Berkley W R Corp Q2 FY2023 Earnings Call

Good day and welcome to W. R. Berkley Corporation's Second Quarter 2023 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, beliefs, expects or estimates. We caution you that such forward-looking statements should not be regarded as 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 the new information, future events or otherwise. I would now like to turn the call over to Mr. Rob Berkley. Please go ahead, sir.

Breanna, thank you very much and good afternoon, all. And again, welcome to our second quarter call. Along with me on this end of the phone, we also have our Executive Chairman, Bill Berkley, as well as Chief Financial Officer, Rich Baio. And we're going to follow our typical agenda where momentarily, I'm going to hand it over to Rich, who will walk us through some highlights from the quarter. I will follow up with a few observations after Rich makes his comments and then we will be opening it up for Q&A. Before I hand it over to Rich, a few comments from me. Based on everything, I can see, it seems as though the stage is being set for what one might call yet another but-for quarter for the industry. It seems as though catastrophe losses don't make a difference. And bizarrely, from our perspective, people seem very quick to back out catastrophe losses as though it's not real money. But ironically, they don't seem to back out the premium associated with the exposure that just had the losses. So again, from our perspective, it's no wonder why the industry struggles oftentimes to make good risk-adjusted returns. In order to do that, one needs to recognize the exposure taken on and not pretend that it doesn't exist, particularly when it occurs. Through our lens, we are in the capital management business. We are focused on risk-adjusted returns and around here, catastrophe losses count. In our opinion, it is not Monopoly money. It is real money. And when we measure how we are doing, we do not back out catastrophe losses. Perhaps we are a bit of an exception to the industry, but ultimately, we think it is an economic reality and that's not something we shy away from. So with that, Rich, if you would, please.

Of course. Thanks, Rob. Net income doubled from the prior year quarter, resulting in $356 million or $1.30 per share. Annualized return on beginning of year equity was 21.1%, driven by strong underwriting and record investment income results. Operating return on equity was excellent at 18.4% and the heightened industry-wide catastrophe activity in the quarter enabled us to once again demonstrate our underwriting discipline in challenging environments. Simultaneously, our decision to maintain a short duration, high credit quality investment portfolio has enabled us to benefit from higher interest rates. Net investment income increased almost 43% to a record $245 million. The core investment portfolio grew 71.6%, driven by a higher book yield at 4.2% in the quarter compared with the preceding consecutive quarter of 3.8% and second quarter of 2022 of 2.6%. Second quarter operating cash flows of $709 million, combined with the first quarter, brings us to a first half year record of almost $1.2 billion and strengthens our ability to grow investable assets at higher interest rates. A duration of 2.3 years also positions us well to reinvest assets at a higher new money rate on fixed maturity securities compared to the roll-off of existing investments while maintaining our high credit quality of AA-. The investment funds reflected a loss of $1 million, driven by a decline in market values in certain funds in the consumer goods, real estate and financial services sectors. Please keep in mind that we report our investment funds on a one-quarter lag. Pretax net investment gains in the quarter of $59 million is comprised of net realized gains on investments of $47 million and an improvement in unrealized gains on equity securities of $21 million, partially offset by an increase in current expected credit losses of $10 million. Turning to underwriting results. Underwriting income was $265 million, representing a calendar year combined ratio of 89.6%. Current accident year catastrophe losses were $54 million or 2.1 loss ratio points compared with the prior year of $58 million or 2.5 loss ratio points. Prior year development was favorable by $3 million or 0.1 loss ratio points, bringing our current accident year combined ratio ex catastrophes to 87.6%. Current accident year loss ratio ex catastrophes was 59.5%. The expense ratio ticked up 0.4 points to 28.1% in the quarter, consistent with the expectations we previously communicated. The two main contributors include the change in reinsurance structures as well as increased compensation costs and start-up operating unit expenses. We're working hard to identify and implement innovative strategies to drive operating efficiencies and leverage technology in order to reduce operating expenses across the entire organization. Closing out the underwriting discussion with premium production. We increased gross premiums written by 9.3% to a record $3.3 billion and net premiums written increased 8.7% to a record $2.8 billion. All lines of business grew in the Insurance segment, with the exception of professional liability and workers' compensation, while property reinsurance grew in the Reinsurance & Monoline Excess segment. Stockholders' equity remained strong at almost $6.9 billion after returning more than $320 million of capital to shareholders in the quarter. We repurchased almost 5.1 million shares for $292.5 million at an average price per share in the quarter of $57.79. In addition, we paid regular dividends of $28.3 million. The combination of these capital-related actions for the first quarter, including the special dividend, translates to $614.5 million returned to investors on a year-to-date basis or 9.1% of the beginning of year stockholders' equity. Rob, I'll turn it back to you. Thanks.

