Categories Earnings Call Transcripts, Finance

WR Berkley Corp (WRB) Q2 2020 Earnings Call Transcript

WRB Earnings Call - Final Transcript

WR Berkley Corp  (NYSE: WRB) Q2 2020 earnings call dated July 21, 2020

Corporate Participants:

W. Robert Berkley — President and Chief Executive Officer

Richard M. Baio — Executive Vice President Chief Financial Officer and Treasurer

William R. Berkley — Executive Chairman

Analysts:

Philip Stefano — Deutsche Bank — Analyst

Mike Zaremski — Credit Suisse — Analyst

Yaron Kinar — Goldman Sachs — Analyst

Meyer Shields — Keefe, Bruyette & Woods — Analyst

Brian Meredith — UBS — Analyst

Joshua Shanker — Bank of America Merrill Lynch — Analyst

Presentation:

Operator

Good day and welcome to W. R. Berkley Corporation’s Second Quarter 2020 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 and 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 31st, 2019 and our other filings made with the SEC for a description of the business environment in which we operate and the important factors that may materially affect our results. W. R. Berkley Corporation is not under any obligation and expressly disclaims any such obligation to update or alter its forward looking statements whether as a result of new information, future events or otherwise.

I’d now like to turn the call over to Mr. Rob Berkley. Please go ahead, sir.

W. Robert Berkley — President and Chief Executive Officer

Thank you, Shantel, and good afternoon all. Thank you joining us for our Q2 call. We have on the phone, in addition to myself, Bill Berkley, Executive Chairman; and Rich Baio, Executive Vice President and Chief Financial Officer. We’re going to follow a similar format to what we’ve done in the past. Rich is going to lead us through a summary around the numbers and the performance in the quarter. I am then going to offer a couple of thoughts on the heels of this comments. And then we’ll be opening it up for questions.

So with that, Rich, if you want to get us started please.

Richard M. Baio — Executive Vice President Chief Financial Officer and Treasurer

Absolutely. Thanks, Rob. Starting with our premium production. Gross premiums written grew 2% to more than $2.1 billion, despite a shrinking economy arising from the global pandemic. The growth was driven by an overall rate improvement and a comparable historic premium renewal retention ratio that Rob will be discussing shortly. Offsetting this improvement is a decline in exposures from the economic downturn as well as the strengthening of the US dollar against certain foreign currencies. Net premiums written of approximately $1.7 billion was relatively unchanged from the prior year’s quarter.

The Insurance segment decreased 2% to approximately $1.5 billion, primarily due to reduced exposure and rate decline in workers’ compensation as well as higher reinsurance reinstatement premiums. The Reinsurance & Monoline Excess segment grew 16.5% to about $200 million in the quarter relating to improving markets.

Pre-tax underwriting income of $23 million was adversely impacted in the quarter due to approximately $86 million of COVID-19-related losses. This compares with $100 million for the prior year underwriting income. In addition, we reported approximately $20 million of catastrophe losses for civil unrest and $40 million for severe weather-related losses. This brought our total catastrophe losses to approximately $146 million in the quarter or 8.7 loss ratio points.

COVID-19-related losses represented 5.1 of these loss ratio points. The reported loss ratio was 67.7% in the current quarter compared with 62.4% in 2019. prior year loss reserves developed favorably by $3 million or 0.2 loss ratio points in the current quarter. Accordingly, our accident year loss ratio excluding catastrophes was 59.2% compared with 61.4% a year ago. The improvement is driven by lower non-cat property losses and a change in business mix. The expense ratio was 31%, reflecting a decrease of 0.5% compared with a year ago and the 2019 full year. As we’ve seen over the recent quarters, the growth in net premiums earned has outpaced the growth in underwriting expenses, which has favorably impacted the expense ratio.

In addition, due to the global pandemic, expenses are considerably lower in travel and entertainment, resulting in relatively flat underwriting expenses in dollar terms quarter-over-quarter. To this end, the impact from COVID-19 may cause some variability in our expense ratio attributable to normalized operating costs and investments we make in the business. The accident year combined ratio excluding catastrophes and COVID-19 for 2020 was 90.2% compared with 92.9% for the prior year.

