Berkley W R Corp Q3 FY2024 Earnings Call

Good day and welcome to W. R. Berkley Corporation's Third Quarter 2024 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, 2023, 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.

Krista, thank you very much. And echoing Krista's comments, welcome to our Q3 call. In addition to me, on this end of the phone, you also have our Executive Chairman, Bill Berkley, and Chief Financial Officer, Rich Baio. We're going to follow a typical pattern, and that is Rich is shortly going to walk you through the highlights. I will then follow up with a few comments and then of course we're very happy to open it up to Q&A and address any questions participants would have. Before I hand it over to Rich, two points that I'd like to make. One, obviously, the third quarter and then more recently, even in the fourth quarter, there's been a significant amount of natural catastrophe activity. And oftentimes on these calls or any industry discussions, as we've flagged in the past, people start talking about estimates and models and numbers, and those are all important and real to consider. That having been said, from our perspective, this has impacted countless people's lives, and that is not lost on us. So while we are certainly focused on the numbers and the economics, my colleagues and I are also acutely aware of the challenges that many people in this country are facing as a result of this catastrophe activity. Further, in addition to extending our concern to all those impacted, I'd like to thank our claims colleagues that are going above and beyond to ensure that we deliver on our promise to all of our policyholders that have been impacted by these events. So again, thinking of those impacted and sending thanks to those that are doing their job and making sure that we deliver on our promise. The second topic I did want to flag, and it really stems from a subject matter that has been getting greater attention more recently, and that is the growth in the specialty space and in particular the excess and surplus (E&S) market. I don't think it's lost on any of us, the pace of change in the world, how it seems to be accelerating, the level of complexity and risk continues to be on the rise. And certainly there are many contributing factors, but amongst those contributing factors without a doubt, the climate change, as well as social inflation. Both of these items are playing an important role in having a meaningful impact on the insurance industry. And quite frankly, as these two items are impacting loss cost trend, I think much of the standard market, specifically the admitted market, is having a difficult time pivoting. That is creating opportunity for, in particular, the non-admitted market. One of the pinch points that is not discussed as actively in the commercial lines market space as it is in the personalized market space, is the challenges on the regulatory front. There are many insurance departments that are struggling from a staffing perspective, and also we, in addition to that, see the impact of politics creeping in as well. So as we look at the circumstance and we see this pinch point on the regulatory front, we think that is likely to continue. That is likely to continue to drive more business into the specialty and in particular the E&S market. And by extension, we think that is going to bode well for an organization such as ours with a particularly large footprint in the specialty space overall and in particular the E&S marketplace. So with that as a bit of a backdrop, I'm going to pause there and Rich I'll hand it over to you please.

