W R Berkley Corp (WRB) 2016 Q4 法說會逐字稿

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

The speakers' remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words including without limitations, believes, expects, or estimates. We caution you that such forward-looking statements should not be regarded as representation by us that the future plans, estimates, or expectations contemplated by us or 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 would now like to turn the call over to Mr. W. Robert Berkley, Jr. Please go ahead, sir.

Thank you, Andrew, and good afternoon, everyone, and welcome to our fourth-quarter call. As usual, joining me on this end we have Bill Berkley, Executive Chairman; Gene Ballard, Executive Vice President, and Rich Baio, Chief Financial Officer. In addition to that, to be perfectly frank we have, I don't know how many other people. There's seems to be well poised and positioned to try and censor the four of us but we will see how they do.

The agenda for the call is, I'm going to kick it off with some macro industry comments and I'm going to share with you some thoughts on our quarter and following that I'm going to hand it over to Rich. He is going to run through some of the numbers and highlights from the quarter as well and then over to all of you to answer any questions that you may have. So on the macro front, it is clearly an interesting moment in some ways things are as expected and in other ways it is not so clear.

As far as under the category of as expected, the commercialized insurance market continues to be incrementally more competitive. Comp is aligned and it is probably seeing the greatest level of erosion at the most rapid pace. In some ways this isn't completely surprising, given the margins that have been available there for some period of time and the action that many rating bureaus are taking across the country.

Property remains very competitive. To a certain extent this behavior continues to be empowered or enabled by the reinsurance market. Professional liability, it is a very broad line with so many different classes, it is difficult to use a broad brush. Having said that, there are some parts of the professional market that are exceedingly attractive and there are other parts where people need to be quite cautious.

Commercial auto, while it does continue down a path of improvement, from our perspective, much of that marketplace still has a way to go. Casualty remains the bright bulb, at least for the moment. And finally, the reinsurance market remains as irrational as ever from our perspective.

And quite frankly, it is a bit disappointing because every now and then you see some green shoots popping through and then in relatively short order it would seem as though somebody comes along and stomps those out. Other thoughts beyond the immediate market conditions that I will raise, and I'm just going to run through these pretty quickly, to the extent of a note or nerve with anyone I'm happy to pick it up further during the Q&A. I guess number one would be, quite frankly we continue to be quite surprised by what one might refer to as the resistance that the insurance industry, particularly the commercial lines, P&C space, continues to have towards change.

Specifically, the struggles around embracing analytics and technology, as well as what would seem to be a lack of recognition for the change in consumer behavior. Another area that we are certainly are paying attention to is the role of federal regulation. We have seen that on the uptick over the past several years.

Clearly, it is unclear as to what the position that the new administration is going to take as it relates to federal regulation's role and involvement in the P&C space. We will have to see on that one but that is something again that we are focused on.

Interest rates and directionally where they are headed, we have seen some movement. Certainly there is good reason to believe that we will see them moving up from where they are today. Obviously, for some this creates a bit of noise in their book values coming from the impact on their bond portfolio. For organizations such as ours that have gone out of their way to manage the duration and, quite frankly, keep it somewhat short but also have a fair amount of leverage so that investment income when you look at our economic model, we think that we are particularly well positioned.

One more topic that I will put out there, which is a topic that I think is getting an increasing amount of attention recently, and is near and dear to my boss' heart, is the topic of tax. Clearly, there is a lot of noise or a lot of discussion around a lower corporate tax rate in this country. We, along with many others, would benefit from that. I think the other component, which is perhaps in some ways a little less clear, is what is the impact going to be as result of tax reform on companies in the marketplace that are not domiciled in the United States. Many companies that participate in the US P&C market have benefited from being outside of the United States and the question will be whether that benefit will continue going forward or whether that is something that perhaps may change or be impacted by decisions and actions coming out of Washington.

Let me change it over to the quarter and again I will keep this pretty high level. Rich is going to get you into the weeds as far as the numbers go. Top line of the growth float, it was really driven by a spike in competition in the fourth quarter. It is hard to say for sure. Some might speculate it's as a result of many market participants trying to hit their budget. Early returns on January, and we don't have perfect visibility into January, let alone the quarter, let alone the year. From our perspective, there is a reasonable chance that we are going to see our insurance growth start to recover. Having said that, as far as the reinsurance component of our business, we do not see that, quite frankly, growing in 2017 and there is a better-than-average chance that we see it fall off further from where it is.