Net investment income decreased to $85 million primarily due to investment funds. As we mentioned last quarter, the net investment income for investment funds did not reflect the turmoil in the financial markets due to the one quarter lag. Accordingly, we are recognizing the effects of the downturn in our second quarter results, which amounted to a loss of $58 million. This decrease was evident in the energy, financial services and transportation funds. We understand that for modeling purposes you may want some direction regarding net investment income for investment funds in the third quarter. We’ve not received any estimates yet from the investment fund managers and accordingly are unable to provide any guidance at this time.

In addition, the combination of the low interest rate environment and the defensive position we’ve taken to enhance our liquidity and shortened our duration to 2.4 years has resulted in lower net investment income in the current quarter for fixed maturity securities. You’ll note that our cash and cash equivalent position has increased to almost $2.7 billion as of second quarter end or 13% of net invested assets. We believe this is prudent given the uncertainty in the financial markets and the economy. The fixed maturity investment portfolio, including cash and cash equivalents, maintained a high credit quality of AA- and reported a significant recovery and after-tax unrealized gains in the quarter.

From the first quarter of 2020, the total after-tax unrealized gains in stockholders’ equity improved from an after-tax unrealized loss of $110 million to an after-tax unrealized gain of $209 million. Pre-tax net investment gains in the quarter of $78 million is primarily attributable to the change in unrealized gains on equity securities of $62 million and a reduction in the allowance for expected credit losses on investments of $16 million. The change in fair value on equity securities is largely driven by Fannie and Freddie preferred stock. The favorable change in the allowance for expected credit losses is driven by the improved prices on foreign government bonds.

Our net income in the quarter is $71 million or $0.38 per share. Stockholders’ equity was approximately $5.8 billion at the end of the quarter, an increase of more than $300 million after share repurchases and dividends of $117 million. The company repurchased approximately 2 million shares for $96 million at an average price per share of $49.29. As a result, book value per share increased 7.7% before share repurchases and dividends. The company had strong cash flow from operations in the quarter of $427 million, which benefited under the CARES Act from the deferral of tax payments until July 15th. The liquidity is strong at the holding company with more than $1.5 billion in cash and liquid investments.

At this point, I’ll turn it back to Rob. Thank you.

W. Robert Berkley — President and Chief Executive Officer

Thanks, Rich. That was great. So, a couple of quick comments from me. Clearly a challenging moment for all of us on many different levels. Everyone is appropriately very focused on COVID-19. Having said that, I think we’re all struggling with the reality that there are more questions than there are answers. Hopefully, that will not be the case in the future. Hopefully, the behavior of many people will change and that will help us bring the situation more under control, and hopefully a pharmaceutical solution is not too far in the distance.

Having said that, while, again, the COVID-19 is the topic du jour [Phonetic], I think it’s important that we not lose sight of some of the other realities or factors that are impacting the industry and by extension our business. If one thinks back to last year, there was a growing groundswell of a firming market. You could probably see it before 2019 but during ’19, it very much came into focus. We saw it accelerate throughout the year and we saw it continue to accelerate into 2020, very evident in Q1.

The evidence of this was demonstrated at least in part by business leading the standard market making its way to the specialty market, and in particular the E&S market. We saw rate increases that we as an industry have not seen in some number of years, and we could see a reduction in capacity that various carriers were offering. All of these things were being driven, in our opinion, by two major factors; one being a low interest rate environment and the knock-on effect for what that means for investment income; and number two, loss cost trend, in part driven to — actually to a great extent driven by social inflation, which has been benign for an extended period of time and then, in our opinion, crept up on the industry when it was least expecting it, and it has proven to be much more of an issue.

