James River Group Holdings, Ltd. (JRVR) CEO Adam Abram on Q1 2020 Results - Earnings Call Transcript

James River Group Holdings, Ltd. (NASDAQ:JRVR) Q1 2020 Earnings Conference Call April 30, 2020 8:00 AM ET

Company Participants

Kevin Copeland - Head IR

Adam Abram - CEO

Sarah Doran - CFO

Bob Myron - President & COO

Conference Call Participants

Mark Hughes - SunTrust

Matt Carletti - JMP

Randy Binner - B. Riley

Myer Shields - KBW

Seth Rosenberg - UBS

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the James River Group Q1 2020 Earnings Call. At this time, all participant lines are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to hand the conference over to your speaker today, Mr. Kevin Copeland, Head of Investor Relations. You may begin.

Kevin Copeland

Thank you, operator. Good morning everyone and welcome to the James River Group first quarter 2020 earnings conference call.

During the call, we will be making forward-looking statements. These statements are based on current beliefs, intentions, expectations, and assumptions that are subject to various risks and uncertainties which may cause actual results to differ materially. For a discussion of such risks and uncertainties, please see the cautionary language regarding forward-looking statements in yesterday's earnings release and the Risk Factors section of our most recent Form 10-K, Form 10-Qs, and other reports and filings we make with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

I will now turn the call over to Adam Abram, Chairman and Chief Executive Officer of James River Group.

Adam Abram

Thank you, Kevin. Good morning everyone and welcome to our first quarter conference call. I'm joined by Sarah Doran, our CFO, and Bob Myron, our President and COO. I'm going to kick the conversation off with comments about the quarter and observations about the potential effects the combination of COVID-19 and the potential significant recession might have on our company. Sarah is going to be talking about the quarter in depth, and then Bob, Sarah, and I will happily address questions at the end of Sarah's remarks.

First, let me say we were able to effect a smooth transition to remote working with very little disruption. All of our employees have been able to maintain connectivity and to continue processing business at the same or higher rates than prior to when we closed our offices. I believe we remain highly responsive to our producers and to claimants. Additionally, and very importantly, our internal communications remain strong and we've been able to underwrite accounts with the same thoroughness as prior to leaving our offices. We all tip our hat to our IT teams, which have been proactive, efficient, and creative, and to our HR group as well, which has been very helpful in arranging and coordinating the disbursal of all of our people.

We're particularly grateful that as up this moment we know of no COVID-19 illnesses among our employees. Of course, many friends and associates around the country and relatives of our colleagues have been affected, and our hearts go out to everyone who is suffering from the physical, emotional, and financial effects of the virus.

Turning now to our financial results for the quarter, we believe our results reflect the strength of our franchise as well as the early stages of disruption in the economy. Freed from the burden of the large commercial auto account that we had come to - that had come to so heavily influence our results, our E&S division grew 37% in core lines at rates incorporating 13 consecutive quarters of rate increases. In the most recent quarter, the rate increase was 12.9%, which was the second highest of all the sequential periods. The growth was spread across the entire E&S book with 11 of our 12 E&S underwriting divisions reporting higher gross written premiums.

Submissions in E&S grew 20% in the first quarter, and while we are aware of the warning signals for the general economy, we are pleased and even a bit surprised to see that our submissions in the month of April had exceeded those from April 2019, as have our gross written premiums in this segment, and rates remain very positive.

The runoff of the large commercial account is going well. We're settling commercial auto claims at a rapid pace for amounts that are consistent with our held reserves. One quarter removed from the cancellation of the account, we still receive claims from the period when we were on the risk. However, the pace of our risings is much reduced, and during the most recent quarter, open claims counts fell by more than 25%. Now, we do not expect that pace to continue and I do not anticipate updating this statistic every quarter, but I offer it today as a marker that we are making good progress in closing these claims.

Our Specialty Admitted segment reported almost exactly the same gross written premiums this quarter as in the first quarter of last year, despite the fact that our largest fronting program, a worker's compensation account, was much reduced. The leadership of our Specialty Admitted unit has added new fronting programs which are taking up the slack. In these fronting relationships, we tend to retain less risk in earned fees. Fee income generated by the Specialty Admitted unit increased 12% over the same period last year. Increasing fee income is a focus of our plan for this unit.

Our individual worker's compensation business held steady during the quarter, though we are now ceding 70% of this premium and risk to others. We had been retaining 50% of the premium and risk. We took this step because while the book is performing well, we see a downward trend in workers' compensation rates and anticipate that profits may come under pressure from this line of business.