As I have suggested, the reinsurance market continues to be astonishingly competitive and we are not going to view that marketplace through rose-colored glasses. Loss ratio was adversely impacted by tax to approximately the tune of $37 million in the quarter. Matthew and Tennessee wildfires were the big contributors there.

Again, Rich is going to give you some detail on that. That was partially offset by positive reserve development of approximately $17 million and my understanding is that this is the 40th quarter in a row of net positive development. And I think again that speaks to our approach of wanting to be being measured when we set our [loss picks] and as they season out then we are prepared to adjust our views.

Briefly on the expense ratio as well as corporate expenses, they did tick up in the quarter. It was not surprising to us, given some of the new initiatives, some of which we have announced, some we have not announced at this stage. As a reminder, as far as expenses go, businesses that are in their infancy and have not started to write business, we hold those expenses at the corporate expense level. Once businesses are operational, and our definition of operational are writing business, then that will come through in the expense ratio.

And then just finally a quick sound bite on the investment portfolio. Terrific quarter. Fired on all cylinders. Both the bond portfolio by and large weathered pretty well. In addition to that, our funds performed particularly well. And finally one of our private equity investments, specifically HealthEquity, we recognized some gains in that position. And in addition to that, Richard is going to talk to you about some other impact on our balance sheet as a result of our holdings dipping down below 20%.

As people know, we have made efforts over the past couple of years to expand our activities in the alternative investment area. In many cases, I think some have struggled with it from a modeling perspective because it doesn't model as easy. It's a little bit lumpier. Having said that, folks that are responsible for that part of the business have done a great job and in spite of the fact that it is a little lumpier clearly, the risk-adjusted returns have been great.

So I am going to pause there. I'm going to hand it over to Rich and, again once he is through, you have all four of us to answer any questions that you might have. So, Rich, if you would please.

Thanks, Rob. For the fourth quarter we reported net income of $153 million, or $1.20 per share. That compares with the prior year's net income of $110 million, or $0.85 per share. The growth of 39% in net income was due to an increase in realized pretax gains of $86 million, primarily from the sale of a portion of common shares in HealthEquity and to an increase of $32 million in pretax net investment income.

Those increases were partially offset by a few items including lower underwriting income, which was impacted by the cat losses as Rob alluded to earlier; lower income for non-insurance businesses largely due to the sale of Aero Precision's operations in August this year; higher startup costs associated with new operations, once again Rob had alluded to this earlier where certain of our operations are included in the corporate expenses, [life], Berkley One, or high net worth as many of us refer to, and other, yet to be announced companies; higher interest expense due to the repositioning of our capital structure we undertook earlier this year which we had alluded to on some of our earlier calls; and finally, to a decline in insurance service process.

Our operating income for the fourth quarter was $104 million or $0.82 per share, compared with the prior year's operating earnings of $115 million or $0.89 per share. Overall, our net premiums written increased 0.7% to slightly more than $1.5 billion.

The insurance segment grew about 1% to approximately $1.4 billion, while the reinsurance segment declined 1.2% to $145 million. The growth in the insurance segment was led by a 12% increase in our professional liability business, offset by a decline of commercial automobiles due to continued inadequate rate environment in certain areas of this market. For the reinsurance segment, the increase in property's net premiums written largely offset the decline in casualty business. As Rob referenced in his comments, the reinsurance market continues to be competitive and we have maintained our disciplined approach to fulfilling capital on a risk adjusted basis.

Our overall pretax underwriting profits decreased $24 million quarter-over-quarter from $106 million to $82 million due to hire cat losses in the current quarter. The cat losses increased $26 million over the prior year's quarter to $37 million. The accident-year loss ratio before cat losses was 60.1% compared with 60% a year ago.

The cat losses represented 2.3 loss points in fourth-quarter 2016 compared with 0.7 loss points in 2015. The two significant cat events were hurricane Matthew and the Tennessee wildfires, as Rob referenced. They totaled $18.5 million and $15 million respectively. Loss reserves developed favorably by $17 million, representing a $2 million increase over the same period a year ago. That gives us a calendar-year loss ratio of 61.3%, an increase of 1.5 loss points from a year ago.

Our overall expense ratio for the fourth quarter was 33.6%, compared to 33.3% in the fourth-quarter of 2015. The insurance segment expense ratio was 33%, which is an increase of 4/10 of a point from the fourth quarter of 2015. The increase in the expense ratio for the insurance segment was due to the addition of new operations, in particular Berkley Cyber Risk Solutions and Berkley Transactional were added to the insurance segment in the quarter. These were pre-announced. We expect these operations will develop further in the near future and begin to contribute underwriting profits for the Company.

