W R Berkley Corp (WRB) 2016 Q2 法說會逐字稿

Good day and welcome to W. R. Berkley Corporation's second quarter 2016 earnings conference call. Today's conference is being recorded.

The speaker's 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, or estimates. We caution you that such forward-looking statements should not be regarded as a representation by us that the future plans, estimates, or expectations contemplated by us will in fact be achieved.

Please refer to our annual report on Form 10-K for the year ended December 31, 2015, 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 will now turn the call over to Mr. W. Robert Berkley. Please go ahead, sir.

Thank you, Andrea, and good afternoon, everyone. Again, welcome to our second quarter call.

With me on this end of the phone, I have Bill Berkley, our Executive Chairman; Gene Ballard, our Executive Vice President; and new to the call is Rich Baio, our Senior Vice President and Chief Financial Officer. Some of you have had the opportunity to meet Rich. Others, I'm sure, will have an opportunity in the future and all of you will be hearing from him today.

He's been with the organization for something more than seven years and the lion's share of that time he was our Vice President and Treasurer, and we are delighted to have him now in the role of Chief Financial Officer.

So the agenda that we have laid out for you all today is I'm going to start out with a few comments about the environment. Then I'm going to offer a couple of sound bites on our quarter, and then I'll be handing it over to Rich who is going to run through in some more detail highlights from our numbers, and then you will have the four of us at your disposal for Q&A.

So turning to the environment, clearly an interesting moment when you look back on the quarter. A flurry of cat activity, nothing particularly outsized but certainly a reminder that cats do occur.

Also, continued dislocation in the marketplace amongst some very large carriers, as some of them are managing to do a merger or acquisition, and others are just going through a meaningful restructuring. And then finally, we have this continued low interest rate environment around the world, and it has really gotten to the point that it could almost make your eyes tear.

In spite of all that, the insurance market seems to march to a similar beat to what it did in the first quarter. The reinsurance market continues to flirt with the bottom. On the other hand, the insurance market is becoming incrementally more competitive, though it can vary greatly by product line or plans.

A couple of general comments around some of the product lines in the insurance space. Property, particularly cat-exposed property remains surprisingly competitive to a certain extent. My speculation would be this is as a result of the reinsurance market empowering the insurance market to be less than responsible in many situations.

The professional space is very much a mixed bag. On one hand, the Fortune 5000 D&O excess market is surprisingly competitive, as are parts of the medical space. Having said that, there are other components of the professional market that are exceptionally attractive, and we can provide meaningful opportunity for growth where margins are attractive.

Turning to commercial auto, certainly a part of the market that we have discussed several times over the past few years. It seems like it is finally getting to the point that discipline is returning. We are seeing rate increases and we are seeing the momentum begin to shift between supply and demand.

On the other hand, we have the comp market which is very much a mixed bag. As many of you are aware, workers compensation is the largest component of the commercial line space. There are parts of this market where the margins are exceptionally attractive, and we continue to find opportunities to grow our business, and there certainly are parts of the comp market that give one reason to pause.

Probably the market that makes one pause for the longest and scratch their head these days would be the Florida market. Fortunately for us we have very limited exposure to that marketplace.

The casualty market is probably the brightest bulb on the tree. Hopefully that will continue or some period of time.

Finally, the stupidity award would go to the aviation and the global marine hull market.

Turning to our quarter, by and large it was in line with our expectations. The growth in the insurance market came from the -- rather, in our insurance segment came from the places we expected it to, led by casualties, followed by professional. Again there are some components of the professional market we continue to find very attractive.

On the reinsurance front, which may have been something that caught your eye coming out of the press release, the growth that we have there, you may be pausing and scratching your head over that given how competitive the market is. However, we are finding ways to grow. And the growth was really driven by four components, one being our facultative business that distributes on a direct basis. They have a series or suite of turnkey products which are effectively specialty products that are just sold on a wholesale basis.

Second would be our global property fac business which writes property fac around the world, outside of the United -- or ex-US. And this is a business that we have started last year and is getting momentum. Additionally, we started as we had announced last year as well, a business in South Africa, and they are getting good traction.