Great. Thanks, Rob. Good evening, everyone. Our record third quarter net income resulted in an increase of almost 10% over the prior year to $366 million, also contributing to a nine-month record net income of approximately $1.2 billion. We continue to generate outstanding returns on equity of 20% in the quarter and more than 21% year-to-date. Both strong underwriting and investment income contributed to our operating earnings of $374 million or $0.93 per share. Despite the above average catastrophic activity experienced by the industry, we've once again been able to demonstrate our careful and prudent underwriting discipline and in particular, stability and earnings. Our calendar year combined ratio was 90.9% inclusive of 3.3 loss ratio points from several catastrophic events and 87.6% on an accident year ex-CAT basis. During the quarter, there were four hurricanes that made landfall, with Helene being the most destructive across several states and continuing severe catastrophe activity that contributed modestly to the total amount of catastrophe losses. Our net premiums written grew above $3 billion for the second consecutive quarter and continues to benefit our record net premiums earned, which increased 10.8% over the prior year. Current accident year underwriting income, excluding catastrophes, increased 13.4% to $362 million pre-tax, adjusted for CAT losses of $98 million and prior year favorable development of $1 million. Our current accident year loss ratio, ex-CAT, improved quarter-over-quarter by 1.5 points to 59.1%, driven by business mix. We continue to invest in the business to drive efficiencies and better experiences for our customers, combined with new startup operating units that we've announced before. The combination of these items along with the changes in business mix and reinsurance structures have contributed to the increase in our expense ratio by 20 basis points to 28.5%. As previously communicated, we continue to believe that our expense ratio should remain comfortably below 30%. Turning to investments, pre-tax net investment income increased 20% to $324 million. Fixed maturity securities grew by more than $50 million with the Argentine inflation-linked securities normalizing to an amount commensurate with the prior year quarter. We do not anticipate much change on a prospective basis regarding these securities. However, do remind you that when modeling out 2025, you should factor in the elevated non-recurring income in the first and second quarters of 2024. Record operating cash flow in the quarter of $1.25 billion contributes to the record year-to-date cash flow of almost $2.9 billion. Combining the increase in investible assets with a new money rate that's higher than the roll-off book yield on our fixed maturity securities, we remain well-positioned for further investment income growth. The credit quality of the investment portfolio remains at a AA minus, and the duration is 2.4 years for the quarter. Foreign currency losses in the quarter of $25 million related to the US dollar weakening relative to most other currencies. As mentioned in the past, we actively manage our foreign currency exposure and you'll note an improvement in our currency translation adjustment in stockholders' equity, which offsets the amount in the income statement. The effective tax rate remains elevated relative to the prior year and has been the case in the first half of the year due to the contribution of foreign earnings taxed at rates greater than the US Statutory rate of 21%. This quarter was 23% and we expect the fourth quarter will likely revert to the high 23% to 24% area that we saw earlier in the year. Stockholders' equity increased above $8 billion for the first time to more than $8.4 billion. Strong earnings of $366 million coupled with an improvement in after-tax unrealized investment losses of $381 million and currency translation gains of $49 million fueled the increase. The company also returned total capital of $138 million, consisting of $95 million of special dividends, $31 million of regular dividends, and $12.5 million of share repurchases at an average price per share of $52.30. Our total capitalization remains strong, and our financial leverage ratio of 25.2% is at its lowest level in almost two decades. Book value per share before share repurchases and dividends grew 10% in the quarter and 20.1% year-to-date. And with that, I'll turn it back to you, Rob.

Rich, thank you. That was great. Let me share a few quick thoughts. I believe Rich provided a thorough overview. First, the rate excluding compounding for the quarter was 8.4%. Auto liability is leading the way, closely followed by excess and umbrella. We have been focused on the loss trend in the auto line for quite some time. We are optimistic about our position, but if this trend continues, we will need additional funds to be well-prepared for upcoming claims. Rich discussed the loss ratio, which was 62.4%, including about three points of catastrophe losses, a decent outcome given the severity for those in the specific group, which is at 59.1%. We anticipate this will remain a recurring topic. In our view, the focus is on building book value with an understanding of risk-adjusted returns and the notion of disregarding cash as if it doesn’t exist. One might think this would be resolved by now, given the annual industry catastrophes. So again, from our perspective, we measure the business at 62.4%. Rich also covered the expense ratio. I’d like to add that we currently have a couple of businesses that are not yet scaled but are in the process of doing so. As they expand, we expect to see benefits from the increased earned premium, positively impacting the overall group's expense ratio. We are also actively investing in technology and data, which incurs costs, but we believe the return will be worthwhile. Rich spoke about the business mix affecting results. Additionally, I want to highlight reinsurance. Generally, we operate with low limits, meaning our reliance on reinsurance differs from many of our peers who depend heavily on it. We have no issue with our reinsurance partners earning a profit; in fact, we acknowledge their need for reasonable risk-adjusted returns. However, if we encounter market conditions where aggressiveness or gouging occurs, we have the flexibility to adjust our reinsurance purchasing strategy, which can also affect the expense ratio. Lastly, Rich discussed the foreign exchange impact on our financials. As for FX, it affected us by about $0.05 per share. Now, let’s shift to investments. I’d like to take a moment to reflect on past events, and I appreciate your patience. Everyone remembers the economic stimulation during the financial crisis and again during COVID. We believed there would inevitably be some inflation following those actions, and while it took time, it indeed manifested strongly. Following government actions, interest rates increased, especially on the short end, resulting in an inverted yield curve. Our organization was rewarded for opting to maintain a shorter duration, leading to a dramatic increase in our investment income over a short span. Looking ahead, we feel it’s likely that although inflation might decrease, it won’t drop drastically. We also expect short-term rates to decline, but perhaps not as swiftly or aggressively as predicted. No matter who occupies the White House, it appears each candidate aims to increase the deficit by trillions of dollars. Given that reality, we believe that the federal government will continue to grow its deficit, raising questions about the future of government debt supply and demand. What does this mean? We anticipate that the yield curve will continue to adopt a more traditional shape, offering us the chance to extend our duration while increasing book yields. Specifically to our numbers, as Rich mentioned, our duration sits at 2.4 years, with a domestic book yield of 4.5% and a new money rate above 5%. We don't expect to compromise much on the new money rate; instead, we'll extend our duration. Our average loss reserves have a lifespan just below four years, allowing us ample room to extend that duration, maintaining or even improving our book yield and new money rate. In summary, our business continues to grow, and we believe the rate hikes align with and possibly surpass the trends. Consequently, our underwriting margins are likely to improve further. Additionally, the investment portfolio contributes positively, with our new money rate expected to remain above our current book yield. Our cash flow is exceptionally strong, leading to portfolio growth, which translates into increasing investment income. In conclusion, more underwriting income combined with more investment income suggests higher earnings for the foreseeable future. We feel our business is as well-positioned as it has ever been. Let me pause here and invite questions.