We are also expanding business in certain international geographies as well as domestic opportunities that are still early stage in development and also contributed to the elevated expense ratio. Examples include expansion in Latin America and the Asia-Pacific region. The reinsurance segment expense ratio decreased 0.9 percentage points to 38.5%, which reflects the higher increase in earned premium relative to underwriting expenses. In pure dollar terms, the underwriting expenses increase by 10% while net premiums earned increase by 12.7% quarter over quarter.

This decline reflects the increased net written premium earnings through from prior quarters. That brings our combined ratio to 94.9% for the fourth-quarter of 2016, which compares with 93.1% for the same quarter a year ago. Investment income increased approximately 25%, or $32 million, to $159 million, resulting from a few main contributors.

First, income from fixed income securities was up about $8 million to $109 million with an annualized yield of 3.2%. The most significant contributor to the growth in fixed income is the larger investment base. Second, income from the investment fund increased $27 million compared with the year-ago quarter, which was primarily attributable to investments in energy and real estate funds. And finally, earnings from loans receivable declined $4 million resulting from the maturity and payoff of certain loans in the portfolio. At December 31, 2016, after-tax unrealized investment gains were $427 million, representing an increase of $246 million from the beginning of the year, or approximately 136%.

The average rating was unchanged at AA minus and we shortened the portfolio from 3.3 years at December, 2015, to 3.1 years at December 31, 2016. The overall tax rate was 33.7%, which increased primarily due to the significant net investment gains in the quarter and higher state income taxes. The realized gains in the quarter primarily related to the sale of a portion of our common shares in HealthEquity, which is a reminder was not previously reflected in stockholders equity.

That gives us net income of $153 million and an overall return on equity of 13.3% on an annualized basis. And for comparison purposes, a pretax return on equity of 20.2%. Book value per share increased $1.17 to $41.55 in the quarter representing an annualized increase of 11.6% and the full-year growth and book value per share of $4.34, or also 11.6%.

In the quarter we also returned $109 million to our shareholders through a special and ordinary dividend as well as repurchased approximately 575,000 shares of common stock. In addition, book value significantly grew due to the realized gains from the partial sale of shares in HealthEquity and unrealized gains on the remaining interest, which changed to an available-for-sale security. This growth is partially offset by a reduction in net unrealized gains in our fixed income portfolio due to the rise in interest rates during the quarter. Thank you.

Thank you, Rich. Andrew, at this time we would like to open it up for questions please.

Thank you.

(Operator Instructions)

Our first question for the day comes from the line of Kai Pan from Morgan Stanley. Your line is open.

Thank you and good afternoon. The first question, Rob, just follow up the tax reform. If the tax rate were to go down to, for example, 20%, how much of these, [or earnings, have creation] you would think would be retained and how much you would think would be either reinvested in the business or [be compete away]?

No different than how we manage our capital account when people have asked about our approach to repurchasing stock, the dividends, and so on. We try and look at what our needs are to operate the business, what our needs for capital are. Ultimately, it is just additional earnings and the question is do we need to hold onto it or give it back or is there an opportunity to return it to shareholders. So I think we're hoping that we have the problem where we have a lower tax rate and we have more earnings to either grow the business or return to shareholders

Okay. And then the following question is really on your core loss ratio as well as expense ratio. Given the -- you said the market becoming a little bit more competitive with inflation trend, do you think of these underlying loss ratio will maintain at current levels or could it be some deterioration? And on the expense side, it looks like this quarter is higher than the prior three quarters in 2016. Should we looking for it to be like a full-year basis or you think the current run rate is a good number for 2017?

Yes. The two pieces there, let me touch on the loss pick first. As far as the loss ratio or the margin, I think on an apples-to-apples basis in the industry certainly for much of it rates are going down. Having said that, I think the one variable that you did not touch on, which we are very focused on every day at every level, is selection.

So I don't envision, generally speaking, that just because we are seeing some, what I would say, modest incremental growth in rate pressure that one should naturally just assume that we will straight through translate to higher loss pick. Because again, we are constantly combing through our book and making sure that we are optimizing and many of the things that we are working on internally I think could more than offset anything you see happening with rate.

As far as the expense ratio goes, as Rich commented, I offered a thought on as well, a lot of it has to do with what we have in the hopper. What we have in the incubator. And those are the big drivers as far as where the expense ratio came in for the quarter and the impact on corporate expenses.

