W R Berkley Corp (WRB) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to this W.R. Berkley fourth quarter 2009 earnings conference call. Today's call is he being recorded.

This is a "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2010 and beyond, are based upon the Company's historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved.

They are subject to various risks and uncertainties, including but not limited to: the cyclical nature of the property casualty industry; the long-tail and potentially volatile nature of the insurance and reinsurance business; product demand and pricing; the impact of significant competition; claims development and the process of estimating reserves; investment risks, including those of our portfolio of fixed maturity securities and investments in equity securities, including investments in financial institutions, municipal bonds, mortgage-backed securities, loans receivable, investment funds, merger arbitrage and private equity investments; the uncertain nature of damage theories and loss amounts; the potential impact of the economic downturn, and any legislative, regulatory, accounting or other initiatives taken in response to it, on our results and financial condition; natural and man-made catastrophic losses, including as a result of terrorist activities --

We're okay with that, because we want to shorten it up, so why don't I start, and I'll call you when we're ready to ask questions. Okay?

Very good, sir. Go ahead.

Hi, this is Bill Berkley. Something got lost in the translation between us and the Operator. You were getting the long version, not the short version, of our Safe Harbor statement.

You all know you can't rely on anything we say. It's all estimates and our best guesses, but we can be wrong on occasion. Sometimes the occasion is frequent.

We were pretty happy with our quarter and our year; certainly far from wonderful, namely in the issues of pricing and volume. I'll come back to that in a bit. We're going to have Rob talk about our operating units, then gene talk about the numbers, then I'm going come to back and finish up, then we'll take questions.

So Rob, why don't you start. Thank you, good morning.

The quarter was generally in line with our expectations. The environment remains challenging due to the general economic conditions, coupled with a very competitive insurance market. While significant competition can be found throughout much of the industry, in particular construction, transportation and product liability continue to be amongst the most competitive areas. Additionally, we tend to see the greatest competition coming from a few national carriers, as well as a select group of others that seem for some reason to have an unquenchable thirst for premium, and a lack of appreciation for the exposures that come with it.

In spite of the significant obstacles that exist in the market today, we remain successful in finding opportunities to build our business. The group continues to be rewarded for our ability to effectively differentiate ourselves in the eyes of our distribution partners and their customers. Our financial strength, combined with our attention to service and details, as well as our overall consistency, allows us pricing leverage -- allows us pricing leverage, excuse me, in many situations that others don't enjoy. Furthermore, we believe our strong analytic abilities allow our operations to understand available margins with greater precision than others. It is worth noting that there are pockets of opportunity where the market is bearing meaningful price increases, due to industry losses coming into focus.

Attracting and retaining many of the industry's most talented people remains our true competitive advantage. The group's recognition that this is a cyclical industry that requires one to take a long-term view allows the management teams of our 42 operating units to make choices and decisions that will undoubtedly be gratifying in the future. Additionally, this philosophy has made the organization an attractive alternative for management teams in search of a new home. Clearly, there is a short-term cost to this approach which comes through in our expense ratio. However, in the long run we remain convinced that the Company will be well rewarded.

We are generally pleased with the traction our start-ups are achieving, and applaud their underwriting discipline. These operations are becoming more accretive to the overall every day. While this group of companies currently represents a relatively modest percentage of the corporation's income statement and balance sheet, we are confident in their ability to become significant contributors under different market conditions. Our more mature businesses remain the bedrock of the organization. These companies' demonstration of true grit, and not chasing irrationally-priced business, has served us well to date and will do so in the future.

A couple of comments about the numbers. Gene will be getting into more detail shortly, but our net premiums were $828 million for Q4, down 7%, and $3.7 billion for 2009, down 7.5%. These reductions came about as a result of our unwavering commitment to underwriting discipline that I referenced earlier during these challenging times. On the topic of pricing, our price monitoring showed a deterioration of a mere 1% for the 2009 year, which included a negative 0.4% in Q4. Additionally, I should mention January pricing continued to show positive movement, coming in at a plus 0.4%.

It is important to note that one month is only one month, and it is not necessarily a conclusive data point. As I have mentioned in the past, I would caution all to keep in mind price monitoring is not a perfect science. Much of it depends on the methodology being applied, and different participants in the market apply different approaches to the same exercise. Obviously, the adequacy of the rate at the time the measurement begins is very relevant as well.

Our loss ratio of a 58.2% for Q4, and 61.4% for '09, is consistent with our historically measured approach to how we book the current year; additionally, how we recognize prior year developments. We continue to believe that both inflation and frequency are wild cards that one must plan for thoughtfully. Given the current market conditions, as well as our estimate as to where we are in the cycle, we remain very comfortable with our footing.

Finally, it is our belief that the Company is exceptionally well positioned for a turn in the market, which we anticipate in the foreseeable future. Thanks, Rob. Gene, do you want to go through the numbers?

Sure. Thanks, Bill.

