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W R Berkley Corp
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Good day, and welcome to the W.R. Berkley Corporation Third Quarter 2018 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 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, 2017, and our other filings made with the SEC for a description of the businesses 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.
Thank you Mani, and good afternoon all, thank you for joining us on our third quarter call. On this end you also have Bill Berkley, our Executive Chairman; and Rich Baio, our Chief Financial Officer.
Let me give you a quick sense of the agenda, which is similar to what we've done in the past. I'm going to start off with a few comments or thoughts on what's going on at a macro level in the industry, offer a few sound bites on the quarter. And then I will in short order hand it off to Rich who will walk you through the quarter in greater detail.
Before we jump into the agenda, let me just offer a comment on behalf of my colleagues and myself. There is somewhat of a more personal nature. The cat activity in the third quarter of this year while not quite in some ways, as severe as what we saw last year was still very significant and obviously we're seeing cat activity in the fourth quarter as well. It's easy for this activity in this industry to turn into something that's thought of as ratios and numbers, but people should not lose sight of the fact that these are people's lives. And from our perspective, we would like to extend our thoughts and prayers to all those that are affected. And hopefully this does provide an opportunity for the industry to demonstrate the value it brings to society and helping it get back on its feet in affected areas.
Turning to the business of today, a couple of topics that are referred to here and there are topics that we have discussed in the past. And I would suggest they could fall under the category of how much data or perhaps how much pain is required for there to be a change in behavior. Maybe starting with the property markets particularly cat exposed property, yet another quarter has gone by with frequency of severity, and for all we can tell there's not a significant change or appetite for change in behavior in the marketplace.
Yes, you may be seeing incremental change, but it does seem as though the concept of risk adjusted returns, the idea that the dollars lost are real and that this capital is entitled to return does continue to be lost on many market participants. And this idea, again, continues to be a published author just backing out tasks, cat losses, as if they don't count really has never and continues to make no sense to us.
The other area that we and others have talked about more recently, I think we started to talk about it 18 maybe 24 months ago, is inflation. And as we've discussed with people in the past, and others have as well, it comes in two obvious flavors one being financial that seems to get a lot of attention, the one being social, the other one, excuse me, being social which is getting an increasing amount of attention.
In spite of the attention and in spite of all the discussion, it is concerning to us on behalf of the industry, that the dialogue and the focus did not be seem to be converting into action. Hopefully that will change as we move forward. Certainly, as we have demonstrated, and will continue to demonstrate both of these points are things that we as an organization are very focused on, and we believe we are taking appropriate action as we position the business not just today, but also thinking towards tomorrow.
Let me offer a couple of quick sound bites on different product lines. Again, from our marketplace perspective reinsurance continues to be what I would define as a relatively grim picture, I would tell you that we are able to find a few isolated green shoots in the 3D market outside of the United States, the US 3D market continues to be exceptionally competitive and quite frankly concerning, I would tell you that there are early signs of possible encouragement coming out of the fact market but I think it is premature to call it a trend. On the insurance side, again properties though we’re seeing the market get incrementally better it remains surprising to us in light of the cat activity that we’ve seen over the past year. The lack of movement in particular, the London market seems a bit sluggish in responding as it would have historically responded to this level of cat activity, again also there has been a lot of chatter, but we will have to see if that converts into a change in behavior.
I would characterize the GL market in general as steady, worker's comp I think there has been a lot of chatter around action rating bureaus have taken in moving rates down, at the same time I would caution people not to overreact to this rate activity or rate action given the way worker's comp gets priced off of payrolls with payrolls moving up, salaries moving up that certainly helps keep up, and in addition to that obviously the frequency trend continues to be negative which emerge to the benefit of lost costs. Professional liability from my perspective continues to be among the most concerning parts of the business in particular, the D&O market, especially the larger D&O accounts, large law firms in certain parts of the medical market give us real reason to pause and having said that there are some niche opportunities within the professional space that we continue to find very attractive.
