Berkley W R Corp Q2 FY2022 Earnings Call

Good day, and welcome to W. R. Berkley Corporation 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.

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. Before I hand it over to Rich, there is a one point or a 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 occurred. That creates additional complexity in 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 changes abound, volatility is material, it becomes much more consequential. Most businesses in other industries, I would suggest, operate 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, it's different from what driving a car. In some ways, it's more like steering a boat, where the rotor 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 hill. This is something that we spend a huge amount of time 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 embody 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 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.

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. Pretax 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 pretax 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 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% 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 evidenced 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 and income from the core 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 AA-. Pretax 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 6 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.

Thank you, Rich. That was excellent, as always. I have a few brief points to share before we move to the Q&A. Our top line remains very strong. Specifically in the specialty sector, including E&S, we continue to see robust submission activity, which is encouraging. Additionally, the reinsurance market is finally showing some resilience, contributing to growth in that area. On the insurance side, other liability showed significant strength, both shorter tail and commercial auto segments performed well. Regarding growth contributions, rates have played a significant role, with an ex-comp growth rate of about 6.8%. It's crucial to differentiate between rate growth and exposure changes, especially in today's inflationary environment, which we closely monitor. We're also attentive to ensuring our appraised property values align with current market conditions, as about two-thirds of our policies are adjustable based on exposure to keep pace with inflation. Despite concerns about the economy, we are experiencing strong momentum in audit premiums, which rose by 45% this quarter compared to last year. On retention, we strive to avoid churn and maintain the quality of our book while pursuing appropriate rate adjustments. Our renewal retention remains just above 80%. As for the loss ratio, there have been some fluctuations attributed to recent catastrophes, characterized by frequency and modest severity, contributing 2.5 points to the ratio. We've mentioned before that, despite our rate increases, the loss ratio hasn't dropped significantly for the current accident year. This is due to the unknown factors and volatility in the market, a cautious approach is essential given the current inflationary context, both socially and economically. Additionally, we need to consider the court system's backlog, estimated at around 18 months due to COVID. One data point we monitor closely is the paid loss ratio, which we find significant. Here's a quick historical comparison for Q2 from 2017: 55.9% in '17, 58.3% in '18, 53.8% in '19, 52.9% in '20, 44.3% in '21, and 41.9% in '22. While this reflects a positive trend, it’s crucial to understand it doesn’t paint the full picture. Regarding our expense ratio, we continue to see improvements driven by enhanced efficiency and growth in earned premium, with an overall reported expense ratio of 88.6%. After accounting for catastrophe losses, the adjusted ratio stands at 86.2%, indicating a strong operating return. Briefly touching on our investment portfolio, our duration remains shorter than our liabilities at 2.4 years compared to approximately four years. We are beginning to realize the potential of our earnings power, with our book yield increasing from 2.2% to 2.6% in just 90 days, and our new money rate now above 4%. We've emphasized the importance of discipline and foresight in both underwriting and investments. The future earnings potential in a rising rate environment is significant and merits careful consideration. As we look ahead, we see robust business opportunities with a consistent flow and the ability to secure the rates we need. This, combined with the expected leverage from investment income, positions us well not just for the upcoming quarters, but likely for the years to come. I’ll stop there, and let’s open it up for questions.

Your first question comes from Elyse Greenspan with Wells Fargo.

My first question, you guys just spoke pretty positively about just submissions within, I think, you said the specialty and 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?

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 rates, 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, components 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's 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 in somewhat of the on-deck circle.

And then just one on the capital side. You guys are trading above 2.5x 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 on that thought there? And would you guys consider a scalable acquisition to drive further top-line growth?

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

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

First question is on the expense ratio. You talked about, obviously, the lag between written and earned that's going to help in the near term, but it feels like we're at that part of the cycle for everybody. So I guess, I'm just kind of wondering especially with your talk on emphasis on exposure growth, it's 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 comments on that if you could?

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, 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'll have to see how it unfolds, but I think we're very pleased with the progress that we've made. Ultimately, we'll see where underwriting conditions go. The 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. 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.

Thank you. For the second question, you mentioned comp potentially leveling off and ongoing efforts. Regarding the recent venture you launched in California, could you clarify if this reflects optimism in that market, or is it part of a broader strategy? Can you also discuss whether this is solely focused on the California business or if there are plans for expansion in the future?

Initially, the focus will be on California within a specific segment of the market. Over time, we are open to exploring broader opportunities. Long term, we appreciate comp. We are favorable towards this market segment, and we believe the team that has joined us is exceptionally skilled.