Our Reinsurance segment wrote more gross written premium than it did in the first quarter of last year, as we added a fronted account in the second half of last year, which renewed this quarter. We do not retain any net exposure on that fronted account. Both net written and earned premium declined as compared to last year, which was our expectation. Nonetheless, our casualty re-segment was behind our expectations for underwriting income in the month due to relatively minor adverse reserve development from prior years, which was somewhat offset by a reduction in sliding scale commissions that we would pay to others.

We earned an annualized 11.6% return on tangible equity during the quarter, and given the yields available on investments, this rate of return was satisfactory. Our group combined ratio of 100.6% reflected a 91.9% combined ratio in E&S, a 107.4% combined ratio in Specialty Admitted, and a 99.4% combined ratio in our Reinsurance segment.

The high combined ratio in the Specialty Admitted segment was driven by assumed losses from the NCCI pool related to calendar year 2019 as well as an accrual for ceded minimum premium for reinsurance on a fronted program. Together, those two items added 7 points to the combined ratio in specialty admitted somewhat ironically, the reduction in our workers' compensation premium by buying a larger quota share worked against us this quarter as the assessment for the NCCI pool for 2019 was charged against a smaller amount of earned premium. We had less earned premium - as a consequence of that, we had less earned premium, against which to absorb the NCCI charge, which was calculated on prior year premium levels.

I would expect our combined ratio across the group to decline as the year unfolds, and as I will discuss in a moment, this will focus - this will require us to have a focus on expenses.

As we prepare - first, I'd like to say though, turn to the COVID-19 issue. As we prepare for the balance of the year, three matters are front of mind. Very few companies in the United States will be immune to the economic consequences of COVID-19 on our economy. And while the insurance industry is potentially materially exposed, we believe our company is better positioned than many property casualty insurers.

I'm going to take the risk of getting into more detail than our listeners may want at this stage just in the interest of your being able to have a deep understanding of how our company is positioned in the world of COVID-19 and the exposures that might arise.

First, the majority of our premium comes from the E&S market where freedom of rate and form permit coverage to be shaped to reflect the tougher nature of the risk covered under E&S surplus lines forms. 91% of our earned premium in this quarter came from E&S accounts written either in our E&S segment or our Reinsurance segment, which primarily insures E&S liability risks. Importantly, we do not write property - primary property risk in our E&S or Reinsurance segments. Business interruption insurance is typically introduced in primary property coverage.

In our excess property book, our attachment point is usually above the business interruption limit purchased by the customer. The majority of our excess property forms include an organic pathogen exclusion regardless of any physical loss or any loss of use. As an excess property writer, we also benefit from any exclusions that may be contained in the primary policy on top of which we sit. In our liability policy forms, we also have strict exclusions for viral contamination and communicable diseases. We do expect that there will be a raft of claims as many policyholders are being advised to file claims as a matter of routine. This is not unusual when a new cause of loss arises and is a routine part of how the market has generally addressed the new cause of loss.

One common claim we anticipate being registered for - is for general liability - for general liability policies, is for loss of income due to a business closing down. We've received a handful of these claims already. While this might be a legitimate cause of loss for a business interruption policy, it is not a basis for a claim under a standard liability forms, and we do not anticipate these claims will progress very far.

We also expect claims from patrons of insured businesses, in which the claimant will maintain they were exposed to COVID-19 insured business. Many of these claims may be properly denied based on our absolute pollution and communicable disease exclusions and other relevant policy terms and conditions. In other cases, we think it's generally unlikely that a claimant could reasonably demonstrate they contracted COVID-19 when they were in a particular location as opposed to on a bus or from street or some other location.

Our allied health book may have some exposures, though we only have two claims reported from this book at the beginning of this week, neither of which appear to be for covered events. However, 96.8% of our allied health policies include a communicable disease exclusion.

Our workers' compensation book is heavily reinsured, as I've mentioned earlier, and only two classes within the book have obvious potential exposure for COVID-19. About 2.5% of our workers' compensation policies are written for retirement or nursing homes. Remember, we only insure the workers in these small facilities, not the residents. We also have a book of home health aides where we believe we have limited exposure since our aides are generally visiting patients who can't leave their homes and therefore have a very limited chance of contracting - contraction of COVID during work. But net of reinsurance, we are only exposed to $300,000 per claim on our individual risk workers' compensation business.

In general, other than claims arising from our individual workers' compensation book as described above, which is currently 70% reinsured, we have little exposure from the book where we provide front paper. As a reminder, we generally retain about 10% of the risk in our fronted book. Within the specific programs, the risk is either low given the nature of the program, and where business interruption is a risk, the majority of those policies require a physical loss and were written with a virus exclusion.

