W R Berkley Corp (WRB) 2010 Q2 法說會逐字稿

Good day, and welcome to the W.R. Berkley Corporation's second quarter 2010 earnings conference call.

Today's conference 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 limitation believe, expect, or estimate. We caution you that such forward-looking statements should not be regarded as a representation by us that the future plans, estimates, or expectations contemplated by us will in fact be achieved. Please refer to our annual report on Form 10-K for the year ended December 31, 2009, 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 a new information, future event, or otherwise.

I would now like to turn the call over to Mr. William R. Berkley, please go ahead, sir.

Good morning, everyone. First, we want to all let you know that this is a celebratory day because it's Gene Ballard's birthday, and, therefore, after this call we will be all out on a birthday party for Gene. Before I give you my views and whatever, we are going to start with Rob, talking about the operating units, then Gene is going to talk about the finances and then I'm going to give you my overview of where we stand and then take questions. With that I'll start and turn this over to Rob Berkley.

Thank you, good morning, everyone. Overall the market conditions during the quarter remained challenging due to the headwinds that continue to exist stemming from both the general economy as well as an overall competitive marketplace.

Having said this, the good news is that it appears as though pricing has generally bottomed out, payrolls and receipts are not eroding at the same rate they were in past quarters, and consequently, the pace of return premiums is slowing. Additionally, there seems to be a growing recognition amongst both carriers as well as the distribution system that the status quo is not sustainable.

Our price monitoring indicated our rates were down a modest 0.8% for the quarter. Furthermore, it is worth mentioning there are a growing number of areas where we are achieving rate increases. Finally, for the first six months of the year, our renewal retention was running at about 80%.

Our net written premium for the quarter was $961 million, an increase of 5.8%, which was the first time that our net written premium has grown in almost four years. The growth came about predominantly from our startup, the international segment led by our Lloyd's operation in particular stands out but also our companies in Brazil, Argentina, Norway, Hong Kong, Australia and Canada performed well.

The alternative markets division also contributed handsomely to the group's growth over the three months. Our specialty and reinsurance business remains relatively flat with our regional business shrinking somewhat.

It is worth noting that while the net result of a segment may be flat or negative, one should not misinterpret that. There may in fact be companies in those segments that are growing. Obviously seeing this type of growth in parts of our business given the environment raises our antenna. However, it is worth commenting that we have a high level of confidence in the people managing these businesses and we remain comfortable with their risk selection and pricing.

Additionally, our rate monitoring and underwriting audits provide all interested parties with additional piece of mind. We strongly believe our growth has come about as a result of our customer focused team, their relationships and the financial strength and stability of the group.

Finally, I would remind you that we have started 19 businesses over the past few years so this level of growth should not be surprising. Onto the combined ratio for the quarter which was a 94.4%, which was comprised of a 60.2% loss ratio and a 34.2% expense ratio. The loss ratio was adversely impacted by storms as well as our exposure to Trans-Ocean which in the aggregate added 3.4% points. The expense ratio improved by almost a point compared with Q1 and we expect this trend to continue. While Gene will take you through the details regarding the numbers, one additional comment from me on this topic is when he cuts through all of the moving pieces back and forth, it is our belief that we are currently running at a current accident year combined ratio of a 98% and if you add storms into that, it brings you to approximately a 101%.

Having said this, it is certainly possible that we will outperform these numbers given our ongoing philosophy of cautiously reserving the current year.

As we observe the current market conditions, we can't help but notice the many parallels that are present between the existing environment and the market conditions the industry experienced in 2000. Obviously, one noticeable difference is available investment return, which may very well apply additional pressure to the situation with (inaudible).

The group continues to remain focused on maintaining underwriting discipline while simultaneously positioning ourselves for the inevitable change in the market.

Finally, I would suggest that the growth the group experienced in the second quarter is a fraction of what we expect under improved market conditions.

Thank you.

Thanks, Rob. Now, Gene, you want to take us through the numbers quickly and then I'll add my two cents.

Okay. Thank you and thank you for not mentioning which birthday this is as well.

Good morning, everyone. Rob already took us through the change in premiums for the quarter. The only further details I have to add on that are the actual numbers for the startup company and net premiums written for the companies, the recently started companies by that we mean the companies we started since 2006 were $162 million in the quarter and that's up 81% from $89 million in a prior year quarter. Most of that growth was -- more than half of that gross was in the international segment.

Startups overall now represent 17% of our premium volume for the quarter. With regard to losses, our overall loss ratio was 60.2%, down 2.5 points from the second quarter of '09, favorable reserve development was $67 million or 7 loss ratio points in this quarter. That compares to 3.5 points in the prior year quarter. The majority of that favorable reserve development in 2010 was related to the specialty and regional segments and to the 2006 through 2009 accident years. Storm losses were $30 million or 3 loss ratio points compared to 2.5 points in the prior year period.

In addition, we incurred a net loss including reinstatement premiums of approximately $5 million for our share of the deepwater horizon loss. The expense ratio was 34.2%, up 1.7 points from a year ago, about 0.7% of the expense ratio in the quarter was related to startup companies that -- for which the earned premiums have yet to reach sufficient scale to cover their fixed expenses, and for the international segment the impact of startup companies was actually 2.8 points.