So obviously, for example, as Rich mentioned, Berkeley One, our entry into high net worth, that is a meaningful component to corporate expense. Some of the other growth that or new initiatives that Rich had mentioned that are already up and going. Those are having a significant impact on our expense ratio. So what I would tell you is that I think it is possible that by the end of -- or towards the end of this year, it is possible that you will see our corporate expenses coming down and maybe our expense ratio itself will be treading water or it might even tick up ever so modestly from here.

So again, I appreciate what you are trying to do and the complexities in trying to get your head around it and the lack of visibility. But this is all driven by new initiatives that we think are going to bring value to shareholders over time

Thank you very much for all the answers.

Thank you. Our next question comes from the line of Arash Soleimani from KBW. Your line is open.

Thanks and good afternoon. Good evening. Just on the -- back to the expense ratio. I know you mentioned that things that are in the incubator won't directly impact the expense ratio. I guess when high net worth does go live, what type of expense ratio impact should we expect at that point?

The answer is that we haven't really published it at this stage. The impact we will have to see but it certainly would raise it. At the same time, we do not know some of the businesses that are already under the category of expense ratio, how they will be maturing.

Our expectation is that many of the younger businesses or businesses that are operational but in their infancy will have gotten some traction, the earned premium will be kicking in, so that will be moving the expense ratio down. But if you are looking for a specific dollar amount or number of basis points that high net worth is going to have on the expense ratio, that is not something that we have to share today.

Okay. That's helpful. Thank you. My other question -- obviously interest rates still have a way to go up but as they do go higher, does your investment appetite or does your investment strategy change from where it is today? Just given that you have obviously gone more into the capital-gains-oriented approach.

This is Bill. The answer is, we have gone into capital gains with a very limited amount of our portfolio. And we don't buy things to own forever, for the most part, although there may be some things that we own forever.

We make decisions based on the environment and our examination of how we look ahead. So that will depend on, not just interest rates, but inflation and uncertainty. So for example, we moved more money into the real estate marketplace when real estate was not particularly attractive. We may choose to be less involved in real estate.

We moved into certain industrial areas when that wasn't attractive. We may be less or more. So it is a judgment we are constantly making.

At this point in time, we think inflation is going to be modest and interest rates are going to go up modestly. And we will continue to try and find opportunities that are attractive. But industrial opportunities will become more attractive if interest rates and taxes go down. So obviously that is the offset to that.

So bottom line is we will probably continue with our current balance. We may move our nontraditional bond portfolio a little bit, but we do expect tax rates to go down a little and interest rates to go up a little and inflation to move up a little, which would mean we are not likely to increase our fixed income investments. We're likely to keep the balance we have.

Thanks very much for that answer. My last question just is an extension of Kai's question on taxes.

To what extent would you expect your underwriter's appetite to change and that if -- are they evaluated on pretax underwriting incomes? Do they get evaluated on an after-tax basis? To what extent do tax rate changes make them more aggressive?

So from my perspective and I believe my boss' perspective, first of all underwriters -- we are focused on making a reasonable risk-adjusted return and they are focused on making an underwriting profit. And we, collectively with the Management Team of each operation, figure out what the right level of margin or underwriting profit is. As far as the impact on tax and that changing our targets, I think it is more likely then not going to be actually turning that on its head.

I think what there's a real possibility is, you are going to see companies that are based outside of the United States that all of a sudden find themselves paying a higher tax rate than they have historically, having to examine what their underwriting margin is and whether they need more underwriting margin in order to make their economic model work because their tax benefit is eroded or eliminated.

Thanks very much for the answer.

Thank you.

Thank you. Our next question comes in the line of Joshua Shanker from Deutsche Bank. Your line is open.

Good evening, everybody. I wanted to talk a little about the commercial auto market. I see premiums pulled back. It's obviously probably the place where you are getting the best rate.

So can you talk a little bit about where rate is and how much volume you're losing, and I should assume it's intentionally? And why now? Maybe this is the time to grow commercial auto given that's there's pricing there.

So I think there were a couple of questions in there, Josh, so if I miss a couple of them let me know. First of all, it is true that our business has shrunk in the commercial auto space. And I would suggest to you that from an exposure perspective we shrunk even more than it appears in the release because you got to remember we are getting significant rate increases and we are still shrinking. So that perhaps is an indicator to you as to actually the exposure is down even more than you might think at first blush.