Finally, as we are heavy users of external reinsurance, we have reviewed our treaties and believe they sufficiently cover us in a follow-the-fortunes format, meaning that we do not anticipate being without their protection to the extent we do or may have exposure to COVID related risks. We have one fully fronted national property program. All policies in that program contain a virus exclusion. We have a fully fronted program related to cannabis. All policies require a physical loss and contain multiple virus exclusions. We have a program for auto dealerships. Given closures there and the nature of the risk, we think the exposure is low. Our retention is also a minimal, $100,000 for property and $125,000 for casualty.

Finally, our largest fronted program is the California workers' compensation program, in which the dominant class is contractors. We don't think this class has particularly heavy exposure to COVID claims and the program is heavily reinsured whereby, net of reinsurance, our maximum exposure per claim is $110,000.

As of early this week, we had received about 200 total claims associated with scourge. While we take every claim seriously and fully embrace our duty to pay all claims owed, the claims received to date reinforce our belief that our approach to underwriting insulates us from the worst of this pandemic.

Turning now from direct exposure on insurance from COVID-19, I'd like to turn to the broader implications of the coronavirus on the economy and our business. One unanticipated benefit of the shelter-in-place orders is that it has lowered, reduced activity, and lowered the number of accidents we might usually expect to see. Loss reports are significantly down. This month, for example, we've received 30% fewer claims than in April a year ago in both our E&S and Specialty Admitted segments. This is in spite of having a larger book of business as compared to a year ago and despite the addition of some COVID related claims this year.

However, if the economy remains shut down, we can also anticipate lower premium volume going forward. We did not experience that in the first quarter. Even in March and April, when short shelter-in-orders were in effect across most of the country, our companies enjoyed strong premium growth at attractive rates. Nevertheless, common sense leads us to anticipate and prepare for a significant decline in workers' compensation and general liability accounts as companies that have less business were fold. About 10% of our E&S premium covers bars and restaurants and the like.

One final word about premium expectations. In both our E&S and Specialty Admitted segments, we write accounts for small and mid-size businesses. Sadly, many of these businesses may not survive a deep recession. However, these are the type of businesses that are the first to resume as entrepreneurs who shutter their business in the deep recession restart those enterprises as soon as the recovery permits. When they do resume business, these entrepreneurs coverage will fall in the E&S market and they will require a workers' compensation insurance. Our companies are well positioned to be early beneficiaries of a recovery. This is what we discovered in 2009 and 2010 following the financial crisis.

In the interim, we recognize that a recession will challenge all companies to maintain current premium levels. We recognize the challenge our expense ratio poses to our profitability and we're actively working to rein in expenses over the balance of the year. Consequently, we're focused on this expense reduction and we expect our full year expense ratio to fall in the low 30% range. With lower premiums and lower investment yields than we could have expected or would have expected six weeks ago, the need to adjust expenses is more acute. Our estimate is that operating return on average tangible equity for 2020 will likely be in the high single-digit to low double-digit range.

And with that, I'd like to turn the call over to Sarah.

Sarah Doran

Thanks, Adam. Let me highlight a few of the financial points from the quarter. Last night, we reported first quarter operating earnings of $0.50 per share and adjusted - annualized adjusted net operating return on average tangible equity of 11.6%. While net earned premium declined due to the October 2019 cancellation of what was formerly our largest account, it grew about 48% in our core E&S business as compared to the first quarter of 2019 and otherwise held steady throughout the balance of the group.

Let me jump right into investments. Unrealized losses on the portfolio drove our net loss for the quarter. For the last 11 years, we have been invested in a diverse portfolio of externally managed senior secured bank loans, representing over 120 credits with no individual position larger than $4 million in market value. The portfolio does not have any meaningful sector or credit concentration, no exposure to the oil and gas sector, and has provided a meaningful return and attractive contribution to our investment portfolio. We have approximately $10 million of common equity risk outside of that portfolio, but in our entire investment portfolio and have chosen to take measured risk here given the attractive risk return profile.

Effective January 1, 2020, new accounting rules applied addressing current expected credit losses, otherwise known as CECL. With these new rules, we elected to report our bank loan portfolio at fair value with changes reported through the income statement, but excluded from operating earnings. Previously, the portfolio had been accounted for at amortized cost net of an allowance for any credit losses. Given the market volatility this quarter, this portfolio especially experienced greater volatility than it has in the 11 years that we have been invested in this asset class. It had unrealized losses of $43.9 million for the quarter. As of Tuesday's close though, the portfolio had recovered meaningfully, $6.4 million of additional value coming to it since quarter-end.