And finally commercial auto, from my perspective it’s certainly continued to improve but we need to be thoughtful and selective in how one participates in that market. As it relates to our results in the quarter again I am going to leave most of the details to Rich so just a couple of comments from me. I think overall it was a good quarter. We were pleased with the topline growth that we’re growing in the places where the margin is, in addition to that we were pleased with the rate that we're giving, so in the insurance business as Rich will walk you through, we grew 5%, and if you look at the rate that we’re getting in our business ex workers comp we’re getting about 3.9% rate increase. In addition to that our renewal retention ratio continues to run at about 80% so even if we’re pushing for rate we think the integrity of the book is remaining well intact.
The rate that we’re getting we think is very appropriate just going back to that idea of inflation that we touched on earlier and we have talked about in past quarters, and while rate in a vacuum is not the sole remedy it is certainly an important ingredient, one needs to obviously take into account as we’ve also discussed in the past, terms and conditions, attachment points, etc., etc., the lost ratio 63.5 couple of points for tax in there, by and large again not what we would strive for but from our perspective, not unacceptable given the level of cat activity. Rich will talk about the incremental improvement and the expense ratio we continue to work diligently on that and there are a lot of people very focused on it and we think we’re making progress. I would tell you or I would caution you it is not going to be a perfect curve or even development, there will be moments where we’re able to make meaningful progress like what you saw in the quarter and then there will be quarters where we have to take a half step back in order to take two steps forward.
Overall, 95.9 for the quarter again, from our perspective pretty good in light of the cat activity for those of you who seem to subscribe to the, but for model that will translate into a 93.9. On the investment portfolio, again this was an example of us having good foresight in my opinion as we thought about inflation and where interest rates are going. We have continued to manage the duration down to the 2.9 years. Rich will give you a little bit more color on this. But at this stage, I think that is really one of the main drivers as to why we are having the effect or lack of effect on book value as we see interest rates moving up.
So I will pause there and I’m going to let Rich get into more of the details with you all and again, then you’ll have three of us for any questions. Rich please.
Thanks Rob, I appreciate it. We reported net income of $162 million or $1.26 per share unchanged from a years ago quarter. Earnings were favorably impacted compared with the prior year by higher underwriting profits, net investment income and foreign currency gains. Offsetting these positive results were lower net investment gains primarily attributable to the new accounting treatment on equity securities.
Overall, net premiums written increased 3.4% to approximately $1.62 billion in the third quarter of 2018 premium improved 5.1% to $1.5 billion in the insurance segments. The growth was led by a 9% increase in short tail lines followed by about 8.5% in commercial automobile and 6% in other liability. Workers compensation reflected a small increase resulting from growth and exposure as a strong economy resulted an increases in payrolls offset by declining rate environment as Rob alluded to. There are pockets of opportunity in the global reinsurance market although the North American assumed property casualty environment remains more competitive than other areas.
The team has maintained its underwriting discipline and shrunk the business when unable to write business that can achieve its targeted risk adjusted rate of return our reinsurance segment declined by 14% to $190 million, primarily driven by the soft area of the market. Pre-tax underwriting income was $66 million this current quarter, reflecting lower cat losses and relatively flat underwriting expenses. The gross and net premiums written of almost 3% year-to-date is earning through the income statements contributing to improving underwriting performance. The current accident year loss ratio for forecasts of 61.5% cat losses declined from $190 million or 7.5 loss ratio points for the prior year to $39 million this quarter or 2.4 loss ratio point.
A year ago, the industry experience catastrophe events more significant and it’s been seen in over a decade with Hurricane Harvey, Irma and Maria along with the two earthquakes in Mexico. Albeit on a smaller scale, we were reminded again in 2018 that Mother Nature can deliver powerful storms like Hurricane Florence and Typhoon Jebi. Losses from these storms have demonstrated that our cautious approach to underwriting global property risks is likely to continue to result in below average volatility. Loss reserves developed favorably in the quarter and prior year quarters by $7 million or approximately 0.5 loss ratio points. Accordingly, our reported loss ratio is 63.5% in the third quarter of 2018.