And then finally here back in the States, our treaty business has been finding some niche opportunities within the structured space. The structured space is, and I believe Gene's touched on this in the past, is a part of the market that, while the potential for great underwriting margins may not be there, the way once we structure these deals, the downside is very limited. So as always, when we think about our business and included in that the reinsurance business, we start from a perspective of risk-adjusted returns, and we believe the structured deals that we are able to participate in make a lot of sense when we think about the required capital charge and exposure.

Turning to the loss ratio, and again Rich is going to get into a lot of these numbers, so I'll keep it high level. Approximately $40 million of cats. This by and large is in line with what our expectations were given the level of cat activity in the quarter. I think different organizations use different definitions of cat. Our definition is PCS, at least domestically.

We've certainly seen some of the announcements where they come out talking about cats and weather-related as well. From our perspective it's not unusual to see certain types of weather losses certainly in the second quarter. Rich will break that down for you a little bit more, but I believe that was about 2.6 points for us on the loss ratio as a result of the cat.

On the expense front, by and large again in line with our expectations. The insurance segment continues to show improvement as the earned premiums develops or grows or builds following the written. And on the reinsurance front, the adverse impact on the expense ratio was just mainly driven by the structured deals that carried a slightly higher commission; and again Rich is going to touch on that in more detail shortly.

Turning to the investment portfolio, many of you saw the announcements that we made a little while ago about the sale of Aero Precision. This is a pre-tax gain of approximately $130 million. And we highlight it not just because the $130 million is material to the organization, but it's yet another example that demonstrates the approach that we've taken to how we manage the investment portfolio.

As you've heard our Chairman talk about for some number of years now, given the interest rate environment, we had to look for alternatives, hence the building out of our alternative investment portfolio, and gains have become a more meaningful part of our strategy. I think the guidance that we have given and we continue to believe as appropriate is approximately $25 million a quarter in gains. Having said that, that will fluctuate some time to time because the gains don't come through necessarily in such a predictable or I should say smooth manner.

With regards to other parts of the investment portfolio, again the duration continues to shorten a little bit. We're at approximately three years for the fixed income portfolio and the yield is 3.2. Again, kudos to our colleagues managing the fixed income portfolio. They managed to find ways to maintain the yield while not compromising on the duration.

Again as far as the reserves go, Rich will touch on this but we continue to see positive reserve development. And last comment from me about numbers and then I'm going to hand it off to Rich to get into a little more deeply, but on the FX gain that you saw come through of about $13 million. From time to time, we have seen some people that follow the business and write on our results on a quarterly basis, they tend to focus on that and I'm not sure if they totally appreciate the full picture.

The fact is we have this gain because of our approach and our philosophy to how we manage our currency exposure; and yes, that gain came through, but we'll need to keep in mind the fact that some of our underwriting income was impacted by a weaker local currency as gets translated back into dollars. So is it an exact push? No. But I would assure you that this is not just a one-off benefit. We have things going both ways.

So again I'm going to pause there, I'm going to leave it to Rich to run through some of the numbers with you in more detail. Once Rich is done, we'll be opening it up to questions and you have the four of us to try and address anything we can for you. Rich?

Great. Thanks, Rob, I appreciate it.

For the second quarter we reported operating income of $105 million or $0.82 per share, which is unchanged from the prior year's operating earnings of $105 million or $0.81 per share.

As Rob alluded to, earnings reflected a slight increase in investment income and the recognition of net foreign currency gain, which were offset by a modest decline in underwriting income due to higher catastrophe related losses. Overall our net premiums written increased by 6.4% to more than $1.6 billion.

For the insurance segment premiums increased 5% to almost $1.5 million. The growth was led by a 15% increase in our other liability business.

In addition, professional liability was up approximately 8%, while workers compensation, commercial automobile, property, and other short sale lines were relatively flat quarter over quarter. The segment's increase was understated due to changes in foreign exchange rates. In original currency terms, premiums rose by 7.1%, compared with the USD equivalent basis of 5%.