On a calendar year basis the overall combined ratio was 94.4%, down 1 point from a year ago, and as Rob mentioned on an accident year basis the combined ratio was 101.5% including storms and 98.5% before storms. Net investment income was $128 million, down $4 million from a year ago. The decline was due to lower earnings from the arbitrage account which reported a profit of $1 million this quarter compared to $7 million in the prior period. As a result, the annualized yield on the overall portfolio was 4.0% in the quarter compared to 4.3% in the prior period. Investment funds reported a small profit in the quarter.

State municipal bonds represent 41% of our overall portfolio at June 30. We included a schedule of our state municipal bond portfolio in the earnings release this quarter that illustrates our continued focus on pre-refunded bonds, revenue bonds and state -- non-state general obligation bonds.

As you can see on the schedule, state general obligation bonds for the six dates that we presented represent just 3% of the overall tax exempt portfolio. As we have planned all along, we used all of our earnings in the first half of the year of $229 million to buy back treasury stock. We bought back 5.1 million shares in the quarter and almost 9 million shares year to date and that's nearly 6% of our outstanding shares at the beginning of the year. We also set aside cash at the holding company to repay $150 million of debt that's maturing this September.

Our operating cash flow exceeded our earnings. Operating cash flow was $130 million in the quarter, our overall tax rate after giving it back to our tax exempt income was 24% and the impact of foreign currency exchange rates on the quarter was not significant. All together that gives us operating earnings of $0.65 per share and net income per share of $0.70. In addition, unrealized investment gains were $505 million at June 30, which is up $105 million on the quarter and $170 million for the first six months. With that, our book value per share was $24.81 at June 30, up 4.2% for the quarter and 8% year to date.

Thanks, Gene. We were pleased with the fact that the quarter came out as it did. It's interesting. Lots of you on the phone think I'm an optimist but rather I'm a realist, not an optimist. A realist in that I look at the facts, I look at where things are and how the marketplace is and I see it as it is. Many of the people who we compete with in fact are optimists. They see the world as they'd like it to be. The result of that is I may anticipate a market change sooner than they do. That's because of realism.

Looking out ahead, we are pleased with our results. We started this 19 odd new operating units over the past four years and candidly they got off to a slower start than we expected. That's one of the reasons our expense ratio has crept up and this slight increase in volume is that they are finally gaining traction just over time being there using their long-term relationships and the discipline of maintaining the pricing has kept them from growing very quickly, but we are getting business slowly over time and as Gene mentioned they represent almost 20% of our total business and that's because our historic business is down so much.

We have been able to maintain some semblance of a continuous level of volume because of those new units. And now with those new units continuing to grow and our established businesses no longer losing volume, we are starting to see that growth.

We don't think we are going to grow particularly rapidly but we will continue to get traction especially in the international segments and a couple of other pieces. We do believe that we are now in the final stages of the market turning around. April and May prices were basically flat. In June, prices were down. In fact, the entire quarter we thought we were going to be flat until June came along and the entire of 0.8% decline in pricing took place in June basically. That's a sign of aggressive competitors trying to achieve certain volume gains.

From our point of view, we are out there seeing in our standard business less competition. The most competitive areas are in large risks, which we basically already lost, almost all of them, and our excess and surplus lines busines and our regional business are the two businesses that have the most pressure today for volume, although we see that at least in the ENS business as we have lost our largest risks there, that pressure is not quite so great.

Looking out ahead, we do think our investment income will recover. The downturn in investment income in this quarter came primarily a result of the reducing spreads in our arbitrage account, which caused a decline from quarter to quarter of $7 million and that was the big change. Other than that, yields and so forth are relatively unchanged.

So, we are optimistic. We see a good year ahead, still very competitive. We continue to seem to establish our current accident years on a more cautious basis than some of our competitors. We probably, given where inflation is, have been continually more cautious than may be warranted. That will only mean the reserves continue to have a comfortable margin should inflation in fact return. We are not suggesting it will or it won't. We are just suggesting that we have taken a more cautious approach at the moment. With that, I'm happy to take questions.

Thank you. (Operator instructions).

Our first question comes from Dan Johnson from Citadel. Thank you very much. A couple of questions but maybe first a few simple ones. The FX impact on the top line, if you could, please.

Not significant. Immaterial, less than $1 million.

Right.

Okay. Just another simple one on the new money yields where you are investing today you had some comments about maybe not going out quite on the duration level you had before, so can you tell us a little bit about when you're putting money to work, sort of roughly what are you putting it to work at?

Well, first I don't think I said that.

What I said is we had spoken in our last quarterly call about extending our duration and several people asked about that and as we got into this quarter, we concluded that extending our duration was not the thing we wanted to do.

So, we tried to maintain our duration as it is right now and with that, that really means we are probably buying things in the 10 years or under area other than a few build America bonds that are out a little bit longer, but not much. I would say that the duration of our investment is still probably matching the duration of our slightly longer side of our portfolios.