Following the first quarter, we made the decision to meaningfully reduce our exposure to bank loans by selling into the rally in this asset class. While we like the asset class and we will remain invested in bank loans, we are reducing our exposure to the class in order to damp down volatility. Apart from the bank loan portfolio, it's worth noting that our fixed income portfolio has also improved significantly since quarter-end. The portfolio was in an unrealized gain position of $29.8 million at quarter end, and through this Tuesday, the unrealized gain position grew an additional $21 million. Our investment grade portfolio does not have any material exposure to the hospitality or the oil and gas sectors.

It's worth a reminder that the overwhelming majority of our investment portfolio is reported in the quarter it occurs. This quarter, we earned $20.8 million in net investment income, an increase of 7% from the prior-year quarter. The increase largely resulted from the October 2019 addition of what is now $1.1 billion of restricted cash that was previously held in a collateral trust off-balance sheet. These funds are now invested in short-term securities. Given the severe decline in short-term rates during the quarter, we would expect that these assets will generate less investment income in future quarters. Also, as mentioned last quarter, we continue to return balances to our former client when the account is determined to be over-collateralized, which we expect to continue for the next few years as the runoff runs its course.

Finally, moving on from investments, this quarter, we posted a loss ratio of 66.4% and an accident year loss ratio of 65.8%. The decline from 73.1% accident year loss ratio in the first quarter of 2019 was also due to the cancellation of the large commercial auto account, which had been written at a much higher loss ratio than the rest of our small account, casualty-focused core E&S business. We have obtained attractive renewal rate increases in core E&S each quarter for over two years now, as Adam reported, and reported losses have remained benign for multiple quarters in that book. Core E&S now makes up about 95% of gross written premiums in the E&S segment as compared to about half of the segment in the first quarter of last year.

As Adam mentioned, we have received a handful of COVID related claims, but given our policies and exclusions, which he went through in detail, we did not put up an additional indemnity estimate related to COVID for the quarter. We did not experience any material reserve development in our commercial auto line. The runoff of what was formerly our largest account is performing well within our expectations. While we continue to receive new claims for events that occurred prior to December 31st, 2019 when we canceled the account, we are pleased with the pace of runoff. The number of reported claims has slowed and we are successfully [indiscernible] claims for fair value.

At the end of the first quarter, open claims for all years of the account represented 3.5% of the total reported claims for the account. I reported to you last quarter that at the end of last quarter, all claims - open claims for all years of the account then represented 5.2% of reported claims, and as of the fourth quarter of 2018, open claims for all years of the account represented 7.2% of all reported claims. So the decrease is good as we move through the runoff block. Of our approximately $1.35 billion of total group-wide net loss reserves on balance sheet at quarter-end, approximately $350 million of this supports the runoff block of business and it remains close to evenly split between case in occurred, but not reported reserves.

We had adverse development of about $1.8 million in our Casualty Reinsurance book, but a portion of this was offset by sliding scale commissions, which come through the expense ratio. A majority of the development related to treaties we no longer write and we also had about $1 million of favorable reserve development from our individual risk workers' compensation book.

Moving to expenses, the expense ratio increased to 34.2% this quarter as compared to 22.6% in the first quarter of last year. As discussed in prior quarters, the cancellation of the large commercial auto account had an impact on both accident year losses and expenses, as it was written with very low commission expenses. While not reflected in our first quarter results, as Adam mentioned, we are actively reducing our expenses and expect to meaningfully reduce cost through the remainder of the year.

Lastly, and I promise I'm almost finished, I will note that we drew down most of our unsecured bank facility capacity in mid-March, prior to the start of the Federal Reserve intervention. We did this purely from a precautionary stand, given where we saw broader market volatility at that time in the treasury market. The $119 million of additional drawn capacity remains on our balance sheet as a precautionary measure. Late last year, we had expanded our syndicated facility and renewed it for five years. Our balance sheet liquidity is strong and credit metrics are within the parameters of rating agencies and other counterparties. Our thoughtful debt to capital mix utilizes a number of hybrid issuances and we do not have any maturities until 2034.

And with that, I'll turn the call back to Adam.

Adam Abram

Thank you, Sarah. And operator, let's take questions, if there are any.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Mark Hughes from SunTrust. Your line is open.

Mark Hughes

Yes. Thank you very much. Good morning.

Adam Abram

Good morning.

Mark Hughes

Adam, I appreciate all the detail on your policy language. You had mentioned April, I think, you said the submissions were up in April, gross written premium was up year-over-year. I think later on, you talked about strong growth in premium in March and April. Would you apply the strong additive to April or any way to frame up what you're seeing in April?