The expense ratio of 32.4% represents the decline of 0.2% from the year ago quarter and was lower than the consecutive quarter of 33.3%. In dollar terms our underwriting expense was relatively flat to the comparative quarters and year-to-date, as the gross and net premiums written earns through the income statement in coming quarters we expect an improving expense ratio. In addition several new businesses we’ve scaled we believe their contribution will further improve the expense ratio. We have and continue to look at ways to streamline our processes internally not only does this create efficiencies and strengthen our service offerings but it also minimizes the cost of doing business. This brings our quarterly combined ratio for the third quarter of 2018 to 95.9%, and our accident year combined ratio excluding cat to 93.9%.
Investment income increased 31% to 44 million to 186 million; the core portfolio increased approximately 15 million led by fixed maturity securities; higher base of invested assets and rising interest rates have benefitted the income statement. Investment funds increased 26 million primarily due to higher earnings from energy, aviation, and real estate funds. We’ve also maintained an average rating of double A minus and an average duration of 2.9 years for fixed maturity securities including cash and cash equivalents. We reported pretax net realized and unrealized gains of $22 million, due to the change in accounting for equity securities adopted in 2018, there are now two components comprising pretax gains.
The first is pretax realized gains from the sale of investments of $154 million and second is a change in unrealized gains on equity securities of $132 million resulting from the adoption of this new accounting announcement. The change in unrealized gains and equity securities is not reflected in any prior year’s income statement results and therefore creates an inconsistency to comparable periods. Had no change occurred in this treatment our annualized pretax return on equity for the quarter, would have been approximately 10% higher. We recognized foreign currency gains of $17 million in the current quarter, approximately 16 million of which primarily is due to the strengthening U.S. dollar relative to Argentine pesos.
Beginning July 2018 Argentina is considered hyperinflationary, under the accounting rules hyperinflation arises when the cumulative inflation over three years is equal to or greater than 100%, and accordingly, we were required to change the functional currency from Argentine peso to U.S. dollars for our Argentine operations. The effective tax rate was 21.4% for the quarter, the total income tax expense reflects the reduction in U.S. statutory tax rate from 35% to 21%, and effective tax rate differs from U.S. federal income tax rate of 21%, primarily because of tax exempt investment income offset by foreign operations with the higher tax rates. Stockholders equity increased slightly quarter-over-quarter and from the beginning of the year, the combination of lower unrealized gains on fixed maturity securities due to rising interest rates and the return of capital offset much of the earnings in the quarter and year-to-date.
Fortunately our early decision to maintain a short duration on our fixed maturity portfolio has positioned us well to minimize the adverse impact on the balance sheet while benefit from rising interest rates through the income statement. We also returned capital to investors of $79 million in the quarter and finally our return on equity for the quarter on an annualized basis was 12% on net income. Thanks Rob.
Great Rich thank you very much. Mani now we would be pleased to open it up for questions.
[Operator Instructions] Our first question comes from Amit Kumar with Buckingham Research. Your line is now open.
Just a couple of quick questions. The first question I had for you Rob was I was trying to tie your commentary on pricing of 3.9% with your frustration with the industry behavior regarding what they are doing. Is that -- does that mean that we should anticipate a continued upward trajectory in WRBs pricing? Or am I simplifying the thought process too much?
Well, from our perspective I think it's pretty clear that in many lines of business loss costs are moving up. Workers comps maybe one of the few phenomenon where we're seeing certain components of the loss cost particularly the frequency trends being negative which then annures to the benefit. But overall, when you look at the level of financial inflation in the broader systems and if you look at the level of social inflation that there is a growing evidence around we think that there are lots of ways to affect the rates. Again, one is the price we charge, one is terms and conditions attachment point deductable et cetera et cetera.
Our view is that given the level of inflation that is in the system and that presents itself in many different ways one needs to be taking appropriate action. So yes, when we talked about 3.9 of rate that is just what's you're being driven by the pricing we are doing other things as well which we think will impact the margins.
