Left to Right: W. Robert Berkley, Jr., President and Chief Executive Officer
William R. Berkley, Executive Chairman
To Our Shareholders:
BY EVERY MEASURE, OUR 2019 RESULTS WERE EXCELLENT. OUR AFTER TAX RETURN ON CAPITAL WAS 12.5%, UP FROM 11.8% IN 2018, AND WE WERE ABLE TO GROW OUR PREMIUMS BY OVER 6%. THESE ARE GOOD SIGNS OF A STRONG YEAR.
We achieved rate increases and growth at the same time, while remaining steadfast in our focus on underwriting discipline. Our loss ratio improved slightly, and we managed to further reduce our expense ratio from 32.9% to 31.5%. These are positive numbers for the underwriting results of our business, and they are driving our momentum. We remain focused on improving our underwriting results.
The key elements of our year were rate increases, premium growth, maintaining our disciplined investment approach with a focus on total-return, and embedding the behaviors that foster innovation into our culture. The Company continues to focus on improving underwriting margins and growing our most profitable lines of business, and we believe our 2019 return on equity is a sign of a positive trend. The improving rate environment, along with continued opportunities for growth, offers the likelihood of better risk-adjusted returns in the next few years. Cost controls and growth will help with our expense ratio.
The economy was favorable throughout 2019, which put the wind at our backs. We became more confident as we saw both rate increases and growth improve quarter to quarter. The fourth quarter served as additional confirmation of the growing momentum in rate, as well as the opportunities for utilizing our competitive strengths. New business pricing, which is a key indicator of the market temperament, was at least as good, and sometimes even better than, pricing of our renewal business. This trend is a good sign for the direction of the market.
Investment income, the other key part of our economic model, is being challenged by low interest rates and a relatively flat yield curve. This environment puts pressure on our core investment income. We work diligently to maintain a very high-quality, short duration fixed-maturity portfolio, which had an average rating of AA- and an average duration under 2.8 years during 2019. This task has not been easy, but it is a key element of our strategy to ameliorate investment risk.
Our high-quality, short-duration bond portfolio represents approximately 75% of our invested assets. In addition, we invest in a modest amount of common and preferred stocks, a merger arbitrage portfolio, investment partnerships, and real estate that consists of Class A office buildings primarily in New York City, Washington, D.C., and London. We also have a modest private equity business that is giving us outstanding returns that have averaged close to 20% over the past 10 or more years. Each of these asset classes has been critical to offsetting the impact of declining interest rates. We do not believe the inherent risk in our aggregate portfolio of non-fixed income securities significantly changes the risk profile of our total portfolio.
Their allocation does, however, change the liquidity profile, yet we retain substantially more liquidity than we require. Given our long-term view, we are not overly concerned with the lack of quarterly predictability in returns for these asset classes. Over time, they have been accretive to our overall return on equity.
We are pleased overall with the portfolio and its balance. We believe the physical assets in our real estate portfolio and certain of our investment funds reasonably protect our balance sheet from the prospect of inflation, while, at the same time, the short duration in our bond portfolio provides substantial flexibility.
We continue to focus on optimizing our long-term risk-adjusted return, and, as we reflect on the year just passed, we must recognize that it is not just about the numbers. While we believe we have many obligations, all of which must be fulfilled and none of which can be considered mutually exclusive, we always start with our shareholders. We believe that we can only achieve the best long-term return for our shareholders by meeting the interrelated needs of our customers, agents and brokers, and society. We meet those needs by providing meaningful products and services along with the confidence that we will meet our coverage commitments. Through our business and charitable works, we contribute to society in a manner that makes our world a better and more humane place. Our success in these endeavors generates strong returns, which in turn, provides access to the capital that we need to grow.
All of these obligations go hand-in-hand. We have long believed that in order to meet these obligations and to make a successful enterprise, we must have the best people. Our people have truly been our greatest asset during our more than 50-year history, and will continue to be long into the future.
We decided that in order to maintain our Company as a dynamic entrepreneurial enterprise, we had to embed the behaviors that foster innovation into our culture. We first recognized the need to engage our full team in new ways of thinking and doing if we wished to continue to grow and prosper. Early on, it became clear that the best ideas often come from cubicles rather than from corner offices.
We, therefore, invested heavily in training to ensure an understanding at every level of the organization that innovation is not a separate function, but a way for each of us to look at everything we do with a fresh set of eyes. Our innovation mindset has now set standards for examining all of our activities. It has compelled each individual to consider whether what they do and how they do it will help us fulfill our mission. We want to be sure we always remember that meeting the needs of our customers, shareholders, employees, and the society in which we operate is not just a series of one-time tests, but in fact, is something we must think about continually. Our innovation initiative has become a key element that will enable us to maintain our entrepreneurial culture for many years to come.
An annual report is a brief summary of 365 days of activity. The good days and bad days are a blur, but without a doubt, we can be proud of what we have accomplished in 2019. It was a year full of challenges and successes. It was a year of performance for our Company. It was a year we can look back on with great satisfaction. Like every other year, we would not have succeeded without the commitment of our agents, brokers, shareholders and employees, and the support of our Board of Directors. It is clear the current environment is uncertain and the risks we face each day create challenges for people in our business, because our job is to help ameliorate the risks of other businesses, institutions and individuals who are our insureds. And it is just as clear that we have the people, the mindset and the tools to do even greater things in 2020.
William R. Berkley, Executive Chairman
W. Robert Berkley, Jr., President and Chief Executive Officer
P.S. As this annual report goes to press, we are in what feels like a different world since the beginning of 2020. The Coronavirus, which originated in China, has now swept the world. Nations are on lockdown as the infection rate increases and thousands of lives have been lost. The economies of the world are suspended, and we all sit and look in amazement at things we have never seen. The level and speed of economic rebound will be uncertain and, in part, depends on the nature and speed of various government programs and efforts. There is no question that the government wants to act positively. There is a question of whether they can in fact put all the pieces together. Fortunately, property casualty companies are designed to deal with uncertainty and society should be able to weather the storm. We are optimistic that by the time this report is distributed, the world will be over the crest and things will begin to get better. In the meantime, we hope we all get through the current crisis and survive this great uncertainty successfully.