As you said, from a financial perspective, it was a very solid quarter. There's nothing really unusual in the period. Our underwriting results came in about where we expected them. There were no surprises in the investment portfolio, and for the first time in awhile there were no big changes in the accounting rules at the last minute; a good thing.

Looking first at our premiums, our gross premiums, as Rob said, were $954 million, down 5%, and our net premiums were $828 million, down 7%. By segment, premiums were -- declined for specialty by 13%, regional by 10% and alternative markets by 9%. Prices were essentially flat, and our renewal retentions held up well in the quarter, so that decline is almost entirely due to a reduction in new business written. For the other two segments, reinsurance was up 6% and international was actually up 23%, and that's primarily due to our new operations at Lloyd's and also in Canada and Norway.

Net premiums written for our new operating units on a combined basis were $98 million in the fourth quarter, which is about 12% of our total Company premiums. For all of 2009, start-up premiums -- premiums for start-up companies were $403 million, and that's up from about $241 million in 2008. Our overall combined ratio was 92.6% for the fourth quarter. That's unchanged from the fourth quarter of 2008. The expense ratio was up 2.8 percentage points to 34.4. Part of that is due to the impact of the new units that have yet to reach scale, which actually added about 0.8 of a point to our expense ratio, and the rest of the increase is due to the lower earned premium in the quarter, which was down 10% from a year ago. The increase in the expense ratio was offset by a 2.8 percentage point decrease in the loss ratio, and that was driven by higher favorable reserve development.

We reduced our estimate for prior year reserves by $56 million, or six loss ratio points, in the fourth quarter, and that compares with favorable reserve development of $41 million, or four loss ratio points, in the fourth quarter of 2008. For the full year, our prior year reserve estimates declined by $190 million in 2009, compared with $196 million in 2008. We're estimating our initial loss ratio for our casualty business at about between 66% and 67% for accident year 2009. And as Rob said, we recognize that that's more conservative than most other casualty companies, but we think that's important -- it's important to be cautious, particularly where the inflation trends are so uncertain.

Our net investment income was $141 million, up $28 million from a year ago. That's an increase of 24%, and is due to higher returns for both the arbitrage account and for the core bond portfolio. Arbitrage earnings were $11 million in the quarter, compared with a loss of $11 million in the fourth quarter 2008. The arbitrage account, which now totals a little bit over $700 million, had an annualized yield of 6.1% for the quarter and 7.5% for all of 2009. The carrying value of the overall portfolio was $13.7 billion at year end; 89% was invested in fixed income securities, 5% in the arbitrage account, 3% in equity securities, and 2.5% in investment funds. The average duration of the fixed income portfolio was 3.6 years at year end, and that's up from 3.1 years at the beginning of 2009. Also, in the fourth quarter we reported net investment gains of $20 million, and income from investment funds of $5 million. Both of those items are excluded from our operating income. At year end, our unrealized gains before taxes were $338 million. That's down slightly from September 30th, but up significantly compared with an -- unrealized losses of $221 million at the beginning of the year.

So for the quarter, that gives us total operating earnings of $0.71 per share and operating return on equity of 15.5%, and we ended the year with book value per share of $22.97, up 22% for the year.

And if we hadn't bought back shares, we would have been $23.01, virtually the same as the average price we paid to buy back stock, which was $23.02 during last year.

So, we were pretty well satisfied with the year. We think we did all right. We met our minimum standards, not our -- numbers that would make us happy. Our views continue to be that the cycle is, in fact, turning. Prices are generally flat to slightly up.

I thought I would take a couple of minutes before I end, although I won't get to it yet, to talk about what does it mean for the cycle to change, and how is it changing, and to point out is what I've said to people is by this year end, prices will be up 8% to 10%, and why I think that, and we'll get to that in a minute.

I would say that our operating units are doing well, and are extremely disciplined. The level of business we've lost between lost business and price reductions are really more than appears at first glance, because our new businesses represent something more than 10% of our total premiums written. So, in fact, if you look at how much discipline is really being applied, and then adjust for reductions in price, we're really doing well. And that's why you're seeing our loss ratio, which being conservatively reported, still staying in line, and we're pretty pleased about that. We have been surprised at the levels of redundancy a number of other companies have found, but we think the current accident year is being booked quite optimistically by some of our competitors. Some are being cautious and conservative; others are being pretty aggressive.

One of the things that's important to note is, when you're trying to forecast claims, your anticipated inflation has a huge impact. So, in fact, just modest changes in your expected cost of living can have dramatic changes, because of the compounding impact of that ultimate claims cost. And we build in that inflation in our estimates when we look at things, and that could account for some of that change. We would suggest that, at this point in time based on our best judgment, and our best judgment says valuation, which is modest CPI from [$0.99] forward, is that the current pricing levels are sort of reflective of where they were at 2000; and we think, just like in 2000, prices are starting to move up.

The other fact that has the most dramatic impact, and has the highest correlation of any fact in turning the cycle, is the release of prior year's reserves. Just to put a hole in one thing, people might look, and they talk a lot about capital adequacy, but the have last time the cycle changed, the industry was riding at 1 to 1, which was right around 2000. You can go back to other periods of time when the cycle changed, and capital adequacy was always the same. It didn't change dramatically, and it just was roughly the same in 2000 as it is now. So there's no -- this tremendous redundancy of capital.

