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W. R. Berkley Q2 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Corporate Executives

  • W. Robert Berkley
    President and Chief Executive Officer
  • Richard M. Baio
    Executive Vice President, Chief Financial Officer
  • William R. Berkley
    Executive Chairman

Presentation

Operator

Good day, and welcome to W. R. Berkley Corporation's Second Quarter 2022 Earnings Conference Call. Today's conference call is being recorded.

The speakers' 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, 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-K 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. 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.

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Josh, thank you very much and good afternoon to all and thank you for joining our second quarter 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, offer a few thoughts of my own and then we'll be pleased to open it up for Q&A and take the conversation anywhere participants would like to take it.

But before I hand it over to Rich, there is one pointer or topic that I did want to flag, and it's something that we talk about with some regularity within our shop and I don't think it's a unique observation, I'm sure everyone on the call and beyond is acutely aware of this point. 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 that 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 cost of goods sold, until oftentimes many years after the transaction has actually occured 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, 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 we're driving a car in some ways is 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, 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 health. 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 two 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. 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 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. Fortunately, my colleagues throughout this organization have those characteristics in freights 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 keeping it short at the beginning and handing it over to Rich, 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?

Richard M. Baio
Executive Vice President, Chief Financial Officer at W. R. Berkley

Of course. Thank you, Rob. I appreciate it. The company reported another strong quarter as you saw with operating income increasing 43% to $313 million or $1.12 per share. 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 million or $0.65 per share. Pre-tax underwriting income of $268 million in large part kept pace with the record first quarter representing an increase of 32.6% over the prior year's second quarter. Our year-to-date quarterly results of $543 million 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 natural catastrophes, we reported pre-tax cat losses of $58 million in the quarter or 2.5 loss ratio points compared with $44 million 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 $3.1 billion. Net premiums written grew 16.9% to a record of nearly $2.6 billion. Our decision to retain more business on a net basis can be seen by the lower cession 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% to more than $2.3 billion, while the Reinsurance & Monoline Excess segment increased 19.1% to almost $260 million. The overall growth is significantly coming from increased exposure. 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 million 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% over the prior year's quarter.

In summary, the current accident year combined ratio excluding catastrophes improved 1.3 loss points to 86.2% compared with the second quarter 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 million, the rising interest rate environment is a key contributor to growth in income from the portfolio of almost 30%. On investment funds, you may recall, we report on a one quarter lag and despite the decline in the equity markets in the first quarter, the investment funds performed well with a book yield of 8.3%. The transportation, real estate and energy funds led the way. The overall investment portfolio also maintained the same duration of 2.4 years and a credit quality of a AA minus.

Pre-tax net investment losses in the quarter of $172 million is primarily attributable to the net change in unrealized losses on equity securities of $132 million which related to sector declines in financial services, energy and metal mining and manufacturing. Stockholders' equity was $6.5 billion 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 first six months of the year through regular and special dividends amounting to $182 million of which $159 million was in the second 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.

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

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

The topline continues to be very healthy. I would tell you that in the specialty space in particular E&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, consequently, as you saw the growth in that segment as well. On the insurance front is jumping around here. Other liability was particularly strong shorter tail was strong as well and commercial auto was reasonably robust.

As far as what the contribution to the disk 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 on and I worry that some industry participants may not be as focused on is a change and exposure, particularly in an inflationary environment. It's something that we pay a lot of attention to, obviously, there is an opportunity to keep up with it through payrolls on comp, GL as far as revenue, on the property front, the appraised values that you get at the time of the underwriting and inception, but making sure that one does not fall behind is an important thing and approximately two-thirds of our policies are adjustable based on exposure. So that's a really important piece to make sure that we can keep up with inflation.