Thank you, Rich. It's been very helpful. The market continues to operate unevenly, with major segments moving independently. We see the marketplace struggling to balance the need for rate increases with the trend in loss costs, while also wanting to grow. In this industry, there's potential for rapid growth, but achieving a desired loss ratio for acceptable returns makes it more challenging. Maintaining rate adequacy to support a reasonable loss ratio and deliver acceptable returns is a priority. Our results reflect this ongoing commitment, as we focus on keeping up with trends. Regarding the marketplace and key product lines, I echo Rich's comments about our growth areas and those we find less appealing, where we are more defensive. For instance, public D&O insurance is a segment where caution is necessary as prices are declining rapidly. While there has been a good margin previously, it's quickly diminishing. In liability lines, particularly auto insurance, we face significant challenges driven by aggressive tactics from plaintiffs' attorneys, which are affecting general liability and umbrella insurance. We believe we can manage these challenges with appropriate terms, conditions, attachment points, and pricing, but we recognize the current environment is tough and requires careful attention. There's also a trend indicating that the duration of claims for some product lines may be extending. In property insurance, there's now clarity regarding catastrophe-exposed properties, which is impacting non-catastrophe risk accounts, necessitating additional rate increases. Additionally, the risks of severe convective storms, wildfires, and winter storms, which were previously underestimated, are now receiving more consideration. Workers' compensation is another topic we've explored. During the COVID period, the industry's frequency rates dropped, but they've returned to normal levels. What we're beginning to observe is a rise in medical inflation, which impacts all payers, including workers' compensation, as over half of all claims costs derive from medical expenses. We can delve deeper into that later if there's interest. Lastly, there's a growing divide in the market between aggressive standard carriers and areas they avoid, creating favorable opportunities for specialty markets, including E&S. The submission flow remains robust, and we're optimistic about what the rest of the year holds, with positive early returns in July. We benefited from ongoing rate increases, reflected in an 8.2% increase in ex-comp rates this quarter, consistent with earlier in the year. Our loss ratio again underscores our strategy regarding exposure management and portfolio balance. We factor in volatility as a crucial element in building book value. Regarding expenses, we are committed to being strategic about our spending, and we anticipate remaining comfortably below 30. In terms of our investment portfolio, we've benefited from our stance on duration, lessening the adverse effects on our book value as interest rates rose. We were able to invest funds at higher rates faster than many peers, achieving a new money rate of approximately 5.25%+, which points to further upside potential compared to our book yield of 4.2%. Rich mentioned the duration, which has slightly changed but is mainly a rounding issue. We're keenly observing potential opportunities and will adjust our duration accordingly. Overall, we believe we had a strong quarter in light of industry catastrophe challenges, reflecting our ability to generate a 21% return, a testament to our team's effectiveness and strategy. Ultimately, our goal is to build book value, which requires both forward strides and avoiding backward steps. We're now ready to take your questions. Thank you.

Your first question comes from Elyse Greenspan with Wells Fargo.

My first question, Rob, is about the underlying combined ratio of 87.6% for the quarter. I was wondering if there were any one-off factors in that number. I know that in the last couple of quarters, there have been some elevated non-cat fire losses that you have mentioned. Were there any similar losses in this quarter, or is there anything within that 87.6% that we should consider regarding the level of margin we might see for the rest of the year?

That pig is still making its way through the python. I don't have a specific number for how much it contributed but it is reducing, if you will, but it did play a role. I think the other piece is just general mix as well in the portfolio. As you can see, it shifts a little bit every day as far as the underwriting portfolio. But yes, there was a little bit of non-cat property in there but it is diminishing.