Thank you. Your first question comes from Elyse Greenspan with Wells Fargo. Please go ahead.

Hi, Elyse. Good afternoon.

Hi, thanks. Good afternoon. My first question just on the reserves, I think the movement was negligible in the quarter. Was there any movement within insurance versus reinsurance in terms of prior year reserve development?

To tell you the truth, Elyse, it was reasonably uneventful between the segments. I think, Rich, what was a couple of million going in the other way? $3 million favorable on the insurance and $2 million adverse on the reinsurance and monoline. So not overly noteworthy.

Okay. Thanks. And then the premium growth did slow within insurance in the quarter. I believe it went from ex-workers' comp from around 13% to 14% to 9%. So it looks like the implied impact from exposure went from something in the range of 5% to 6% to flat given that you gave us, right that 8.4% ex-comp pricing. Just looking to just get some color on the exposure piece or just what went on within the premiums within insurance ex-comp in the quarter?

Yes. I appreciate, Elyse, that there are a lot of moving parts. I'd like to highlight the main factors, particularly regarding the Auto-lines and, to a significant degree, the Excess and Umbrella lines. These product lines are largely influenced by our perspective on Auto. We have a sense of what rate adequacy should be, thanks to my colleague's insights. They have established certain benchmarks and have been waiting for the market to align with those views, which significantly impacted the quarter. Looking at October, we see signs suggesting that the market is starting to align with our previous conclusions. However, I would advise against considering the growth from the quarter as a new standard, based on the indications we are observing in October. It appears that the market is quickly adapting to our insights.

So given that comment, Rob, would you expect, I guess you've kind of steered us in the direction of expecting 10% to 15% top line growth based on how you see October, as well as your view for next year or would you expect to be back in the Q4 and then in 2025?

I don't have a perfect crystal ball, but I continue to believe that given the breadth of our offering, we as an organization should be able to grow between 10% and 15% annually. As I've suggested before, there may be a quarter where we exceed that and a quarter where we come in below it. However, on an annual basis, I believe we should be operating at that level.

Thank you.

Thank you.

Your next question comes from the line of Rob Cox with Goldman Sachs. Please go ahead.

Hi, Rob. Good afternoon.

So I was hoping to dive into loss trend a little bit. I think looking back a few years ago, you guys might have noted that or implied that it was in sort of the 5% to 6% range. So I was just curious any thoughts or any color you could provide on the loss trend in insurance today? And is financial inflation coming down a reason to maybe loosen the loss trend assumptions in some places at this point?