If I were to guess, it's probably in the four to seven-year area is what we are buying now.

And the yields drive off of that?

Our target yields are still trying to match our current portfolio yield, which is give or take a little better than 4%.

4%. Okay. And then last --

And in fact we have been able to do that.

Great. And then lastly, on the price monitoring you talked about, can you just give us a little background on the process and how you do that, especially when you look at things like exposure changes, maybe if you have any views on exposure changes as well and whether or not this focuses on new business as well.

Go ahead, Rob.

Yes, the answer is that, you know, lots of people call it price monitoring but what -- in our opinion is, it's really rate monitoring. It's number of dollars you collect for unit of exposure and certainly as we have discussed in the past, price monitoring is not a perfect science, but we believe at this stage that there is some precision to it. Clearly, with the renewal book where we are able to keep track reasonably carefully of exposures, we are able to understand the change in exposures with new business, it can become a bit more challenging depending on the line of business. So, generally speaking we think there's a reasonable level of precision and it is probably a bit more at the renewal than the new.

So your number includes new business as well?

The answer is that we -- my 0.85% includes new business but we track them with a fair bit of granularity so we are able to dissect it to see what the rate changes are, but the 0.8% includes new business as well the renewable.

I mean, coincidently for renewal business it's 0.8% and then we examine new business to see if it's pricing under par with our existing business and so the conclusion is it tracks the same.

I got more questions, but I better -- I'll jump back in the line. Thank you.

Our next question comes from Josh Shanker with Deutsche Bank.

Good morning, everyone. I want to follow on Dan's question a little bit. The new Berkeley businesses that are generating the top line growth, in terms of pricing those markets. How do we get confident about your pricing of those markets? Where do you base that sort of pricing analysis off of?

I'll let Rob answer the details, but basically when we enter any new business for a startup or whatever, we have a price model, we examine pricing levels but we have standards that we enter into the business before we get into the business. So it's not that we go into a business and say, okay, let's see what happens.

So, you enter the business with pricing expectations, with market expectations having examined it. It's not sort of a random theory of pricing.

Rob, do you want to --

I guess I think you covered it, the one that I would add is as suggested we have technical rates and that we derive through a fair bit of work in addition to that obviously we are conscious of where the market is. And quite frankly, when we look at the pricing that we see in these startups, not only there but technical rate, but generally speaking they are the top or above market hence our comfort that we think these folks are doing the right thing in building these businesses. In addition to that, obviously, we do have other resources within the group that sister companies that have expertise and we are able to bring this peer view to bear as well.

In addition, I might add that, you know, a number of these teams of people wrote hundreds of millions of dollars of business in the places they were at and are now in our company writing $30 million or $40 million in business because they understand we mean that we are looking at price discipline, so they understand what they mean. So, this has been a very slow start and it's still moving very slowly.

Yes, I mean most of these businesses that I think you're referencing are below the budgets that they have put together for themselves 12 months ago because of market conditions and to the point that I made earlier about the number of startups combined with the amount of business that these people wrote or managed at fire organizations, this is really -- this is really just a reflection of their skills, expertise and their relationships, in our opinion.

Would it be a correct statement that most -- the vast majority of business that you're receiving is business that they have brought from their former employers at this point? And that --

I don't -- that would not be a correct statement.

That would not be?

No.

Okay. And then the second question will be, why do you think that in the second quarter of 2010 it seems like there's been an acceleration upward?

I just think it takes time. It takes time. It takes time. You have relationships. We don't go out and ask people to move business. It takes time, you have relationships with people and they get comfortable doing business with you and the fact is they have to get comfortable that we and they are going to be able to do what they expect and write the business.

Okay. Thank you very much.

Our next question comes from the line of Keith Walsh with Citi.

Good morning, gentlemen. First question for Bill. You know, Bill, you've been on the call talking the last several quarters about undisciplined competitors and then you guys put up this type of premium growth. I guess my question would be, What would your reaction be if your competition put up your numbers this quarter would be the first question.

Well first of all, I think you're asking the wrong question, sir. I think that the first question I would have asked is probably starting a few years ago is why is Berkeley investing so much money in so many of these startups and he's getting no business out of them because in fact we have started 19 operating units and we still shrank over that whole period of time, but with 19 new operating units, we shrank for 15 quarters. So, that's the first question you have to ask because if you want to take a snapshot at one quarter, then you probably shouldn't be investing in the insurance business.

Okay. So with that --

Let me finish your question, please.

Sure.

Second of all, I think the next question, if I was out there is where is the growth and it's mainly in international in places that there are other kinds of opportunities, there are other things going on. And finally, if you divide that number up of 5.5%, which is $50 million, amongst 20 operating units, it's not very many dollars from all of those teams and all that investment. So, I would certainly pay attention, I'd look at it but I wouldn't come to any conclusion right away.

Okay. Then taking your advice if we just focus on the new business my second question would be, you know, doesn't the new growth imply you're undercutting existing players in those current markets?

No. What it implies -- I mean, I guess in that statement or that question it assumes that people make selections as to who they do business with or who they buy insurance from, purely on price. I think in that comment you're suggesting that skill, reputation, relationship, financial strength, ratings, et cetera, are irrelevant to the decision process.