For the reinsurance segment, net premiums written increased almost 20% to $171 million. This growth continues to be driven by structured reinsurance, and a few of the other items that Rob alluded to earlier in his comments. During prior calls, Gene has referenced these transactions which have very limited cat exposure and carry a lower than average loss ratio, while being partially offset by higher profit commissions.

Our overall pretax underwriting profits decreased $7 million or 8% to $79 million, primarily due to increased cat losses. The accident year loss ratio before cat losses is 60.3%, compared with 60.5% a year ago, and comparable to full year 2015 at 60.6%. Although our cat losses were in line with expectations, this quarter we reported losses of $40 million or 2.6 loss points, compared with $25 million or 1.6 loss points in the prior year.

Loss reserves developed favorably by $16 million representing our 38th consecutive quarter with positive development. That gives us a calendar year loss ratio of 61.8%, an increase of 1.1 loss points from a year ago.

Our overall expense ratio for the second quarter was 33.1%, compared to 33.5% in the second quarter of 2015, and relative to the full year 2015 of 33.2%. The insurance segment expense ratio was 32.3%, representing a decline of 7/10 of a point from the second quarter of 2015, and slightly below the full year of 2015 of 32.6%. The decline in the expense ratio for the insurance segment as Rob referenced earlier, is largely attributable to a higher increase in the earned premium relative to underwriting expenses.

The reinsurance segment expense ratio increased 1.4 percentage points to 40.1%. That increase was due primarily to the growth in the structured business which has a higher expense ratio relative to the other reinsurance business written.

For comparative purposes the structured business represented 25% and 8% of the net premiums earned for second quarter 2016 and 2015 respectively. That brings our combined ratio 94.9% for the second quarter 2016, compared with 94.2% for the same quarter a year ago.

Touching on the investment income and the contributors to that. Investment income increased approximately $2 million or 1% to $129 million, resulting from a few main drivers. First, income from fixed income securities was up $3 million to $108 million, with an annualized yield of 3.2%, which is unchanged from the second quarter 2015, and slightly lower than the full year 2015 of 3.3%.

Second, income from the merger arbitrage accounts increased $3 million compared with the year ago quarter. And finally, earnings from the investment funds declined $3 million to approximately $19 million, attributable to improved energy fund results, offset by a decrease in other fund income. The investment fund performance of approximately 6% on an annualized basis is in line with our target return.

At June 30, 2016, after-tax unrealized investment gains were $363 million, representing an increase of $182 million, or more than 100% rise, from the beginning of the year.

The average rating, as Rob alluded to, was AA minus, unchanged, and we shortened the portfolio from 3.3 years at December 2015 to 3 years at the end of June 2016. The overall tax rate was 31.2% which is almost unchanged from the overall tax rate for the prior consecutive quarter, as well as the full year of 2015. That gives us net income of $109 million, and overall return on equity of 9.5%, and for comparison purposes a pre-tax return on equity of 13.8%.

Also during the quarter, our book value per share increased $1.22 to $39.97, which is an increase of 12.6% on an annualized basis. Our operating cash flows remain strong, with $156 million for the second quarter 2016, and almost $300 million year to date 2016.

Finally, as Rob was alluding to earlier, subsequent to our second quarter we announced the sale of Aero Precision and invested in our private equity portfolio. The estimated pretax gain of approximately $130 million, or an after-tax gain of approximately $70 million, [translates] to an increase in book value per share of $0.64 and 1.7 percentage points improvement on our ROE, which we would expect to reflect in our third quarter of 2016.

Thank you, Rob.

Rich, thank you very much. Andrea, I think that will complete our formal remarks, so if you could please open it up for questions, and again you have all four of us here to try and answer any questions folks have. Thank you.

(Operator Instructions)

Kai Pan, Morgan Stanley.

Good afternoon and thank you. The first question on the reinsurance side, the growth. Are those one-off deals or do you expect those to sort of (inaudible)?

