. So from our perspective, we think they've been reasonably resilient as you can see. Please keep in mind that we booked it on Quarterly lag, so we don't have perfect visibility as to what Q3 will look like at this stage. Will it be as healthy and robust as it's been in the first half of the year? We'll have to see with time.

Speaker 1

We don't have that visibility yet. But we do not anticipate it being a big problem for us either based on our casual conversations with those that are managing the money.

Speaker 12

Got you. Thanks. And then I guess another question. I'm just curious from a macro perspective. It's been since the 70s since we've been in the stagflationary environment and it looks like we may be going into 1.

Speaker 12

Just curious, And Bill might know this, how did the industry kind of perform in a stagflationary environment? What are the kind of consequences in the playbook? And does it really matter that much

Speaker 7

Well, I think the answer is that Stagflation is really an issue of how you reserve your plans and how you price your product and the mix of business you're in. Some companies did really well and some did really badly. And you saw a number of companies effectively go out of business And others prospered and were the acquirers. So I think that it's a mixed bag of companies who paid attention to the numbers did quite well And Prosper and companies who chose not to fault it. A great example would be Job that Prosper and AIG made some bad decisions and they faltered.

Speaker 7

I think There's a whole mix of companies, some that did well, some that did not do so well. But going forward, I think that It's going to be a much greater differentiation based on both the lines of business you're in and the Greater opportunities, but also substantial punishment for the companies that don't pay attention to The changing environment, I think the environment is going to continue to change at a more rapid pace.

Speaker 12

Thanks.

Speaker 7

Yes.

Operator

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

Speaker 7

Yes. Hey, Josh. Good afternoon.

Speaker 13

Good afternoon. I appreciate that you I want to keep the secret sauce in the company and totally makes sense. People always ask you what your loss cost trend is or what your inflation assumption is and You'll be qualitative about it, not so quantitative. But can you talk about when you're out there searching for business, Competitors are now some people are obviously very disciplined like yourself, but how wide is that variance do you think when you're Out there, spelunking for pricing, I guess, between what smart people and less smart people are doing.

Speaker 1

So, Josh, I think it's a hard one to answer because it varies by product line And level of competition. And in addition to that, not to be a wise ass, but competitors aren't really inviting us to their Rate making meetings, so knowing how they make their rates and come up with it, we're not really privy to. I would tell you that It's surprising to me quite frankly and I think we may have touched on this last time, but Sorry, I apologize if it's repetitive, but there's a real divide these days between what I would define as standard market, That being national carriers and super regionals have an appetite for versus what they don't have an appetite for. If they don't have an appetite for it, there seems to be more meaningful discipline in the specialty and the E and S market And that's really attractive. I have been surprised that many national carriers and large regional carriers Have been willing to be exceptionally competitive on what remains within their strike zone or their appetite.

Speaker 1

So again, I can't speak specifically to how they're thinking about loss trend and what their view is on this or that. But I can tell you that it is a very bifurcated world as far as level of competition between what is Still within the appetite of the standard market and what falls outside.

Speaker 13

Okay. I'll unpack that and work with it as I can. And then I guess a question for the Chairman. Look, I have a model going pretty far back, but not as far back as yours. When we talk about lengthening, What is the longest duration or I guess relative duration to liabilities that Berkeley has ever been willing to run?

Speaker 7

I think that the answer is Duration is an unlimited exposure and it's not one we would ever consider taking, whereas shorter durations Let you reset your mistakes More quickly and with more specific challenges. So if you have your duration 3 years Shorter than the portfolio duration, you know what your exposure is, whereas your duration is 3 years longer Then your portfolio, that gives you a different kind of risk. So I would guess the answer is, We have never been consequentially longer, a year or 2, maybe 3, on the long side. And when we have been such, we've been such because we think the world is paying way too much And interest rates for the current interest rate picture. So today would be a different story.

Speaker 7

We think that The pricing for interest rates is such that it's unlikely that we get a lot of exposure to People are paying a lot too much as far as rates. And I think that that's maybe even worse Because at the moment, it's really an issue where you're confronting An environment where current interest rates are significantly in excess of the current market. So We have never, as far as I remember, really gambled on Interest rates substantially in excess of our forecasted duration. And The answer is we've never been betting on the long side. It doesn't suit our general conservative nature.

Speaker 7

So yes, you in fact have caught one of the views that we have primarily and that is you don't get rewarded We're taking a long term bet on interest returns being in excess of the return on your duration.

Speaker 13

Thank you for the clarification. Appreciate it.

Speaker 1

By the way,

Operator

I would be

Speaker 7

happy if somebody has the idea of when we come up with that because that would be a hell of a bet. Sorry, Josh, did you have another question for us?

Operator

That's okay. Not a problem. Your next question comes from the line of Michael Phillips with Morgan Stanley.

Speaker 5

Hi, Michael. Just had one follow-up. Yes, thanks for the follow-up. You mentioned earlier on a question about your small mistakes in loss picks could result in kind of big ramifications. And I guess I'm curious, Were you specifically referring to you or the industry?

Speaker 5

And if you, is that just because of your exposure to excess layers and your factors?

Speaker 1

No. I think that's just a reality of this industry. If you look at anyone when you think of their economic model in this Industry and you sort of unpack what are the drivers in a loss ratio and the leverage And certain assumptions that go into coming up with the loss ratio, some of them can be very leveraged, Such as how do you think about economic inflation? What do you think social inflation means? And those numbers don't need to be Adjusted very much for there to be a heck of a ripple effect.

Speaker 7

Okay. No, thanks. I just want to

Speaker 5

make sure I didn't If you're specifically thinking of your own business.

Speaker 1

No, it wasn't pointed. I think it's just a reality for the industry. But The longer the tail, the more potential there is for leverage.

Speaker 5

Sure. Okay. Thank you. Thank you. And then if I could, your high net worth Look, haven't heard much about that yet.

Speaker 5

We've heard a lot of severity issues on traditional homeowners companies. And any thoughts you could share there on what you're seeing?

Speaker 1

Business continues to do exceptionally well and it's clearly considered a very attractive Alternative to some of the more traditional or longstanding names in the marketplace, Some of which perhaps have lost sight of their value proposition. And fortunately for us, we have colleagues that are doing a great job building that business And have a laser focus on what the value proposition is that, that us audience or customer base is looking for And that's being recognized.

Speaker 5

Okay, perfect. Thanks for your time. I appreciate it.

Speaker 4

Thank you.

Operator

Yes, there are no further questions at this time. I'll turn the call back to Mr. Rob Berkley for any closing remarks.

Speaker 1

Okay. Josh, thank you very much, and we appreciate all that participated, you finding time to visit with us today. Clearly, a strong quarter, which is obviously very encouraging, but perhaps even more encouraging is There is clear evidence that the momentum continues to be there in a meaningful way on the underwriting side in a particularly noteworthy way as it's building on the investment side. So we will look forward to connecting with you all in 90 days.

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