Well, Rob, I don't remember exactly what we may have said some number of years ago. I don't even remember what I had for lunch today at this stage. But let me give you a little color as to how we think about it. As I said earlier, ex-comp we got 8.4%. I believe that we are comfortably in excess of the trend at that level. Obviously, it varies greatly by product line, but we are very focused on making sure that rate adequacy continues to be the priority for us. So we are not in a position to be able to start giving you what do we use for trend by product line or even give you a blended number at this stage. But I think you hopefully can take comfort as I do that at 8.4%, we are clearing the hurdle by a margin. That having been said, as we've also said in the past, and this I have a pretty clear recollection of, is that we understand and have a respect for the unknown. And while I think there are others, perhaps in the marketplace that have a firm view on what loss trend is and to the extent that they are coming in, in excess of that, they will be dropping their pick. And obviously, it is for them to decide how they operate their business. But from our perspective, given the uncertainties of the insurance industry, we are not going to get ahead of ourselves. And one would have thought even what has transpired and how the industry has been impacted by social inflation, people would have learned from that and elected to err on the side of caution. As far as shorter tail lines in your question, clearly, financial inflation was one of the big drivers for short tail lines. We saw, and obviously, property, there was a meaningful impact on the auto physical damage line as well. Without a doubt, a lot of the pressure that was stemming from a more inflationary environment has subsided and that is giving a bit of a relief. That having been said, I would suggest to you on the social inflation front, particularly impacting many of the liability lines, I think that that is as challenging as ever is probably the right way to characterize it.

Very helpful and very comprehensive. Thank you, Rob. Maybe just as a follow-up on the hurricanes this quarter and into 4Q. Clearly, some really unfortunate losses there in a number of levels from the recent storms. Do you have a sense of how the market might react from a pricing perspective kind of across admitted E&S and reinsurance? And any impacts outside of the Southeast?

I believe it’s a bit early to draw any conclusions on that. At this point, the outcomes of both storms you mentioned, especially Milton, aren't very clear yet, and we'll need to wait to see how things play out. From what I understand, the reinsurance market is doing what it can to prepare for a flat market, but unless Milton turns out to be significantly worse, it may be difficult for them to maintain that flatness. Regarding the insurance market, we will have to see how it develops and what the losses turn out to be. With Helene, the main issue was that a lot of the losses occurred in areas where such natural disasters aren't expected to happen. This has left many people reevaluating what this means for exposure and proper pricing. So, to sum it up, everything is still coming into focus.

Thanks Rob.

Thank you.

Your next question comes from the line of Andrew Kligerman with TD Cowen. Please go ahead.

Good afternoon, Andrew.

Hi, good afternoon. It's great to talk to you. Regarding the net written premium aspect, you reported just under 8% in insurance, which is slightly below the 10% to 15% range. As you mentioned earlier, this can fluctuate from quarter to quarter. I would like to understand the outlook better. Is my interpretation correct? It appears that short-term premium increased in the low double digits.

Sorry. When you say short-term premium, are you referring to tail?

I meant short tail. I'm sorry. So Short-tail lines up low double digits. And my sense there is you're seeing a fair amount of PIF (Policies In Force) growth where in contrast, other liability, auto, professional liability with those lines being up in the low single digits premium-wise, net written premium, it would strike me that PIF is going backwards. Am I reading that properly?

You are correct. On the Auto line, our exposure is decreasing at a healthy rate during the quarter for the reasons I mentioned. We hope that between now and the end of the year, possibly extending into early next year, you'll continue to see more discipline in the market, and early signs in October were somewhat encouraging. Additionally, the workers' comp line remained relatively flat. It's important to note that part of the exposure is related to payrolls and wage inflation, which is also influencing that. So in many cases, our exposure is decreasing there as well. As always, we are identifying where we believe the margin is and focusing on areas where a more defensive stance is warranted. We will not compromise on our underwriting. Sometimes there is a lag before the market aligns with our perspective, which seems to be the case with the auto line. However, we are optimistic this month, as it appears the market is starting to recognize that reality. Regarding the reinsurance segment, the growth seen, especially in property, reflects current market conditions, and we still find the trade appealing. The stagnation in the casualty lines is predominantly a reflection of our situation. We have expressed our dissatisfaction with the economics and, quite frankly, the need for ceding commissions to decrease, which has influenced our position there.