The highest single correlation, however, that we've been able to find has to do with the release of prior year redundancy, and we think -- and, in fact, the charts show that the releasing of prior year redundancy is slowing down. It started in 2005, and it was increasing through 2008. 2009 was a slight reduction at the rate of redundancies being released, and we think that 2010 is going to basically bring that to a halt, or very close to a halt, in the aggregate. I think that you have to keep in mind that while 2003 and 2004, and 2005 and 2006, may have all generated redundancies, past years when looked at from 2010 will include 2007, 2008, and 2009, where we feel in many companies deficiencies are being developed. Which is exactly what happened in the late '90s, and it's why in 2000 pricing cycles started to turn. And pricing cycles turn slowly. They go up 1%, 2%, 5%, 7%.

Then what makes them change more dramatically, and I might add, the reason I think you will have an 8% to 10% price increase at the end of the year is there will be modest difficulties, Sarbanes-Oxley, et cetera, but I'm not anticipating some crisis hitting. I would have thought, candidly, that amongst all of the companies in crisis that we had had at the beginning of '09, I would have thought one would have become a crisis, but the Government stepped in and sandbagged those dikes, and we had no crisis. So therefore, I think with no crisis, that's what we'll see, 5%, 8%, 10% price increases at the end of the year.

But in late 2000, October to be exact, Frontier and Reliance went out of business. That created the crisis that tightened the market and the number of lines more dramatically, and as prices started to move up well into double digits, 9/11 made it even more tight, and that created the dramatic improvement in pricing. We'll have modest price increases until whatever the crisis may be happens, and crises do have a way of impacting our industry. We continue to believe that that cycle change is upon us, modest; there's still people out there being aggressive. National companies primarily, new entrants additionally, trying to seize market share, trying to think they can grow where they don't have expertise, writing business in areas where the tail is much worse than they anticipate. But while that's happening, we're still focusing on delivering that 15%-plus return.

When we can't grow and we can't find opportunities, which we're constantly looking at, though, we believe part of our job is to manage our capital account. And managing our capital account means examining opportunities when they present themselves to buy back stock. We're disciplined, we don't tell you, because what we're supposed to do is buy back stock at attractive prices for the people who want to remain shareholders. So, therefore, we go out in the marketplace when there's stock around, and we buy it back at attractive prices. We were able to do that in the fourth quarter and the first quarter, and we were fortunate we bought back quite a bit of stock. We still had 1.5 million shares left from our prior buyback authorization, and we re-upped that, and we now have 11.5 million shares authorized.

If opportunity of price presents itself, and if we have no other use for our capital that gives a better return to our shareholders, we'll use that capital to buy back stock. Those are significant hits. And the other alternative is to increase our dividend. But we will manage our capital in a way to effectively use it for the Company, without increasing our financial exposure. But as you can see, our premiums to surplus continues going down, and we're hoping, and we expect by the end of the year that to turn around. But in the meantime, as we generate more redundant capital, we need to find something to do with it.

So we're continuing to be optimistic. We think the cycle turn is here, although modestly creeping up, which is what we saw in 2000 before Reliance and Frontier. There will still be stupid people who do stupid things. Can't do anything about that. What we have to do is manage our business in the appropriate way for our shareholders.

So with that, I'm happy to take any questions.

Thank you.

(Operator Instructions)

We'll take our first question from Joe DeMarino with Piper Jaffray.

Thank you. Good morning. I was wondering if you could provide us additional detail or color around your favorable reserve development, particularly which accident years, what lines, and then also I guess what's resulting that in favorable reserve development, whether it's your earlier inflation assumptions or something else? Thank you.

Joe, that's not something we generally discuss. I think that reserve development is in many ways an arbitrary process of examining our aggregate reserves and looking at -- if you would like to after lengthier conversation about it, I'm sure you can give Gene a call and he'll give you a little more color. But we're really not specific about those things. I'm sure he can give you more color, however.

Okay.

And, by the way --

Could you say what your is assumption for inflation going forward?

By the way, also we have more detail in our 10-K, but that is not fully completed yet. Our assumption for inflation at the moment is 3.5%.

And how is that compared to prior assumptions for inflation?

I think that we're constantly examining it. For awhile, we were up higher than that, for awhile were lower. And the assumption is not something we implicitly build in. We tell people inflation expectations, but it's note built in per se, in everyone's reserve, and people, we talk about it, and it's up to each company's people who reserve our Company's reserve on an individual basis, and inflation impacts different companies in different ways; long casualty lines are impacted in different ways, excess business is impacted different ways. So it's not -- unlike some companies who say these are the rules, that's not how it works. We talk about inflation here, we give people advice what we're worried about, and it's applied in each individual company by each individual's actuary and (inaudible).

Okay, thanks. That's very helpful. Can you give us -- you might not be willing to share this, but what is your estimate of your current excess capital position?