And you know, I think that the long and short of it is there's a lot of people out there that have relationships that do business and as I said, it's not very much business when you look at it on a per operating unit basis.

Okay. And then the last question just on pricing you consistently say you think pricing is getting better or will get better at some point.

No. What I said is prices have stopped going down. Okay. I didn't say they are getting better and I specifically said prices are down 0.8 of a percent in the quarter.

So, my question is from a client point of view, why should I care about lower investment yields when the industry is still putting up reported underwriting profits? Why should that factor into my decision of why pricing -- why I need to pay more for insurance. Thanks.

Who are your clients? Are they the people who buy insurance or are they the people who invest in insurance?

I'm talking about as a buyer of insurance.

The answer is buyers of insurance have only one thing in mind, they would like to have the least possible costly insurance from the highest quality, most certain providers who pay claims the fairest.

I guess the point I'm getting at when I talk to risk managers or even smaller customers that buy insurance out there they don't care necessarily about what you get on your investment yield. They just care about, they look at the underwriting profits in the industry so why should they --

We don't disagree. The question is the people who are running insurance companies the nature of a well run business is the market, the competitive market sets the price but competitors are supposed to price based on their cost of goods sold. And what I am suggesting is based on cost of goods sold, everybody would like to buy insurance for nothing.

A dollar would be a good price. But that's not a rational economic scenario and ask the people who bought insurance from Alliance or Frontier 10 years ago how happy they are with that settlement or mutual risk. The answer is, people do have the sense to know they need to buy insurance from companies that will pay, and most responsible companies recognize at some point they have to make a return so they can attract capital.

Attracting capital requires return.

Not many people who manage companies should find it attractive to raise new capital at less than book value which is where many of those stocks are selling and they are selling and they're selling there because of the inadequate returns those companies are generating.

So, at some point what's going to happen is people say we answer to our shareholders, those shareholders don't want to be diluted and therefore we better get better return so we won't have to raise capital and dilute our shareholders. Eventually that's where it all plays out. The price people pay, people always want to buy the most they can for the lowest price. We totally agree on that and people buying insurance don't care what my investment returns are.

Thanks a lot. Appreciate it.

Our next question comes from Mike Grasher with Piper Jaffray.

Thanks very much. Good morning, everyone.

Good morning.

Good morning.

Bill or rob, maybe you could comment a little bit on the growth that you achieved in the quarter around the alternative markets line of business?

I guess my perception on that business would be that would be sort of new -- new business development or small businesses starting up and in this economic environment that just doesn't seem to be the case so I'm curious about that business and how you're achieving that growth.

Yes, I'm going to let Rob go do the details , but it's that business has some ups and downs in the quarter and the second quarter is one of its smallest quarters so why I chose a percentage increase of some consequence, the quarter as you might see was the first quarter was sort of $250 million and this quarter is $150 million to sort of start with, so it's a smaller quarter, though a modest gain gives you a bigger percentage gain. But with that, let me let Rob

Yes, I think as you suggested obviously, Q2 we are working off a smaller base than some of the other quarters, but the most significant growth was probably coming from our accident of health business, specifically around the medical stop loss line, but we did see growth in some of the other lines as well. We certainly are seeing some improving conditions in the California Compton and a couple of other spots as well but once again I think that one needs to keep in mind it's been a smaller quarter so it takes a little bit less to move the needle.

And while actually the health doesn't flow into that startup group per se, it is really in many ways, starting off as an enterprise because of the business it does.

Okay. And then the California Comp portion was that driven more by rate filings or by exposure unit?

It's more exposure unit, but you need to keep in mind that in the great State of California one files their rates and then I believe you have the ability to deviate from those filings by a notable margin as is appropriate.

Understood.

I wouldn't focus too much on people filing in California as it relates to Comp as much as -- long story short, we think that there, as we mentioned in prior calls, leads them to believe that California Comp market has bottomed out and it's beginning to firm slowly.

Understood. Thanks for taking the question.

Our next question comes from the line of Meyer Shields from Stifel Nicolaus.

Can you quantify the premium contribution to the premium growth?

I'm sorry. Could you repeat the question?

Yes, I'm sorry. Can you quantify the contribution of return premiums or additional auto premiums to alternative risk growth in the quarter?

You mean the alternative of market segment to what extent that growth was driven by audit premiums?

Yes, yes. It was not significant.

Not significant. The auto premiums and the return premiums would not be significant --

One comment that I would make is that audit premiums and return premiums generally speaking are not overly meaningful, rather, I highlighted that in my comments because I think it's just one more indicator, so to speak, as to the impact the economy is having on the industry and by extension our business.

Okay. That's helpful. On the reserve side, if we look at first quarter stat numbers, there was actually reserve strengthening for actually year 2009 and based on gene's comments it looks like we went the other way in the second quarter and I was hoping you could put some color around that.

Nothing in particular, just the ordinary reestimating reserves from one period to the next. Nothing significant in that change.

Okay. And one last question, if I can. I was hoping Bill could give us some thoughts from his recent trip to Washington .