Got it. And just rounding that out Rob, it sounds like you like the short tail lines? That's a PIF grower. And then the other liability and professional are kind of dipping a little bit in line with auto with the discipline you're showing. Is that fair?

I would say that the other liability is mostly around 9%. There are many factors at play, particularly the excess and surplus lines, which are experiencing significant growth. However, some aspects related to admitted casualty are proving to be more difficult.

Got it. And then just lastly on prior year developments. Anything of note in the 2020 to 2023 accident years?

Rich anything that is noteworthy during those years that you wanted to flag?

I would say it is consistent with what we've been communicating previously and what you've said in terms of the commercial auto liability being an area that is a key focus for us.

Key focus, meaning that you had maybe a bump or an unfavorable or just pretty steady?

I don't have the numbers exactly in front of me, but we had a little bit of noise coming out of the commercial auto liability, nothing particularly overwhelming but certainly evidence of that product line is positioned for a need of change.

Awesome. Thanks so much.

Your next question comes from the line of Mike Zaremski with BMO Capital Markets. Please go ahead.

Hi, good evening. Thank you. My first question, Rob, when you refer to the non-admitted market, is it in relation to the statutory US definition that allows us to track on an annual basis how much US stamped E&S you have? Or do you also consider non-US aspects that may not be reflected in the documentation?

So certainly, a meaningful percentage of what we write non-admitted is through Lloyd's. So Mike, I guess, to your question, you're seeing the US carriers, but I don't think you're picking up the Lloyd's piece would be my guess.

Okay, I understand. That's what I believed. I’m not sure if this needs to be very educational, but is the Lloyd's business significantly different from the US Excess and Surplus business that constitutes most of your operations? Is it more focused on large accounts versus small accounts, or is there anything noteworthy there?

The vast majority of what we do in Lloyd's is US-centric. And while there is some, if you will shared and layered a huge percentage of it is smaller accounts as well. So it's generally speaking, a reflection of our overall philosophy, but they do participate in some shared in Lloyd.

Okay. I understand. It was clear from your answers about your perspective on revenue growth moving forward. I'm curious about Marsh McLennan, which will release an index of pricing by line of business. The excess casualty/umbrella segment has seen significant quarter-over-quarter acceleration, reaching approximately 20%. This might be more relevant to large accounts, which you are not as involved in. I'm trying to grasp whether you believe there is more opportunity to be proactive, particularly in social inflationary lines, if you continue to see prices rising.

The way I would answer that, Mike is we pay attention to different parts of the market. We have a view as to what the margin is and where we think the opportunities are, we are going to lean into it. And where we think, again a more defensive posture is appropriate, we will do so. So do I think that there is meaningful opportunity in the excess and umbrella space to capture the additional rate? Yes, I do. Do I believe my colleagues are executing on that? Yes, I do. But please keep in mind, while we participate with some of the larger accounts, again, the vast majority of what we do is on the smaller end of town. And there is plenty of opportunity there to get more rate, and we are doing it.

Thank you. That’s all I have.

Thank you.

Your next question comes from the line of Mark Hughes with Truist Securities. Please go ahead.

Yeah. Thank you, good afternoon.

Hi, Mark, good afternoon.

I think you had mentioned that the improvement in the current accident year was business mix. I wanted to make sure that I heard that properly. And then Rob, I thought you might have said that with the rates exceeding the loss trend, the underwriting margin should continue to improve. How should I think about those two statements?

I have two points to make. Firstly, regarding our business mix, we are pleased with the advancements made on the property ex-CAT front and the attritional loss ratio. This is something we've discussed in the past, and my team has done an excellent job in improving our position, which is reflected in the loss ratio. Secondly, concerning the rate increase and its impact, we have a perspective on the trend and an understanding of the rate we're receiving, and the difference between the two should, in theory, enhance the margin. However, we are not in a hurry to declare victory too soon.

And then the tax rate for next year, what should we think about that?

You should think about it being too much. Rich, do you want to comment on it?

Based on our current foreign earnings, if we continue on this trajectory, you can expect a tax rate similar to this year's, likely around 23.5% to 24%. However, as Rob mentioned, we are actively exploring ways to keep that rate as low as possible.