I think that we're writing about -- less than 1 to 1. I think more optimistic environment, I think we could write at 1.5 to 1. And I think what our view is, any earnings we generate at this point will be excess. So we're going to look at that, and we probably have a few hundred million dollars of excess capital now. Maybe it's $500 million of excess capital now. But I think that what we're really saying is, certainly all the capital we're generating through earnings, which is that 15% return we forecast for 2010, is certainly going to be redundant unless we're suddenly able to write a lot more business.

And I think the other piece of that is, if the market turns more positive, we have capacity to grow probably 50% without worrying about capital, plus any growth capital that we generate internally. So we have lots of -- my only point being, we have lots of capacity if the cycle should start to turn, even if we use any newly-generated capital to buy back stock.

Great. Thank you. That's very helpful. That's all I had.

We'll go next to Joshua Shanker, Deutsche Bank.

I must have a habit of not really believing what people tell me, and I'll just let you know, I don't know if you have a comment, but most of your competitors are saying that their estimation of inflation is 5%, which I think is extremely high and suspicious, but maybe you can think about how actuaries are thinking about that; any comments there?

I think that -- the question was what am I thinking about inflation, and if they're thinking of 5%, they're not look at the numbers generated by our U.S. Government. 5% would be high. I think when we look at how we set reserves, I think that we reserve in our excess lines and our long-tail lines at what might be a higher rate. But I can assure you of one thing, if they use 5% inflation, we wouldn't to have wait for the cycle to turn, it will have turned.

And along those lines, you mentioned the comment that you think we're kind of at pricing levels similar to 2000. Looking back at the whole industry --

Similar to 2000, relative to what I call pricing stability.

What does that mean?

2000 prices adjusted for inflation, cost of living.

And I guess that maybe I need to -- you need to show me a little bit how that math is done. I'm looking at about an industry 93% loss ratio for 2000. Now obviously there's a lot of variability, depending on what company. I'm thinking when A.M. Best publishes--

That's not an accident year loss ratio.

That's accident year. Accident year.

I don't think so. I think that's the reported year. But, anyway, I'm sitting here looking at chart that has the CPI adjusted going back to 1973, plus 2.4% starting in '99, 1.3% CPI of plus 2.4, and then plus 1.3, and that's what those numbers say, and we can argue about numbers, but that's what the chart says.

And let's argue a little about numbers. I actually having a hard time modeling 15% here. Obviously, you know, my numbers are low, but I'm wondering does that include investment fund projections? I'm trying to figure out -- I just can't get there.

You're certainly welcome to talk to Gene. I don't know how you do your estimates, or where they are. You weren't right on for the quarter.

I'm definitely low.

And I'm not sure how come, but I suggest that you talk to Gene.

Does it include investment funds? That's the question. Does it include investment funds?

No.

No. Okay. I appreciate it. Thank you very much. All the best.

Thank you.

We'll go to Brian Meredith, UBS.

Yes, good morning.

Good morning.

A couple questions here. Bill, first one, can you talk a little bit about what you are seeing with terms and conditions out there? Are they loosening up? Because I believe when we had the last cycle turn, that was one of the things that actually resulted in it turning, because terms and conditions got so loose that you did see an acceleration of the trend?

Why don't I let Rob talk about that, since he's sort of in the field substantially more than I am. Good morning, Brian.

Hey, Rob.

I think what we're seeing is terms and conditions are loosening to a certain extent, but really the place that we're seeing on the road is where we're seeing specialty business being written by standard markets, and where they will write an exposure under very different terms and conditions than the specialty market would have written the business. So while specialty markets I think in general for the most part have been more disciplined than they were, say in the late '90s, as far as maintaining terms and conditions, I think the general market turns and conditions have eroded as the business has shifted from the nonstandard market into the standard market to a certain extent. That's something that we're reasonably confident about. And by the way, Brian, that really happens because what you see is standard -- when those standard lines come in, it undermines the non-admitted forms, or lack of forms, the conditions, and terms that non-admitted carriers put in, and once they get undermined and the standard markets leave the marketplace, you suddenly find that you're able to put those really non-admitted terms and conditions back in place. So it all happens at once, and it happens because the prices really disappear once those admitted carriers withdraw.

Okay. And then can you give us some thoughts on the reinsurance market and -- it sounds like from what people are talking about so far, that it remains a little bit more disciplined?

The insurance marketplace has been astonishingly disciplined. There are still a few idiots. There always are. The good news is they don't have a lot of capacity, and they use up their capacity at low prices, and then they're out of the market. So I think that for the most part, the significant players who have been around for a good length of time have been disciplined, understand what they're doing, and that's been a real help. That's actually the reason you haven't seen so many new small start-ups. You don't see new small start-ups happening this cycle like you saw prior cycles, because there's no reinsurance capacity to let them jump in.

Got you. Thank you, Bill and Rob.

We'll take our next question from Bob Farnam, KBW.

Good morning. To change gears a little bit here, on the investment side what are you investing your cash in these days?

