Berkley W R Corp Q1 FY2023 Earnings Call

Good day, and welcome to W. R. Berkley Corporation's First Quarter 2023 Earnings Conference Call. Today's conference call is being recorded. The speaker's remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words including, without limitation, believes, 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, 2022 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.

Emma, thank you very much, and good afternoon to all participants. Thank you for finding time to join us this afternoon. Co-hosting with me today is Bill Berkley, Executive Chairman, as well as Rich Baio, Executive Vice President and Chief Financial Officer. We are going to follow our typical agenda, where momentarily I'll be handing it over to Rich. He's going to run through some of the financial highlights from the quarter. Once he gets through his comments, he'll be handing it back to me. I will follow up with a few of my own observations, and then the three of us will be available for Q&A to answer any questions people may have. So with that, Rich, if you would, please.

Thanks, Rob. Appreciate it. The company is off to a strong start with the first quarter of 2023 despite the significant catastrophe losses facing the industry. Our scale, specialization and disciplined management approach positioned us well to report an annualized return on equity of 17.4%. Contributions to this performance were reflected in both underwriting and investment income. The current accident year combined ratio excluding catastrophes was a strong 87.7%, and investment income approached the record level achieved in the fourth quarter of 2022, driven by significant growth in our core portfolio investment income of more than 80%. The balance sheet also strengthened with stockholders' equity growing to a record level of more than $6.9 billion, and book value per share increasing 3.7% in the quarter. The company returned almost $300 million of capital to shareholders through regular and special dividends, as well as share repurchases resulting in growth in book value per share before dividends and repurchases of 7.2%. The short duration in the fixed maturity investment portfolio of 2.4 years and high credit quality of AA-minus benefited unrealized investment losses by approximately $181 million. Continuing on investment performance, net investment income increased almost 29% to $223 million. The income attributable to the core portfolio substantially increased due to a higher new money rate on fixed maturity securities compared to the roll off of existing investments. In addition, strong operating cash flow of approximately $445 million in the quarter increased our investable assets and will further contribute to growth in net investment income. The book yield has increased from 3.6% in the fourth quarter of 2022 to 3.8% in the current quarter on fixed maturity securities. The investment funds reflected income of $2 million for the quarter, primarily arising from declines in market value in the financial services and consumer goods sectors, partially offset by income from transportation and energy funds. Pretax net investment gains reflected an increase of $43 million in unrealized gains on equity securities, bringing our total unrealized gains approximately $114 million on the balance sheet. Equity investments in the technology sector drove the quarterly improvement. Partially offsetting these unrealized equity gains were losses recognized of approximately $21 million. Turning to underwriting results, underwriting income was $234 million, which included current accident year catastrophe losses of $48 million or $1.9 loss ratio points and prior accident year unfavorable development of $24 million or one loss ratio point, principally from property catastrophe losses. Winter storms impacted both the current quarter and carried over from late loss activity in the fourth quarter of last year. This compares with catastrophe losses in the first quarter of 2022 in the amount of $29 million or 1.3 loss ratio points. The calendar year loss ratio for the first quarter of 2023 was 61.8%, and the current accident year loss ratio excluding catastrophe losses was 58.9%. The growth in net premiums earned of almost 11% continues to benefit the expense ratio. However, a number of factors are causing the expense ratio to increase a half a point to $28.8%. First, the change in our reinsurance over the last year has lowered our ceding commissions on certain treaties where we've moved from proportional covers to excess loss and/or reduced our quota share percentage ceded to reinsurance partners. In addition, increased compensation costs to new startup operating unit expenses are contributing to the higher expense ratio. We still expect our expense ratio to be comfortably below 30% as communicated on our fourth quarter call. Wrapping up with premium production, net premiums written grew by almost 7% to approximately $2.6 billion. The insurance segment grew 6.6% to $2.2 billion. And as you saw in the supplemental information on page seven of the earnings release, all lines of business improved with the exception of professional liability. The Reinsurance & Monoline Excess segment increased 7.1% to $363 million, a record level for the segment with growth in all lines of business. And with that, I'll turn it back to you, Rob.