Thank you.

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

Hi, Josh. Good afternoon.

Good afternoon. How are you all doing?

Doing fine, thank you. Hopefully you're well.

Wonderful. Thank you very much. Rich may have said it, where is the new money yield on purchases going on right now for the portfolio?

I think it was me and got slightly over 5%. I'd use more than 5%, less than 5.25%. Those are the bookends for you.

And is that being purchased at a different duration than that?

Just to be clear, that's on the domestic. So you would compare that to the 4.5% that we flagged earlier.

Is there a lengthening of the duration considering the changes in the yield curve behavior?

Incrementally so far. But we'll see what happens over time.

That's exactly what I mean. What would we need to see for you to say that longer is better?

I think, Josh, we probably don't have a specific answer, but what I can tell you is we're playing close attention to it, watching it every day. And we'll see how the story unfolds, but I don't have a specific roadmap that I'm in a position to share with you at this time.

Is credit a concern for you? It's always a concern, but are you more or less worried about it compared to a year ago, given the current outlook?

I think we are always concerned about credit, and that's why as Rich flagged, we are maintaining a very strong AA- on the credit quality of the fixed income portfolio. And you will not see us compromising on quality just to try and fluff up the book yield, if you will. We saw colleagues doing that, quite frankly, during the financial crisis where they compromised on duration and compromised on quality, and that's just not something we're going to do.

All right. Well, thank you for all the answers.

Thanks for the questions, Josh.

Your next question comes from the line of David Motemaden with Evercore ISI. Please go ahead.

Hi, David. Good afternoon.

Hi, thanks. Hi, good afternoon. Rob, I had a question just on the insurance business. So the 60.2% accident year loss ratio ex-CAT improved 50 basis points year-over-year. Sounds like all of that was mix and some of the progress you guys have been making on some of those fire losses from a bit ago. I guess I just wanted to see if there's anything unsustainable in the result as well that might be flattering things from maybe like a light non-cap property perspective or anything else that you would highlight?

So look, obviously, we'll know through the passage of time, but the biggest contributor to the improvement that you are referencing was the attritional loss ratio associated with the property. So do I think we just got lucky? My sense is when I look at it, I don't think that's necessarily the case. I think we have many colleagues that are working really hard and have improved the situation. And you are seeing it come through. But again, that's my sense based on what I have seen, we'll see more over time.

Got it. Okay. That's helpful. Is that fully reflected in the numbers now, or should we expect to continue seeing improvement in the attritional property book going forward?

David, not trying to be difficult, but they are what they are as we share them with you, and that's us being completely transparent. Could it get better from here? Yes, it could. Could it somehow take a step back? Yes. I mean, I can't guarantee or promise exactly what tomorrow will bring. But based on my look at it. I'm encouraged by the progress that has been made, and I think it is a reflection of the efforts of many of our colleagues.

Got it. Great. That's helpful. And then maybe I saw this in the 10-Q in the first quarter and the second quarter. It looked like there was some adverse prior year development that you guys have taken on the other liability line of business for accident year '21. And I guess I'm just wondering if that continued here in the third quarter and also just how accident year 2022 and 2023 are holding up?

I think as opposed to getting into that detail, we'll have a lot of it in the queue, and ask that once you have a chance to flip through the queue, if you have any questions, please reach out to us. But for what it's worth, there's nothing, as Rich suggested earlier, there is nothing concerning or alarming from our perspective.

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

Hi, Ryan. Good afternoon.

Hi Rob, good afternoon. I guess just the first question, thinking about the 10% to 15% growth and trying to figure out if I'm thinking about this right. So is it what you're really saying is you think that Berkley is a 10% to 15% grower but you flagged some risk reduction or remediation or what have you commercial auto over the next few quarters? And perhaps while you are doing that, it might be more of a challenge to do 10% to 15%. I'm just trying to understand, am I thinking about that right, that the 10% to 15% is sort of a longer-term view?