What are we investing our cash in? We're doing -- first of all, I think that we're doing probably corporates where the spreads have gotten more attractive, in the generally less than 10-year area, but on occasion we'll go out to 15. We're doing municipals, although only either pre-refunded or special revenue bonds. We're also doing what we believe are real, on their own bottoms, AAA tranches of mortgage securities, which still actually exist, but nobody wants to own something that says mortgage on the name. But can still buy a first mortgage bond that represents 15 or 20 percent of the value of the underlying building, and then securitize, and you can actually do that still.

Okay. Just trying to get a feel for where you are thinking yields may be going forward. With the lost cost trends, is the flat pricing offsetting loss cost trends, or you think the [actual] numbers are still going to be going up in the near term?

I think pricing -- pricing is -- as the cycle changes, price changes are sporadic. I think that you've got several things going on in the pricing environment. First of all, there's -- today, roughly a third of our lines of business have increases in their price. A third are relatively flat, and a third are down. The evolution may be that the ones that are up now are going to go up more. The ones that are most competitive have momentum that's downward, and people fighting fore continues. Unfortunately a lot of people haven't figured out that with investment returns as low as they are, getting underwriting losses in some lines of business can be catastrophic.

So we think that overall prices will move up, but there still will be a couple of longer tail lines of business that generate cash flow that people will be aggressive in. So we think price is going up. We think the trend to real combined ratio for the industry is going to be down. We think commercial lines will sort of be certainly approaching 110. We think if you separate out that, I think that overall pricing levels are going to go down.

I think that probably some of the issues that to have do with adequacy of pricing, and where pricing levels were and combined ratios for prior years, have to do with all kinds of assumptions made; and one of the things we found out is that forecasts, including ours and everyone else's, are so sensitive to assumptions you make about inflation, CPI, loss costs ,that it's really hard for people, if they don't want to be conservative, for them to really come up with numbers that match. So we continue to be optimistic. We're pricing off of 2006 numbers.

So you basically still thick that the actual -- your number for 2010 is going to be about 110 for commercial lines? Is that --

Yes, I would say that. And I think that 2009 for commercial lines is going to be 108 on an accident year-developed basis. So I don't think it's going get a lot worse.

Okay. Very good. Thank you.

And we'll go next to Michael Nannizzi with Oppenheimer.

Thank you. Just a question on the duration of the portfolio, Gene. You mentioned it was 3.6 years, and it was 3.1 last year. Is that the result of lower holdings of cash, or maybe a mark on securitized assets increasing during the year, or a rotation into longer duration securities during the year?

It's several things. Number one, a dramatic reduction in cash. Number two, you have to remember the duration of our portfolio. Every 12 months, do nothing, it gets reduced by a year. So if we're still believing interest rates stay like they are, we have to be opportunistic in finding things to invest in. And we got to 3.1 down from 3.5, 3.6 the year before because of our being cautious, and we really were uncomfortable with that. The duration of our liabilities is something a little more than 3.8. We didn't want to be that short. We wanted to be much closer -- much more closely matched. So we effectively bought some long things, got rid of some cash, and tried to come up a little bit closer to the duration of our liabilities.

Great, thank you. And then you mentioned the 15% ROE. Can I just talk about what role you see investment income playing in that profile this year and next year and out years?

Yes, I think investment income is back on track. I think we'll continue to do reasonably well in the investment area. We have a bunch of excellent people, and I just think that we're going to continue moving along, but we also think that we have some positive things. You also have to consider that every time we buy back stock selling at book value, it has a pretty positive impact on those returns.

So I think people aren't running the numbers quite to the extent that we bought back 10 million shares of stock, and the impact that has on our returns and where it goes. Effectively, you start to put those numbers in, it starts to have a meaningful impact on our earnings, and we think that that's another big plus.

And in terms of holding those short-term investments, you have lower catastrophe exposure than most. What's the run rate, or what do you think about in terms of cash holdings, cash at the holding company, just for day-to-day operations versus kind of where you are today?

At the holding company level, we have cash and/or securities we can sell of $400 million or $500 million. But the fact is as long as we have more than a year, we don't require much cash, and we have lots of dividend capacity from our operating unit. So cash is not ever a particular problem at the holding company. "Ever" is a long time. In 1979, it was a problem, but it hasn't been for a long time.

Got it. Then just competitively, you mentioned some market's you're seeing improvement and some are seeing some deterioration. Can you talk about just competitive pressure and some of -- I think on the last call you mention speed 800-pound gorillas, or are they -- those 400-pound gorillas, are you seeing continued pressure from those players, or has that since abated? And thank you for answering my questions.

I think that there continues to be pressure from very large enterprises whose role is to gain market share. And I think that there are other companies who, in spite of their results, are extremely arrogant about how they do business, and think they have a right to have a market position that's not justified by their results. And then there are lots of responsible companies out there.

It's unfortunate but, look, I think that what makes the system work is there are a lot of people doing a lot of different things. It would be nice if everyone measured their results in a long-term industry by looking at their long-term results. We think the problem is a simple one. We think the current and the most recent couple of accident years aren't being booked to appropriate levels, given the business and the pricing they're writing the business at.

