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Text: Along with me co-hosting, we have our Executive Chairman, Bill Berkeley; as well as Rich Baio, Group CFO.
We're going to follow a similar agenda to what we've done in the past, so we're in a moment or two going to hand it over to Rich to walk us through the quarter and focus our attention on a few highlights.
And once he is through, I'm going to offer a few soundbites, and then we will be opening it up for Q&A.
Rich, so if you would please.
The positive momentum continues to build in our business as evident by our growth in premium and expansion in underwriting profits as rate improvements and additional premium associated with increase in exposure through the income statement.
We reported a consecutive quarterly record underwriting profit in the second quarter of 2021 along with strong net investment income, resulting in an annualized return on beginning of year equity of 15%.
The company reported net income of $237 million, or $1.27 per share.
The components include operating income of $219 million, or $1.17 per share and after-tax net investment gains of $18 million or $0.10 per share.
Drilling down into our quarterly underwriting performance, you will note that gross premiums written grew by $529 million, or 24.8%, almost $2.7 billion.
Net premiums written grew $472 million, or 27.2% to more than $2.2 billion, recognizing an increase in both segments.
Our overall cession rate decreased in the quarter due to changes in certain underlying outward reinsurance arrangements, lower reinstatement premium and business mix.
Moving into segment production of net premiums written, the insurance segment grew 29.2% to almost $2 billion, with an increase in all lines of business.
Professional liability led this growth with 64.8%, followed by commercial auto with 31%, other liability of 28.7%, short tail lines of 21.2% and workers' compensation of 15.6%.
The reinsurance and Monoline Excess segment grew about 11% to $218 million, with an increase in Monoline Excess of 20.9% and casualty reinsurance of 17.5%, partially offset by a decrease in property reinsurance of 13.8%.
Underwriting income benefited from the compounding rate improvement above loss cost trends along with growth in exposure and lower claims frequency in certain lines of business.
We did experience an above average level of non-weather related property losses in the quarter that partially offset these benefits.
In addition, our current accident year, catastrophe losses decreased significantly quarter-over-quarter from $146 million, or 8.7 loss ratio points in the prior year to $44 million or 2.2 loss ratio points in the current quarter.
As a result, quarterly underwriting income increased almost 800% to a record $202 million.
The reported loss ratio was 61% in the current quarter, compared with 67.7% in 2020.
Prior-year loss reserves developed favorably by about $0.5 million in the current quarter.
Accordingly, our current accident year loss ratio, excluding catastrophes was 58.8% compared with 59.2% for the prior year's quarter.
The continued growth in net premiums earned has benefited the expense ratio, which was 28.7% in the current quarter compared with 31% a year ago.
Net premiums earned outpaced underwriting expenses by a margin of more than 8.5%.
We also continue to benefit from reduced cost associated with travel and entertainment, but do anticipate some of this will be given back as the economy more fully reopens.
Wrapping up the full picture.
On the underwriting side, our current accident year combined ratio, excluding catastrophes, was 87.5% for the quarter compared with 90.2% for the prior year quarter.
On the investment front, net investment income increased 96.9% to $168 million, driven by strong results in investment funds.
The fixed maturity portfolio reflected a decline quarter-over-quarter due to the lower interest rate environment.
Although the quarterly gap is closing.
We also continue to maintain an above average level of cash and cash equivalents as of June 30, 2021, which has been decreasing over the past few quarters where we see opportunities to invest at attractive risk-adjusted returns.
Our duration remains flat at 2.4 years, while maintaining a high credit quality of AA minus.
Pre-tax net investment gains in the quarter of $24 million is primarily comprised of realized gains on investments of $39 million, a reduction in unrealized gains on equity securities of $18 million, and a decrease in the allowance for expected credit losses of $3 million.
The realized gain was largely driven by the sale of two real estate properties, which also resulted in the reduction in our debt that was supporting one of the real estate properties of approximately $102 million.
Corporate expenses increased approximately $13 million due to debt extinguishment costs of $8 million relating to the redemption of hybrid securities on June 1st, and higher incentive compensation costs as well.
In addition, we announced the formation of a new operating unit in the second quarter, which you may recall that such expenses are reflected in corporate until the operation begins writing business and is then moved into the underwriting expense.
Stockholders' equity increased by $164 million to approximately $6.6 billion in the quarter after regular and special dividends of $112 million.
Book value per share increased 2.5% in the quarter and book value per share before dividends increased 4.3%.
And finally, cash flow from operations continue to be strong with approximately $700 million on a year-to-date basis.
And with that, I'll pass it back to Rob.
So let me just offer a couple of quick observations and then we'll get to your Q&A and take the dialog anywhere participants would like to.
I think by virtually any measure, it was a great quarter for the company.
And from my perspective, it's been in the making for some period of time.