These drivers that I just referenced remain alive and well. And quite frankly, I would suggest if you thought during 2019 interest rates were low, then you must think that they are really low today. And if in 2019 you are worrying about loss cost trend and inflation, social inflation, then you probably should be worrying more about it today than you were then. One needs to be careful that the current circumstance stemming from COVID-19 does not overshadow the underlying issues that are driving loss cost trend because we expect that this will just be a brief hiatus.

Today, we continue to see business exiting the standard line, making its way to the E&S market and the specialty market overall. We continue to see a reduction in capacity being offered, and we’re certainly seeing the leverage moving back towards those that are selling the product, and in part we are seeing that demonstrated by the rate increases that are coming through. And as we referenced in our release, we’ve got 13 points of rate in the quarter.

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It’s worth noting that the rate increases came through without our renewal retention ratio coming unfastened. Our renewal retention ratio continues to be consistent with what it’s been for not just many quarters but many years that are hovering between, I would say, approximately 80%. In addition to that, another data point that we shared with you all in the past is our new business relativity metric, where we measure the rate that we are getting on new business compared to our renewal business.

For the quarter, it came in at 1.084%. What does that mean? That means we are getting 8.4% more rate on new business than our renewal business, and that is something that we look for and expect because you know more about your renewal book than new business. These factors have allowed us maintain a top line. While we have not been able to grow at the same rate that we did in Q1 or that when we were doing our planning, we thought we would be growing in Q2. We were still able to maintain a top line.

And in addition to that, I would add that when we do see an economy that begins to open up again and recover, which hopefully is in the foreseeable future, it is likely that that will have a very meaningful positive effect on our top line when you combine growth in the overall economy with what we are able to achieve on the rate front, along with business making its way into the specialty market.

Let me give you a little more granularity on a couple of the lines of business and how we see the pricing and the competitive nature. I think, as it’s widely understood, the property market rates continue to move up. The larger the account generally speaking, the more the rates are moving up.

Similar story on the GL front. I would tell you that the SS and umbrella market very much stands out. And quite frankly, both of these product lines need the rate that they are getting, and probably more. Professional liability, it’s a very broad spectrum. I would tell you virtually all components of the professional space we are seeing rates moving up. Public D&O particularly on the large accounts continues to stand out and we’ve gotten to the point where we are getting rate on rate in a meaningful way. And I again would suggest that the industry needs every last penny.

As it relates to workers’ compensation, which has been marching to the beat of its own drum most other commercial lines products we have been seeing some level of rate for some number of quarters, comp has been moving in a different direction. We are seeing early signs that workers’ compensation pricing may be in the early stages of bottoming out. And I would not be surprised as we make our way into 2021. If you started to see a change in trend and rates actually start to move up at some point next year.

Lastly, the reinsurance market clearly has been waiting give or take, I don’t know, call it a decade-and-a-half for perhaps the moment that is upon us. Things are firming. We’ll have to see how much discipline really returns to that market. As we see that discipline return, you will see us grow our reinsurance division more and more, and certainly it may have an impact on how much business we choose to cede to the marketplace. Rich did a nice job as always covering the loss ratio. I just want to tack on a couple of quick observations around that. One, as it relates to COVID, the number both that we put aside for COVID in Q1 and now in Q2, when you total that up, approximately 75% is sitting in IBNR or approximately one quarter is either paid or case with the lion’s share of it available for incurred, but not reported.

I’d also make the comment around a topic that has been widely discussed, and that is what is the impact at least in the short run of COVID-19 on loss activity. I don’t think anyone knows with certainty what it is going to be when the dust settles, but certainly — without a doubt, there are product lines that have found themselves in a situation where frequency is considerably down. Shouldn’t be a surprise to any of us, given people sheltering in place and the slowdown in the economy.

Having said that, it is our expectation that when the economy opens back up, you will see frequency return to a more normal level. I should also mention on this front as a result of what we are seeing with frequency, our actual versus expected continues to run more benign or the actual has proven to be less than the expected as far as loss activity in many lines. Most of those lines are longer tail in nature, few are shorter tail. Shorter tail for example auto physical damage or property, as Rich referenced in his comments. The lion’s share of our business is on design loss ratios. So even when we have a reduction in loss activities specifically stemming from a reduction in frequency, that is not reflected in our reported numbers because we again book the business on a design loss ratio which we hold for some period of time as those reserves season out [Phonetic].