As far as the 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. 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 bucket intact [Phonetic] 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, 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 in past calls, we've heard from some people when they look at all the rate that we've gotten, 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 is a lot of unknown, and there is a lot of volatility, and there are a lot of various leverage assumptions that we want to make sure we are appropriately thoughtful and measured and we don't respond too quickly. 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 are 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 is 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. From our perspective, it is an important data point, it's not the whole story, but it is 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 a apples-to-apples basis as we can at least using short hand.

The paid loss ratio Q2 in '17 was a 55.9%. In '18, it was a 58.3%. In '19 it was a 53.8%. In 2020, it was a 52.9%. In '21, it was a 44.3% and in '22, it was a 41.9%. 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 to see improvement for a whole host of reasons, 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 lags are written there is 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% reported. If you back out the CATs and you do the buck forwards it's an 86.2% on an operating basis, obviously a pretty attractive return by virtually any measure.

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 four years. I think it's also worth noting, you're just in the early stages of seeing the opportunity for this company and it's 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. I think it is certainly been exercised on the underwriting side, but it is important to recognize how it has been also exercised on the investment side. 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. 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.


Questions and Answers

Operator

Certainly. [Operator Instructions] Your first question comes from Elyse Greenspan with Wells Fargo. Your line is open.

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Hi. Elyse, good afternoon.

Elyse Greenspan
Analyst at Wells Fargo & Company

Hi, thanks. My first question, you guys just spoke, you're pretty positively about your submissions within, I think you said the specialty in the E&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?

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

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 the opportunity to continue to grow the business, both based on policy count, growth in 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. And while the realities of a cycle, certainly, apply to all product lines, we need to remember that product lines are not marching in lockstep these days. So for example it is our view that over the next 12 to 24 months, you are going to see the workers' comp market likely bottoming out and beginning to firm. And obviously, that's 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 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&S there is nothing that we see in the short term derailing it and I think that there are going to be other things such as comp that are somewhat of an on-deck circle.

Elyse Greenspan
Analyst at Wells Fargo & Company

And then just one on the capital side. You're -- 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 Berkley 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 topline growth?

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

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, 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 by and large they probably wouldn't do them all over again, if they could and we're not looking for that experience.

Elyse Greenspan
Analyst at Wells Fargo & Company

Great, thanks for the color.

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Thank you for the questions.

Operator

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

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Hi, Michael. Good afternoon.

Michael Phillips
Analyst at Morgan Stanley

Hey, good afternoon. Thanks. First question is on the expense ratio. You talked about, obviously the lag between written, so that's going to help in the near term. But it [Indecipherable] cycle for everybody. So I guess I'm just kind of wondering especially with your talk on after the exposure growth is kind of where we are today with that 27.7%, is that about to peak of improvement longer term. Near-term, maybe a little bit more given premium growth, would you just kind of comment on that if you could?

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

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 cost along with boards bureaus taxes etc, etc. So a limited amount of that is in our, if you will, direct internal controls. So do I think we can do better? Well we have to see how it unfolds. But, I think we're very pleased with the progress that we've made and ultimately we'll see where underwriting conditions go. It's 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 it will be coming through in the earned premium and that will in part benefit the expense ratio. 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, Mike, 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.

Michael Phillips
Analyst at Morgan Stanley

Okay. Perfect, thank you. Second question, you touched on it a little bit a second ago, with comp kind of bottom out at some point. And for me, 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 -- maybe you can speak to that enterprise. Is that just a comp, California business or is that going to maybe expanded out beyond that eventually?

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

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 -- we -- long-term we like comp whereas we like this part of the market and we think the team of people that have joined us are exceptionally capable.

Michael Phillips
Analyst at Morgan Stanley

Perfect Okay, thanks for that. [Indecipherable] Thank you.

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Thank you for the questions.

Operator

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

Yaron Kinar
Analyst at Jefferies Financial Group

Thank you. Good afternoon.

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Good afternoon.

Yaron Kinar
Analyst at Jefferies Financial Group

I wanted to start with going to comment in the press release, the earnings release where you say that most of our businesses are achieving or exceeding 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 is maybe less room for improvement in the underlying loss ratio going forward. Or...