I think I testified before the house. No one from the other side effectively chose to testify, although they were invited.

I think that they -- we think there's a fair possibility of this happening, but one never knows in Washington how things play out.

I've been at this now for four years. I have perfectly -- I have lots of tenacity and I'm willing to persevere as we move through this and I would suggest that we probably are now with a better than 50/50 chance we will get some -- something attached to other legislation because of the need to raise money, and the blatant unfairness of the existing tax structure and the fact is that United States insurance companies pay tax in a different way and if you write business in the United States you ought to pay tax the same way we do for that business. And that's really what the deal says and we certainly believe there's a reasonable possibility that that will happen.

If it doesn't happen, it just means congress will decide to give a competitive advantage to non-domestic companies.

Okay. Thank you very much.

Our next question comes from the line of Doug Mewhirter, RBC Capital Markets.

Hi. Good morning. Most of my questions have been answered.

I guess my two questions revolve around -- our first question revolves around startup businesses. Especially with the growth of the international business and there's sort of wide variety of countries and underwriters as well as in the domestic area, does that -- do you think it would meaningfully change the profile of your insurance portfolio over time and maybe more of a swing toward property or a certain kind of casualty? Or, do you think that you're sort of -- your business mix is still kind of consistent with your historical profile?

I don't think our business mix is making any long-term dramatic changes in the short run. Obviously, when more business comes from new units, there are some subtle changes but the mix of our startups is primarily looks like our existing business.

There is some additional property exposures, although it's not catastrophe-related property exposure. There is certainly some additional property exposure. No different than the startup being our offshore energy business where we had the trans-ocean risk which effectively was (inaudible) but didn't change our operating results. So, you know, I think that we were in this position once before and we don't really think that this is going to have a material impact.

We think what's going to really happen is as the cycle starts to turn, our other domestic businesses will start to grow dramatically and candidly this business will not grow at that point in time at nearly as great a rate and will just be a much larger company and this will be a piece of that larger company.

Okay. And then the second question, which is more in the what's happening right now the rates seem to be, I guess I would say fairly benign based on your tracking. How are terms and conditions holding up? I've heard little rumors here and there that there's -- people were softening in terms of conditions because they really can't -- they are seeing some pressure to keep the --

You mean prices are so low already there's nothing else they can do but (inaudible).

Yes, yes.

Yeah, I think that the answer is for probably the past six months there's been some changes in terms and conditions, especially on very large risks, that's the case.

As I've said now for probably the past 12 months, we have lost virtually all our large risks and terms and conditions don't change much on small risk, although they have changed somewhat.

I think that that seems to not have continued to get worse at the moment, but you can have a rash of a couple companies wanting to get more business for the quarter, so you can have a month where crazy things happen. One of the signs of the turn in the cycle is seemingly volatile decision making in various companies where they zig and zag a lot and that's some of the things you're seeing people, People getting into one business, out of another business, doing all kinds of things to try to generate business and I think you're starting to see that and they are all the signs of that turn in the cycle coming but it's not here yet. There's no question, it's not here yet.

Okay. Thanks. That's all my questions.

This is Michael Nannizzi with Oppenheimer.

Just a couple questions on the ventures if I could.

Could you talk about how the accident year pictures have been relative to the rest of your book and also since I think you had said, Gene, that most of the development across the entire business has been in '06 and since years, has there been any sort of development in the startup?

And if I can have one follow-up. Thanks.

Our loss picks have been conservative in any year and more conservative in the startups than in the existing businesses. We consistently increased our loss picks each year to reflect what we think are trends for inflation and pricing trends, so our loss picks, for instance, are more probably 10 plus points higher than our develop loss ratio, for instance, in 2007, so it's -- so, we have got substantially increased in our loss picks and that may or may not prove to be needed but that is how we go and the startups have more conservative loss picks as opposed to less conservative loss picks. You had another piece to your question you asked Gene?

No, no. That was it on the startups.

And then if I could one maybe mostly for Rob on the alternative business, it looked like the gross written premiums were higher, seating was also higher.

Can you talk about what drove those trends and maybe it's just a one quarter phenomenon And then one last question. I'm sorry.

Just one second.

One second.

Okay. Thanks.

I think that that has more to do with the assigned risk premiums that flow through as far as the gross versus net.

In addition to that, we historically have written that assigned risk business in two segments, the regional segment and the alternative market segment. We are on -- we are gradually migrating all the business into the regional segment, so no longer -- into the alternative market -- (overlapping speakers). So, you're seeing some noise from that but the important thing about that, our business, is that it's a hundred percent reinsured so it goes to our gross norms, gets 100% reinsured back out and has no impact on our bottom line.

Or on our net numbers.

Or on our net numbers.

Great. Got it. And then, just a capital question, mostly. So, portfolio and debt relative to equity are a bit higher than the peer group and I would guess that the debt is costing you more than you can generate right now just on dollars invested basis in the portfolio. What would need to happen on the underwriting side or just on the outlook for the business side to consider buying back some of your own debt and reducing both of those portfolio and debt --

Well, in September we pay off I think $150 million just as it comes due.