Great. Thank you very much.

We'll take our next question from Larry Greenberg, Langen McAlenney

Good morning. So I interpret your comments to be that you, to date, haven't seen any reduction in the appetite of standard carriers moving into the E&S business. Assuming that's correct, I'm wondering if you think about the time period from which these companies started moving into E&S, when would you think that some of these relaxed terms and conditions will catch up to these players, and they're going to see that they stepped in a pile of something they wish they hadn't?

Well, there two are pieces. First of all, when you write even the longest tail line of business, if you write it cheap enough, it becomes a short tail line of business, and I think people forget that. That is, if you can cut the price enough, you're able to pay out all your premium in the first year, no matter how long a tail line it is, and I think that we're approaching that point for a few things.

Number two, I think that I must say that I've been surprised at how lax some actuarial and accounting firms have become about Sarbanes-Oxley. But I think they look at the reserves overall and say they're okay, and they probably are, but I think in the current years, they're not. So I would expect, certainly before we get through this year, those problems will be home to roost.

I don't think -- I think if you look at the pace of redundancy releases, and the angle of that, it would tell that you people are recognizing that they don't have an unlimited amount of reserves to release. So I think as you start to see those past redundancies diminish, will you start to see the change.

Great. And just to beat this inflation horse to death, if I were to present you a scenario where there wouldn't be any inflation for the next three years, and then heightened inflation after that, would that change your approach to the casualty business?

Your question really has to do with how you trend inflation reserving, as opposed to what rate you think -- I answered a question which I think wasn't necessarily the question they think they wanted answered, but the answer was what was our expected rate of inflation. I think if you build in a high rate of inflation for excess and long-tail lines of business, that would probably be appropriate. So it depends on the line of business. Some lines of business, the claim is established today, yet you pay it out at today's rate over a very long period of time. They're not impacted by inflation. There are other lines of business that the ultimate amount you pay will be impacted by inflation, because the amount you pay will be established four, five, ten years from now.

So what I was trying to plain is every one of our companies ultimately uses the appropriate inflation rate, depending on the kinds of lines of business they use, and where they fit in the stack of claims payments. So excess is, in fact, going to be inflated; inflated at a much higher rate. Primary, if the claim is going to be established at the point and date of accident, is not. So every one is different. We believe that the exposure to inflation is down the road, and it's much higher than 3.5%.

Okay. So you're almost agreeing with that scenario to some degree?

No, I'm completely agreeing with it, but I'm also saying that there is no one number Berkley Corp. uses, because every line of business, every class of business is impacted by how inflation hits that line of business. So its impact -- excess Workers' Comp is one thing, and malpractice is another, and product liability is another; its impact on every line of business is different.

Got you. Thank you very much.

We'll go next to Meyer Shields, Stifel Nicolaus.

Thanks. Good morning, everyone. Bill, when could it become appropriate to start involving yourself in the political process, so that the Federal Government is no longer propping up competitors?

Well, I'm Chairman of the American insurance Association, and the American Insurance Association is quite concerned about the Federal Government stepping in to provide support, and become owners of our competitors. And I think I speak for virtually all the members of the American Insurance Association that we think that there's some level of stepping in, if you will, to a degree that you probably can live with. I think the issue that you diplomatically talk about, which is the Federal Government owning the largest player of the business, AIG, is a problem for most of us who have to compete with them; and the fact is, as we're trying to point out to Congress, it's sort of is an extremely difficult thing.

You know, AIG made the case that they insure one of every ten businesses. I think to say that they have an insurance policy to one of every ten businesses may be true, but they're not the primary insurer for one in every ten businesses, nor are they for one in every ten risks. They delude themselves in their own importance. They have lots of good people. I have no problem with many of them. But the insurance business is not -- systemic risk, the property casualty industry, is one that can stand on its own, and it's unfortunate that this whole thing happened. And the answer is, yes, I am involved, and the American Insurance Association involved, and as far as I know, every real public company, other than that owned by the U.S. Government, is involved, and not too enthusiastic about situation.

Okay, that's helpful. Thank you. And in your opinion, is the fact that we've seen a fair amount of insurance brokerage consolidation over the past couple years, and maybe more expected this year, is that going to play a role in maybe allowing underpricing companies to do that for longer, or forcing underpricing companies to do it for longer?

Well, it depends how much professional liability these companies can buy, because someone ultimately pays when an insurance company goes broke; and especially in commercial lines, where there's limited guarantee fund accessilbility. And one of the things that will happen is some significant company, who issues large limit policies, will fail to perform. And when that happens, people are going look to the broker. We've seen it happen, in fact. And the broker tries to then persuade insurance companies to make payments that are outside of their contractual expectations or responsibilities to solve the problem.