The other question I had was going back to the broader discussion on expense ratio, and I know Rich made some comments and there were some comments specific comments in the press release. I know in the past we have talked about I guess the 1% to 2% number. Are we still on track for that? Or could we even end up doing better than that?
Well, I don’t want to get ahead of ourselves. I think as we have commented in the past we are running at 33 something pretty consistently. We are looking to take a point off that over time consistently. And once we have gotten to that new level then we will look to see other opportunities for us to improve from there. But again, I would caution you and others please keep in mind that occasionally we need to make certain types of investments in order to position ourselves to improve which could come at a cost.
Got it, that's helpful and maybe just sneak one more quickly and I'll stop. Do you have any early indications what's your hurricane Michael exposure might be?
Are we getting some loss notices yes, of course we are as I presume others are in the market place but I think would be a really premature for us to begin to even speculate as to what that’s going to be having said that as you know, and as we continue to demonstrate we’ve managed volatility in what we believe is a thoughtful and measured manner and given our comments around property pricing particularly cat exposed property we tend to underwrite that certainly compared to the average among our peers.
Thank you. And our next question comes from Kai Pan with Morgan Stanley. Your line is now open.
Just a follow-up on Amit’s question raises versus inflation, if you balance these two the rate increasing as well as you have inflation trends, will you be able to maintain the underwriting margin going forward, or you can actually the rate increase itself outpaced the last inflation, that you can have some improvements on it?
Our expectation between the rate that we’re looking to achieve and we’ve been able to achieve so far as well as some of the other underwriting actions that we’ve taken we believe that ultimately it will to inure to the benefit of the margin and you’ll see margins enhancement on the underwriting side.
Okay, that's great. And then just following up the workers compensation like commentary you’ve seen active frequency trend, what we heard from some other competitors talking about the increasing frequency, is it something sort of different your basis of writing versus the others?
Well I am not familiar with the others book of business. I can only react to our portfolio and I would suggest that you might give a call to the folks over at CCI, they put together some what I would define as very helpful broad data on the industry and I think that might give you some further insight and I would expect that would dovetail with our comments.
And then on the investment side, it looks like the alternative fund, sort of the fund returns have been more than sort of like last few quarters, like you said energy and real estate funds are there any early indications for the fourth quarter results because I remember those results probably lagging the market in terms of…
Yes. Much of what's in there we book on a quarterly lag, having said that I think it’s a little bit early for us to really point you in a direction, I think Karen has given some historical guidance in the past and we’ve as well I think somewhere between 15 million to 20 million a quarter and but again if you look back over the history there’s a fair amount of volatility in that, it’s a very different animal than the fixed income portfolio.
Last one if I may on the sort of realized gains and losses and the capacity always guiding $100 million a year so far you did 420 in three quarters so how should we expect going forward is that going to be less because you’re already realized a lot or if the current trends going to continue?
We continue to guide people towards the 25 million a quarter is the right plug if you will for your model at the same time as we have been quite emphatic the nature of the type of investments and how it gets realized there it’s going to be a good deal of volatility. We’ve had a couple of good years. I would suggest do not make the assumption that that means that we have gone through all of the opportunity to monetize I would tell you that the pipeline is both deep and broad at the same time the timing of when that gets realized could easily vary by some number of quarters. So again, my suggestion to you is as you continue to use the 25 million at the same, per quarter at the same time from our perspective. Well it may not help you that the nature is there will be volatility in there.
I was hoping Bill can make some comments on what asset classes feel right for sort of harvest in terms of valuation?
Well, I would suggest you give Bill a call.
I don’t think this is going there with a broad audience.
I think the long and the short of it is, it’s really an opportunistic decisions, opportunity comes along we'll harvest one asset or another and it really is purely opportunistic. And I think that will continue to be where we are.
[Operator Instructions] And next question comes from Mike Zaremski with Credit Suisse. Your line is now open.
Follow-up on Kai’s question and Rob your remarks on workers' comp. So if we take into account the important nuance you brought up about payrolls and wage increases helping and frequencies being negative. And we mesh that with pricing, which is negative. Are margins staying steady or are they just deteriorating by trading off of excellent levels. Just trying to get directionally where that line is going?