It depends on the part of the business. As you may recall, I pointed to four different areas that were driving the growth. Certainly it is our hope and expectation that our global property fac business, or the property fac business that's non-US, I think that business will continue to grow. We would expect our business that's focused on South Africa to continue to grow as well.

The turnkey business where we offer through our direct fac operation domestically, we would expect will grow. And as far as the structured deals, those tend to be one-off. While there can be renewals on those, it really depends on the season.

So short answer is that it's a mixed bag. I would suggest to you that this quarter that the planets and stars lined up. I don't think our expectations of this type of growth are necessarily going forward.

So roughly the 19% year over year growth, would you say the treaty business on the structured deals is, accounts for majority of it or --

I'm not suggesting that. I'm suggesting that I don't think we're continue to grow at 19% quarter over quarter.

Okay, that's great. And then on the insurance side, it looks like you have a pretty healthy growth on the other [liability] lines [growth] as professional lines. Like where do you see this repricing [marks] right now?

I'm sorry, where do we see -- could you repeat that? Where do we see what?

Sure. Where do you see the pricing environments right now in these lines and also [as this grows], how would that impact your sort of like mix of loss ratio going forward?

Well, you know the other liability or what we refer to as casualty in general is pretty wide and diverse, as is the professional space. So we are growing in places where we think that the margins are attractive. So I guess, ultimately from our perspective, we think that this will be accretive to our business and help us achieve our targeted returns.

Okay. And then your new business that you mentioned, about the high net worth business as well as the Asia business. Could you talk more about these new hires and new startups and what would that impact on your expense ratio in near term?

So just to touch on the overall expense question and perhaps this will give a little bit of insight or color for some on the phone. When we were starting a new business, the expenses associated with starting a new business are expenses that we maintain at the holding company or corporate.

Once those businesses begin to operate, which often times can take a little bit of time between when they are hired and when they actually start writing business, but once they start writing business, that's when you will start to see them participate in the overall ratios, including expense ratios.

So the two businesses that you are referring to that we referenced in our release, one in the high net worth space, from our perspective we think that, that is very much a specialty business. Many people think of the personal line space as a commodity business, and there are certainly parts of it that are a commodity business. But ultimately we like the high net worth space because we think it is a specialty business that targets an audience where they value claims service, they value service in general, and they are willing to pay for that value.

As far as our expansion into Asia, it's a team of people again that are focused on the commercial specialty business. They have a great track record. They have great relationships. We don't think that this business will be overwhelming from a scale perspective any time soon.

But if we take a long term perspective and you think about where the global economy is likely to grow over the next few decades, Asia is likely to be a big part of that. And we feel as though, as we manage the business and position it for the future, we need to be learning and participating in a thoughtful and controlled way; and the people that are managing the capital in that region on behalf of the shareholders, we think are more than capable of doing so.

That's great. If I may add in one last one on the $130 million pre-tax gain, the Aero Precision divestiture. First -- two things on that. First is that, [what's] earnings impact going forward? And then secondly, how do you think about the proceeds? Are you going to invest in other deals like private investments, or like could be used for capital management including buybacks?

The issue is when we get the money we'll make the decision how we use it. Money [is] at the holding company and we'll make our own decisions, as we do with all holding company funds.

As to effect earnings, the third quarter will close some time the end of July, the end of August, in that period of time. It's hard to tell just what it'll do, as an ongoing basis, it'll have some impact but we also are always looking to buy things in that area and expand. So, it will have an impact in the very shortest run, but we would think that in the longer term, we would expect to expand that aviation business again and restore it to its level of profitability.

Great. Thank you so much for all the answers.

Ryan Tunis, Credit Suisse.

Thanks. I guess my questions are just a little bit more on the structured deal in reinsurance. I think Rob said first of all, that the margins are a little bit lower but the risk/reward is a little bit better. In other words there's less downside. What would you say the target combined ratio is on these structured deals that you've been doing?

So, you know that's just not something that we're going to get into on the call. I would tell you that we're not going to deploy capital unless we think it's a reasonable risk-adjusted return, but how we price individual transactions, that's just not typically something that we would get into that level of detail.

