Good day, and welcome to W. R. Berkley Corporation's Second Quarter 2020 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 and estimates. We caution you that such forward-looking statements should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will in fact, be achieved. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2019 and our other filings made with the SEC for a description of the business environment in which we operate and the important factors that may materially affect our results. 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'd now like to turn the call over to Mr. Rob Berkley. Please go ahead, sir.

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

Absolutely. Thanks, Rob. Starting with our premium production, gross premiums written grew 2% to more than $2.1 billion despite a shrinking economy arising from the global pandemic. The growth was driven by an overall rate improvement and a comparable historic premium renewal retention ratio that Rob will be discussing shortly. Offsetting this improvement is a decline in exposures from the economic downturn as well as the strengthening of the U.S. dollar against certain foreign currencies. Net premiums written of approximately $1.7 billion was relatively unchanged from the prior year's quarter. The insurance segment decreased 2% to approximately $1.5 billion, primarily due to reduced exposure and rate decline in workers’ compensation, as well as higher reinsurance reinstatement premiums. The reinsurance and monoline excess segment grew 16.5% to about $200 million in the quarter relating to improving markets. Pre-tax underwriting income of $23 million was adversely impacted in the quarter due to approximately $86 million of COVID-19 related losses. This compares with $100 million for the prior year underwriting income. In addition, we reported approximately $20 million of catastrophe losses for civil unrest and $40 million for severe weather-related losses. This brought our total catastrophe losses to approximately $146 million in the quarter or 8.7 loss ratio points. COVID-19 related losses represented 5.1 of these loss ratio points. The reported loss ratio was 67.7% in the current quarter, compared with 62.4% in 2019. Prior year loss reserves developed favorably by $3 million, or 0.2 loss ratio points in the current quarter. Accordingly our current accident year loss ratio excluding catastrophes was 59.2% compared with 61.4% a year ago, the improvement is driven by lower non-cat property losses and the change in business mix. The expense ratio was 31% reflecting a decrease of 0.5% compared with a year ago and the 2019 full…

Thanks, Rich. That was great. So a couple of quick comments from me, clearly a challenging moment for all of us on many different levels, everyone is appropriately very focused on COVID-19. Having said that, I think we're all struggling with the reality that there are more questions than there are answers hopefully that will not be the case in the future. Hopefully the behavior of many people will change and that will help us bring the situation more under control and hopefully a pharmaceutical solution is not too far in the distance. Having said that, while again COVID-19 is the topic de jure, I think it's important that we not lose sight of some of the other realities or factors that are impacting the industry and by extension, our business. If one thinks back to last year, there was a growing groundswell of a firming market, you could probably see it before 2019 but during '19, it very much came into focus. We saw it accelerate throughout the year and we saw it continue to accelerate into 2020, very evident in Q1. The evidence of this was demonstrated at least in part by business leaving the standard market making its way to the specialty market and in particular, the E&S market. We saw rate increases that we as an industry have not seen in some number of years. And we could see a reduction in capacity that various carriers were offering. All of these things were being driven in our opinion by two major factors. One being a low interest rate environment and the knock-on effect for what that means for investment income. And number two last cost trend, in part driven to actually to a great extent driven by social inflation, which have been benign for an extended…

[Operator Instructions] Our first question comes from Phil Stefano with Deutsche Bank Your line is open.

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

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

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

So I would tell you that there are a couple of things at work here. First of all, I think we all have a sense that frequency for many product lines is down considerably given the environment. Number two, I think the other piece that should not go unnoticed is that the rate increases that we have been getting for some period of time now that are no longer just on a written basis, but are hitting our earned are meaningful. And I think if you look at our mix of business, which we disclose and lots of public information and you can get a bit of a glimpse into that in the release, I forget which page it is, but where we show the mix of business, you can see the different product lines and how much of our portfolio would fall under shorter tail products where that would be coming through in our P&L now versus longer tail that would be on a design loss ratio, where you would not see an impact of any consequence on a reported basis.

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

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

Our next question comes from Mike Zaremski with Credit Suisse. Your line is open.

First question regarding the COVID related losses, and I appreciate the stat on 75% IBNR. Just curious if there's any more color, you can offer on the newly available information or legal developments that arose, so we can kind of better understand whether there's potential for that to persist in a meaningful way in the back half of the year.

So the work that that we have done and obviously we're in a much better position to try and get our arms around it now than we were when we're talking to you give or take 90 days ago. But given the work we have done by and large, we are assuming that this is going to be more under control by call at the end of this year or early next year. And as far as the activity, again, there hasn't been a huge amount there's not a lot paid or for that matter in case reserves, the lion's share of it is just sitting there in IBNR and it's just our best estimates as to what we think the impact could be. From our perspective so far workers’ compensation has not proven to be a big issue and neither has casualty. The challenge has more been in the shorter tail lines. And probably some I don't have the numbers in front of me. But I would say that the biggest component of that is event cancellation.

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

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

Okay. Understood. And I guess finally, we saw that you continued to buy back some stock during the quarter. Any thoughts on stocks somewhat recovered? Any thoughts on whether you still view the stock as being attractive from a buyback perspective?

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

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

Our next question comes from Yaron Kinar with Goldman Sachs. Your line is open.

My first question just goes to better understanding IBNR. What I did not realize in the first quarter was that there are some definitional differences there. And just want to make sure I understood how you're thinking about it. So, when we talk about from [indiscernible] reported, do you also include losses or events that have not yet occurred? But you think have a high probability of occurring?

We have looked at it so I appreciate the question and let me try and clarify. We look at our portfolio, we look at our exposures. We think about how it will be affected by COVID and that's how we came up with our number. So some of it is events or losses that have not even occurred, but the exposure is out there and we think that there is a possibility that there could be a loss associated with the exposure.

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

We have looked at the full portfolio.

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

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

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

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

Our next question comes from Meyer Shields with Keefe, Bruyette & Woods. Your line is open.

Rob, I want to go a little bit deeper into what you just talked about with the exposure for lines like EPLI to increased COVID-related losses. I appreciate the fact that there is no -- that you're not booking lower loss picks for lines of business where claim counts were down, frequency was down in the second quarter. Are there any increased provisions for lines where now that reality has changed and maybe the social inflation, et cetera, make things worse?

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

Okay. Fair enough. Maybe different question. In the past, I think we've worked for -- I've worked under the premise that economic inflection points take 3 to 6 months to actually impact written premium volumes. Because that makes sense, so that makes sense in the current environment can we expect maybe if we're seeing if the recovery continues right now that exposure units have already bottomed?

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

[Operator Instructions] Our next question comes from Brian Meredith with UBS. Your line is open.

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

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

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

We think with the rate increases that we are getting --

That the market is getting, yes.

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

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

So, just a couple of questions, more investment related and insurance related, I guess. I see that you are moving the money to cash and you are shortening the portfolio. Should we expect that the 2Q traditional investment portfolio result is a good indicator of where the future is going to be and so you decide to redeploy that cash again?

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

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

Yes. Obviously putting aside funds as far as a core portfolio.

Yes. And can you just talk a little bit about the result from the arbitrage portfolio for the quarter?

They had a particularly strong quarter. Part of it was some of their traditional activities, part of it has to do with some activities they participate in the rounding specs.

That's just one-time in nature is the $58 million loss in LP. We shouldn't expect, those are the change in how you're deploying and that could continue in the future.

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

Okay. And just we don't get the number, can we know what the reinsurance recoverable was for the quarter.

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

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

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

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