The thoughts that I would share with you are the following. I think, it varies greatly by territory, it varies greatly by class. So I would be reluctant to use such a broad brush for really it will requires a fine brush to provide a specific answer as you’re looking for. I would tell you that they’re clearly parts of the market not the whole market, but there are parts of the market that we find very attractive still in spite of what’s been happening with the action coming out of the rating bureaus, which is why you see us continuing to grow the line of business as articulated in the release.
Okay. That’s fair and I know that’s a very nuanced by state. My next questions regarding the catastrophe load. It seems like it’s continually a little below investors expectations and are you guys emphasize volatility management for portfolio mix has changed a good deal over the last 10 decades? And honestly, I’m just taking the 10-year average. So just curious whether maybe I shouldn’t be taking your average?
I’m sorry, we missed the last part of that we were pre-occupied with the 10 decades and I turned to my…
Sorry. I’m a little bit [indiscernible]. So yes, I just don’t have as much as for instance you guys.
I think that it would be appropriate to think that when you see cat activity should expect the experience on a relative basis for our organization to be relatively benign. The growth that maybe referring to in the product line that Rich, I think you're going to the release is really driven by, but I would define as non-property short tail lines. So examples of that not limited to this, but examples of that would be surety, as well as A&H. But we have had and continue to have the view that this business is all about risk adjusted return. If and when there's an opportunity that we believe that the risk adjusted returns make sense in a cross property cat space, we are prepared to play that game. But we believe that when you think about risk one needs to factor in volatility.
So until you see a dramatic shift and it would have to be very dramatic. Then you will continue to see us the underweighted in some of the cat exposed lines. And to the extent that rates get attractive then we certainly will be sharing with you and other stakeholders to the extent our appetite has changed and why. But we are not going to do anything that we don't think we get paid appropriately for the risk.
Okay, great. And I can throw one last one in, you mentioned the prepared remarks as well the real estate portion of the investment portfolio has grown by more than a couple points since year-end. How do you think about the total return opportunity in that portfolio and just curious do higher interest rates make the opportunity to harvest maybe less promising over time?
No. First of all, we generally don't use leverage in our real estate portfolio. So it has really had much impact on us. Our real estate portfolio I think we have one building that we will read for one mortgage on, but that's the total sum of our historic mortgages. So it doesn't really have much impact on us.
Number two, we're developing projects. So the increase in our investment in real estate, we finished the building in London it's something like 60 something percent rented up, maybe 70% I don't know exactly as of the moment. And we have buildings in Washington that are just finishing up and we have finished in 100% leased building in New York City. So what you've seen is our completion of buildings and renting them up, not new project started.
Okay. Thank you very much for the color.
Thank you. And our next question comes from Joshua Shanker with Deutsche Bank. Your line is now open.
Good evening everybody. Hi there. Excellent quarter, good job. I would love to talk to you guys a little about your personal lines for a and if there's a new business penalty associated with acquiring business and what that happens over time and given some travelers remarks and we had this big fire out in California. What is the appetite long-term for that kind of business? Obviously you're looking for specialty business but try and understand your overall appetite?
All right, Josh let me repeat the question back here to make sure I got it correct if you don't mind. So were you asking about Berkeley One our personalized business or just in general or exposure to cat or I just want to make sure.
So Berkeley One and how it relates to exposure to cats?
Okay. So…
And also there's and if there's a new business penalty as you grow?
Okay. So for starters is when you say new business penalty what does that mean exactly I wanted?
I mean in the past certainly Bill has said that that you -- unlike a lot of companies you like to write new business at a better margin then business that’s already on your book. So you understand the nature for the business on your books, by taking on new business most companies say look we don’t know that business is well so often times it contains losses and a loss profile that’s in excess of we might've expected. I guess that's what I mean.