But ultimately, it's in everyone's interest to have rational economic pricing, including the broker's. Their job is to get responsible carriers who have the capacity, the willingness and the ability to pay claims. And they help, really, carriers that have no capacity to their detriment. Frankly, most brokers take that responsibility seriously and behave appropriately. There are a few who don't, but for the most part that's a responsibility I think brokers take seriously; and most bigger ones take it more seriously.

Okay, that's very thorough. One last question, if I can. Is there -- has there ever been a significant decrease in the amount of talent that is available?

At the peak of every cycle, you always lose some experienced people who say, not going through the down cycle again, and they retire. So the fact is, I think in 2007, some pretty good senior people stepped out, and I think that's always the case. And I think that we're now getting to the point where it's harder to get good people. And I think as an industry, we haven't done as good a job as we should in attracting young people who view this as a concern, as a great opportunity, and I think it's probably one of the most serious concerns the industry has to face.

Thank you very much.

We'll take our next question from Vinay Misquith, Credit Suisse.

Hi, good morning. The accident year loss ratio this year, ex-cats, has stayed virtually the same versus last year. Could you help us understand whether that was because of lower loss cost trends than you expected, or is it because you now foresee lower inflation for the future?

Do you want the truth, or do you want a quick answer?

Always the truth.

The truth is, prior years have developed out more positively, and as we've noted more positive development in prior years, we've brought down our current years by a little bit. We still think we're probably pretty conservative in our current year. But -- seeking to get the right numbers is a hard thing, but our prior years' development has caused us to somewhat lower our current year.

Sure. Have you also reduced your expectations of compensation versus the past?

No, not really. I think that what we've done is we've moved out our expectations of inflation, we think now inflation is a little further away, but predicting Washington is always difficult.

Sure. The second question was on the duration of your assets. I believe in the past it was lower than your liabilities. Now there seems to be just a small difference, a [one] or two-year difference, so do you think that the duration of your assets is now more appropriate, and the further expansion of yield may not be possible in the near term?

It goes hand in hand with my comments about our inflation expectations. With lowered inflation expectations, I'm concerned about opportunities to invest at higher rates. Therefore, I want to invest out there now, and try to be a little more matched up. I didn't want to make quite such a bet that I expected rates to move up in the next 18 months. So I just wanted to lower that bet a bit.

That's great, thank you.

We'll go next to Mark Dwelle, RBC Capital Markets.

Good morning. Just a couple of numbers questions to start with. Bill, you had commented that there is -- you have 11.5 million shares authorized. Is that what's left after the amount that you indicated you did in January, or that's --

As of this very moment, that's what we have.

Okay, thank you. The second question I had was related to the earning margin on the investee earnings. That seemed to be significant lower than the prior quarter run rates. Was there anything unusual, or maybe seasonality there or just --

It was really from Greenwich [Era], which is a wholly-owned subsidiary. There were just some adjustments and stuff, and there may be some more adjustments in the first quarter. It's not -- the answer is small business, they make adjustments, and it's a small number. The difference in that margin was, I think, $600,000 or $700,000 in the quarter. It's just -- it's properly accruing bonuses, it's just miscellaneous stuff as that business grows and consolidates.

Thank you. Then thirdly, you had commented in terms of the amount of overall premium volume from the start-up operations. What portion of that falls within the international segment, as compared to any of the others?

Start-ups for international are probably Australia -- do you have the numbers? Yes. For the year? That's the fourth quarter. For the fourth quarter, I've just got to add them up, one second. A little less than 20% of that, so around $20 million in the fourth quarter of the roughly $100 million.

Okay, that's helpful. Then finally, I know that the State of California approved some increases in their base rates for Workers' Comp. Have you seen any evidence that that's getting into pricing at this point, or too soon to tell, or no market impact?

Well, this is Rob. As for as the California market specifically, I assume you're referring to Workers' Compensation?

Right.

We certainly are seeing signs that those that have been less responsible operators in the market are recognizing that they need to change their behavior, and that is occurring. Having said that, the position that the insurance department takes as far as rates and the messaging sent, I think tends to oftentimes be more directional. But one needs to recognize that in the California market, one has the ability, I believe, to deviate from one's filed rates by 50% plus or minus. So I think that it's important as far as signalling, but I wouldn't suggest that that is the sole determinant as to where rates are at any moment in time.

Okay, that's helpful, thank you. That's all my questions.

And we'll go next to Dan Johnson, Citadel Investment Group.

Great, thank you for taking the call. Bill, a question for you on how you think about leverage. I say that using whatever metrics we want to use. I was just looking at -- your debt to cap is around 30, 31, and whether looking at reserves to equity, or surplus, or premium to equity or surplus, you're on the upper end of I guess what would you call the relevant peer group. Granted, some of those numbers are pretty low for the peers, but how do you think about those sorts of metrics in light of sort of the magnitude and the pace at which you want to redeploy capital using your buyback? Then I've got another question after that, please.

First of all, you have to look at our volatility as a business. We don't have property cat exposure. We don't have volatile lines. We don't write big lines of business. So if you look at us to our peer group, our volatility is probably 15% of what our peer group is. So it totally changes the metrics for the kind of capital you need.