And then in terms of the mix, right? So your rate ex comp in the quarter was 8.2, right? We can call that stable with the 8.3 last quarter. And I would have thought, like given we've heard of a lot of strength within property in the quarter that you might have seen the rates move up a little bit. Is that just a function of mix?

Yes. I think it's a function of mix. And certainly, we are benefiting as much as anyone on the property front. At the same time, there are clearly challenges for workers' compensation. And you can see that and, quite frankly, how much we are growing or not there. And on the professional liability side, as Rich flagged as well, D&O is very competitive. So the number that we give you is an aggregate, obviously, but I can promise you that we are getting good traction on the property front. And the more catastrophe exposed it is, the more traction we are getting and it's significant.

And then one last one. The PYD, you guys said was favorable $3 million. I know you guys typically wait for the Q to give insurance versus reinsurance. But could you give us a sense of the magnitude in one segment versus the other?

Honestly, compared to the reserve position in both cases, it was minimal. I don't have the exact number in front of me, but one was slightly positive while the other was modestly negative.

Your next question comes from Alex Scott with Goldman Sachs.

First one I had is on the reserve sort of a follow-up on the PYD question. In your commentary, you mentioned occurrence and the tail potential yet extended. You mentioned plaintiffs' bar and medical inflation and so forth. I mean I would think all of these things would potentially put pressure on some of those reserves. Can you talk about why you didn't feel like you needed to make adjustments, sort of confidence in those reserves despite some of those headwinds that you see?

The answer is that much of what we have been anticipating aligns with your observations. When people ask why we are not adjusting our current accident year or our loss ratios, it’s because there is significant uncertainty in the market. We feel very secure about our position at this stage. We regularly review our loss ratios by product line in detail every 90 days. We believe we are well-prepared to handle what we are encountering.

Got it. And then a follow-up, maybe just a high-level question on excess and surplus versus standard lines. I know in the past you've talked about standard lines and a lot of things going over; I mean we're certainly hearing about it in personal lines. I mean can you help us think through that end and just how that's been going in the last quarter and where you're seeing opportunities?

Our E&S businesses are experiencing a strong submission flow. We have no indication that the overall market or the specific lines I've mentioned are weakening. There is considerable momentum in both property and liability, including certain sectors like professional liability. I specifically noted D&O because it faces unique challenges, as does workers' comp, which has been highly competitive for a long time. However, for much of our other work, we are observing very strong submission flow.

Your next question comes from Mike Zaremski with BMO Capital Markets.

I want to follow up on Elyse's question regarding potential non-cat property losses. Rob, you mentioned a metaphor about the pig through the python. Are you suggesting that some of the current year's property losses are connected to the underlying issues from last quarter to this quarter? I thought that term referred to the reserve tail.

No. What I'm talking about is that during the quarter, there were some non-cat property losses that contributed to the loss ratio. That is what I'm referring to. That is less elevated than what we've seen over the past couple of quarters but more elevated than what we've seen historically. And the actions that we are taking, we believe, are taking hold but it takes a little bit of time for that to work through the book in its entirety.

Okay, that makes sense. I'm curious, many of your competitors provide specific information about non-cat property, indicating if it was 2 points higher or lower than expected. However, Berkley has a smaller property portfolio compared to those competitors. So, I'm wondering, what is the impact of non-cat property losses on your loss ratio? Are they accounting for about 10 points, or is it more typical with a lower impact on the loss ratio?

No, property is not a significant part of our business, and it would not be close to the number you mentioned.

Okay. I have a follow-up on your comments regarding the growing evidence that the tail is elongating in both occurrence and claims made. Could you elaborate on that? Last time we checked your statutory pay-to-incurred loss ratios, we didn't see that trend. Also, I noticed you didn't provide an update on how your paid-to-incurred loss ratios are trending.

What we're observing is that the tail is elongating based on conversations with our colleagues in claims and their insights. We will start to see this reflected in the data. However, we proactively engage with our colleagues on the front lines to gauge their observations, as that serves as a leading indicator for our expectations. The plaintiffs' bar remains highly aggressive, often waiting until the last moment to make demands, which they believe will create favorable outcomes for them. We recognize their strategies and are managing the situation accordingly. I don’t expect this to lead to a significant change, but we are aware of the dynamics at play. I don’t have the loss ratio details at the moment, but I will follow up on that for you, Mike.