Okay, I appreciate the clarity. So maybe this is as far as that piece right off the bat, we do not burn our way into the market maybe to put a slightly finer point on it whether that’d be due to selection or pricing or whatever our colleagues that are running the business are true professionals and not only do they have the technical expertise but we’ve a shared set of values out of respect for the capitals that our various stakeholders provide us, so is it possible at any given one off risk that we could be cheaper than competitor C, yes it is certainly possible, but it's also possible on the next three quarters that we would be less competitive than competitor C or competitor A or competitor P, so to make a long story short, no I do not believe that we are burning our way into the market and philosophically I don’t think the folks that are running that part of the business on behalf of the shareholders subscribe to that at all.
As far as our overall approach to cat and exposures such as wildfire it certainly is something that we have a high sensitivity to, we measure our exposure and our aggregates very carefully we’ve some very skilled people in our ERM department making sure that we understand what we have out there. We have a clear view around what our risk appetite is as an organization and then ultimately we will find partners that are looking to deploy capacity in the reinsurance market to help us manage whatever exposure is beyond what our appetite may be. So long story short, at Berkeley One has not changed our philosophies in general or our risk appetite.
And do you have in way of framing in a five years sort of view how big Berkley One could be?
How big? I think Berkley one five years from now is going to be very meaningful to our organization. I think it is meaningful today because of the contribution that colleagues are making in building and developing our franchise and I think that that will broader terms here as the financial contribution becomes something that will move the needle in a meaningful way for the group.
Thank you. And our next question comes from Meyer Shields with KBW. Your line is now open.
Rob in your prepared comments you talked about terms and conditions is there market trend right now where terms and conditions are near your competition in insurance?
I think there's certainly are pockets of the market where you see standard market appetite expanding and consequently you see a relaxing of terms and conditions and I think that there is a meaningful parts of the market that are moving in the other direction where you're seeing a tightening of terms and conditions as well and you’re seeing business exit the standard market. So again I am not trying to be difficult but it really varies depending on what product -- what pocket excuse me of the market you’re referring to but I referenced the terms and conditions, attachment points, deductible etc., because people tend to get very focused on did the rate move up how much, did it move down how much and those are really important things and certainly our rate monitor tries to capture some of that, what I would tell you is that I don't think any rate monitor is fully is able -- excuse me is able to fully capture change in terms, conditions etc.
That's helpful, that makes a lot of sense, within the frequent -- I am sorry within the general liability lines, you’ve talked about social inflation for a while, is that trend accelerating or is it just sort of worse than it had been but at the same level?
I think it’s a lot of things, it’s very difficult to determine that over a short period of time I think clearly as we get a few more quarters under our belt it will become more evident. But I would tell you we have a little bit of data what I think the growing gut feel within our organization is that you're seeing a resurgence in activity and efforts in the plaintiff's bar, you've obviously seen some very large awards are coming out of juries, and often times when you see these large numbers that tends to set the bar for what other awards may be as the new reality. So again I don’t feel as though anyone has enough evidence or data at this stage to be able to point you definitively in a direction, but I think there is a growing amount of data that would support, there is good reason to have concern around the social inflation idea.
Thank you. And our next question comes from Brian Meredith with UBS. Your line is now open.
Actually that was kind of my question there, but Rob let me just follow-up on the social inflation a little bit here, I am just curious what do you think is going to be driving it here going forward and if you look at obviously the court system right now we’re back to kind of balanced federal public court system as far as Republican and Democratic appointed judges, we've obviously got a favorable Supreme Court, how do you think that impacts things going forward?
I think the pendulum tends to swing back and forward as we observe and I think there’s a delay and I think we’re on -- we’ve expressed our view in the past and it continues to be our view Brian that part of the resurgence in the plaintiff bar and perhaps some of what you see coming out of jury is a reflection of the environment over the past eight years that we had Washington really very much influenced through a more of the Democrat lens, I suspect if you roll the movie forward over time you’ll see the pendulum swinging back the other way but there’s clearly a delay.
That makes a lot of sense, and then secondly Rob just curious you made the comment that you’re still seeing some favorable frequency on workers compensation insurance, can you tell us what would drive that to kind of pop back up the other way?