Let me at least try to answer your question. I think what we have suggested and are trying to suggest today on an annual basis, we believe the business can grow at 10% to 15%. In addition, as we suggested in the past, there could be a quarter where we grow more, there could be a quarter that we'd grow less. Ultimately for us, while we certainly would like to grow, underwriting margin is king, queen whatever label you'd like to use. When we look out at the marketplace during the quarter, we took some action as it relates to auto, in particular, and quite frankly, a few other lines related to auto. As a result of that, that slowed the growth. One of the things that at least I was trying to suggest earlier is it would seem as though. The issues that we have identified parts of the market are starting to more actively grapple with those in October, and that would provide some encouragement that you will see what I would view as a one-off quarter headwind, maybe subsiding somewhat. So as I suggested earlier, long story short Ryan, I am not of the view that we are changing the position that the business should be on an annual basis able to grow 10% to 15%. I was merely trying to unpack the quarter a little bit and help you understand what that speed bump is which I believe is becoming less and less of an issue based on what we saw in October.

Got it. Then just a follow-up, just a couple of quick ones on CATs. First off, I’d be curious what your loss was from Helene? And then second of all, I know you don't want to give a number for Milton. But if I look back to the Ian quarter a couple of years ago, it was about $100 million of CATs. Can you say directionally like could it be that big again given the growth or probably from a dollar standpoint, this is a different situation?

For Helene, I think you should assume about half of it, give or take, was Helene related. Then there were some other catastrophe activity, as Rich referenced, though Helena obviously got all the attention. There were some other losses going on. Switching over to Milton, I think it is premature for us or for that to really give you a specific number. But as I think whatever the outcome would be, it will be sitting within what you would expect from this organization as far as the size of the loss. And as you've heard from Rich, you've heard from my boss, you've heard from me, we pay very close attention to the topic of volatility, whether it be on the underwriting side or the investment side. So that's probably about as much color as I can give you on Milton, but I don't think that there is something that's going to come out of that, that's going to make anyone pause severely.

Thank you.

Your next question comes from the line of Alex Scott with Barclays. Please go ahead.

Hi, good afternoon.

Good afternoon.

I wanted to ask you a question about capital. Your growth seems to be slowing a bit as you explore different areas. It's often difficult to gauge how much available capital a company has to take advantage of opportunities as they come up. I would like to know how you view this situation. Additionally, could you update us on your priority order regarding pricing improvements and positive signs, even though they aren't leading to growth right now? How do you approach share buybacks and special dividends?

So from our perspective, the company has a comfortable surplus of capital plus. And again, anyone who has a real curiosity can go through the painstaking experience of perhaps taking the S&P model and taking our data and running it through. And you will get a large surplus or excess of capital, which is there to allow us to be opportunistic. Arguably, we have more capital than even one would need to maintain that position. And as we see opportunities, we will be returning that to those that belongs to specifically our shareholders. So long story short, we have an excess of capital in the company at this stage is generating capital more quickly than we can utilize it. So it's a reasonable assumption that we will continue to opportunistically look for ways to return the capital to shareholders while still maintaining a comfortable balance.

Got it. That’s helpful. As a follow-up, I wanted to ask about reserves. I mean, it's no secret that some external folks struggle with looking at the disclosures on more recent accident years and myself included in that. And it's hard from the outside. So I wanted to ask you, like what are some of the nuances to it? What are some of the things that when you all look at the more recent accident years? And maybe it is an update on the paid loss ratios you're seeing, I don't know. But what are some of the things that give you more confidence than I've had?