Okay. Lastly, we value your insights. You've mentioned that medical inflation is on the rise. The CPI data appears to be slowly increasing, but it still seems relatively stable compared to historical levels. Is this view based on your discussions with frontline workers and your understanding of the macroeconomic situation, leading you to believe more inflation is on the horizon? Or are you observing evidence of this? For instance, Travelers noted today that overall, workers' comp inflation remains negative for them.

I believe the frequency trend is quite appealing. Regarding the medical trend, I don't see it as negative, and I think it will start to increase, based on the available industry data. Those who are willing to explore further will discover this.

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

My first question is about a recent report from one of your competitors, who mentioned a notable increase in renewal pricing across their portfolio. They indicated that their 8.2% renewal price change is stable compared to last quarter, though not particularly significant. Has the market changed materially in the last three months? Are there any dynamic factors affecting business pricing that you've identified?

More people are beginning to understand that action is needed regarding rates. I won’t comment specifically on other market players, but perhaps they recognize they require more, prompting them to take stronger actions. We have had a clear understanding of what we need and what constitutes rate adequacy for some time, and we feel confident in our position. It aligns with our current beliefs about our requirements. Overall, we believe we are in a solid situation.

Okay. And if my model is right, I think the quarter enjoyed the most share repurchase you've done on a dollar-value basis in over 15 years. It suggests to me that you probably find the stock attractive at the current value. At the same time, this quarter, you did a 15%, 16% operating ROE in a quarter with a lot of cat losses and poor results on the investment fund portfolio which I think is a pretty good result given the headwinds.

Did you say poor results in the investment portfolio?

I mean the investment funds portfolio.

Okay, yes. Understood.

Yes. Yes. And I mean that's volatile. We know it is. But I think it's a pretty good result. What I'm saying, you have a lot of headwinds and you still had a good result.

Yes.

The repurchases are a choice but they're also a cost. You could have put that $300 million into more underwriting but you bought back the stock instead. Can you walk us through, I guess, the capital utilization model and how you think about the trade-off between the value of Berkley stock and the value of putting money to work in the 2023 insurance marketplace?

Yes, thanks for the question, Josh. To keep it brief, we are happy to discuss this offline if needed. Currently, we assess our business and its future, ensuring we are positioned with enough capital, not just for our anticipated needs but also with a buffer. Ultimately, if we end up with extra capital beyond our current requirements and future expectations, we will consider the best ways to return that to our shareholders. There are various methods for returning capital, and our analysis will take into account not only the current value of the business and our assessment of its true book value but also its earnings potential for the foreseeable future. We aim to make thoughtful decisions regarding how to return value to shareholders. Regarding business growth, I believe we can maintain a healthy growth rate and generate strong returns, while also being mindful of risk-adjusted returns in a consistent manner. If you'd like to delve deeper, we can discuss this offline. We will not simply hold onto unnecessary capital, and we are aware of future capital needs and the perspectives of rating agencies that may impact us.

Your next question comes from Mark Hughes with Truist.

I appreciate the call. On the Reinsurance segment, your loss ratio was pretty low, hasn't been that low in a while. Is that just good experience in the quarter? Or is this maybe the impact of cumulative rate increases over the last few years?

I think it's a combination of both good underwriting and a job well done by many of our colleagues. And again, we also had a bit of positive development coming through there.

And then in the GL line, you had a nice acceleration sequentially back up into double-digit growth. You'd mentioned the challenges around the plaintiffs' bar and the inflation but you seem to be enthusiastic. Any additional commentary about what you're seeing in GL?

We are growing in areas that we find appealing. A significant portion of the growth in that product line is attributed to our colleagues who are managing E&S businesses.

The casualty re was down, likely reflecting your perspective on the plaintiffs' bar. Is that an area you might avoid in the near future?

No. It's not so much the plaintiffs' bar, though. Obviously, that's a contributor to how we think about loss cost and trend and rate adequacy. But it would seem as though the reinsurance marketplace struggles to have discipline across the board. So just as they're getting more disciplined in the property space, it would seem as the professional and liability space may not have the same discipline it had yesterday.

Your next question comes from Ryan Tunis with Autonomous Research.