So again I don’t know if anyone can scientifically if you will or mathematically prove exactly what has driven this relatively benign environment for an extended period of time even though there’s data that would suggest it has to do with safer workforce, medical costs as well and a variety of other things.
I would suggest that perhaps that one of the larger concerns that we have, that could send it sailing back in the other direction. Putting aside what people have been trying to do on as far as managing costs would the a very, very tight workforce, like one that we’re seeing today, sub 4% but what ends up happening when you have an environment like that often times Brian you get people in jobs that they have not received an appropriate level of training for it, that often times can lead to accident and injury.
They also get people working overtime, and oftentimes people get a degree of fatigue that can lead to accident and injury. So my crystal ball is pretty much as foggy as anyone else’s, but that certainly is one of the things that when we lock ourselves in a room together and try and figure out where things are going, that’s one of the thoughts that we kick around.
And our next question comes from Ryan Tunis with Autonomous Research. Your line is now open.
I just had, I had a couple on underwriting and then one on expenses. I guess in the underwriting side, just how would you characterize this quarter in terms of like man-made losses, short tail stuff it’s non-cat. Can you got help the loss ratio or was that little more than it’s been?
I think it was trying to right up the middle by and large. So I think the improvements that we’ve been talking about that you’ll see with time are going to come as a result of rate and changes that we are making on in the underwriting front for the pricing again, and not just terms conditions but selection as well.
And actually that was my follow-up. So on the step [indiscernible] the terms and conditions, the risk selection I know in the past you talked about moving up in attachment point. Philosophically does that change, is it a change the volatility of your results are you more likely to have lumpy quarters if you're higher up I mean, are you I mean is there any offset do you think in terms of, obviously it’s going to help margins but is there any caution about what there might be for the volatility standpoint or anything else?
Again as we suggested under the lens of volatility risk adjusted return we’re focusing on property cat and the comments earlier. Volatility in general is something that we are very sensitive to. I would caution you not to make the leap that in some cases where we adjust attachment points that that would have a dramatic impact on the type of volatility we have in our portfolio. I would also remind you that the lion's share of the business that we write is not large account or even in an access tower. The vast majority of the business we write is relatively small limit business.
So I think this as a data point, more than 85% of our policies have a limit of $2 million or less.
So when you think about that in the context we are not a big access market and we are not a subscription market in a big way. The lion's share of what we do, we write the whole individual account.
Got it. And then on the expense side, I'm not exactly sure it's been having with the ratio there and reinsurance but it looks like one place where you've made a lot of improvement has been in reinsurance. Looks like you're at kind of low 40s selling an operating expense run rate now and that was up towards of 60, just over a year ago. Just some color I guess on what you're -- what are some of the changes you're making there?
There was -- we've had a shift in the portfolio and I'm going to give you my key suggestions, then Rich can give you a little bit more color. Rich, that was my heads up, it's about to come over to you.
Fair enough.
What's happened is we had several structure deals there where the loss ratio had a quarter or cap on it, if you will, and the commission was on a sliding scale. The commissions were particularly high. The colleagues running the business decided pursuing those in general did not make a lot of sense going forward. Commissions came down, scale of the business came down, internals went up. I'm done.
I think that's a fair summary, Rob. The other point that I would add is that as we see, on the commission side as you're pointing out, a reduction, the fixed costs are obviously down a little bit as well. And that reduction is not enough to counter the effect of the earned premium reduction that we're seeing coming through quarter-over-quarter. So it's really just a reflection of that fixed and variable costs proportion to the earned premium.
And I guess [indiscernible] for a second, but Rob you did -- kind of so much you're cautioning towards run rating this level of expenses this quarter going forward. What kind of…
If that was the message that I sent to you and others or if I left you with that and questions -- what I'm suggesting is this. We've been running at 33 something give or take, more often than not for a while. We did express a desire to take a point off of that. And once we get that accomplished, we will be as a group looking to see other opportunities to improve from there.