As far as the market goes, and apologies if I gave the wrong impression, our view is that it has finally touched bottom and it is moving in the right direction. We certainly do not believe that by and large the commercial auto space is a hard market or anything approaching that.

Having said that, it is one of the few lines where it seems like rate increases are outpacing trend, as opposed to some other lines of business where rate increases are treading water with trend or maybe in some cases a product line is losing altitude. So from my perspective, and I think my colleagues' perspective, it is by and large for primary commercial auto better than it was yesterday but not attractive enough from our perspective that we want to open up the spigot yet. And we will have to see if it gets to that point.

Quite frankly, we saw a lot of momentum in the commercial auto space as far as people willing to push for rate up until December. And then we looked at December and we were surprised by the level of competition that seemed to step back into the market. So we are cautiously optimistic. What didn't I answer?

Has the market maximized it's sense of pain over that market yet?

I don't know the answer to that. I cannot speak for others but it would seem as though, if -- I can't put myself in other people shoes, Josh. I don't know what's going through other people's minds.

Clearly, there -- for much of 2016, there seems to be a recognition that things need to tighten up. People needed more rate. And hopefully that will continue to 2017. But we will have to see what happens.

And the exposure that you are losing, is that because it's being bid away or that's because you're walking away?

Both.

Both.

Often times those go hand-in-hand. We say this is the rate we need and somebody else will come along and do it for something materially less. Sometimes we will look at the exposure and we will say we just don't like the exposure period.

Thank you very much.

Yes. Thank you.

Our next question comes from the line of Amit Kumar from Macquarie. Your line is open.

Thanks and good afternoon. Maybe just a couple of questions. First of all just going back to the discussion on US corporate tax rate.

I guess what you're trying to figure out is if the tax rate goes down, does the benefit get competed away based on your comments regarding the competition. And I guess what you are saying is that might be a more blended outcome. Is that a fair way to look at it or how should we be thinking about that?

Well, you know what? I'm going to yield to our Chairman here who has strong views on the topic.

I think the answer is, we believe we have a President and a legislature who is very conscious of the fact that we should not have a tax law that gives preference to non-US entities and that is what the insurance law, tax laws do at the present time. So two companies who write US business, one offshore and one domestic, the company offshore pays substantially less to no tax. So we think that will benefit us because we think this President and his legislature will recognize that sometime over the next 12 months and level the playing field.

So that will not lower -- likely not -- that part will not lower our taxes. But (technical difficulty) -- excuse me one minute. Will raise the tax of our competition. The overall US tax rate, we think will go down, which will benefit us. So we would expect there will be -- probably continuing the same amount of competition at a lower tax rate.

Yes. So, Bill, if I go back, in the past you were involved with -- there was a coalition for a domestic insurance industry, then there was, I think a council for competitive insurance rates. I'm just curious, would you be playing a similar role this time around?

We continue to have an American coalition for competitive insurance rates and this group of American domestic companies continue to work hard to seek a legislative solution to having level taxes. And we are confident that is something that the current administration and the current Congress is much more receptive to than in the recent past.

Those jobs, those people and that capital, paying a fair rate of taxes in the US is the objective. So, yes, I expect that we will continue. I will continue and we think we have substantial support and the United States property-casualty industry will work with us in this process.

Got it. And then the final question. I will make this quick. Just going back to the discussion on Berkeley One, obviously we're now getting close to the launch date in the second half of 2017 and I know we had talked a lot about this in 20 -- May or June 2016 when this was being set up.

Now that this is clearer -- closer to being launched. How should we think about the mid- and the short-term and the long-term opportunities? Should we outsiders expect an immediate ramp-up for the product or is there a slow slope which will last for a few quarters before the premiums are more apparent to us? Thanks.

The answer is that it is going to be a gradual build as the business rolls out. And it will build momentum over some number of quarters, as we suggested in the past. We think over time it can become a meaningful part of the business.

But this is not a situation where one flips a switch, so to speak, and all of a sudden a large business pops out of a box. So there will be a ramp-up period of time as it scales. That will take quarters and ultimately years as it grows and develops out.

Got it. Thanks for all the answers and good luck for the future.

Thank you.

Thank you, our next question comes from the line of Jay Cohen, Bank of America Merrill Lynch. Your line is open.

Good evening, Jay.

Good evening, Rob and Bill and the rest of the team. Let's see. Several questions. Rob, you had mentioned an increase over the past several years in federal regulation.