Rich, thanks very much. That was great. So let me provide a couple of observations through my lens. And then, again, as promised, we'll open it up for Q&A. So, upon reflection, certainly one of the things that we chat quite a bit about on our end of the phone is this, taking note of how clearly the cycle remains alive and well and the emotions that drive the behaviors remain very much intact. But we continue to note the fact that major product lines, while they are still subject to the cyclical behavior, are clearly not in lockstep at all. And we've talked about this in the past, but it seems to become more and more pronounced. So to that end, just a snapshot on how we're thinking about property. Clearly in what I would suggest is early stages of meaningful firming. From our perspective, it is a little bit disappointing regarding the momentum that we saw on the insurance side when it comes to property in January. We saw a little bit more momentum in February. And quite frankly, in March, we started to see real progress in April. I think there was meaningful traction in terms of rate. While it perhaps is a little more pronounced or extreme on the CAT side, I would tell you these comments apply to non-CAT or risk exposure as well. Professional liability, on the other hand, is a very broad category and it is a mixed bag. I think on the miscellaneous D&O front, particularly written on an E&S basis, there is still great opportunity and we are making meaningful progress there. On the other hand, the D&O marketplace, particularly large account D&O, has been in a state of free fall regarding rate adequacy or pricing, which is concerning to us. In addition to that, although a smaller line than D&O, I would tell you hospital professional liability is another product line in desperate need of some discipline returning to the marketplace. Moving away from professional to the topic of casualty, it seems there is also meaningful opportunity, particularly in the E&S lines on the primary front and the excess front, particularly large accounts becoming more challenging. Clearly, a similar situation on the auto classes as well, where excess is becoming a bit more competitive, and the primary there is competition but not as severe. I think the industry needs to be very careful with professional casualty and auto, in particular, because they are notably susceptible to social inflation. From our perspective, while there are signs that economic inflation is cooling a little bit from the heights that it reached, social inflation shows no sign of abating. Moving on to comp, clearly continues to bounce along the bottom. One observation there historically or at least oftentimes California has lagged the rest of the market regarding its position in the cycle. There is some evidence that California is actually ahead of the rest of the market and showing potential signs of firming. Finally, regarding reinsurance, I think there was a lot of excitement and discussion around affirming the reinsurance market. Certainly from our perspective, the reinsurance market, particularly around property and property CAT has gained a meaningful level of additional discipline relative to where it's been in past years. That said, the casualty market is somewhat disciplined, and there are certain parts of the professional marketplace that have given us reason to pause. We are just not seeing the ceding commissions coming down, even though we see the pricing of the underlying eroding. Pivoting to us, a couple of sound bites. I think as Rich suggested, a 17.4% return is a great way to start the year in our opinion. The top line was impacted by what I would refer to as strong or excellent cycle management by our colleagues as we deemphasized certain product lines and leaned into others. Just a reminder that our priority is the bottom line. We are focused on building book value through a lens we refer to as risk-adjusted return. We applaud the discipline and opportunistic approach that our colleagues demonstrate. On the topic of rates, which we touched on earlier, clearly the rate was quite strong in the quarter, which we were pleased to see. The 8.3% ex-comp is the strongest that we've seen on the rate front since this time last year. Additionally, I would mention that the renewal retention ratio still remains around 80%, which is important because it reminds us that we are not churning the book, and the rates we are obtaining are sticking. We are not changing the quality or integrity of the book. My point is that by any measure, we are comfortably outpacing the trend, and you will likely see this reflected in our loss ratios over time. Even with the CAT activity, the combined ratio of 90.6% is quite attractive. If you look at the CAT activity, it would have been an 87.7%. The difference, as Rich indicated, and you would have picked up in the release, was driven by two factors: One, the CATs that we had during the period, which equated to approximately 1.9 points, and then we had a point of negative development. Before anyone gets too carried away with the negative development, it was essentially driven by property and property CAT losses that occurred during the fourth quarter. As people will recall, some of that CAT activity happened late in the fourth quarter, and we just didn't have a complete understanding at that point. So please don't misconstrue the development as something different than it is. The paid loss ratio was 48%. I believe people will continue to note the delta between the paid versus what we are booking the loss ratio to. We get questions from time to time, given how well the paid loss ratio has been running relative to the loss ratio picks we are carrying, about when those will converge. I would tell you that it's coming. In my opinion, there's a reality for the industry and we are not entirely insulated from it. 2016 through 2019 was a challenging period. We've been cautious and measured about how quickly we want to recognize the progress made since 2020 and more recent years. I think that's coming into focus as we progress through this year into next year and likely it will have implications for the loss picks we are carrying in more recent years and how we think about current year loss picks. Rich touched on the expense ratio of 28.8%. As he indicated, this was partly driven by new business initiatives, partly driven by investments we are making, particularly in technology, and finally, some shifts we are making regarding reinsurance. The ceding on something proportional or quota share obviously is very different from excess of loss. While we want our reinsurance partners to achieve a reasonable return, we will not accept being inappropriately charged and we will use our flexibility as appropriate. Moving on to the investment portfolio, there is clearly a lot of momentum there. I think we've discussed it in depth before. You can see it coming our way. There is more opportunity ahead. The duration of 2.4 years allows us to opportunistically extend that duration. I don't think we will move the needle dramatically overnight, but we hope there will be windows of opportunity to do just that. The book yield at 3.8% is notably below where the new money rate is. Our best estimate is that the new money rate today is between 4.25% and 4.5%. So you can do the math on the upside there. As Rich mentioned, we had a bit of noise in the quarter, which was not a complete surprise, stemming from some private equity funds we participate in. We believe we have clarity around this and expect going forward that fund performance will likely turn to between $20 million and $50 million a quarter. So, in summary, a 17.4% return, a combined ratio of 90.6%, with some CAT activity this quarter and spilling over from Q4 2022, robust rate increases, and a 50 basis point plus upside relative to the book yield are all encouraging. To the extent you are a numbers person, a 87.7% could yield a 20% plus return. I think that is more than enough from me. Why don't we, Emma, go ahead and open it up for Q&A, please.