Right.

And I think that there's a whole lot of issues that you have with characteristics of the debt issues that you have outstanding and some of the debt that's out there has characteristics that you can't issue anymore that's 30, 40 plus years, plus preferreds and some other things that have terms and conditions and they are out there in ways that would be hard to replace.

And we think that the return on our equity is such that if anything were better off using new capital generated to buy back stock, then to reduce debt at the moment. I am -- I think that at some point we may consider that buying back debt would be a better alternative but not now. I think that when we look at capital management we look at several things.

One we look at buying back two, two, we look at buying back debt and three we look at dividends. Do we want to change our dividend policy, want to pay a special dividend and every board meeting we sit and talk about that issue of our capital management and best use, best alternative for that capital and at this point we think given the quality of our ability to generate underwriting income and investment income, the returns are still better than keeping the debt outstanding is a better alternative for the moment.

And just one follow-up if I could on that topic. On the ARB business, so I think you had said that spread income was about $7 million lighter over the link quarter last year.

So, what would have to happen there for you to say maybe, that's something that you either don't want to keep doing or maybe just set a time frame for achieving what might be adequate returns in that business? I guess it's been a decent year on the M&A front relative to last year. So, just want to understand like how you're thinking about that as part of your overall portfolio. Thank you for all the questions.

Yes. The amount of money we allocate our business is up and down. I mean, at 1.18 months ago I think we had $150 million allocated to it and the rest of the cash we had.

Right.

So it's not that we give them money and it just sits there and they have it.

So it's an integral part of our portfolio and we've gotten fabulous returns over 20 years, substantially better than alternatives and we've had money in other -- outside ARB accounts and our guys have basically a risk adjusted basis have equalled or exceeded those returns in virtually every year. So, we are pretty happy with the returns they have generated.

We are not happy with some of the volatility we have in a quarter there and it's aggravating, but I have to practice what I preach and that is I can't change our strategy because one quarter was disappointing and they continue to do an outstanding job and we expect we will continue to get great returns. And frankly, I'm more concerned with how do I maintain liquidity and get -- with getting such returns on cash which is a bigger concern for our company and for every insurance company, returns on cash are so crummy.

Right. Thank you so much for the answers.

Our next question comes from Vinay Misquith with Credit Suisse.

Hi. Good morning. Could you provide some clarity on the growth in the international business and the combined ratios in the business of 100% plus.

If you could help us understand how you gain comfort on the new business and is some of that growth because of the new large platforms?

Go ahead, Rob, why don't you start.

Yes, a significant amount of it is from the Lloyd's platform.

We are comfortable with the growth because when you put aside the combined ratios, I think that you've mentioned a moment ago when the businesses are in their infancy, we are particularly focus odd what the loss ratio is and we believe the expense ratio will get sorted out as scale comes along in an appropriate manner and we have earned premium that will be able to -- that we can leverage the expenses by. So is there another question you have?

Specific to that, that was it.

And the second question was with respect to reserving on new businesses. I think you mentioned something about that before. Just wanted to confirm that the loss spec on new business relative to the renewals is higher.

Are you picking up higher loss ratio for the new business?

The answer is that generally speaking when we use design loss ratios for our younger businesses or startups if you like, we feel as though it is prudent to err perhaps on the side of caution because clearly the available data and information with a new business is not as plentiful as it would be with a business that has been part of a group for an extended period of time or more mature.

Sure. So since this business surely hasn't earned through as yet should we expect lower -- higher accident DR loss ratios for the company in the near term just as the new business runs through?

I don't think that necessarily should be the case. I think that our writings have been gradually grown over some period of time, and I think you are going to see the earned premium begin to come more visible than it has in prior quarters.

And I think that while the payout tale for losses may be the same as the average duration, there isn't the same risk of new losses and development that's the losses themselves. So, we should -- with should know pretty quickly as to the loss fix of the payout patterns are still going to be in the probably three plus year duration. So, we are going to know pretty quickly.

We have not gotten into -- in the international business other than Australia, which has a fairly long duration, we have not gotten into any businesses that will -- we should find anyway, Surprises as to the loss picks, payer patterns are long, though in some of these areas.

And how has Berkeley managed to grow in these international locations versus US peers. Is it that US peers don't have the sort of presence in US foreign countries that you have?

Again, it comes to hiring teams of people who are well connected, who have relationships in these countries who know people and, you know, it's also -- it's not like we started yesterday, okay.

We started these things three years ago and it's taken a long time before we've got any significant traction at all that they are just starting to do well.

If you look at the total volume from all these businesses, they are all very small. I mean, as I said before, some of these teams of people ran businesses that were three, four, $500 million. In fact, one of them was a billion dollar team that today they are writing 10%, 20%, 30% of what they were writing three years later.

So, it's not like they are suddenly writing these huge amounts of business. They are barely scratching the surface and that's the price we pay for when we started.

Thank you. Yes.

Our next question comes from Brian Meredith with CVS.

Hey, good morning. First, a quick one for Gene. Tax rate in the quarter looked like it was a little bit low.

Anything unusual there or is it just my calculation?