In addition to that, I think there is a growing amount of evidence that would support the idea that there is more to come and it's just again quite encouraging.
And as far as drilling down into the market a little bit more, when we look at the major product lines with the exception of workers' compensation, all of them continue to get rate increases that outpace our view of loss trend, and that is even as we have been factoring in a bit more for financial inflation.
Regarding workers' compensation, there are again growing but early signs that the level of erosion there is slowing.
That having been said, we also are paying close attention to wage inflation and what that may mean for the comp economic model.
Rich walked you through the top line, obviously, the 27% growth plus is pretty healthy.
A couple of observations there, though, one, please keep in mind, if you go back and you look at 2020, we were not an organization, where in Q2 of '20, our top line fell off a cliff.
We will give or take flat.
So this was not just a bounce back to a normal run rate.
This was a meaningful growth.
In addition to that Richard commented around the Excess and reinsurance segment, you would have noted possibly in the release and also again in Rich's comments, that it was the reinsurance segment where particularly our domestic treaty business where we backed away from a couple of deals where we just felt as though the rates were good, they weren't good enough for us to participate.
If you unpack the 27% growth overall, give or take about a third of it is coming from rate, the balance of it is coming from exposure as you would have gathered from the rate increase coming in ex-comp at just shy of 10%.
I think it's important that people not read too deeply into as I suspect some might as to the rate increase.
And what does this mean relative to what the rate increase was last quarter or the same time in the prior year?
The simple fact is that when we think about our economic model, it is multi-dimensional.
We look at the margins that are available in the business and as we become pleased with available margins, we start to think about possibly how we reprioritize exposure growth versus pushing further on rate.
And again, as we have seen the margins in a meaningful part of our portfolio become particularly attractive.
We are still pushing for rate.
We are still getting rate by and large ex-comp that outpaces trend, but again growing exposure becomes even more of an opportunity that we are capitalizing on.
Couple of other comments just as it relates to the top line, I think it's a helpful data point, particularly our specialty businesses are getting flooded with submissions.
It's a clump and in particular, it's our E&S businesses.
Two things, and opening economy which clearly we are benefiting from across the board.
And of course, a standard market that continues to revisit its appetite.
As far as the opening economy just bouncing back to workers' compensation.
As we have expressed in the past, we are concerned with that product line and where rates have gone.
But you would have seen that product line growing in our release [Phonetic], and that is really driven by payroll growth.
And again, I think it just speaks to the health and well-being of the US economy, as it continues to recover.
Maybe pivoting over to the combined ratio, Rich got through a lot of this.
Just a couple of observations from my perspective.
On the expense front, coming in at a 28.7% from our perspective is a pretty good place with opportunity to improve from here.
As Rich suggested, as our travel and entertainment picks back up.
Certainly some if not all of the approximately 50 basis point benefit that we've been getting as far as expenses due to COVID, that is likely to erode and disappear.
That having been said, if you look at the power of the earned premium coming through and how it is likely to build from here, and you can see that given the written leads the earned, there is likely more benefit to be had over time.
Loss ratio pretty good at a 61%.
The ex-cat accident year, as Rich mentioned, was a 58.8% [Phonetic].
He talked about non-cat property loss activity of that added relative to where it was running last year, about a little over two points.
So this was, quite frankly, we had a rash of fires.
Some would suggest it's bad luck, we tend to believe that oftentimes you make your own luck.
So we're digging into that to make sure that this is not a new normal, and it was more of a one-time unfortunate series of events.
Another data point on the loss ratio front, the paid loss ratio came in at a very attractive 44.3 [Phonetic].
A couple of comments on the investment portfolio.
Again, Rich, commented on the duration of the 2.4 years, the book yield is running coincidentally at about 2.4 as well.
We continue to be very focused on inflation.
From our perspective, inflation is very much here.
There are some people that talked about it being this transient, that may be true.
I'm not quite sure when people talk about transient will -- well, how long is transient, regardless the cost of things are up today.
But even if you saw inflation return to 2.5% or 3% level, we continue to believe that a 10-year at 130 [Phonetic] or less doesn't make a whole lot of sense for the long run.
One other comment just related to the balance sheet and the capital structure and we can get into this during the Q&A, if people are interested.
We've done a fair amount of work and restructuring certain things per one of Rich's comments around the prepayment or the calling of certain securities and the cost associated with that.
But as you think about, again, the earnings power of the business later this year, but even more so for '22 and '23, there is a very meaningful benefit that will be coming through, again, savings around capital costs.
So long story short, very good quarter.
And I think what's more encouraging than even just the results is, if you look at how the table is set for what is likely not just to be the next couple of quarters, but quite frankly the next couple of years.
This is an organization that is going to benefit greatly from the broader macro conditions.

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compname reports qtrly earnings per share $1.27.
qtrly earnings per share $1.27.

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