Thank you. Your first question comes from Mike Zaremski with BMO. Your line is now open.

Hi, Mike. Good afternoon.

Good afternoon. I have a question about some changes in premium growth. It appears that there were significant growth rates in the insurance segment, particularly with workers' compensation seeing considerable growth, along with some other lines. Can you share your insights on why workers' compensation is growing so rapidly, especially regarding California, and also mention any lines that are experiencing a decline?

Well, as far as comp goes, Rich, correct me if I'm wrong. I think we were kind of flattish. I think we went from $303 million in the quarter to $310 million, which isn't a large uptick. That said, I would tell you it's mainly payrolls. Certainly, we're getting a bit of traction from our new initiative in California. But what would be driving it more than anything else would be, I think we all have an appreciation for where wage inflation has been going recently. And we're picking that up, whether it be initially or coming through in the audits. Rich. Am I correct on that?

Yes. On the primary side, that's right, Rob.

Okay. My bad. I think I looked at an incorrect number. So I'll do my best to ask a better follow-up question. So, on the investment portfolio, we've received a lot of questions about commercial real estate. Clearly, W. R. Berkley has an excellent track record, but any stats you want to offer for additional color on Berkley’s commercial real estate portfolio, such as maybe LTVs or anything else that you think could be helpful?

Well, there's a couple of things there, Mike. First of all, I would note that these buildings, much of it is unleveraged. So, as far as the whole loan-to-value thing goes, I think the other piece is that we are very comfortable with the occupancy rate. We're also comfortable with the credit of the tenants. And as you'd expect, it's something that we pay attention to. So the occupancy rate, the credit of the tenants, and the duration of the leases, we believe we're in a fine spot.

Okay. And lastly, I guess, looking at your prepared remarks, it feels like there are a number of puts and takes. I mean, it sounds like guarded optimism. Any help in kind of thinking about the top line?