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

I want to start with a comment in the press release about how most of our businesses are achieving or exceeding our target return on equity, and we're placing a greater emphasis on exposure growth. Should we interpret this to mean that as growth shifts to exposure, there may be less potential for improvement in the underlying loss ratio moving forward?

No, I don't think that's how we intended it to be interpreted. What we're suggesting is that if you look at our portfolio, a growing percentage of it has reached or is exceeding our targeted returns, and our approach to balancing exposure growth and rate may be refined. That being said, we are still very focused on ensuring that the rate is adequate for parts of the business that are below our targeted returns. So I believe it would be a mistake to assume that the underwriting margin does not have the opportunity to improve from here. What we're trying to convey is that in many product lines, rate is not the primary target for us when considering the balance between rate and growth. Additionally, regarding our economic model, I think you'll find that there is tremendous upside leverage for us with the investment portfolio.

In your opening comments, Rob, you mentioned your intention to be cautious regarding the loss picks and the loss ratio while also considering the long-term perspective rather than just focusing on the current quarter. However, it seems that there is some confusion among us because we often hear about the potential for hundreds of basis points of margin that have yet to materialize in the results. So my question is, why can't we find a compromise where, if there is confidence in these hundreds of basis points of margin while still being prudent, we could also see a 100 to 150 basis points improvement in margin or loss ratio?

Well, I think, at least from our perspective, and obviously, everyone is 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 risk. 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 shareholders without increasing the risk by declaring victory prematurely. 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're just not going to want to run the risk of moving prematurely. But in spite of that caution, we're still very proud of the results.

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

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 second quarter of last year, I believe there were a few large fire losses. Just wondering if there's anything in there one-off, whether that's positive or negative, that impacted the loss ratio this quarter?

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?

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

Got it. Okay, that's clear. For my follow-up regarding the pricing change this quarter compared to last quarter, could you provide more detail on different segments of the market? I'm curious about where competition is increasing and whether there are areas where the market might be strengthening as we navigate the ongoing inflationary environment.

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 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 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 try to flag earlier is, there's a lot of the marketplace that we participate in that we like the rates. 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're 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.

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 there's more and more...

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&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 and SPACs, 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.

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

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? Just a little comment there would be helpful.

I believe many people are concerned about the economy and its weaknesses, but I don't think those issues are immediate. Instead, I think there is a lot of anticipation around how the interest rate environment will affect the economy. From our perspective, our insurers appear to be performing well. Businesses are expanding, sales are strong, and payrolls are increasing. Additionally, inflation seems to be a significant factor driving these trends. For example, in workers' compensation, payrolls are rising due to wage inflation. Local businesses might be selling more, but a part of that increase is due to higher prices for their products. Furthermore, we all recognize the changes in property values. Therefore, from our standpoint regarding audits, we are not observing any financial troubles for our insurers at this stage. Their growth is partly a result of a healthy economy, but it's likely even more influenced by rising inflation, prices, wages, and values.

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

From our perspective, we have a clear expectation of how our business will perform. Some reinsurers are true partners throughout the cycle, while others attempt to exploit us. We are aware of the cost of capital and understand the margins within our business, and we will act accordingly. We are in a somewhat unique position because we do not engage significantly in catastrophic risks and generally do not write large limit business. While we do write some larger policies, approximately 90% of our insurance policies have a limit of $2 million or less. Therefore, we are less reliant on the reinsurance market since we are not significantly involved in catastrophic events and are not major limit players. We are committed to working with those who genuinely partner with us, and we do not wish to be taken advantage of by those seeking to do so.

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

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 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, that seems to be the focus?

We are very comfortable with our capital position and our ability to continue to pursue all of the well-priced business available to us. Currently, we do not see capital as a constraint, nor do we anticipate it becoming one in the near future. Additionally, one advantage of our investment portfolio strategy is that, while we are not completely insulated from the impacts of interest rates on book value, we are in a much stronger position than many of our peers. The rating agencies assess capital strength on a relative basis, so while some peers may be facing severe challenges with their bond portfolios, we are fortunate not to experience similar difficulties. Overall, we feel confident about our capital situation, and it will not hinder our growth. We believe our capital's health and soundness are well positioned, considering the portfolio's duration and quality.

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?

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

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 hundred million dollars on a comparable basis of additional investment income. So we're quite optimistic, and we're not in a rush to push our duration out further.

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

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, reason why you might have a lower headline rate number?