Pivoting over to the expenses, Rich covered this well. I would just offer the observation. As far as the expense ratio benefiting in the quarter, I would tell you that give or take probably 75% of the improvement comes from higher earned premium with the balance coming from, we just don’t have people getting on trains, buses, planes or staying in hotels, and obviously there is some savings associated with that. My opinion is that it’s fair to assume that the company continues in a normalized number running somewhere between 31 and 32.

I’m not going to belabor the discussion around the investment portfolio again. Rich covered that. But I would offer a couple of thoughts briefly. The investment portfolio is something that we view very clearly through a lens that we think about as risk adjusted return. There is a huge amount of uncertainty in the world today. And from our perspective, we have reached the conclusion, I should say, that it is better to take a defensive posture.

We have had a duration that has been shortening for some period of time. And we have quite frankly not seen much of a reason given where rates are to take that back out, so there is a limit. And as far as quality goes, we have gone from what I would define as a moderate AA- to a very strong AA-. I was chatting with a colleague earlier today, half of our portfolio can get reduced by a notch, and we will remain a AA-.

I think this brings us to one last point that I’d like to make, and then I promise we’ll get on to your questions. When we think about the business, including the investment portfolio, we think about it as owners. We don’t think about it as people that collect a paycheck every two weeks. We think about it with a long-term view in a sense of obligation and commitment as if we as a team, 6,500 of us, own this business. We think about risk adjusted return. We think about the uncertainties that are in the world, and we have made an active decision that this is a moment that we are willing to pay the price for taking a defensive posture and for having flexibility, given the unknown.

So let me pause there and, Shantel, if we could please open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Phil Stefano with Deutsche Bank. Your line is open

Philip Stefano — Deutsche Bank — Analyst

Yeah, thanks. And I guess, the attritional loss ratio particularly on the insurance business side, it felt like it had a nice improvement. In my mind, part of the rationale may have been the slower frequency that we’ve seen on the heels of the economic slowdown, given COVID. And it feels like Rob in your prepared remarks that wasn’t the case. And it was like most of the…

W. Robert Berkley — President and Chief Executive Officer

The way I would characterize it that there certainly was some benefit as a result of the slowdown. But please, again, understand that much of the difference in actual versus expected or a thing — or the reduction in frequency does not come through in our reported numbers. So, you will see the impact on the auto physical damage front fewer cars, trucks, etc, on the road but you’re not going to see that on the auto liability. You will see that again on the property. But you are not going to see that on the comp or the GL, etc. So, in Richard’s comments, he referenced that one of the contributing factors was non-cat property. And it was quite frankly in my opinion are a couple of different reasons within the non-cat property that we have this result. One of them has to do with some reunderwriting that we’ve been doing over some period of time and that has come through. But I would tell you that — what did you say [Phonetic]?

Philip Stefano — Deutsche Bank — Analyst

Is there any way you can help us kind of conceptualize the frequency benefit versus price versus trends, and I think the third metric that you mentioned was a mix of business.

W. Robert Berkley — President and Chief Executive Officer

So, I would tell you that there are couple of things at work here. First of all, I think we all have a sense that frequency for many product lines is down considerably, given the environment. Number two, I think the other piece that should not go unnoticed is that the rate increases that we have been getting for some period of time now, that are no longer just on a written basis but are hitting our earned are meaningful. And I think, if you look at our mix of business, which we disclose in lots of public information, and you can get a bit of a glimpse into that in the release. I forget which page it is, but where we show the mix of business, you can see the different product lines and how much of our portfolio would fall under shorter tail products where that would be coming through in our P&L now versus longer tail that would be on a design loss ratio where you would not see an impact of any consequence on a reported basis.