Adam Abram

I really don't want to front-run this too much, Mark. I would - just would say that honestly, as you look around the economy and you think about the number of people who are unemployed, and really disturbingly so, just Sarah and Bob and I were talking yesterday about thinking about airports, for example, and how many people are out of work there, we would have anticipated a much faster reversal in premium, but that's not what we've seen so far. As I said, and I don't want to get into too much detail about this, but submissions are up and the April premium was more than last year's April premium. I do not anticipate that continuing for the year.

We are thinking about the rest of the year as having good rate and maintaining the positive rate structure that we have and that we've earned over time because if you think about the losses that may be coming into the insurance industry, difficulties some companies are having, we know, with placing reinsurance et cetera and just the general capacity crunch. We think rates will remain good, but we think that the economy is weak, and so that will be a balance and we're going to manage to that and get to that high single digit, low double digit ROTE.

Mark Hughes

Anything you can say about what you've seen so far in terms of cancellations or requests for...

Adam Abram

The cancellations have not been a factor yet, but I would anticipate that is - I would anticipate they could, in the industry, become a factor. And we have thought about that in terms of - ourselves in terms of how we recast the rest of the year.

Mark Hughes

And then in the E&S book, what would you anticipate for the ceded premium ratio? I think you've been, as I understand it, writing more excess casualty, you cede more of that premium. Would we assume that to hold steady similar to Q1?

Sarah Doran

I would think, Mark - I know this is a question that we had last quarter too. This quarter, in the E&S book, it's always difficult with mix, but one of the strongest signs of growth we had in that book was our excess casualty line, which almost - which I think more than doubled from the first quarter of last year. So that had an outsized effect in pushing up the ceded ratio. I would expect that we would see - we would have a cede between kind of 20% to 30% of that book, which is pretty consistent with where we've been, perhaps a little bit lighter than what you saw this quarter.

Mark Hughes

Thank you.

Operator

Your next question comes from the line of Matt Carletti from JMP.

Matthew Carletti

Hey, thanks. Good morning.

Adam Abram

Good morning, Matt.

Matthew Carletti

Adam, I was hoping you might be able to give us a little color on just what you - a little more on the commercial auto runoff book, and what I'm thinking is, we've heard - we have heard in the industry generally on open claims, across a number of lines, workers' comp [indiscernible] practice, so on that already there is some impact from the recession in the sense that settlements being maybe a little lower than expected, there is a need - some people have a need for cash now versus holding out for a bigger number. Just curious kind of if you're seeing any of that, if that's playing into kind of the settlement values where you're closing these claims out at or if not, if that's something you would expect as we move forward.

Adam Abram

I'm going to pitch to Bob in just a second on that issue, but before that, let me just say, look, we are and we always have been committed to settling each claim at fair value for the claim, and I think it's important to say that because I would not want anybody to think that we are just somehow taking advantage of a situation. Having said that, and I did say this - that I'm not going to keep us updated on this, but through Bob's leadership and our claims teams' leadership, we've reduced the number of outstanding claims from that commercial auto account by 25% during the period.

Bob, do you want to comment further?

Bob Myron

Yes, sure, and good morning, Matt.

Matthew Carletti

Good morning.

Bob Myron

Yes, we're definitely seeing opportunities, more opportunities to settle in and some more willingness to settle on the other side of these open claims, and that starts with all the court closures and some of which have dates in which they may reopen and some of which do not. And so some cases that maybe were scheduled to go to trial or arbitration have been - the dates have been kicked way out or there is no date that is coming up. And so - and as Adam said, we've continued to focus on working to settle claims at fair value, but definitely have been a lot more opportunities to settle claims, I think, in the - given the uncertainty around when there might be trials and arbitrations as well as the state of economy and all of the parties on the other side of the transaction and sort of their willingness and/or potential need to sort of get cash now versus cash later.

Matthew Carletti

Okay, great. Thank you. And then one quick - just to revisit a number for Sarah and your comments on the investment portfolio. I caught the - I think it was $21 million kind of rebound in fixed income. Can you repeat what you said on the bank loans? I caught $6.4 million, but is that the rebound from the March 31 level or did I that catch that number right?

Sarah Doran

You got that right. Unrealized, that's right, yes.

Matthew Carletti

Okay, great. That's all I got. Thank you. Best of luck going forward.

Adam Abram

Thanks, Matt.

Sarah Doran

Thank you.

Operator

Your next question comes from the line of Randy Binner from B. Riley. Your line is open.