Yes, no, it's nothing unusual. Just the mix of our tax advancements come relative to our total profit but --

Because the arbitrage is probably down, that's probably why?

Well, yes, it's a function of how much our pre-tax income is because the tax exempts have a lower pre-taxed, more tax exempt impact against tax exempt so it varies some. The amount of tax exempts that we are invested in has not changed.

Got you.

Tax rate was about 24%.

Okay. One other quick numbers questions for you Gene. Do you have the reserve (inaudible) by business segment?

We will have those in the queue.

Okay. Thanks. And then the last question, Rob and Bill, on the new business, not to beat a dead horse on this, is it more that your submission activity sup or are you actually seeing hit ratios rise as well on that business?

The answer is that most of the growth is coming because people are showing us business due to the relationships that these teams have, so it's not necessarily that there's been this constant flow of business and all of a sudden hit ratios are taking up in a meaningful way.

Rather, it is driven by, excuse me, business being brought to our attention because of relationships and people's presence in the marketplace and the distribution system that insurers want do business with them.

Got you. Thank you. Our next question comes from the line of Larry Greenberg with Langen McAlenney.

Good morning. Thank you. Bill, with you guys realizing, accelerating and I don't know what looks like to me record reserve redundancies over the last four or five quarters, have you -- are you seeing anything that changes your thinking with regard to when the industries redundancies might run out?

It's very hard to assess other people's redundancies, not so hard to look at where the current loss picks should be. I think that we loss picks should be.

I think that we have consistently continued to be more cautious in our current accident year picks as prior year redundancies become greater since we set our current years based on the prior years that automatically means our current years are going to prove to be more conservative. So if 2006 was set and it has proved to be seven or eight points redundant, that means. However, we set 2010 the establishment of that base was going to have started from a base level that was seven points redundant. So, that automatically means our current accident years are more cautious.

As far as the industry goes, I think that if you look at the industry at the noncatastrophe accident year loss ratio, I think that probably a number of companies are picking pretty conservative numbers I think -- the question is are they conservative enough and some companies are pricing the business knowingly at a more aggressive price basis expecting that on renewal they will be able to raise prices, which hasn't in fact been the case.

I think this is a game of actuaries and accountants getting together looking backwards and forwards and trying to conclude where the returns are. I think when you look at the world and you see the judgments that boards need to make and they have to focus on and that is when you see stock selling at discounts to book value, the marketplace is telling you that your returns are less than what they need to be, and therefore, since the printed returns would be reflective of the current returns, that wouldn't be the case.

So, I guess the long and the short of it is I think people are being overly optimistic that their redundancies are certainly on their last legs. Whether that means they have one quarter, one month or one year, I can't tell you, though.

Okay. You would say that your results currently are reflective of conservative loss picks going in as opposed to, you're just seeing no losses develop in certain lines of the regional business where you might have thought there would be losses before.

I wish there were no losses, every night some people ask they should live another day and could they please have no more losses for one day and that never happens. We get losses every day and -- but within the recommend of predictability, there's no question.

The trends have been better than we would have expected, but not enough to offset the silliness with the pricing levels and again if you recast everyone's investment income to current yields, you don't have anybody or certainly have very few people making decent returns.

Thank you.

Our next question comes from the line of Jay Cohen with Bank of America Merrill Lynch.

Yes, just a follow-up on that last question and specifically on the claims. I mean, you had mentioned that the claims trends maybe have been somewhat better than you had expected. Have you been able to dig into why that is? Because we hear from others but no one has a good sense of why and it's probably an important question if we are kind of concerned about that going the other way at some point.

I think first of all, there are a couple of external factors, Jay, that you have to look at.

First of all inflation has been virtually nonexistent except for medical.

Medical inflation has been real, it's been substantial and it's had an adverse impact on cost trends for lots of lines of business. But the other side is because of a difficult economy, people have been more willing and more anxious to settle claims and get paid. So the capacity to settle claims within reason has really improved somewhat so I think you've got those two things on an external basis.

Less business activity, less drive, all those kinds of things that take place in a more difficult economic time certainly reduce the number of exposures you have to the bad things happening so I think you put all those things together and things were a little better, a little better, however, isn't enough to take care of the offset medical cost inflation and declines in prices. So my guess is that people are being a bit optimistic.

I guess if we do have a stronger recovery, it is more miles driven and more workers out there, I guess there's a chance we do see an increase in claims frequency at that point?

I would think that but also simultaneously with that, the industry would have more courage to raise prices. I think right now there's -- right now there's the driving prices really our companies are afraid to lose business, agents and brokers are afraid to lose business and the customer is reluctant to pay more even for better coverages so you've got everything putting down I think that that's easing up because there's lots of companies that recognize they are not making any money in the current situation. And they are all -- (multiple speakers).

Thanks, Bill.

Yes, sir.

Our next question comes from Dan Johnson from the Citadel.

Thanks, my questions have been asked and answered.

Our next question comes from Greg Locraft with Morgan Stanley.

Hi. Thanks. Just wanted to get an update on how much capital is at the holdling company level? And once the debt comes due, how you're thinking about proceeds going forward?