We generally think of this industry as being state regulated. I'm wondering are there are any regulatory issues at the federal level that have been burdensome that may potentially go away or go down with the new administration?

You know, Jay, from my perspective, I think that ultimately it is just a question for the industry trying to figure out who its regulator is or who they are. Who its master is to a certain extent. And who sets the rules and that is fine.

I think over the past several years as FIO got some momentum, there were certain situations, such as equivalency, that popped up that created a little bit of confusion for market participants as to who was doing what, as to what would be managed at a state level/by the NAIC and what was the role for Washington. Obviously with the new administration, we will have to see what the view is as to, again, the role that Washington should play in the property and casualty insurance industry.

Got it. Next question. Given the rise in interest rates, I am wondering if you can tell us what your new money yield is relative to your portfolio yield at this point?

The new money yield is still probably 50 basis points under our average portfolio yield. So even now, our new money is not going to give us where we are but that is also in part because we're keeping a short duration. If we were more confident about inflation and interest rates and we pushed our duration out to the longer side of our liability duration, it would be closer to a max that it is right now.

But right now, keeping with that 3, 3 1/4 year duration, we are still coming up short. The offsetting feature to that is, both our capital gains and our increasing size of the portfolio which is giving us more investment income.

That's really helpful. And the last question, I guess back on the tax side. Maybe a potential benefit for your reinsurance business, but if US companies are going to be, obviously, buy reinsurance from offshore entities, do you see the border adjustment playing a role and possibly making it more expensive to buy from offshore reinsurance companies for domestic insurance companies?

First of all, Jay, I don't think anyone at this point knows what the tax posture is going to be. I think if you go to a border adjustment plan, the most likely event in our opinion would be most of the major foreign re-insurers would open US subsidiaries. And that would take care of the problem.

The US represents give or take 40% of the property casualty business. And I think that, that will probably make the real outcome. But I think we are a long way at this point from knowing what the tax equalization structure will be for these kinds of things.

Got it. Thanks for the comments.

Thank you.

Thank you. Our next question comes from the line of Brian Meredith from UBS.

Couple questions here for you. Rob, just given your comments about the competitive reinsurance environment, particularly on the casualty side. Are you seeing any opportunities to seed more business away? Other companies, I think, are starting to do that.

We certainly are acutely aware from the perspective of the [seed-ent] and how competitive the market is so we are conscious of that as far as the specifics around our reinsurance purchasing strategy. That's generally speaking, not details that we get into but we are aware of the market conditions and we try and take advantage of that. At the same time we are conscious of the fact that these re-insurers are our partners and we are not looking to treat them as anything other than a partner.

Got it. Just wondering if it was an opportunity to help your expense ratio as you grow out some of these businesses with reinsurance.

No. It is certainly something that we look at. Having said that, some of the seeding commissions are attractive but we think the businesses that we are building and growing, we think they are pretty attractive too. But we do look at quota-share structures to try and give us a little bit of relief.

Great. And the next question, for you and Bill. One, just can you talk a little bit more about what you're seeing with respect to loss cost inflation? And two, the reason I bring it up, we've seen more and more companies buying these adverse loss reserve development covers, which I seem to remember was starting to happen back in the late 1990s. Maybe your perspective on that?

Well, my two cents is -- well, it's kind of funny, Brian, that you bring it up because the two of us were just chatting about that the other day as to, are these signs of something else to come? Clearly, if you look at the accident-year loss ratios, there are a lot of challenges that exist in the market. We have and continue to believe that there are a lot of pain that this hasn't come into focus potentially.

And if you actually backed out or normalized for cat activity and people stopped living off of prior-year development, which eventually it would seem as though they're going to need to. There are a lot of issues. So do I think that this is going to turn into a situation like the late 1990s, 2000?

No. But do I think that there are some organizations that got a little ahead of themselves? Yes. And I think that there is some pain and some of those companies that have some pain, I don't think that there is a lot of patience for volatility amongst their shareholders.

Got you. The last question for you, back on tax but more from the market perspective. Do you think if we do get a reduction in the US income tax rate that some, if not all, of that will ultimately be competed away with respect to price?

No.

Okay.

I think, quite frankly, at this stage it could go the other way, Brian, at least. And I can't speak to the whole market, but I can tell you from our perspective the number of competitors that we are in the ring with every day, that are based outside of the United States, it is a significant percentage of the population.

So a lower tax rate for us and a higher tax rate for them I think is just going to force them again to really focus on their underwriting result and their core economic model. And quite frankly, I think if anything it is possible it could be a double positive for our shareholders.