Randy Binner

Good morning.

Adam Abram

Good morning, Randy.

Randy Binner

Hey, good morning. Yes, just a couple of follow-ups and I may have missed some of this because I came in late, but I guess just - Adam, you said that you had bar and tavern risk of 10% of the book. Were there other categories you outlined that are kind of higher exposure to the economic shutdown?

Adam Abram

I'm sorry, I missed the first part of your question. It just - it faded out from me. Can you...

Randy Binner

Yes. It's Randy Binner from B. Riley, and beyond bar and tavern at 10%.

Adam Abram

Yes, bars, restaurants and taverns are 10% of our book in the E&S segment.

Randy Binner

Are there other kind of acute categories that are exposed to the economic shutdown that you outlined?

Adam Abram

Yes, of course. We write small and medium-sized businesses, we write contractors, right? We - for example, contractors are a meaningful class for us and there may be less work for them. Look, I think if - we would expect, we would anticipate that the premium level that we enjoyed in the - the increase in premium level we enjoyed in the first quarter will abate in the second, third, and fourth quarters. I just don't think we're going to be able to maintain that rate of growth. Even though, through all the way through March, and as I indicate - just gave a gentle indication that April was also very positive, but we anticipate that will abate and abate significantly and so we've recast our expenses, we've recast our forecast, and we think we'll get at the end of the day to a high single-digit, low double-digit return on tangible equity.

The one thing I would say is that, while we go down, E&S recovers quickly. That is to say it's an early recovery - recoverer when you come out of a recession in the E&S industry because all new - basically most new businesses and many small businesses, especially if they do come back into the E&S fold. So I don't know whether this is an L, a U or whatever it is. We don't have crystal ball with regard to that, but I think we'll do fine this year, and if we start a recovery, that will be a - we will be the first to experience positive results from a recovery.

Sarah Doran

Hey, Randy, I just want to clarify because I think we had a hard time hearing the beginning of your question, I apologize, but the 10% that Adam referenced in his script was bars, restaurants, taverns, hotels, motels, everything that we think about being most impacted by the shelter-in-place right now. I just wanted to make sure we're [indiscernible].

Adam Abram

Thank you. That's an important addition, right. It's broader.

Randy Binner

Okay. Yes. Thank you.

Adam Abram

Yes. Thank you.

Randy Binner

Got it. And then just one on the Uber runoff, the 3% figure, Sarah, that you shared. That number is kind of open claims as a percent of all reported claims. Now that you've not renewed that book, can there be further claims that come out of the book thinking is this - is that open percent of the all reported basically only going to go down, and if there is any tail left in that run-off, can you outline how that may be affected by less driving activity?

Sarah Doran

Sure. Well, it's a couple of things and then I'm happy - Bob, would you like to?

Bob Myron

Yes. So Randy, I don't think we're going to get a benefit from reduced driving activity because the way the policy works is, we don't have any exposure for - or way the cut-off worked, we don't have any exposure for any accidents or activity after December 31st. There isn't a tail in earned premium and therefore sort of a tail of the exposure. So any new claims that we would be getting reported would be related to accidents that happened December 31st and prior. So that's the first point.

We have still seen some level of claim activity from 2000 period so to speak, but it's really slowing down to a trickle, given what I just described previously. So I would fully expect that that percentage of claims outstanding road of the total claims received is going to continue to drop.

Randy Binner

That's perfect. Thanks a lot.

Operator

Your next question comes from the line of Meyer Shields from KBW.

Meyer Shields

Thanks. Am I coming through?

Adam Abram

You are.

Meyer Shields

Good morning. How are you?

Adam Abram

Fine. Thank you.

Meyer Shields

Is there any way that we can relate the, I guess, restricted cash on the balance sheet to the outstanding claim count for the terminated commercial auto accounts?

Sarah Doran

Yes. I - the way that I think about it, Meyer, is it's not necessarily a binary relationship. I do think about that runoff block of business and really more so the assets that we have on balance sheet being around for about, call it, two years and it will decline. It's declined over $100 million during the course of a quarter. So I would suspect that that is - that's going to be a lumpy pace because it's going to depend on collateral needs and other factors, but we are currently thinking that that collateral likely winds down with the runoff block over about two years.

Meyer Shields

Okay. No, that's perfect. That's helpful. When we anticipate slowing premium growth, should we - I'm trying to think the best way to phrase this, should we assume that the - any mid-policy term adjustments to exposure units for premium written in the first quarter will be - there'll be a negative associated with that in coming quarters?