First question, just on reinsurance. The attritional loss ratio improved quite a bit there. Maybe you could just talk a little bit about either the sustainability of that or the drivers this quarter?

Yes. Look, we're pleased with how the business is performing, Ryan. We're not going to get into a whole lot of minutia around that. But we think that the various businesses that make up that segment have positioned themselves well and they're reaping the benefits from it. And we think that it's likely that for the foreseeable future, that we'll continue to see good performance. That having been said, as I mentioned a few moments ago, there was some positive development; and that came out of one of the operations in that segment which was helpful.

Got it. In the Insurance segment, I'm curious about growth. It appears that some primary carriers are experiencing significantly higher growth compared to their rate increases. In contrast, your top line growth seems more in line with the rates you're reporting. Could you explain why we're not seeing greater growth alongside those rates? Is retention lower than it was last year? Are you securing less new business? Please give us some insight into this.

When you look at the group, we have a mix of performance. Some of our E&S businesses are growing very quickly, and other parts of the organization are also seeing growth. However, we emphasize underwriting discipline. As noted in the release, some areas of the business are expanding rapidly, which aligns with your observations about other companies. In contrast, there are areas where we are adopting a more cautious approach. For instance, we are concerned about the competitiveness in the workers' compensation market. Despite the growth in payrolls, we are in a somewhat defensive mode. The same applies to professional liability, and we are uncertain about public D&O. Regarding reinsurance, casualty reinsurance is slightly down while monoline excess has seen minor growth. I understand why some might want to generalize, but we are analyzing our business and each market segment closely to ensure we make sound decisions. When you consider all parts, this is the outcome we reached. I do see potential for further momentum in certain areas, but ultimately, the combination of factors led us to this conclusion.

Got it. And then just following up, we've heard I guess, partially in response to the softer professionalized pricing market, there's been a more diverse set of players that find the cyber line attractive. Would you count yourself among that? Or has cyber been a big growth area for Berkley?

It's not a big growth area for us these days. There were moments in time where we found it to be very attractive. And then to your point, we saw a lot of people coming into the space. And again, we have the underwriting discipline that we're not going to do foolish things. So have we ever been a giant player in the space? No, we're careful and selective and we're conscious of how to manage the systemic exposure that comes along with that product line. But clearly, cyber has become a more competitive market and we have a view as to what an accurate rate is and appropriate terms and conditions. And we will draw the line in the sand and stay on the right side of it.

Your next question comes from David Motemaden with Evercore ISI.

So I had just a question on these fire losses. Just had a question just in terms of how far along we are in fixing that and specifically how many more quarters would you expect this to really have an impact on results?

I think you're going to see it having a diminishing impact on results between now and the end of the year and it will be diminishing gradually.

Got it. And then I guess, I'm assuming that the shift in mix, just sort of excluding the fire losses, the shift in mix would mean that something in the neighborhood of the loss ratio ex-cat, ex-reserve development is somewhat of a sustainable level just given the mix shift is obviously enduring. Is that the right way to think about it?

I can't answer the question with certainty, but we believe that given how the portfolio is performing and our capability to achieve a combined ratio of 90 or better, along with an 18% to 21% return depending on perspective, we are in a relatively comfortable position. I do think there is a chance for the 59 to improve slightly, but we are not going to take unnecessary risks that could lead to future disappointment, especially in such a complicated and volatile environment. We believe that it is not in anyone's best interest to do so. Therefore, in our view, we are achieving very strong outcomes for stakeholders while ensuring that we are not exerting excessive pressure on the situation, which we consider to be a favorable position to be in.

Got it. And then maybe just a follow-up. Obviously, not a big impact on the entire book with the $3 million of favorable reserve development. But you guys have been on top of the 2019 and prior casualty lines. Can you just talk about any changes you may have made to those lines for those years in the second quarter and how you feel about your reserving position there going forward?

You'll see more detail when the quarterly report comes out. If you have any questions, we're happy to discuss them later. We feel confident about our reserves and believe they are well-prepared for the challenges facing the industry. There has been a lot of discussion about why, despite the rates we've received, our loss ratios haven't decreased more, and that's due to all the uncertainty. Overall, I believe we are in a good position. Looking at the average duration of our loss reserves, which is about 3.5 years, we can infer that the years from 2016 to 2019 are progressing well, suggesting that things are stabilizing. As for the more recent years, we feel they are in an exceptional situation.