What I would tell you is, that while the upside to me not be as attractive as some other activities, the downside is very limited, and the commission, the (inaudible) commission is on a sliding scale, and then again as mentioned earlier, when we look at the capital exposed, we think it justifies utilization of the capital.

But as far as the details, I'm not sure if that would really make sense to our shareholders to get at that level [of the weeds].

Sure, sure, that's fair. I guess just from an accounting standpoint, I think I heard that 25% of the earned premium this quarter within reinsurance was coming from these deals. And I think you also said that they tend to be one-off. So maybe just looking for some visibility over the next few quarters on, to the extent that you don't do any more of these, sort of where we should see the combined ratio and reinsurance even out, I guess is maybe the right way to put it.

Yes, I think that the way you might want to think about this -- well first of all this isn't just like some flurry of deals that we've done in the last 90 days. While it's perhaps spiked up a little bit. That in part is because we've reduced our participation in some of, what one might define as the more traditional components of the market. So the structured component is standing out a bit more.

But from our perspective, from a combined ratio, normalized for cat, and perhaps the loss ratio getting incrementally better, I think if you look back to where we've been over the past few quarters, it's probably not a bad data [point].

That's helpful. Thanks.

Michael Nannizzi, Goldman Sachs.

Good, thanks. A couple of questions for you on the Aero Precision sale, Bill. I guess that was one piece of Aero Precision, it looked like it was just maybe one region of that business. I'm just trying to get an idea. Is it possible to understand, whether on a percentage of revenue basis or percentage of something basis, percentage of profit basis, what was the contribution of the business that was sold?

It was the largest single part of [granjero] but it was not all of granjero. And we acquired Aero Precision, rather, I think three years ago.

And we'll reinvest some part of that money in expanding it to other kinds of specific areas that offer us other opportunities in the aviation field. We think we have expertise in areas having to do with the aviation business. So we'll continue to look.

But it had a very -- percentage of the business that has not been a business that has consistently had earnings that are highly predictable quarter.

And did you give the proceeds number from that transaction?

I know that we got the gain number but I don't know --

-- no, we didn't.

Okay. And then I noticed you guys picked up some debt in the quarter. I was just curious, the financial leverage a bit higher than it's been. (Inaudible) it [ticked] up a little bit a couple of years ago when you guys pre-funded some debt. I just wanted to understand how we think about that. You've got a couple of issues coming to you in 2018 or 2019. I'm just trying to get an idea. Is this where you expect or you plan to be running your leverage, and is there a reason why you've chosen to take that out?

Rich, go ahead.

Sure. So as you've pointed out, we do have some maturities coming due in 2019 and 2020. In light of the interest rate environment, our expectation was to try and take advantage of the coupons that one could benefit from. And so as we evaluated our capital [stack], we determined that it would be more efficient to have hybrid capital in our overall debt and hybrid structure.

And so to that end, we effectively are pre-funding, recognizing that the leverage ratio is a little bit elevated from where we would like it to be. I think we target kind of 32% to 33% over the short term.

Okay.

So Mike, we like the trust preferred instrument. We like the duration giving us a lot of flexibility. We like the five-year call option, and it's hard to know when interest rates were going to be moving up, but it seemed like a reasonable window. And is there a little bit of short-term cost? Yes, there is. But as Rich suggested, it's an opportunity to pre-fund and obviously rating agencies are comfortable with it.

Right, okay. And then just one quick one on expenses. When we back out the FX, it looks like the other expenses were a bit higher, and then relatively (inaudible) the expense ratio overall, especially insurance, was a bit lower. So is some of that sort of the expense initiative that you're talking about with regard to these new sort of businesses?

Yes, that's correct Mike. As you recall, over the past, call it 12 months or so, we have started a number of new operations. Some of them standalone, some of them in an incubator that will get folded into an existing operation.

And as I mentioned earlier, we tend to put the expenses prior to operational into the overall expense. So for example, the high net worth as well as Asia that's coming through in the corporate expense, and there are a couple of other bits and pieces that are just in their infancy that are in there as well.