And, Brian, it's Bill. I think if you look historically as tax rates have changed just like when portfolios changed, companies haven't changed their underwriting strategies when their taxes have changed. They have continued underwriting either brilliantly or terribly but not because they haven't changes their attitudes because of taxes.

Great. Thanks for the answers.

Thank you. Our next question comes from the line of Ian Gutterman from Balyasny. Your line is open.

My questions were largely covered but maybe if I just clarify a couple of things. Bill, just to clarify on offshore tax.

How I read the bills that are, the various bills that are out there, it is very unclear how financial firms will be treated in things like a border tax and some of their other proposals. I guess what gives you confidence something will be done about offshore financial companies as opposed to just foreign manufacturing and retailers and things like that? It seems some people think that financials will be excluded from some of this stuff and maybe not a whole lot changes unless we get a remake of the neo-bill.

Well, I think that certainly there are lots of people, especially those people located in Bermuda and Ireland and other places that would like to put forth the view that, that is the case. I think that if you look at what the administration has put forth is, they don't want US business enterprises to be at a competitive disadvantage because you are located from a legal enterprise structure offshore. There is no enterprise that would be more suited to their concerns than the property-casualty insurance business.

We have been able to persuade almost everyone we see, although one never knows where the world goes. And we believe that it is obvious the US would not have written their tax laws to benefit non-US insurers. So we think whether they include all financial companies or not all financial companies, we believe it is most likely that property-casualty insurance companies will be included in any bill that is put forth because so obviously designed in the current status to give non-US companies a benefit and a competitive advantage.

All you have to do is look at where all of the money, the finance companies that are located in Bermuda and Ireland and wherever. The money all came from the US, goes off shore and then they pay no tax under the United States business that they bring over there

I definitely agree. I just didn't know if Congress understood that, is what I was trying to ask.

I believe they do and I think we have more people in support of the neo-bill. But whether it is through border adjustment or the neo-bill, we think that this administration understands that it is billions of dollars of revenue that would come. And how it is introduced could in fact mean maybe even tens of billions of dollars

Understood. And then how does it -- the other place I'm trying to understand how it would affect would be Lloyd's. Not so much on the tax rate being all that different post a reform, but if we do have a border adjustment, a lot of Lloyd's business obviously emanates in the US. What happens to Lloyd's in that environment? To all the US risk they write?

I cannot give you the answer because I don't know. I don't know how the border adjustment tax rules would work. And in fact, Lloyd's has a US trust fund that is really a very special entity. So while Lloyd's might have business that emanates in the US, in many ways Lloyd's business goes into the US trust fund.

So Lloyd's might in fact not be stuck in the same problems with everybody else. But I don't know the answer. That was purely a hypothetical issue.

Okay. Understood and then lastly, the other thing going around, obviously this administration is against -- is very protectionist. But China, I think, has come out and advocated against Chinese firms buying US firms without extra clearance.

Does it feel like some of the M&A maybe starts to slow down? At least the foreign buyers starts to slow down because our President doesn't want it and then the Chinese don't seem to want it and your taking out a major source of buyers?

I'm going to make a brief comment then Rob, who has been much more involved than me, will give you a better comment. And that is, regulations and oversight of these things, having been around now for a long time, has rarely changed the direction the economic factors dictate. So I think everyone may have a view for the short term but it wont change the dynamics of the economies. Rob?

I agree. How's that for a better answer?

All right. Thank you, appreciate it.

Thank you. We have a question from the line of Ryan Tunis from Credit Suisse. Your line is open.

Good evening, guys.

Good evening

Just a few to clean it up. The first one just in the insurance segment.

If you guys could help us a little bit more just understand what drove the slow down in premium growth there? Was it more new business opportunities, retention? And I guess along those lines, is there any way to quantify the impact -- the negative impact of rate?

A couple of things. First of all, the renewal retention ratio, give or take, was hanging around where it has been. I think it was just a tick shy of 80% for the group overall but it was sort of in that neighborhood. What might be helpful -- what page is this, Rich, in the release?

We break out the growth on page 5. I'm sorry, 6. You will see at the top by line of business which will probably give you a little bit of insight as to where it's growing. And by and large it's this, new business is tough to come by. There are a lot of people out there with a pretty big appetite and they want to grow and they seem to be willing to do it at a price levels that just don't make a lot of sense to us.

Okay, that's helpful.