I would suggest -- I guess the additional comments where I would just remind people that in order to make this progress, occasionally one has to take a half a step back in order to take two steps forward.
So I am not suggesting to you, I'm not, in any way shape or form what your assumption should be. That assumption is your assumption. I am telling you is as I think some of the progress that we have been looking to make was visible in the quarter, at the same time we do have other initiatives that could move it back in the other direction temporarily.
Okay, very good. Thanks guys.
Thank you. And our next question comes from Yaron Kinar with Goldman Sachs. Your line is now open.
Thank you very much. Good evening. Rob, in you're prepared comments you expressed some frustration over the way the industry is behaving right now. And I guess my question to you would be, are your expectations of the industry different than what the industry has done over time?Namely we're seeing none of investment income improve interest rates rise where we haven't quite seen losses emerge at any significant scale just yet. Industry capacity remains abundant. I think you guys have been in this industry way longer than I've looked at it, but in your experience, have you seen the industry raise rates in such an environment?
So I'm going to yield to my boss who has decades more experience than I do and I think he can give you a better perspective than I.
I don’t like being referred to as decades. But the long shot to it is -- I think you have different sources of capital that are responding to losses in different ways than this industry has historically responded. So yes, it is different than it was. Primarily because the capital is in this industry for marginal returns over and above their investment returns, there's lots of it. And people are looking at their investment returns in a different way. I think that's going to all change and it will at some point when the catastrophe losses are large enough that it impacts people who find that the unforeseen event is greater than the actuarially projected result. And that will happen, we just don't know exactly when. We have had periods of time where we had 300 and 400 year events in a period of five or seven years. And that's the kind of thing that can dramatically change the outcome. Sandy wasn’t even a hurricane. Imagine if it was a hurricane. Imagine if 38 kind of hurricane came across where it did last time, the losses on Long Island and Rhode Island alone would be bigger than any storm we've seen. So I think that you aren’t seeing people react because they're relying 100% on the predictive modeled results and if you've been in the business long enough you know, predictive models results are only averages based on statistics, they are not perfect. And I think this business has become much, much more predictive than model. As you think it is behaving in a different way at the moment, but we will see whether that's justified or not.
And then I guess the other question, Rob in your prepared comments you also talked about D&O, particularly for large accounts is being an area of that seems especially concerning right now. We have all seen the data around frequency picking up and defense costs being up. Is there anything else that is driving your concern there specifically the large accounts? And on top of that do you see as the private market the smaller market as an area that could be a port in the storm if the trends that you're seeing in large public do indeed go through?
Again, from our perspective the D&O space in general is pretty competitive. As far as opportunities or niches within the D&O space, we prefer not to get into where we see the pockets of opportunities. But again, the large accounts and we all read about the loss activity if you pick up the Wall Street Journal you can't help but stumble across it. There's been a fair amount of loss activity. There has been a frequency of severity if you will and that's not uncommon for the D&O space. I think the problem is that the market has been very competitive for an extended period of time, and I'm not sure if there is an appropriate level of premium to be able to endure the level of loss activity, and again I think that’s particularly noteworthy and what I would define as the Fortune 5000.
Thank you. This concludes today’s Q&A session. I would now like to turn the call back over to Mr. Rob Berkley for closing remarks.
Okay thank you very much, we appreciate you all calling in; from our perspective again it was a solid quarter, it was an opportunity for us to demonstrate how we manage risk and in return particularly in this quarter under the lens of property cat. We spent a good deal of time focused on a lot of things and how we managed the business, but we try not to spend our lives being obsessed with what’s in the rearview mirror, but actually looking at the front windshield. Hence how we've been positioning the investment portfolio for an extended period of time, as well as the actions that we’ve been taking on the underwriting side. We think there are clearly opportunities in the marketplace and we are pleased with the strength and stability of our platform. So, thank you all again for calling in and we look forward to talking about another successful quarter within 90 days.
Ladies and gentlemen thank you for participating in today’s conference. That does conclude the program, you may all disconnect. Everyone have a great day.