I think we have -- in terms of cash capital, maybe $300 million and we also have some investments that we could turn into cash probably for another $100 million, $150 million, $450 million of available resources, $400 million, and, we buy back stock on a quarter to quarter basis, we will look at debt, we will look at dividends.

Right now plan is as we said, we are going to effectively invest what we earned each quarter in buying back stock but we have a board meeting coming up and we will discuss whether that's the optimal alternative or not.

Okay. Great.

And then just shifting gears to the portfolio, you mentioned that is your new money yield today equal to what's rolling off in is that --

Pretty close, yeah.

So --

Pretty close.

So, I think you gave a little bit of color but just once again, what are you buying today that's able to equal those yields?

We really don't talk about individual purchases of securities but there are things -- one of the facets of having a property casualty company we have positive cash flow you can buy things that don't give you instant liquidity. And, therefore, if you sit in the marketplace and deal with people, you find things that are of high quality but not easily liquid and when you look along those lines, most investors crave liquidity and therefore can't or aren't attracted to those things. That's one of the benefits we have.

Okay. So, you're buying less liquidity things, it sounds like?

No. I said -- didn't say that. I said that that was one of the attractive -- we are buying a whole array of individual securities that effectively can give us that 4.2% give or take return.

Okay. And what's the average duration of what you're buying?

Why don't we -- when we file our Q all that information will be there.

Okay. Okay. Because the duration seems to be going down but the --

Duration is -- in our portfolio is virtually flat, it varies one month plus or minus and that's all it's varied for an extended period of time.

Okay. Great. Thanks, guys.

Our next question comes from Robert Barnum with KBW.

For rates to go up by year end user going to need the competitors to come to their senses it sounds like. So, why are you so optimistic that this will be the case and can a few renegade companies keep that from happening?

You make a judgment. You look at the world, and the fact is that my judgment is first of all a few renegade companies can't make it happen.

They can't keep it from happening and I think that there are lots of people who are sitting back and saying, if we re-priced our portfolio to yield what current yields are with the same portfolio, it's going to be very hard to maintain the returns. And I think that a lot of people were thinking about that now and there's always a few people out there who are aggressive, but they don't have unlimited capacity and in fact, there are several people who are in the marketplace trying to get into new lines of business and couldn't find any reinsurers who would support them because they didn't like what they were doing price wise.

So, there is discipline in the marketplace and thank goodness there are actually a lot of reinsurers who say "hey, this is silly" and who aren't supporting most aggressive players and that's one of the things that starts to bring that discipline about. But I think for the most part the most serious people in the business understand where things are and they are going to come to a conclusion that they need to make those changes.

So, do you not see new companies coming in right now who -- I think that's pretty slow at this point?

Not in general, no. There's always competition, always people going in and out but it certainly -- there's not aggressive new competition in the business by and large they are all people leaving the business and getting in, and if I had money to invest and I was outside the business, it would not not very attractive for me to enter as a new competitor.

Right. Okay. And what changes do you see in the marine energy market? It may be early but just curious what you see out there.

I think that generally speaking it would be a bit surprised that the liability rates haven't been moving up even though we are not really much of a player in that space, as much as we would have thought on the heels of recent events and certainly property rates have been moving up. Having said that, that's very much driven an influence by quality of operator and region of the world.

Okay. Very good.

Thank you. That's it for me.

Our next question comes from Meyer Shields with Stifel Nicolaus. Thanks. One quick follow-up. Bill, can you talk about was there any trends in companies looking to be bailed out by being acquired?

Actually, we are just beginning to see people know they have problems. They would not tell you they are being bailed out.

They would tell you there's an opportunity for you, but it's just beginning to be that point and I think that what you're just starting to see accountants ask actuaries looking at things and beginning to be a bit more skeptical, so I think that's just at the starting phase.

That would be -- I think that in the market turning around, it would be one of the best things that could happen is someone getting a lot more pressure from their outside auditors or accountants that something had to be done, but in fact we have seen people who we thought were in trouble and having difficulties get acquired in the past six months -- past three months come.

Thank you.

The next question comes from Howard Schlinker with Schlinker and Company.

Hello Bill. First, I'd like to pay you a compliment and then I have a question. I thought your early payment of your customer's claim at the deep water horizon or deep horizon or whatever it's called was brilliant. You lost interest maybe six or 12 months on the cash you laid out, but your goodwill is probably 50 or 100 times what you had as an opportunity cost. Kudos to you.

And my question is in your rating or reserving, approximately what do you think your underlying inflationary estimate is?

The answer is we don't -- we don't establish the inflation rate per se.

Generally in the back of your mind.

Depending on what it is, it's sort of a 6% medical number and sort of a 3% general inflation number when we are looking at mix of claims. But it depends on how long we hold it, it depends on the pad, it depends on the type of line of business so it widely varies did that's okay.

I just wanted to know -- I'll ask each management that because conditions are changing in a way we haven't seen in probably 50 or 70 years and one way or another there will be a surprise and an opportunity.

No question.

Thanks.

I'm showing no further questions in the queue.

Okay, thank you all very much. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.

Everyone have a great day.