Got it. And then maybe if I could just sneak one more in, just on that last point, the more recent years. I know you had mentioned on the last call that you guys have been measured in terms of how quickly you recognize the progress from 2020 onwards and that could have implications for how you think about loss picks as you make your way through 2023 and into next year. Have you updated this view at all? This most recent quarter, just thinking about some of the comments you made about lengthening tails on occurrence and claims-made forms.

Obviously, the tail comment has applicability in different ways to different product lines. I think some of the comments, if I recall correctly and maybe I'm mistaken, that you may be referring to would stem from policies that are written on a claims-made form. And when you write on a claims-made form and there is no notice, then that chapter is closed. So putting that aside, to the extent that you do have a notice or you have an occurrence form, then you need to spend some time thinking about how do I think about that tail extending or not. So we, as you would expect, bifurcate the book as we examine it in a variety of different ways and look at it at a very granular level. But I think perhaps what I was just referring to may touch on what you had been raising.

Your next question comes from Yaron Kinar with Jefferies.

If we look at the insurance underlying loss ratio, you mentioned that the impact of non-catastrophic fire losses has decreased somewhat from last year or from last quarter. However, the overall result compared to last year has shown more deterioration than what we observed in the last two quarters. What is contributing to this change? Is it due to fewer favorable offsets compared to previous quarters? Is it related to the mix? Why are we noticing this trend?

Putting aside the property piece, to your point, I would say the leading contributor to the question you're raising is mix of business: different product lines, say, different loss ratio picks.

Okay. But I guess on that front, it seems like you are growing the short tail lines faster than most of the other businesses I would have thought those may have a lower loss ratio, underlying loss ratio. Or am I not thinking about that correctly?

Some of them do and some of them are. Hold on, I'm just pulling out a couple of papers. Instead of me fumbling through our papers, let's catch up offline.

Okay, fair enough. And then I'll admit I'm intrigued by your comment and I think it's not the first time you've made it about the kind of the but-for approach that the industry has with regards to cat losses. I am curious if we look at the underlying combined ratio that the company reported, the 87.6%, what would that be without the cat-exposed net premiums earned?

If we backed out? I'm not sure I understand the question, sorry. What would the 87 be without what?

So I think in your opening comments, you said the industry uses a but-for approach and removes catastrophes but doesn't take out the catastrophe-related premiums.

Right.

What would the 87.6% be for Berkley this quarter if we made that adjustment?

Well, we don't really spend a lot of time doing that because we don't fool ourselves that cat losses don't count.

Your next question comes from Brian Meredith with UBS.

So Rob, just curious, property reinsurance, huge growth in the quarter. Is that you all leaning into the cat reinsurance market? Or is there something else going on there?

We are recognizing opportunities in the property reinsurance market. Catastrophe reinsurance is certainly a significant aspect of that. While it is not overwhelmingly affecting our overall group, it presents a real opportunity for us to increase our involvement. In short, the answer is yes.

Good. That's helpful. Second question, I'm just curious, Rob, you talked a little bit about pricing. You talked about D&O being challenging and some pressures you're seeing in commercial auto. I wonder if you can kind of bifurcate a little bit in what you're seeing kind of large commercial and then as you work your way down middle and small. Is it more competitive kind of in the excess liability for larger companies? And as you get down less, any differentiation?

In terms of liability lines, larger accounts tend to be more competitive at this stage, which benefits us since we primarily operate in the small and middle market compared to many of our competitors. However, it is evident that there is increasing competition, particularly with larger accounts.

Got you. And I'll just throw one more in here. I'm wondering if maybe you can characterize your primary commercial property book. When you write commercial properties, is that cat-exposed stuff? Is that regular homeowners? What exactly are we looking at when you're seeing that growth in your commercial property book?

In our commercial property book, we have a mix of different components. There is a portion related to Berkley One, which we will likely separate as it develops. Additionally, we do write some property that is exposed to catastrophes on the commercial side; however, most of it is not categorized as Tier 1 catastrophe-exposed property.

Your next question comes from Meyer Shields with KBW.