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Philip Stefano — Deutsche Bank — Analyst

Got it. Okay. And just one more for me. It felt like if we think back a couple of years ago, interest rates were heading lower. There was reinvestment pressures for the portfolios, but it didn’t have an impact of pricing. Does it feel like reinvestment rates — has something changed as rates just dropped below a point where they are now at leverage of pricing, I guess?

W. Robert Berkley — President and Chief Executive Officer

Well, I think clearly rates are notably lower now than they were after the financial crisis or the great recession or whatever you’d like to label it. They’re extraordinarily low. In addition to that, we clearly have a Federal Reserve and counterparts around the world that seem very determined to manage interest rates for at least a moment — at least as long as they can. And finally, you’ve got to remember that an insurance company, ultimately it takes time for that book yield to come down as the new money gets invested at lower rates. So, from my perspective, I think we’re hitting new lows as far as interest rates. And I think, ultimately it will take a little bit of time, but we’re starting to see the early stages of it actually having an impact where it’s going to hit investment income, but that takes time because it hits the new money.

Philip Stefano — Deutsche Bank — Analyst

Understood. Thank you, sir.

W. Robert Berkley — President and Chief Executive Officer

Thank you very much.

Operator

Our next question comes from Mike Zaremski with Credit Suisse. Your line is open.

W. Robert Berkley — President and Chief Executive Officer

Hi, Mike. Good afternoon.

Mike Zaremski — Credit Suisse — Analyst

Hey, Rob and Rich. Thanks. First question, regarding the COVID-related losses, and I appreciate the stat on 75% IBNR. Just curious if there is any more color you can offer on the newly available information or legal developments that arose, and we can kind of better understand whether there’s potential for that to persist in a meaningful way in the back half of the year?

W. Robert Berkley — President and Chief Executive Officer

So, the work that we have done, and obviously we’re in a much better position to try and get our arms around it now than we were when we were talking to you give or take 90 days ago. But given the work we have done by and large, we are assuming that this is going to be more under control by, call it, the end of this year or early next year.

And as far as the activity, again, there hasn’t been a huge amount. There is not a lot paid little or for that matter in case it’s reserves the lion’s share of it, it’s just sitting there in IBNR. And it’s just our best estimate as to what we think the impact could be. From our perspective so far, workers’ compensation has not proven to be a big issue, and neither has casualty. The challenge has more been in the shorter tail lines, and probably some — I don’t have the numbers in front of me, but I would say the biggest component of that is event cancellation.

Mike Zaremski — Credit Suisse — Analyst

Okay. Understood. That’s helpful. Moving to the top line growth conversation, it feels like what you’re trying to say is that clearly your fortunes will be tied to the economy. Hopefully the economy improves. Although there seem to be some other variables, comp declined by 20% year-over-year. So, anything else we should be thinking about in terms of 2Q being the [Indecipherable] versus ongoing choppiness?

W. Robert Berkley — President and Chief Executive Officer

Yeah. So the way we think about it is that the opportunity to make sure that we have rate adequacy continues to be there, and you can see that in the rate that we are getting. We are an underwriting shop and rate adequacy is the be all and end all when we see it in certain product lines where the rate is not what we think it needs to be, i.e., in certain parts of the workers’ comp market. We’re prepared to let the business go with the understanding it will be back some day when we find the rates to be more acceptable.

The broad point that I was trying to suggest earlier in the call was, we’re able to maintain our top line because we’re seeing the flow of business coming in to the specialty E&S market, we’re able to maintain our top line because we are getting meaningful rate increases. And in spite of the challenges that everyone faces, including us, none of us are completely insulated from what’s going on in the economy and society in general. Those factors are helping to offset those challenges. And in addition to that, if you subscribe us as we do that this will be over time brought under control, a lot of the fundamentals will remain in place, the economy will recover and that it is likely to bode very well for how this business could grow in addition to that what it may mean for margins.

Mike Zaremski — Credit Suisse — Analyst

Okay, understood. And I guess, finally, we saw that you continue to buy back some stock during the quarter. Any thoughts on stocks somewhat recovered, any thoughts on whether you still view the stock as being attractive from a buyback perspective?