I think you should understand a lot of people have budgets and run their business by budgets which is not really how we run our business. So you get to the fourth quarter and people aren't going to meet their budgets and aren't going to get their incentive compensation. So that always happens in the fourth quarter. You get people being more aggressive.

Understood. So maybe the fourth quarter growth rate is not necessarily run ratable into the first half of this year?

Yes. As I suggested earlier, we will have to see. Tell us what the competitive environment is going to be for 2017 and we can tell you what we think the top line is going to look like. Having said that, again as we touched on earlier, we don't have perfect visibility into January and even if we did, that's not a perfect proxy for the first quarter or the year. But early returns in January were encouraging.

In the insurance business, as it relates to the reinsurance business as we suggested, that is a pretty tough environment. We are being very selective as we have been and we will continue to be going forward. And I think there is a better-than-average chance you're going to see that business shrink in Q1 of 2017 and there's a good chance you will see a shrink for the whole year.

Okay. And then just thinking about catastrophes. Obviously, there have been some pretty well-known events but last few quarters you guys have been seeing a little bit more on cats than we would've expected historically and I've noticed premiums have been up, full year. Is there anything about your cat profile as we look into 2017 that you would say is different than it was potentially headed into this year?

No. When we looked at our portfolio, it hasn't shifted. We haven't become more inclined to accept cat risk on a net basis.

I think what's really happened is the series of events, they have from our perspective been in the no man's land zone, if you like. And what I mean by that is they were big enough to be aggravating and noise but not big enough to meaningfully go into our reinsurance structure. Though it's in some cases touched it. It hasn't really been a big enough event that it is a notable industry event and again piercing through to the towers that we buy.

Okay. And then just one last one, maybe for Bill, on capital management looking out into 2017. Is there anything about this no man's land with tax reform that makes you want to take a pause in terms of managing capital? Or is there any way that we should think about the mix being different in 2017 versus 2016? Thanks

I think that you so we paid two $0.50 dividends last year, special dividends instead of $1 special dividends. It is because we are trying to get a better assessment and the world is changing ever more rapidly and there is more uncertainty. We will continue to be cautious trying to assess where it goes and we will continue to search for opportunities.

And we are going to make those judgments as the cost of capital is balanced with what we can do with the money and what the price of our stock is. We are truly a Company that is run with what we think is the best interest of our shareholders. And we make those judgments every day just as though we own the whole Company and we were thinking about it in those terms.

So I don't think were going to make a change or a strategic reconsideration. Every day we get up and we say what can we do that we think is best for our shareholders and that is how we manage the business and I expect it will continue that way. And Rob's feelings are exactly the same as every other Senior Officer here because every one of our people are 60%, 70%, 90%, 100% of their net worth is tied up in ownership of W. R. Berkley stock

Thanks for the answers.

Ladies and gentlemen, one more call for questions.

(Operator Instructions)

I am seeing no other questioners in the queue at this time so I would like to turn the call back over to Management for closing comments.

Thank you, Andrew, and thank you to everyone for calling in. From our perspective it was a good quarter. Obviously the top line, while it slowed down a little bit, in our opinion certainly the insurance business where our margins are, are more attractive at this stage than the reinsurance business. We think you are going to see potentially an uptick in the growth in 2017 from what we saw in the fourth quarter.

Having said that, we will have to see how much of that is offset by the reinsurance operation. When the day is all done we are very focused on risk-adjusted return and underwriting margin and if it means the margin isn't there, we are prepared to shrink the business. I think the other piece that is worth mentioning also is we continue with a focus around total return for shareholders and that is very much included in our approach on the investment front.

There are, from our perspective, a mean -- there is rather I should say from our perspective a meaningful pipeline of other gains that we will be harvesting and as we take those gains and we have some visibility as to how that's going to unfold under the next few quarters, we again think that, that is going to have a meaningful impact on the result of the organization. And in addition to that, while the gains are coming through we continue to plant seeds and create new opportunities which we think will create gains in the more distant future.

And lastly, we went through the laundry list of macro issues in particular, I think the tax question has a lot of people's attention, while no one knows with great certainty exactly how that's going to play out, again as we discussed earlier, clearly a lower corporate tax rate in this country will work to our benefit and by extension our shareholders benefit. But in addition to that I think it would be a mistake for anyone to gloss over or brush off the potential impact for companies that are based outside of the United States and at least the apparent focus of the current administration to, as it was suggested earlier, level the playing field.

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

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect at this time. Everyone have a great day.