Yes. Let me try and give you a little bit more color from my perspective without boring you or anyone else too much. The fact is that from an underwriting perspective, we're focused on margin. And when we see what's going on, for example, in the D&O market, we are not going to follow that down the drain. My expectation, which I believe will prove to be correct, is that it is just taking longer than anticipated. You will see us on the property side be able to flex up a bit. January, as I mentioned, was disappointing. February, maybe we saw a few green shoots, March was encouraging, and April so far, there's visible traction. We have a diverse book of what I would define as specialty insurance. As I tried to allude to earlier, various products don't march in lockstep. If we were a mono line player, the peaks would be high and the valleys would be lower. But because of the diversity, how the cycle has decoupled by product, it's a more stable ship. My best guess is that you're likely going to see our growth rate tick up as we make our way into the second half of the year. I think you're going to see us writing more property. I think our momentum will continue to build with some of our E&S casualty, and I believe you'll start to see some of the comp lines bottoming out. I think you'll see the D&O market slow its erosion at some point. So, my best estimate is that you're going to see our growth rate tick up in the second half of the year based on what I can ascertain. It could tick up a bit in Q2.

Thank you.

Your next question comes from the line of Elyse Greenspan with Wells Fargo. Your line is now open.

Hi. Thanks. Good evening. My first question, can you just provide a little bit more color on what drove the accident year ex-CAT loss ratio deterioration and insurance? And how should we think about the balance of the year, given your design ratio concept?

So I think probably the biggest driver there would be non-CAT property-related losses, Elyse. We had alluded to this in prior calls. I think a couple of things needed tightening up, and they are being tightened up. At this stage, I think that would be the key contributor.

And how large were the non-CAT property losses? Or is that the sole driver of the year-over-year deterioration in the underlying loss ratio in insurance?

I don't have the exact number in front of me, but that was a significant contributor.

Okay. And then, following up, I guess, on the growth question. It sounds like you expect growth to pick up in the second half of the year. You used to talk about double-digit growth, and I recognize there's a lot of moving pieces. If everything plays out the way that you expect, Rob, do you think you'd be back to seeing double-digit growth in the second half of the year?

That's what we would like to see. Obviously, we will see if the D&O market continues to erode. Similar to the D&O market is transactional liability, which has kind of hit a wall, affecting us as well. In addition, a couple of relationships that we had, specifically in the commercial auto space where we had a different view than our partners on rate adequacy have caused us to go our separate ways. Also, regarding professional liability, as I mentioned earlier, we have a view regarding both inflation and social inflation. The cost or the price you pay to stay ahead sometimes entails being early to the market. The benefit of that is you avoid the substantial pain faced in the future. Long story short, I think many parts of our business are growing at a very high growth rate, certainly well north of the 10% you discussed. Yet there are parts of the business where my colleagues exhibit the appropriate level of discipline. They acknowledge they can't control the marketplace, only their actions, and we appreciate and applaud their efforts. When you combine everything, I believe you're more likely going to see our growth rate increase in the second half of the year.

Thanks. And one last quick one. Am I right in assuming that the adverse development, the property CAT that all stemmed from your insurance segment in the quarter?

Rich, I believe so, yes?

Yes. For the most part.

The vast majority was.

Okay. Thank you.

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

Hi, Josh.

Good evening and good afternoon. I was curious about the last cycle. Things are never the same, but at the end of 2004, 2005, and 2006, pricing was favorable. Even though some participants pulled back, there were still five or more healthy years for writing attractive business. The takeaway from that time was that being more aggressive could have been beneficial. I'm not sure if that's the lesson, or if there were still opportunities as pricing began to cool. From 2019 to 2022, we've seen pricing cool as well. It appears there will be some improvement in property, but changes are happening rapidly. Has the industry evolved to the point where insurance companies will always be aligned with loss costs? Has everything become more technical and advanced? Is there no longer a prolonged period of elevated pricing where they can exert some influence? Or is your company and the industry forever linked to pricing and loss trends? Does that make sense?

I believe I follow your question, Josh. If I'm not addressing your points accurately, please stop me, and I will gladly try again. However, the answer is that there is more data, there's more analysis, more technical tools are being utilized today than ever before. That said, in spite of this progress, I think we still see the industry struggling to grasp loss costs in a timely manner. Recent observations regarding the reinsurance market would support this. We can also look at workers' compensation, where it's proving to be more profitable than anticipated. So, yes, there's more analysis and data available, but it's not yielding a perfect solution, and the struggle continues. One significant difference now is how distinct major product lines are from each other concerning their cycle stages. The implications of this separation might affect organizational profitability, but time will reveal the full extent.