W. Robert Berkley — President and Chief Executive Officer

So, I appreciate the question, but you know we’re not going to answer that the way you want us to. But I’m happy to pause. My boss is on the phone, he is the one who is more focused on that than me here. Are you there?

William R. Berkley — Executive Chairman

I’m here, and of course we always think the stock is attractive, it’s attractive today. However, we are always looking at uses of our capital, what we can do with it, how buying back stock impacts, everything having to do with our shareholders. We don’t have a single rule. Our average price in the first quarter was different than in the second quarter. It’s the judgments we make, and how we see the opportunities. So, we don’t really have a single rule. And if there’s an opportunity, we think at that moment in time is to buy stock attractive — at attractive price, we’ll do so. But we don’t really have a rule per se.

Mike Zaremski — Credit Suisse — Analyst

Good to hear from you, Bill, and best of luck for the next quarter. Thank you.

William R. Berkley — Executive Chairman

Thank you.

Operator

Our next question comes from Yaron Kinar with Goldman Sachs. Your line is open.

Yaron Kinar — Goldman Sachs — Analyst

Hi. Thank you. Good afternoon, everybody.

W. Robert Berkley — President and Chief Executive Officer

Good afternoon.

Yaron Kinar — Goldman Sachs — Analyst

My first question just goes that, better understanding IBNR. What I did not realize in the first quarter was that there are some definitional differences there. And I just want to make sure I understood how you’re thinking about it. So, when we talk about COVID not reported, do you also include losses for events that has not yet occurred, but you think have a high probability of occurring?

W. Robert Berkley — President and Chief Executive Officer

We have looked at — so I appreciate the question, and let me try and clarify it. We look at our portfolio, we look at our exposures, we think about how it will be affected by COVID, and that’s how we came up with our number. So, some of it is events or losses that have not even occurred, but the exposure is out there and we think that there is a possibility that there could be a loss associated with the exposure.

Yaron Kinar — Goldman Sachs — Analyst

Okay. And is that mainly for short-tail lines or is that also for longer-tail lines?

W. Robert Berkley — President and Chief Executive Officer

We looked at our — we have looked at the full portfolio.

Yaron Kinar — Goldman Sachs — Analyst

Okay. And then, my second question, a bit more broad [Indecipherable] on social inflation. Can you maybe talk about how it’s manifesting itself today. It doesn’t seem like its COVID related, given that you’re expecting more of the losses to come from the short-tail lines. So where or how is it playing out in the current environment?

W. Robert Berkley — President and Chief Executive Officer

Well, I think, in some ways it is COVID related, and I think you’re going to see it potentially in the professional liability space. An example of that would be with EPLI would be certainly one specific example. I think there is a reality that we have emboldened plaintiff bar, and we have an environment in society overall that is more empathetic for the moment to the plaintiff bar. And that is a reality, whether one likes it or not, and the insurance industry needs to recognize that and adapt appropriately.

Yaron Kinar — Goldman Sachs — Analyst

So does that also affect, for example, business interruption claims?

W. Robert Berkley — President and Chief Executive Officer

Well, I think that we have an aggressive plaintiff bar. And as I think we may have touched on in the last call, certainly they have viewed business interruption as an opportunity. I think while perhaps it’s a plaintiff-friendly environment overall, I don’t think that judges are willing to just completely turn their back on the words in a contract or a policy, which is why you have seen many of the rulings though it is still early come out suggesting that physical damage is required in order to trigger a business interruption. And in spite of the efforts so far to suggest the presence or possible presence of COVID-19 being physical damage, most of the judges that I’m aware of have not subscribed to that view.

Yaron Kinar — Goldman Sachs — Analyst

Got it. Thank you for the answers.

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W. Robert Berkley — President and Chief Executive Officer

Yeah.

Operator

Our next question comes from Meyer Shields with Keefe, Bruyette & Woods. Your line is open.