Adam Abram

I don't - it differs - there are differences across our book. Basically for GL, most of that premium, unless there is a very early cancellation, will stay with us and earn through. So I think the biggest impact on premium is - would be, if there is a significant decline in new written policies or - then I think you'd see a decline, but there are - generally - and there are formulas for each line of business and different - and their different arrangements, but generally, we will be holding along and will have earned most of the premium we've reported to you.

Meyer Shields

Okay. That is very helpful. One technical question, I guess, for Sarah. The ceded minimum premium accrual within Specialty Admitted, was that a reduction to earned premium or was that booked s a loss?

Sarah Doran

It's a reduction to earned premium.

Meyer Shields

Okay, perfect. Thank you so much.

Sarah Doran

Sure. Thank you.

Operator

Your next question comes from the line of Seth Rosenberg from UBS. Your line is open.

Seth Rosenberg

Hey, guys. Thanks for the call. I'm just stepping in for Brian here. I guess, first, obviously the color was great on the COVID risk exposures as we see them now. One follow-up there, and thinking about some of the legislation that's been proposed or implemented around presumption clauses, particularly for workers' comp, how might you think about the potential incremental exposure there? You described contractors in California. Is there any risk of them being considered frontline employees of that nature?

Adam Abram

Well, I think this that anybody who ever tells you there is no risk, probably he doesn't have a lot of experience in the insurance business. We are tracking this very carefully. And I will tell you that in the states that we've paid most attention to because of concentration of premium, the initial proposals seem to be moderating pretty quickly. That is to say there was a first suggestion of a very automatic or a very high level of - very high burden on the insurance companies to assume and take these risks, but that's quickly being reduced as those thoughts are going through the legislature and others that are weighing in. So do - I do not - generally, for example, I would say that contractors are not a highly exposed class for COVID-19 at the current time, and we feel comfortable with those risks.

The other thing I'd point out to you is that, for us, for example, in workers' comp, our retention is substantially lower today than it was a year ago and it was lowered in advance of the COVID-19 eruption.

Seth Rosenberg

Got it. Okay, that's helpful. And then - I'm not sure of the fair way to phrase this question, but you described that there's a lot of - there so far have been some claims that have come in that just clearly are covered based on the terms of the contract, but could you may be give us a sense what is it - what's the cost associated with reviewing, denying, potentially litigating claims that aren't valid just on average?

Adam Abram

Well, I don't think there is an average cost that I can quote you for that, but I will say that many of these will be - look, we, for the last many years, have been handling thousands and thousands of claims, which needed to be individually assessed and evaluated as for coverage and it was complicated because the coverage was different by state, they were making complex claims that had to be - where facts had to be investigated. So this is nothing new from our point of view.

Now, the very strong provisions of our contracts will allow us to quickly screen COVID-19 claims that may emerge. I mean, for example, a COVID-19 claim on one of our general liability policies, which is the majority of our policies issued would be general liability policies, and our pathogen and viral and communicable disease exclusions there, I think will make - in general, each case has to be investigated and the facts have to be understood, but I think it will make it a fast process for those.

Seth Rosenberg

Okay, that's very helpful. Sarah, just one last one for you. I guess, as we're thinking about going forward, E&S, it was helpful commentary that 95% of this segment is core now versus 50% a year ago, but could you may be give us comparable E&S expense and loss ratios for the next three quarters from '19, just - so we can think about the - and track the performance there?

Sarah Doran

Yes. I mean, I think as we mentioned on the call - Seth, it's a good question. We are working to get our expense ratio down. We haven't seen that show up in the first quarter. I think you'll see that in the next three quarters as we do that. It needs to happen throughout the business and you'll see it probably mostly in E&S just because it's our largest business, therefore has the largest sense of expenses. So I expect the expense ratio in E&S to go down a couple of points just because that's mathematically the only way that we get our overall expense ratio to go down to the low 30s. So I think that's pretty reasonable. I also think the loss ratio is, I expect that to be about where it was this quarter.

So, I am not - that will shift a little bit on any given quarter due to mix, but I'm not otherwise anticipating a big delta to the expense ratio in E&S over the course of the year. I'm anticipating a reduction in the expense ratio.

Seth Rosenberg

Okay, great. That's very helpful. Thanks, guys.

Operator

Your next question comes from the line of Mark Hughes from SunTrust.

Mark Hughes

Yes. Thank you. Sarah, how much do you think investment income will be impacted by the lower short-term rates when we think about the 2Q, for instance? What's the delta on that?