A couple of really quick questions, I think. You talked about medical inflation but if I understood your comments correctly, that seemed to be mostly emerging in workers' compensation. And I was wondering whether you're seeing the same sort of pickup in medical costs in, I don't know, commercial auto or medical malpractice?

Regarding medical malpractice, that's a separate issue. However, when it comes to medical costs, our expectation is that the costs for injured workers are clearly increasing compared to what they were in the past. You will see an increase in other product lines, but to a much lesser degree. This is because medical expenses have a much larger impact on workers' compensation claims than on any other product line we offer.

Okay, perfect. That's helpful. Earlier in Richard's comments, there was a mention of the expense ratio being comfortably below 30. Was there anything in this quarter's expense ratio that contributed to that? Essentially, the question is whether being comfortably below 30 is really a challenging target to meet.

I think we're just trying to give people guidance for the long run. And ultimately, our expense ratio can, at any moment in time, be adversely impacted by investments that we are making, whether that be in technology or whether that be in a new business that we are starting that's early on or in its infancy. So I think we're just trying to give people guidance as to what they should be expecting going forward longer term.

Okay, fair enough. And then one final question, if I can. I know it's really early in the third quarter but there's been a school of thought out there that maybe once we went through a full year of professional liability rate decreases that they would calm down. Based on your comments, it doesn't seem like you're seeing that...

Are you referring specifically to the public D&O?

Absolutely, yes.

Yes. There's nothing that we're seeing as of now that would suggest that it's bottoming out, or let alone, pivoting.

Your next question comes from Scott Heleniak with RBC Capital Markets.

My first question is about the investment funds. I noticed there was a loss in that area during the quarter. Have there been any changes to the allocations, or can you provide an update on the strategy for the rest of the year and into 2024?

We were certainly not satisfied with our performance, as we incurred a loss of approximately $1 million. This was primarily due to our involvement in some alternative investments, specifically private equity, where there were some reductions in the valuations of certain investments that impacted us. How this will evolve moving forward is something we will keep you updated on. At this point, we believe that the necessary steps are being taken to ensure that these funds are accurately valued, but we rely on receiving that information from the managers.

Okay. Were those marks significant then for the quarter for the alts? Is there a number that you had on there?

You can follow up with Rich or Karen for the specifics but it was enough to take what's been a reasonably healthy run rate and bring it down to essentially zero.

Yes. Okay, got you. And then, just one more question. You mentioned there'll be a window of opportunity to deploy capital into higher-yielding securities in your durations at 2.3 years now and I'm just wondering if we might be getting close to that window of opportunity and how you see that playing out as well.

It's certainly our hope and we're waiting for that to occur. We believe it's on the way, but it may take some time. Ultimately, as in everything we do, we're focused not just on risk-adjusted return, and we’re not going to make compromises in a foolish way. Again, we are eagerly looking for the opportunity to extend that duration a little bit. For now, we are getting reasonably well rewarded for the position we've taken.

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

I'll give one more question but I don't know if I can get a great answer. Can we talk about share repurchases versus special dividends and how you think about the value of doing both those things?

Josh, I think that was a pretty good prediction on your part as to the quality of the answer, at least that you'd get from me. But why don't I hand it over to our Chairman, who also moonlights as our Head of repurchase.

I think this is a constantly evolving situation, dependent on the opportunities available at any given moment. We will not engage in any actions that prevent us from investing in the business when opportunities arise. Our decisions will be based on our assessment of share values against the returns we believe we should provide to our shareholders. There isn’t a strict guideline; instead, we aim to act when the stock price seems attractive based on our historical perspective. We consider each situation on its own merits, especially when we anticipate having excess capital over the near term. Our focus is on comparing the stock price to the intrinsic value of the company, taking into account our more stable leverage and reduced uncertainties compared to the past. Ultimately, our goal is to determine the best way to utilize our funds for the benefit of our shareholders, which involves understanding the relationship between the stock price and the company’s intrinsic value.

There are no further questions at this time. Rob, I will turn the call back over to you.

Okay, Breanna, thank you and thank you all very much for joining the call. Again, I think this was a moment where the company once again demonstrated its ability to manage risk and to focus on return and recognize that volatility is an important piece of that. We will look forward to speaking with you all in about 90 days. Thank you.

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