Meyer Shields — Keefe, Bruyette & Woods — Analyst

Great. Thanks and good evening, everyone. Rob, I want to go a little bit deeper into what you just talked about with the exposure for lines like EPLI to increase COVID-related losses. I appreciate the fact that there is no — that you’re not booking lower loss picks for lines of business where claim counts were down, frequency was down in the second quarter. Are there any increased provisions for lines where now that reality has changed and maybe the social inflation, etc, make things worse?

W. Robert Berkley — President and Chief Executive Officer

We — every 90 days, we look at our loss picks. And we looked at the data and we try and assess whether we feel as though we are in a good place. Our general philosophy is that we want to try and err a little bit on the side of caution recognizing all the unknowns and as those reserve season out we will tighten up that pick. We don’t always get it right, but we certainly try and when we get it wrong, we’re not shy about acknowledging it and trying to address it. So, as far as the specifics of what we’re doing with our picks by product line, that generally speaking is not something that that we get into at that level of granularity.

Meyer Shields — Keefe, Bruyette & Woods — Analyst

Okay. Fair enough. Maybe different question. In the past, I think we’ve worked for — I’ve worked under the premise that economic infliction points take three to six months to actually impact written premium volumes. Because that makes sense, so that makes sense in the current environment can we expect maybe if — if we’re seeing if the recovery continues right now that exposure units have already bottomed?

W. Robert Berkley — President and Chief Executive Officer

I think, one of the tricky parts is that, it really have things bottomed out as far as the recovery. If you talk to people in New York, they might say, yes. If you talk to people in Florida or Texas or Arizona or parts of California, I don’t think that they would say yes. So, ultimately you know we in the United — in the New York area we had our experience hopefully we won’t have another, but we should not lose sight of what the recent circumstances in other regions the country are facing. And for that matter parts of the world. So, my opinion is that it would seem as we saw things looking better in June than they did in May and May was maybe less ugly than April. And certainly early returns for July were encouraging, but we’ll have to see. So…

Meyer Shields — Keefe, Bruyette & Woods — Analyst

Okay.

W. Robert Berkley — President and Chief Executive Officer

I’m a little bit guarded to suggest that things are recovering. As far as the lead time. It can be a couple of months, yes.

Meyer Shields — Keefe, Bruyette & Woods — Analyst

Okay. That’s very helpful. Thank you so much.

Operator

[Operator Instructions] Our next question comes from Brian Meredith with UBS. Your line is open.

Brian Meredith — UBS — Analyst

Hey, Rob.

W. Robert Berkley — President and Chief Executive Officer

Good afternoon, Brian. How are you?

Brian Meredith — UBS — Analyst

Hey. Good, good, good. A couple of questions for you. Just one, could you talk a little bit about what’s going on with terms and conditions right now and what the industry is doing? And related to that specifically, is there anything you’re doing to protect yourself from, call it, third-party liability claims and you just mentioned EPLI stuff as we kind of look forward and people go back to work and economy does those kinds of things?

W. Robert Berkley — President and Chief Executive Officer

Yeah. So, as far as what are we doing to protect ourselves, we are actively looking at our policy wordings and we are looking to make sure that the policy wording is appropriately addressed, things such as communicable disease and related types of exposures. There are some exposures where we’re very focused on making sure that communicable disease is excluded. There are some situations where we use a much finer brush than that. But we’ve been actually been a bit surprised that the broader market has not been more active in trying to make sure that they are managing their exposure to communicable disease in general and in particular COVID.

I think people were so consumed by what was going on with this disinterruption. They haven’t thought through what does it mean for the liability market, both casualty as well as professional. And I think that that’s something that the industry needs to be more actively grappling with because there is real exposure there to your point as things open backup.