Sarah Doran

Yes. It's a great question, Mark. I think at the beginning of the year, the returns that we were getting on that portfolio, given where the treasury market was, were in excess of, call it, 125, 150 basis points and now the short end of the curve is kind of sub 50 basis points. So just given our balances there, that's going to have an impact. I talked about that we're actively looking to sell out of a piece of the bank loan portfolio as well. So I think that's going to have an impact. So I expect that investment income would - just given the - on the face of those two comments, would decline over the course of the year. I don't typically give a guidance number around NII, but those are the two pieces that I think about it.

Mark Hughes

Okay. And when you think about the GL pricing and you've gone through a period here where there is very little revenue in some of these businesses and presumably GL pricing is influenced by revenue. How do you make those underwriting and pricing decisions in the circumstances like this? Do you look at the former run rate? How do you approach that?

Sarah Doran

In GL pricing, we certainly look at the reported losses and how the book is developing, and then we just look at the rates and opportunities and kind of price those on an individualized basis depending on what's coming at us.

Mark Hughes

I was just thinking...

Sarah Doran

I'm not sure if I missed the part of your call. I was just looking for something else and I think I might have missed the first part of your question.

Mark Hughes

Yes, the question was really more at a kind of a policy specific level, how you would price general liability policies if you're looking at someone who's not really been operating for a couple of months, say, does that influence your pricing or do you just kind of assume they return to the former run rate?

Adam Abram

So pricing, there are two parts of it. So you're assuming someone - and I want to make sure that I'm answering your question. So someone has been out of business, let's say. Let's say they folded their business, Mark. I think that may be a premise of your question. And now they're restarting a business, is that right?

Mark Hughes

Yes.

Adam Abram

Yes. So, typically they are going to fill out a new application. We certainly, if we've seen them before or they provide the information, will be aware of what their business has been. There is a minimum charge for the limit. And then typically, we make an estimate based on what they tell us they're going to do. There is a minimum charge for the limit that's a 100% earned, and at the end of that policy term, the audit in general can only increase their premium, not decrease it. Am I answering your question?

Bob Myron

Let me just layer in a thought, Mark. So - and all of that pricing is going to be based upon some measure of unit exposure like their expected revenues, for example, right? So - and we're going to have a rate for that based upon what is in the submission for their expected revenues going forward. So I think that we may see lower revenue numbers from some of those insured as these policies come in new or renewal, but I don't think that it's going to impact the price per unit of exposure that we're going to be charging. I think that there still is positive momentum from a rate perspective in that regard. And there is a few factors at work there, but there - one of the things certainly is that, as yields on investments continue to go down, I think that that is obviously a positive for insurance pricing because you've got to make money on underwriting because you're not going to make a lot on your investment income float.

And I think another - many of our - still some meaningful number of our divisions and classes, there is a shortage of capacity in the industry. Certainly in excess casualty, certainly in habitational risks within our general casualty division, we are still seeing very, very strong demand for our product and - because of business still coming in from the admitted market or capital departing this area or bad underlying loss experience in the recent past.

Mark Hughes

That's all very helpful. Thank you.

Operator

[Operator Instructions] You have a follow-up question from Meyer Shields from KBW.

Meyer Shields

Yes. Just a quick question for Adam. One of the theories that we've heard is that, as small companies are unfortunately put out of business, there is an increased likelihood of D&O claims against them from other companies with whom they've been doing business. Can you talk about that as potential exposure to the recession?

Adam Abram

We have not seen - I have not seen, in past recessions, and we've ensured many businesses that have gone out of business over multiple years, I have not seen a lot of D&O claims registered against the businesses that we write GL accounts for. That's just not been a phenomenon that has really - where we've seen that. Our average premium is $23,000. These are not generally public companies. These are privately held enterprises where the owners and the directors are often the same people.

Bob Myron

Yes. And I just want to add, our professional liability book is - across the group is really pretty small, and then in E&S, it's really an E&O book for smaller private companies, lawyers, architects, engineers, that type of thing. And that - we really haven't seen a lot of growth there. It's a reasonably small book of business. And so you may be asking more from an industry perspective about this. I think our exposure to the part is really quite small.

Meyer Shields

Okay, fantastic. Thank you for clarifying.

Operator

I'm showing no further questions at this time. I would like to turn the conference back to Adam Abram, Chairman and Chief Executive Officer.

Adam Abram

Thank you, operator. And thank you everybody who's joined and expresses an interest and does work following our company. We very much enjoyed the dialogue and appreciate your interest and your help in making our company. We look forward to speaking to you again and hopefully soon being able to join you in person in the conferences when it's safe to do so. And we hope very much that you and all of your colleagues and your families remain safe. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and have a wonderful day. You may all disconnect.