Well again, I'm not sure I fully understand all the reservations you or others have, but I’d suggest that it's really a couple of things. We've talked about the paid loss ratio in the past, and we're happy to pick up that conversation anytime anyone wishes to. In addition to that, we've talked about the strength of our IBNR compared to total reserves, as well as the strength of our IBNR relative to case, and you can see that trend. And then in addition to that, I think on the last call or two, we talked about our initial IBNR relative to our earned premium, Rich, which we brought back to people's attention because I think, there were some question with the other metrics we were putting forth. Well, how is that impacted by the fact that the business is growing? So that's why we try to draw people's attention to the initial IBNR relative to earned, which should take into account growth. In addition to that, I think that there are a lot of folks that before they reach conclusions, they need to unpack our mix of business with greater granularity. And there are some people that have offered a view on the more recent years and how we've thought about those reserves without having a full appreciation for in some cases where we're using a claims made form as opposed to an occurrence form or amongst other mixes of business. So we look at our loss reserves, very regularly, every quarter, we look at it at a very granular level by operating business, by product line, and we look at the aggregate and we look at it in between the two. And from our perspective, ultimately we respect the fact that everyone is entitled to their opinion. At the same time, we are doing the best we can to try and help people understand but there is also a reality and it is going to be hard for us to prove it other than through the passage of time. I think the last point that I would raise, as it relates to the topic of reserves. I think the world oftentimes paints with a very broad brush. And when they see other market participants having to grapple with some challenging circumstances, they look at the product line particularly when it is casualty or liability exposure. And then they'll extrapolate and they'll say, well, this company over here had problems with this product line, so let's go out and look at who else would potentially have that exposure, and then they'll make this leap that, that is going to be an issue for everyone. And I think that that can be a very slippery slope and would encourage people to invest the additional time and perhaps use a finer brush and recognizing that there is greater distinction than perhaps I appreciate at base value.

Got it. Very helpful perspective. Thank you.

Your next question comes from the line of Brian Meredith with UBS Financial. Please go ahead.

Yes, thanks for fitting me in. Two questions here for you. First one, Rich and Rob, you talked about some of these businesses that are kind of new and incubating right now, but should help the expense ratio as they kind of come online and you put them into your results. Is there any way you can kind of give us some quantification about how much premium is sitting in these businesses and what benefit they could potentially have from a premium perspective looking over the next 12 months?

Hi, Rich, I'm not sure if you want to address that. It's more of a rough estimate. Brian, we can talk about that now or if you prefer more specific details, feel free to give us a call. Rich, what was your comment? Go ahead.

There are four operating units that we've moved over from, I'll say, our corporate expense category into our underwriting expense category in the first quarter and round numbers, $25-plus million in net written premium in the quarter.

So that was the benefit in the quarter. Got it.

That's the premium that they contributed to the quarter. But I think maybe picking up on the point in taking it slightly further. Those businesses, by and large, are very much in the early stages of scaling, Brian. So as they scale you will see them become less dilutive to the expense ratio and hopefully, sooner rather than later neutral. And perhaps at some point, it will become accretive.

Great. For my second question, I believe you've addressed this in previous calls, but your investment funds have been performing below your historical returns for the last 18 months or so. Should we anticipate lower returns moving forward, or is there something unusual happening right now? Will we see a rebound at some point?

I think we book these on a quarterly lag, and it's often surprising to me how long it takes to get visibility. In the short run, I would suggest considering around $10 million a quarter. Over time, I hope you'll see that return to about $20 million a quarter. So, for now, please factor in $10 million. However, it can be inconsistent in the short run, as you know, but we believe in the returns over time.

Understood. Thank you.

Thanks for the question.

We have no further questions in our queue at this time. I will now turn the conference back over to Rob Berkley for closing comments.

Yes. So before we say goodbye. Actually, I don't have anything to add at this time, but I think our Chairman may have a few thoughts.

I would just like to add one comment that went along with the investment income question and that is our goal is to take advantage of the changing shape of the yield curve and move the duration of our portfolio out. On the other hand, if you look at the level of leverage in the world, there is not a rush to do that. At the same time, we have no interest at all, as Rob said of lowering the quality, if anything, the kinds of things we bought in the past quarter have been probably average of AA, not AA-. It's an opportunistic strategy that's geared to the view that we don't think rates are going to go down a lot, especially on the longer side. And therefore, we can continue to invest. And it's not only reinvesting the money, but we're going to probably have $4 billion of cash flow. That's a lot of money to invest. So we are quite optimistic about our investment income, let alone our operating profit margins from underwriting. So we continue to see quality and duration improving as the yield concurrently goes up.

Okay. Krista, thank you very much, and thank you to our participants. As suggested earlier, we think the business is well positioned, and we look forward to catching up with you in about 90 days. Thank you. Have a good evening.

And this concludes today's conference call. Thank you for your participation, and you may now disconnect.