As far as what do we see happening with wordings, certainly we are seeing policy wordings tighten up, just the mere fact that business is making its way from the standard market to the specialty or the E&S market, I think is a leading indicator that policy wordings are tightening up and coverage that has been provided is contrasting a bit. So that, I hope I answered your question. Yeah. Yeah. That’s very helpful. And then my second question, Rob, just conceptually thinking about this. AA corporate bond yields, you’re kind of looking at AA corporate bond yields just kind of new money yield right now that you’re looking at. It’s the lowest since I’ve been working, right. So, as I look at where we are right now, is the pricing environment adequate enough to, I guess, one, earn a double-digit return on equity or even, two, just earn your equity cost of capital at this point? We think with the rate increases that we are getting…

Brian Meredith — UBS — Analyst

That the market is getting, yeah. Yeah.

W. Robert Berkley — President and Chief Executive Officer

The rate — and again, I can’t speak for others. I don’t know that [Technical Issues] portfolio. But for us, with the rate increases that we’re getting today, we certainly think we’re comfortably above our cost of capital. And I — based on my math, we are comfortably in the double-digit space as far as return goes. But there is no doubt, we need that rate. The comments that I made earlier about the impact of this low interest rate environment and what it means for investment income and what it means for the industry’s economic model, that is real. And we are — we are very focused on it.

Brian Meredith — UBS — Analyst

Great. Thank you.

W. Robert Berkley — President and Chief Executive Officer

Thank you.

Operator

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

W. Robert Berkley — President and Chief Executive Officer

Hi, Josh.

Joshua Shanker — Bank of America Merrill Lynch — Analyst

Yeah. Thanks very much. Thank you very much for taking my call. Apologies. So, just a couple of questions, more investment related and insurance related, I guess. I see that you’re moving the money to cash and you’re shortening the portfolio. Should we expect that the 2Q traditional investment portfolio result is a good indicator of where the future is going to be and so you decide to redeploy that cash again?

W. Robert Berkley — President and Chief Executive Officer

Sorry. Josh, could you ask the second part of the question again? you broke up a little bit, I beg your pardon.

Joshua Shanker — Bank of America Merrill Lynch — Analyst

I’m sorry. Should we assume that the 2Q result for traditional investment income is sort of a good guide also to think about until you decide to redeploy the cash to your stockholders right now.

W. Robert Berkley — President and Chief Executive Officer

Yes. Obviously putting aside funds as far as a core portfolio.

Joshua Shanker — Bank of America Merrill Lynch — Analyst

Yeah. And can you just talk a little bit about the result from the arbitrage portfolio for the quarter?

W. Robert Berkley — President and Chief Executive Officer

They had a particularly strong quarter. Part of it was some of their traditional activities. Part of it has to do with some activities they participate in the round [Indecipherable].

Joshua Shanker — Bank of America Merrill Lynch — Analyst

That’s just one-time in nature is the $58 million loss in LP. We shouldn’t expect — there is a change in how you’re deploying and that could continue in the future.

W. Robert Berkley — President and Chief Executive Officer

As much as I wish it was a new normal. I don’t think you should assume that’s the case.

Joshua Shanker — Bank of America Merrill Lynch — Analyst

Okay. And can you — just we don’t get the number, can we know what the reinsurance recoverable was for the quarter.

W. Robert Berkley — President and Chief Executive Officer

I honestly — I don’t have that in front of me. But either Rich or Karen will make that available. We’ll follow up with it if you don’t mind.

Joshua Shanker — Bank of America Merrill Lynch — Analyst

No problem fantastic. Thank you very much and good luck and be safe.

W. Robert Berkley — President and Chief Executive Officer

Thanks, Josh. You too. Be well.

Operator

There are no further questions at this time. I will now turn the call back over to Mr. Rob Berkley for closing remarks.

W. Robert Berkley — President and Chief Executive Officer

Okay. Thank you, Shantel, and thank you all for dialing in. Obviously challenging times and a fair amount of uncertainty. But hopefully from our discussion today, you have a sense for how the business is well-positioned. From our perspective, we are well-positioned in order to weather the circumstances that we’re navigating through. Even more so, we are well-positioned to take advantage of the market when we come out of the other side of the tunnel. So, I think that is all for us. We will look forward to speaking with you in 90 days. Thank you, again, Shantel. Have a good night.

Operator

[Operator Closing Remarks]

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