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

No, I don't think that's how I -- at least that's not how we intended it to be interpreted. I think what we are suggesting is that if you look at our portfolio, a growing percentage of it has reached or is exceeding our targeted returns. And how we think about the balance between 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, going back to the comments earlier, I think that you're going to find that, again, there is tremendous upside leverage for us would be investment portfolio.

Yaron Kinar
Analyst at Jefferies Financial Group

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

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Well, I think, at least from our perspective and obviously, everyone's entitled to their own view, but from our perspective loss cost trend, 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. And given that we think about the business through a risk adjusted return lens, we think we are generating healthy returns for our shareholders without increasing the risk by declaring victory prematurely. So we are 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, we are just not going to want to run the risk of moving prematurely. But, in spite of that caution, we are still very proud of the results.

Operator

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

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Good afternoon, David.

David Motemaden
Analyst at Evercore ISI

Good afternoon. Just a question, Rob, on 58.5 accident year loss ratio ex-CAT, is there anything in there one-off in nature? I know that in the second quarter of last year, I believe there were few large fire losses. Just wondering if there is anything in there one-off whether that's positive or negative that impacted the loss ratio this quarter?

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

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 our 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 if you have a different view?

Richard M. Baio
Executive Vice President, Chief Financial Officer at W. R. Berkley

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

David Motemaden
Analyst at Evercore ISI

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 in the markets hardening a little bit as we sort of enter into -- or as the inflationary environment continues?

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

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 is incrementally is one I would encourage people not to read too much into it in a 90-day period. But number two, 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 are byproduct line by territory is thinking about the balance and its multi-dimensional 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 try to flag earlier is, there is a lot of the marketplace that we participate and that we like the rates. We like the margin that is available. We feel as though that 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 where we like it and we're going to chase it and continue to optimize that balance.

David Motemaden
Analyst at Evercore ISI

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 the normal...

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

I think there is one piece in particular that is worth noting on the professional front. The markets for professional overall we find to be very robust. The one outlier would be public D&O and it's still healthy there, but what has happened, it's less about new competition coming in and more about a slowdown in the capital markets, particularly around IPOs 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. And again that's probably what's really noteworthy on the professional front. Other than that, outside of public D&O, we're seeing a lot of opportunity.

David Motemaden
Analyst at Evercore ISI

Great, thank you.

Operator

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

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Mark, good afternoon.

Mark Hughes
Analyst at Truist Financial

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

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

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 its people anticipating what the interest rate environment is going to do 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 their charging more for their products. And of course on the property front, we all know what has happened with values. 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 peril and we are seeing their businesses grow partly due to help in the economy, but probably even more so as of late due to inflation and prices and wages going up and values.

Mark Hughes
Analyst at Truist Financial

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

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Well, ultimately, from our perspective, 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 believe we understand the margin that's in our business and we will operate accordingly. As far as -- we are somewhat uniquely positioned because, we are not a heavy cap player, we generally speakin do not write large limits business but we do write some. But just as a data point that we have shared with some folks in the past, in insurance -- types of insurance -- insurance where you can legally have a limit 90% of our policies have a limit of $2 million 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. So we will partner with people that are true partners and we are not inclined to be arbitrage by those that are looking to do such.

Mark Hughes
Analyst at Truist Financial

Appreciate that.

Operator

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

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Good afternoon, Alex.

Alex Scott
Analyst at The Goldman Sachs Group

Hey, how are you guys?

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Hey, how are you?

Alex Scott
Analyst at The Goldman Sachs Group

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 is a lot of things driving pretty heavy premium growth here. I mean is there any way we should be thinking about the underwriting leverage of 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 seems to be the focus.

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

So I would tell you that we are very comfortable 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 is well, we are not completely insulated on the book value front from the 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. So again, 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.

Alex Scott
Analyst at The Goldman Sachs Group

Got it. I mean that actually leads into sort of the next question I was going to ask you, which is about the duration of the 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?