Got it, okay. And so, then when we look at the expense ratio excluding those -- so we could expect to see more expense coming through that line as you're building, and then -- (multiple speakers) --

It's almost like an incubator, if you will, and once they leave the incubator then it shows up in the expense ratio. So you'll see it spike in the corporate, then you're going to see it evolve over into the expense ratio, and then as they hit maturity, or the earned gets some level of critical mass, you'll see that expense ratio start to come down as that earned turns up.

Got it, okay, and then when we look at the segment, then that 60 basis point year-over-year improvement in insurance and expense ratio which is reflecting the continuing businesses, that we should be -- that level of expense is reasonable for the way that you're going to be accounting for that business on a go forward, at least as a starting point.

Look, look. I think it's a reasonable number to start with, but obviously as we move, as businesses mature and they go and they are up and operational, then it's going to flop over and hit the expense ratio and it might move it up.

So as things make their way down the assembly line, the numbers are showing up in different areas, if you will, whether it's corporate expense or expense ratio. The improvement that you saw in the expense ratio this quarter, consistent with some of the things that we've chatted about in the past on these calls, is a result of the maturing of some of the operations in that earned premium growing.

So again, as we're starting new operations and they migrate from corporate expense into the expense ratio, you'll see that expense ratio go up and down.

Got it. Okay. And last question just on these new initiatives, do you expect a natural expense ratio for the businesses you're starting to be different at maturity than the remainder of your business?

Some of the businesses will take more time to mature than others. But ultimately speaking, we believe long term that our expense ratio certainly will be in the low 30s. And we're going to keep trying to push on that in a sensible way to the extent we can push that farther.

Great. Thanks so much.

Arash Soleimani, KBW.

Thank you. A couple of questions here. I think that the high net worth business was described by one of your competitors as being $8 billion to $10 billion currently in annual premium but having the potential to hit $30 billion to $40 billion. Just curious if you would [define] that market similarly.

Well, I think that people can define that market in a variety of different ways, and if you talk to ten different carriers, they'll probably tell you ten different definitions as to where the high net worth market starts. I also think it depends on the territory, whether you're talking about the US or whether you're talking about global, and I think it also depends, are you just talking about auto and homeowners, or are you including fine art, jewelers [block], etcetera, etcetera.

So like many things in life and certainly this industry, definition is key. But we do believe that it is a meaningful market where there is not only dislocation, but there is quite frankly, enough scale that there's opportunity for multiple carriers to play and find different ways to bring value to customers.

Thanks. Can you just remind us of some of the business and exchanges that are helping the core loss ratio?

The business and exchanges that are helping the core loss ratio? Generally speaking we'll disclose some things in the Q but we don't really get into the specifics as to what the margins are by product line at that level of granularity.

What I would suggest is if you -- I know it's a bit monotonous but if you go back and hear our comments from today and in the past as to where we think the best margins are, that's usually where the improvement is coming from.

Okay, thanks. And lastly, can you just mention any impact, if any, at all that you expect from Brexit on your business?

I have a couple of thoughts but in addition to title of Chairman around here, it's also Chief Economist, so I'm going to leave that to our Chairman to reflect on.

First of all, we in fact had set up a company in Liechtenstein well in advance, being cautious and wanting to take no chances. So we are equipped to do business in the EU domicile other than the UK. So from a legal point of view, it won't have an impact on us and we did that some time ago.

Clearly the intellect that's based in the London market continues to be there. We don't see it disappearing. So we think London will continue to be the center of the insurance business in that part of the world. And from a regulatory point of view, we've been able to protect ourselves. So we don't really see a major change or significant impact.

Okay. Thank you very much for the answers.

Larry Greenberg, Janney.

Think you very much. I guess this is just a modeling question. But can you tell us what percentage of the investee revenues was represented by Aero? And then is a new normalized run rate for the investment funds line that we should be thinking about?

Rich, do you have any comments that you would like to make?