Number two, if you look at our debt, we effectively were opportunistic in raising debt to pay off some debt that's due in September, so $150 million of debt gets paid off in September for cash that we already raised. So all we were is opportunistic to raise the money, and we put it aside, we told the rating agencies what we were doing, and they were fine with it. We felt it was the right time to do it; it was a cautious strategy, given interest rates, and it proved to be a good thing to do. And --

Go ahead.

Then the final point is, I think that how leveraged you are depends not only on any of those things, it also depends on how you earn, and our earnings level is substantial relative to our debt. We also have quite a bit of very long-term debt. So if you look at how much debt comes due, it's $150 million, $250 million in any one year, not a big amount, and lots of cash flow at the parent company.

Great. On the sort of new business outlook, sort of how are you thinking about, as you write business today, the sort of marginal ROEs that you're able to deploy capital at today versus -- not only in absolute terms, but how has that changed would you say in the last year?

Obviously, we're impacted by interest rates. So the returns we get on our portfolio impacts the kind of return we can get on our operating units. But we still target a 15% return. We don't measure it marginally, however, because otherwise you're pretending everybody is going to get today's at the moment interest rate. We look at our average return for our portfolio.

if you're deploying capital at an expected 15% ROE, and you're targeting a 15%-ish ROE for next year, I'm sure I'm missing something in my simplistic math, but aren't we basically saying we're not expecting any benefit from reserve releases?

No, because, first of all, what we expect and what we get aren't always the same. In spite of my beliefs and my expertise, I must acknowledge some level of fallibility. So, therefore, I may not get what I target. It's, of course, not my fault. It's all of the fault of the Senior Vice Presidents who manage these units. It's their responsibility. Or the Presidents of the operating units. But it may surprise to you know that we actually don't hit our targets at every one of our companies every year.

So there's lots of hiccups in this business, and that's how it is. So you asked me what was my target. That continues to be our target, and we don't want people to write business where we can't achieve that. But you have to leave room for mistakes.

Understood. Thanks for taking the questions.

And we'll go next to Jay Cohen, Bank of America Merrill Lynch.

Thank you, good morning. A couple of questions. First is, your non-U.S. Government holdings, not a huge number, I think it's $300 million to $400 million, but where are those holdings and what are you seeing there?

It's Australia, Canada, the UK. A small bit of the Central Bank of Argentina. Not the country of Argentina, but I think it's like $30 million of the Central Bank of Argentina. Using some of my money to pay other people's debts. I don't like that, but the Central Bank is pretty okay. But that's $20 million or 30 million. The biggest single piece of that is probably UK, then Australia and Canada.

Great. Thank you. And then second question, I guess back to claims inflation, obviously the big surprise for everyone has been the lack of claims inflation over the last several years. Have you been able to drill down and sort of determine why that's been the case? Is it the economy? Are there any other changes that you see where you can pinpoint and say there has been a change, and that's what we ascribe it to?

You know, we'd like precision in this world. We have all these actuaries, too many actuaries. In fact, if you'd like to borrow one for your analysis, we could lend you a few. But try as we may what he we find is that slight changes in assumptions take you all over the map in your outcome. And that's a problem. You know, we were more pessimistic about nearer-term inflation and claims inflation a year ago than we are now. I think that our general view is that, at the current levels, we're going to see modest 3.5% inflation. I don't think that's going to change a lot, Jay. I think that we have a big risk of stagflation, but I don't see it here right now. I think that -- you know, we have a global exposure to deficits and where we're going to get the money from, and it's not just the U.S., it's probably every country in the world except Germany.

But I think for the moment, if you were to ask for my assessment, we're in okay shape for the next 18 months, sometime between 18 months and 36 months we're likely to have an increasing rate of claims inflation. But society, which is the real danger in claims inflation, is not in a runaway claims mode today. It's just not where the world is. The state of mind is fear, concern, get everything under control. So I'm not -- I think we continue to be very conservative in our reservings used, and I think the industry is benefiting in part from that.

No doubt. Great. Thanks, Bill.

And we'll go next to Ron Bobman, Capital Returns.

Hi, wondering if could you refresh my memory. Just curious just on a couple of renewal rights deals. I was curious if the Company has done much in that way in the past, and generally, Bill or Rob, what your views are on renewal rights deals, presumably obviously from the buy side? Thank you.

We have done one renewal rights deal about five, seven years ago. We are always interested and attracted to renewal rights deals, and we look at them very carefully. But to get someone's business that we don't find attractive is not really what we're interested in. So a renewal rights deal, where you do a huge amount of work and you end up with 10% or 15% of the business doesn't make sense. We look at lots of deals, and we're interested, and it would be an attractive thing for us in general.

Thanks.

And with no questions remaining, I would like to turn the conference back over to you, Mr. Berkley, for any additional or closing remarks.

Okay. Well, thank you all very much. We continue to be quite optimistic, and we actually do calculate before we say we think we're going to have a 15% return; so far, our views are unchanged. Thanks, have a great day.

And again, that does conclude today's conference call. Thank you for your participation.