Yes, here’s my perspective. With a single-digit growth rate, you're just returning to double digits. You have the best pricing outside of workers' compensation that you've experienced in several quarters at 8.3%. However, it seems like there isn't a strong urgency to take advantage of it right away. While you mentioned that the margin will improve in the coming quarters, with pricing at 8.3%, I would expect a more optimistic outlook, and for us to already be back in double digits. I'm not here to dictate your business decisions, but it appears there is some hesitation.

No, I value your observation. When you first began your question, I was left wondering whether you had attended our staff meetings. The concern you're raising is very relevant to our discussions. We strive to balance being forward-looking without prematurely applying the brakes, and at the same time, avoiding waiting too long in response to market changes. I concede that the 8.3% is quite healthy, and we are genuinely encouraged by that. However, as you can appreciate, we prioritize underwriting margins. We're sensitive to social inflation and recognize the claims the industry faces every day, which many read about in the press, and the trajectory appears steep. We want to avoid being caught off guard. I believe some of our growth rate challenges were due to a limited number of operating units, six or so, encountering significantly less advantageous market conditions than we anticipated.

All right. I appreciate the comprehensive answers. If there's still time, I may have more questions, but I’ll let someone else have a chance. Thank you.

Thanks, Josh. I appreciate your inquiries.

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

Hi, Ryan. Good evening.

Hey, good evening, Rob. The first question, you mentioned that the property losses again impacted you this quarter, and you seem to have that under control. Are you expecting potentially elevated losses for the time being as you rectify that book?

Look, I can't say with any certainty how quickly we'll return to a favorable position. I can, however, say that we're gaining control over it. It simply takes time for that progress to manifest. Additionally, I'm referring to the accident year loss ratio, which I know we've previously discussed, in light of the rate increases we've received. I believe the challenges the industry faced from 2016 through 2019 are becoming less significant.

Got it. Regarding the expense ratio, it was below 29. I heard Rich mention that you expect it to remain below 30 for the rest of the year. Is that a general comment, or can you clarify whether the expense ratio is expected to increase from this point?

What we're trying to say is that the expense ratio will likely float between 28% and 30%. We don't have it dialed down to the basis point, if you will. The increase you’ve seen is partly driven by new business initiatives. There’s also a degree of increased travel and engagement. Lastly, the investments we're making in technology are influencing this, along with the changing ceding commissions. While the cedes are decreasing for existing structures, as Rich highlighted, the shift from quota share to excess loss carries different ceding commissions, which we approve.

Got it. And just lastly, Rob, on the buyback front, can you provide some context on the timing of your repurchases? Have you been active in the market at all during April?

To be perfectly honest, I don't have that information readily available. However, we would be glad to gather more details for you. I can reach out to Rich or Karen to provide you with further clarity. Alternatively, feel free to contact me offline, and I’ll do my best to provide some details.

Thank you.

Yep. Thanks for the questions.

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

Yeah. Thank you very much. Good afternoon. I'm looking for more detail regarding the other liability line. You mentioned that casualty, E&S, primary seem attractive. However, premium growth did slow in the quarter, and I wanted to know if you expect that to reaccelerate as the year progresses, and what pricing trends in that liability line looked like in Q1 versus Q4.

Yes, generally speaking, the most attractive areas we've been observing are in E&S. I should have mentioned this earlier, Mark; I appreciate you bringing it up. The flow of business migrating from the standard market to E&S remains robust. We're feeling confident in that trend. The one outlier appears to be product liability, where it seems the standard market has regained some appetite. Outside of that, we expect to see growth or accelerating growth on the other liability front as we move later into the year.

And regarding the non-insurance businesses, the revenue was up considerably this quarter. Was that driven by timing or some other factor?

Rich, was that the Greenwich Aero?

No, we acquired a business last year. Therefore, in Q1 2022, it wasn't included because we didn't acquire it at that time.

Very good. That was a business that's part of our in-house private equity, right, Rich?

That is part of our private equity operations, yes.

I appreciate that.

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

Hi, Alex. Good afternoon.

Hi. My first question pertains to commercial real estate, specifically whether there could be an opportunity to take advantage of a more distressed market since you currently have a shorter duration.