I would just say that as it relates to the investment funds there's a fair amount of variability as [you've] seen over the quarter. So I don't know that, that's something we can really predict or provide guidance around.

It changes substantially quarter to quarter and it doesn't model particularly well.

And the Aero as a percent of total investee revenues?

The answer is I can't tell you but if you call Rich Baio up tomorrow, he can give you the answer to that. (Multiple speakers) I don't know offhand.

Thanks.

Jay Cohen, Bank of America.

Good evening, Jay.

Good evening, Rob. A couple of questions. First, the buyback activity. I guess given the accelerating topline growth and also given the added debt, is it reasonable to expect buybacks to be fairly close to nil in the near term?

Jay, I think first off, the trust preferred that we issued, while it looks like debt as far as our room and our basket, we get equity credit for that, so I just wanted to clarify that.

In addition to that, while certainly the growth is there at this stage, we are generating a fair amount of capital and we think that we are well positioned to have over the coming quarters, barring the unforeseen event, flexibility as it relates to special dividends, repurchase of debt, or repurchase of equity or stock.

As you've heard from our Chairman in the past, our approach to returning capital to shareholders varies, and it all depends on what we think is the most appropriate at that moment in time. But we do think that there will be capital in all likelihood available to return to shareholders over the next several quarters.

That' s great, that's helpful, Rob. Second question, you talked about some of the pricing trends that you're seeing. I'm wondering if you could talk about what you're seeing from a claims standpoint? And I guess to highlight one line of business, workers compensation, specifically what you're seeing from a claims standpoint there.

Generally speaking, we continue to be pleased with the frequency trend there. There are some outliers. I referenced Florida earlier as a place that personally scares the daylights out of me, as you may be aware, basic -- what they are doing, not basically, what they are doing is retroactively, they're changing the benefits and fees, and as a result of that, what people thought their loss costs were, those are changing.

So the idea of loss costs and what people had thought they were when they priced the business may not prove to be reality.

And outside of workers comp, any other lines of business where the claims trends are surprising to you at all?

There's nothing that's outstanding but I think as we've commented in the past, we continue to see potentially early signs of an uptick amongst the plaintiff bar and how well organized and focused they are.

It has again, come through on the comp line, and we're seeing early, early signs that it may present itself other lines. Certainly not at the point that anyone should hit the panic button, but from our perspective it's something we're paying attention to.

Great. Thanks for the comment.

Ian Gutterman, Balyasny.

Hi, thanks, Rob. Actually can ask you to spin on the last answer about the Florida comp? I just want to make sure I've understood my reading of the issue. Could you just give me a sense -- I know obviously a lot of the concern is on new business but my understanding is it also applies to any sort of open inventory essentially of unclosed claims. Can you just give a general sense of some [of those writing] workers comp in the state of Florida, how much of their back reserves might be exposed to this?

Yes, you know honestly I'm not the Florida comp guru. There are other people who could opine on this. We do not have a lot of exposure there. I think we have a whopping $5 million or so of premiums, so it's not a big deal for us.

But what I have heard, and again don't go on this please, check it out yourself, but it is retroactive. It is on claims that are open, and I've heard some commentary where there are some people that are actually trying to open old claims.

Sure, okay.

Now this could potentially be quite meaningful. Again I'm not the expert. I would encourage you to talk to others, and quite frankly a great resource is the NCCI.

Exactly, exactly, great. And just most of my other questions were answered. I guess just one thing to pile on all the aviation questions. I think the reason people are asking so much is just it's a hard line to model, as you guys say, and it would be unfortunate if you were to miss next quarter or Q4, whatever it is, for something you could have disclosed in advance on the aviation. So if there's any color maybe you can put in the Q that would help us model, that would much appreciated.

It's hard to give you an answer when we don't know.

Understood, understood, I just --

Part of it, we don't [lose the earnings] till we close. We don't know the date we close. So that's a starter for why we don't know the answer. There's lots of reasons. We're not avoiding the answer, we just don't know it. And giving the wrong answer generally gets people more unhappy.