Property cat is clearly one of the product lines experiencing substantial rate increases. I would argue it has likely been one of the most underpriced lines, whether in insurance or reinsurance, for quite some time. Many results from the industry back this up. Much of this relates to rate adequacy. Once you determine that your rates are adequate or even better, the focus shifts to balancing between increasing rates and growing the business. I agree with your observation that our limited size in property cat may mean we are not experiencing the same rate increases. In the market segments we are involved in, there hasn't been the same level of rate inadequacy. We have been advocating for rate increases for several years now. We may have started this process earlier than others, which affected our volume, but it has been several years of consistent rate increases. This has likely been going on for about three years now.

Yes. I think back to 2018, Rob.

A little bit more.

Got you. And then on the workers' comp market, that's interesting. Can you provide a bit more detail on that? Is it driven by loss costs or is it primarily due to the erosion of pricing over time?

No, I think it's both, to be perfectly frank. I believe pricing has been declining for a long time, and in addition, severity is likely to become a growing concern. The effects of medical inflation, which have been relatively mild for some time, are expected to change. We will likely witness medical inflation increase, and it won't be limited to pharmaceuticals; it will extend to other areas of medical costs as well. For instance, many large healthcare providers, such as major hospital systems, are facing significant challenges, and changes will need to occur. Ultimately, there will be a crucial moment where providers and payers need to reconcile their differences, and the workers' compensation market will not be completely shielded from this. Early indications from discussions with NCCI suggest that recent years have shown trends related to severity issues, and they are beginning to see the limitations of how much current accident years can rely on positive developments from previous years. Additionally, the WCIRB on the West Coast believes that rates should increase by around 7%, but this was halted by the insurance department there. This has created additional tension. While I cannot predict the exact timing, there is mounting evidence that the favorable conditions are coming to an end. The situation may have been extended due to COVID, which caused a lull in frequency, allowing it to persist for a while. However, within the next 24 months or so, or perhaps even sooner, the industry will need to confront these realities. At this point, I believe the workers' comp sector is performing well over 100.

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

A couple of ones here and I think some for Bill here. First, I'm just curious, on the investment funds. Obviously, a terrific result. This quarter, you seem pretty optimistic about some good performance here through the remainder of 2022, despite what many would 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?

Are you talking about specifically the funds? Or are you...

So not investment funds. Exactly the funds.

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 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 as 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.

Got you. And then I guess another question. I'm just curious from a macro perspective. It's been since the 70 since we've been in the stagflationary 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 stagflationary environment? What are the kind of consequences in the playbook? And does it really matter that much for commercial insurers?

The industry is facing stagflation, which impacts how companies manage their plans, price their products, and the types of business they engage in. Some companies thrive while others struggle. We've seen several companies fail, while others have succeeded and attracted acquirers. Companies that closely monitored their performance fared well, whereas those that did not often faced defaults. For instance, Chubb and AIG made poor decisions and suffered as a result. The outcomes varied widely among companies; some succeeded while others did not. Moving forward, I anticipate a significant divergence based on the business lines and available opportunities. In my view, there are generally increased opportunities but also serious consequences for companies that ignore the evolving landscape. The pace of change in the environment is likely to accelerate.

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

I appreciate you want to keep the secret sauce in the company and totally makes sense. People always ask you what your loss cost trend is, what your inflation assumption is. You'll be qualitative about it, not 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 speaking for pricing, I guess, between what smart people and less smart people are doing?

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 going to be a wise ask, 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 I apologize if it's repetitive. But there's a real divide these days between what I would define as the 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&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.

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 Berkley has ever been willing to run?

The answer is that unlimited duration exposure is not something we would ever consider. Shorter durations allow us to reset our mistakes more quickly and address specific challenges. If you have calibrations shorter than your portfolio duration, you're aware of your exposure. In contrast, having a duration that's three years longer than your portfolio introduces a different kind of risk. We have never been significantly long for more than a year or two, possibly three. When we have been longer, it's because we believed interest rates were excessively high relative to the current rates. Currently, we see that the pricing of interest rates indicates a low likelihood of gaining much exposure. People are paying significantly more in rates, and the situation is even more problematic because current rates are much higher than the market rates. As far as I recall, we have never significantly gambled on interest rates being much higher than our expected duration. We don't typically bet on the long side, as that goes against our conservative approach. You accurately captured one of our main views: you don't get rewarded for taking on long-term debt when the interest returns exceed the return on your duration.

Sorry, Josh, did you have another question for us?

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

I just had one follow-up. You mentioned earlier in 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? And if you, is that just because of your exposure to excess layers and your...

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.

Okay, that makes sense. I just want to ensure that I'm not missing anything if you have specific thoughts regarding your own perspective.

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

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

Business continues to do exceptionally well, and it's clearly considered a very attractive alternative to some of the more traditional or long-standing 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 audience or customer base is looking for, and that's being recognized.

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

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's 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.

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