From our perspective, as I hope you're aware, we're opportunistic participants. We recognize the challenges the real estate asset class is facing. We will act with prudence. Should we identify attractive opportunities that benefit our shareholders, we will pursue them. While real estate has challenges, we aren't eager to become overly invested, but we will take advantage of prospects if they arise.

Got it. On professional lines and the potential headwinds you're facing, could you quantify that in terms of how much it's detracting from some of the other factors boosting margins right now?

I don't think it's significantly affecting our margins due to our colleagues' underwriting discipline. However, it is impacting our top line as well, and you could measure the effect in percentage points on the overall group.

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

Hi. Good afternoon. It’s Yaron.

I'm curious with your comments on the shift from quota share to excess loss, specifically in insurance. Why wouldn't we see the ceding ratio decline a bit as a result of that? I believe it has remained relatively stable year-over-year?

Rich, do you want to address that? We were just discussing this earlier.

Sure. When we transition to excess of loss, we technically do not receive ceding commissions. In contrast, on a quota share basis, we receive ceding commissions. Under an excess of loss structure, we have set minimums in deposits and premium costs. These amounts are generally fixed, moving in tandem with changes in gross premiums written. So this explains why the ceded premium does not fluctuate with the shift to excess of loss arrangements. Additionally, please note that we maintain over 125 reinsurance arrangements, creating numerous moving parts.

Okay. I may follow up offline as I’m still a bit confused here. My second question, Rob, you may have referenced some seasoning of the 2020 and 2021 accident years and the strong environment during those years. Is that the reason we're beginning to see a speed up in releases in longer-tail lines, such as other liability from 2020 and 2021?

We validate this through extensive analysis, and I'm open to discussing this further offline, as it could take some time. However, we are willing to walk you through our findings.

Great. I certainly appreciate that opportunity. Thank you.

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

Hello, David. Good afternoon.

Hi. Good evening. Was there any impact in the quarter from your FI book due to the recent banking losses? Did that have any effect on some of your loss ratios or not?

No, nothing outside of the loss ratio picks that we're carrying for the product lines. We do have some exposure, but relative to the group overall, it just flows through.

Makes sense. My second question, as we focus on 2023, have you adjusted your view regarding loss trends, particularly given comments concerning commercial and auto? Also, in Q1 2023, you mentioned non-CAT weather concerns. Were your casualty loss picks modified year-over-year? Did they rise, fall, or stay the same?

We regularly examine our picks to ensure they accurately reflect reality. The answer is that some have been adjusted up while others have decreased, depending on the data and the granular analysis we perform by product line and operating company. I don’t have the specific net impact on hand, but there are indeed instances where increases and decreases were made.

And any thoughts on loss trends?

We generally maintain our initial views regarding loss trends as we entered the year. Even though we acknowledge that economic inflation appears to be easing somewhat, we remain highly concerned about social inflation. We believe we are currently well positioned regarding this issue, but we do not think it's the right time to lessen our focus on pricing to ensure we have sufficient premium to keep up with trends.

Your next question comes from the line of Meyer Shields with KBW. Your line is now open.

Great. Thanks so much. Rob, I'd love to get your thoughts on earlier inquiries by line of business. You spoke about workers' compensation growing largely due to increasing payrolls. Could you elaborate on what's driving growth in commercial auto? I've been told that social inflation and driver shortages could still be issues pressuring that line.

The growth in commercial auto is primarily driven by rate increases. While I don't recall the exact rate uplift for this line, it was significant, particularly for auto liability but applicable across the board. Additionally, we have a new operation within this sector that is gaining momentum. Overall, the main driver for growth in commercial auto is the rate increases.

That's encouraging to hear. My second question concerns, I am uncertain if this is better suited for Rich. When you mentioned the effect of changing reinsurance on the expense ratio, should we expect some benefit in the loss ratio due to the shift from quota share to excess of loss?

We expect our premium retention will increase, and we believe the loss ratio is healthy, but we don't anticipate seeing that benefit immediately given how recovery is handled.

No, I regard your comment as 100% accurate, Rob.

That's great. Usually, that's not the case.

All right. I’m all set. Thank you.