Understood. All right. Thank you.

[Jamie England], (inaudible).

Rob, I wanted to call with a (inaudible) sort of an interesting time. But I'm trying to get a sense of where you think we are, meaning if you look back over 10 years, you guys have had ROE of 14%, you've got book value per share growth nicely double digits. What to you is the most important metric and what do you think about your ability to achieve that over the next 10 years?

Look, I think ultimately we believe our model has worked well and we think the fundamentals of that model will continue to serve us well. And that is really a focus on expertise and a focus on the parts of the market where it's expertise that are the great differentiator. And we continue to do that as we build out new operations, and we continue to invest from the perspective in our existing operations in bringing in new talent.

So clearly there are a lot of variables, a lot of questions as to how the business will operate over the next 10 years, and that ranges from predictive modeling to analytics to how product in many parts of the marketplace will be distributed, and the list goes on from there.

But fundamentally we choose to participate in parts of the market that are not easily commoditized. We want to participate in parts of the market where people and expertise that make the difference and we believe that approach has served us well and we believe it is applicable going forward.

Can you speak to the question about metrics and what you think is the most important things to you?

We focus on risk-adjusted returns. All returns are not created equally, and we try and evaluate the risks that we are taking on and what an appropriate return is associated with that.

Ultimately, we are focused on, obviously going hand in hand with the risk adjusted return, is ROE.

Okay, great. Thank you.

(Operator Instructions)

Josh Shanker, Deutsche Bank.

Good evening, everybody. Can we talk a little bit, we've got election season coming up about what you think the chances are for bipartisan tax reform?

You know what, in addition to being Chairman and our Chief Economist, he's also our Chief Lobbyist [laughter] so I'm going to yield to him on that one as well.

Hi, Josh, how are you? Tax reform, you know I don't know who's going to be elected president, probably neither of these bums would be a good outcome. I have no idea whether we're going to get tax reform or not. I think that the reality is that the tax system is not working, not just for the insurance industry, but for lots of parts of corporate America and how people behave and what people do.

Will we get tax reform? We sure should. We need it. I spend less time in Washington as I become less enthusiastic about something happening. Last week I spent time with our lobbyist and talked about it. He was more optimistic because they don't have much choice.

So I'm slightly more positive than I was two years ago, but you surely can't bet on it.

And what about in the UK? I heard the rumblings that UK taxes might come down, maybe benefiting Lloyd's and whatnot, in order to compete with you?

They're talking about lowering the tax rates in the UK from 25% to 20%. But they, I think they're talking about a lot of things in the UK. They haven't yet turned in their resignation from the EU, and we don't know that what's going to happen there. So I think there's a lot of uncertainty.

I'm just sort of trying to keep our company in a position so that we have the optimal level of flexibility. It's why we have an EU-domiciled company as well as a UK-domiciled company. We're just trying to sit here to be sure we can do the best for our shareholders and the best return. It's why we're investing in different kinds of things and fixed income securities because we couldn't get great returns that way. And we're just trying to be as nimble as possible until we feel like we have some way to judge the future and it's pretty comfortable.

Well good luck, always good luck. Take care.

Kai Pan, Morgan Stanley.

Thanks, just a number of questions. The $60 million reserve, can you break down into the insurance and reinsurance segment?

Generally speaking we don't get into that detail in the call. It will be in the Q as it has been in the past.

Great. Thanks.

Anything else?

I'm showing no further questions at this time. I would now like to turn the call over to Mr. W. Robert Berkley for any further remarks.

Andrea, thank you very much, and thank you to all that dialed in.

Again from our perspective, we think the business is particularly well positioned. We think the investments that we've made over the past few years and continue to make today are going to serve us very well over the foreseeable future.

And as a result of our structure and the people that make up the organization, we are able to find opportunities, and for that more specifically, very attractive opportunities to make good risk adjusted returns, when others that have a more traditional structure and perhaps are not as nimble are not able to identify these types of opportunities as easily as we believe we can.

So again thank you for calling in, and we look forward to speaking with you in about 90 days.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.