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

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

William R. Berkley
Executive Chairman at W. R. Berkley

My only addition, I mean, would be, in spite of where the world is, where interest rates are, the Fed has no choice but to raise rates 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 hundred million dollars on a comparable basis of additional investment income. So we're quite optimistic and we're not in rush to push for duration [Phonetic] further.

Alex Scott
Analyst at The Goldman Sachs Group

All right, thank you.

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Thanks for the questions.

Operator

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

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Hi, Ryan. Good afternoon.

Ryan Tunis
Analyst at Autonomous Research

Hey, good afternoon. 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 relative lower exposure to short-tail lines perhaps at this point, a reason why you might have lower headline rate number?

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

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 is 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 the 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 writer and I think we need to draw the distinction between CAT-exposed property into traditional risk, 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. You got to remember, we've been pushing for rate for several years now, at this stage. I think we were earlier than some and we paid the price for that 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 three years?

Richard M. Baio
Executive Vice President, Chief Financial Officer at W. R. Berkley

Yes, I think back to 2018, Rob.

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

A little bit more.

Ryan Tunis
Analyst at Autonomous Research

Got you. And then on I guess the 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 such as from the erosion of pricing over time?

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Well, I think, loss -- I think it's both to be perfectly frank. I think the pricing has been eroded for an extended period of time. And in addition to that, I think you're going to start to see severity become more and more of an issue and I think the realities of 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 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. I mean if you look at health care providers, big hospital systems or large groups, they are believing out of their years 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 them. I think that there is early signs, if you chat with the people at NCCI, they are starting to see in the more recent years, issues around severity trend. And they're starting to recognize the current accident years can only be supported so much by positive development coming out of prior years.

In addition to that, my understanding is that the WCIRB 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 shut 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'd say 24 months or so, maybe less, people are going to have to start to wake up and address it. I think the industry is probably running well over 100 at this stage as far as comp goes.

Ryan Tunis
Analyst at Autonomous Research

Thanks.

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Thanks for the question.

Operator

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

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Hey, Brian. Good afternoon.

Brian Meredith
Analyst at UBS Group

Hey, good afternoon. A couple of ones here and I think some for Bill here. First, I'm just curious on the investment front, obviously terrific results this quarter. You seem pretty optimistic about some good performance here to remainder of 2022 despite what many consider a very challenging investment environment. Just curious if you can kind of give us a little breakdown as to why that is? Why you're pretty optimistic about it for the remainder of the year?

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Are you talking about specifically the funds or are you...

Brian Meredith
Analyst at UBS Group

Not investment funds, exactly the funds.

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

The funds. So from our perspective, we think they've been reasonably resilient. As you can see, please keep in mind that we booked on a 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 than it's been in the first half of the year. We'll have to see with time, 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.

Brian Meredith
Analyst at UBS Group

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 stack inflationary environment and it looks like we may be going into one. Just curious and Bill might know this, how did the industry kind of perform in a stack inflationary environment. What are the kinds of consequences in the playbook and does it really that matter that much for commercial insurers?

William R. Berkley
Executive Chairman at W. R. Berkley

Well I think the answer is that stack inflation is really an issue of highly deserved clients and how you price your product and the mix of business you are in. So some companies did really well. I would come to the badly right. We saw a number of companies is that to be glad at this.out of business. And others [Indecipherable] with the acquirer. I think that it's a mixed bag. A company has paid attention to numbers did quite well and [Indecipherable] and the company usually chose not to faulter. Great example would be chop the cost per AIG, made some bad decisions and they faultered. I thhink there is a whole mix of companies, some did well, some did not do so well. But going forward I think that it's going to be much greater differentiation based on both the lines of business you are in and particular opportunities that are out there. My point of view, I generally see 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.

Brian Meredith
Analyst at UBS Group

Thanks.

William R. Berkley
Executive Chairman at W. R. Berkley

Yes.