Thanks for your question.

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

Hello, David. Good afternoon.

Hey, good afternoon. I had just a quick question about the non-CAT property losses this quarter. I think there were fire losses last quarter when you had it. Can you elaborate on that? Was it fire again? Additionally, can you talk about what you're doing beyond seeking additional rate to tackle these issues? Did this impact your approach to growing property?

Certainly, fire and other non-CAT losses were significant factors. While seeking rates is a solution, I emphasize that proper selection is crucial. The efforts on this front have involved tightening our standards, which has proven effective. While rate is one element, selection is paramount.

Got it. That's helpful. In your comments, Rob, you've highlighted a few lines of business you're deemphasizing. Could you elaborate on what those lines are?

Certainly, it’s somewhat anecdotal, so don't read too deeply into it. We’ve taken a firm approach to certain professional liability lines, which could stem from both the U.S. and our Lloyd's operation. Additionally, we've drawn a firm line in the commercial transportation sector, as we have different views from distribution partners on rate adequacy, amongst other considerations. Major areas of focus would include professional liability and commercial auto.

Got it. Thank you. Lastly, I’d like a higher-level view on social inflation. You've mentioned potential burdens for the industry from 2019 and prior years. How far along are we in terms of courts reopening and claims hitting the carriers and the industry as a whole?

From our perspective, the legal system is primarily operational but remains somewhat overwhelmed. The general consensus within our team is that the backlog continues, with a delay of about 18 months relative to pre-COVID times. Many people are trying to catch up, but the plaintiffs' bar is aggressive at present, with notable claims emerging that are often merely the tip of the iceberg. These are challenging times, but we believe we have set aside sufficient resources for claims costs both now and in the future.

Okay. Great. Thanks for that perspective.

Your next question comes from the line of Mike Zaremski with BMO. Your line is now open.

Hi, Mike. Mike, are you there?

Thanks. Yeah, I’m here. Just a quick follow-up on the overall marketplace competitiveness and dynamics. I’m curious if anything other than heightened data analytics has caused the pricing environment to perhaps shift. You've noted several times how the market is not moving in lockstep. Were structural changes like broker consolidation or perhaps lower barriers to entry affecting things? For instance, on Marsh's call today, they noted 20 new carriers entering the professional liability space, resulting in a soft market. I'm just wondering if anything has changed or if this is just the usual dynamics.

I believe that, if we use public D&O, especially large account public D&O, as an example, it's pivotal to note that the supply and demand elements are both struggling. I can't verify the exact number of 20 new entrants, but it is evident that many have entered the market. The reality is there's not much preventing new players from entering this space. On the supply side, the demand is considerably reduced due to factors affecting capital markets, leading to a dramatic decline in IPOs and reduced activity in purchasing D&O insurance. Furthermore, the decline in M&A transactions has heavily impacted transactional liability. In summary, the reduced demand combined with increased supply has created a challenging competitive landscape. Our colleagues clearly recognize that their role is not merely issuing insurance policies but effectively managing capital; they are cautious about how they expose it.

Helpful. Thank you.

Thanks for the question.

This concludes our Q&A for today. I turn the call back over to Rob Berkley for closing remarks.

Okay. Emma, thank you very much. We appreciate everyone's participation. We look forward to speaking with you again in 90 days. Before we sign off, I'll hand it over to my boss who has a few final comments.

I think that it is a business that's easy to get into. And everyone needs to remember that it's not so easy to get out. You sign on very long-term commitments. The brokers who have their customers need to ensure they get paid. So, if you fail to meet your commitments, you lose your place in the market very quickly. We've been in this arena for more than 55 years, always operating with a long-term view, fully understanding the implications of risk, and comprehending our commitment to our ultimate customer, the insured, is paramount. Sometimes this leads us to decisions contrary to prevailing market practices, but we maintain a sensible approach. We remain optimistic about our alignment with the marketplace, our customers, and our distribution channels. While we may stumble occasionally, we are confident that we are on the right track toward growth when opportunities arise to optimize returns on our investments. We thank all of you for your support over the years and look forward to demonstrating our commitment and success. Thank you very much.

This concludes today's conference. Thank you for attending. You may now disconnect.