Operator

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

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Hey, Josh. Good afternoon.

Josh Shanker
Analyst at Bank of America

Good afternoon. Good afternoon. I appreciate you want to keep a secret sauce in the company, it totally makes sense. People always ask you what your loss cost trend is, what you're 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, how big is the gap do you think between what your inflationary assumptions are and what your 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 going through with the pricing I guess but what smart people and less smart people are doing?

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

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 but competitors aren't really inviting us to their rate making meeting. So how they make their rates and come up with it, we are 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 so I apologize if it's repetitive, but there is 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 want to have an appetite for that seems to be more meaningful discipline in the specialty and the E&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. 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.

Josh Shanker
Analyst at Bank of America

Okay. I'll unpack 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. What -- when we talk about lengthening, what is the longest duration or I guess relative duration to liabilities that Berkley has ever been willing to run?

William R. Berkley
Executive Chairman at W. R. Berkley

I think the answer is, duration is on limited exposure, it's not one we would ever consider taking, whereas shorter durations, like we said your mistakes, excuse me, like we said your mistakes more quickly and more specific challenges. So if you calibrate [Phonetic through the years shorter than the portfolio duration, you know what your exposures, whereas your duration is three years longer than your portfolio. And that gives you a different kind of risk. So I would guess the answer is, we have never been as sequentially longer, a year or two, may be three, on the long side and when we have been such, we've been such because we think the world is paying way too much in interest rates where the current interest rate picture. So today would be a different story. We think the pricing for interest rates is such that it's unlikely that, a lot of exposure to people paying a lot too much as far as rates. And I think that that's may be may even worse, because at the moment, it's really the issue where your consulting the environment where economy shapes are significantly in excess of the current market. So we have never as far as I remember really gambled on interest. Interest rates substantially in excess of our forecast of duration and the answers we've never been [Indecipherable] on the long side. It doesn't suit our general conservative nature. So yes you infact have got one of the views that we have turnaround and that is you know you don't get rewarded for taking a long turn back. Interest returns being in excess of the return on your duration.

Josh Shanker
Analyst at Bank of America

Thank you for the clarification. Appreciate it.

William R. Berkley
Executive Chairman at W. R. Berkley

By the way, I will be happy if somebody as the idea of when to come up with that, because I would be [Indecipherable] with that.

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

So 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. Your line is open.

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Hey, Michael.

Michael Phillips
Analyst at Morgan Stanley

Just had one follow-up. Thanks. Thanks for the follow-up. You mentioned earlier on a question about your small mistakes and loss picks could result in kind of big ramifications. And I guess I'm curious, were you specifically referring to new or the industry and if you -- is that's just because of your exposure excess layers and you're [Technical Issues]

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

No, I think that's just a reality of this industry. If you look at any one affect their economic model in this industry and you sort of unpack what are the drivers in a loss ratio, and the leverage in 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.

Michael Phillips
Analyst at Morgan Stanley

Yes, okay, no, thanks. I just want to make sure I didn't -- you're specifically thinking of your own...

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

No it wasn't pointed towards us. So I think it's just a reality for the industry, but obviously the longer the tail, the more potential there is for leverage.

Michael Phillips
Analyst at Morgan Stanley

Sure. Okay. Thank you. Thank you. And then if I could, your high net worth book haven't heard much about that yet. We've heard a lot of severity issues on the traditional homeowners companies and any thoughts you could share there on what you're seeing there?

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

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 audience or customer base is looking for and that's being recognized.

Michael Phillips
Analyst at Morgan Stanley

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

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Thank you. Josh?

Operator

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

W. Robert Berkley
President and Chief Executive Officer at W. R. Berkley

Okay, Josh. Thank you very much. And we appreciate all that participated you finding time to visit with us today. Clearly a strong quarter HMH 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 and 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. Thank you again for your participation and have a good evening.

Operator

[Operator Closing Remarks]

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