W R Berkley Corp (WRB) 2010 Q4 法說會逐字稿

Good day and welcome to W.R. Berkley Corporation's fourth-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, believes, expects or estimates. We caution you that such forward-looking statements should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will in fact be achieved. Please refer to our annual report on Form 10-K for the year ended December 31, 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 new information, future events or otherwise.

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

Good evening. I wish I could tell you my prognostications for the quarter was totally accurate, but I can't. It actually looks like I would be in fact telling you how accurate I was, as we went into October and November and December popped that balloon quickly, when the world got more competitive and prices in fact came down as everyone rushed off to meet their budgets and shoot for volume. And, what looked like a quarter of some at least significant, or at least measurable price increases, that seem to be the start of the first two months of the quarter ended with very modest probably three-tenths of a percent decrease in pricing.

We were pretty pleased with our quarter, we continue investing in opportunities around the world and in the US, and I'll talk about all of the overview of what we're doing and opportunities we see, at the end. First, Rob will talk about our operating results.

Good evening, everyone. Market conditions remain challenging during the fourth quarter. Some of the areas of most significant competition during the period included professional liability, excess workers compensation and casualty facultative reinsurance. While the list goes on from there, these are some of the hot spots. However, it is not all doom and gloom. There is an ever-increasing number of encouraging signs that change for the industry is not far off. We continue to observe an inconsistent yet growing number of carriers adjusting their underwriting behaviors. However, the real potential leverage will come when the general industry-wide anxiety about inadequate rates converts into action, and it remains our belief that this point of inflexion is approaching.

Additionally, the fourth quarter provided further evidence of a strengthening US economy. This trend has been validated to improve other premiums, as well as the mid-term endorsements of additional units of exposure. These data points clearly indicate that the relatively recent pressure on our insured revenues and payrolls is in fact easing.

Net written premiums for the fourth quarter came in at $919 million. This is an increase of 11% over Q4 2009. The growth came predominately from our International and Specialty operations. International growth was mainly a result of a series of strategic decisions the Group made some time ago. Our investment in growing economies with sound underlying fundamentals in such regions as Australia-Asia, South America and the Nordic region of Europe are paying off. Additionally, our Lloyd Syndicate continues to have success in developing its presence in a precautious and thoughtful manner. While on the topic of International, I should mention we do not envision the Australian floods in January of this year to have a material impact on the Group.

Increased ratings amongst our Specialty companies were by a large spread across several startups in this segment. Much of this traction has occurred, due to our ability to provide holistic solutions to our insurers, as opposed to a mono line offering. Also, several of the operations are focused on industries that have not been as adversely impacted by recent economic woes. While clearly this level of growth might in-- it might, in isolation, raise a warning flag, we remain comfortable with the quality of both the risk selection as well as the pricing of the portfolio. As mentioned in the past, this confidence is achieved through the faith we have in our Management team, combined with our technical data and rigorous internal audit process.

The Group's price margin indicates that rates were down less than half of 1% in the quarter while maintaining a renewal retention approaching 80%. The combined ratio for the fourth quarter was at 92.6%. Our loss ratio was at 59.8% which includes one point to storms. Storm activity was impacted by an unusually-- an unusual hailstorm during the month of October in, of all places, Phoenix, Arizona. The expense ratio was at 34.3% which represents a modest improvement over the corresponding period last year. We would anticipate this improving trend to continue as our earned premium grows and, consequently, we are able to leverage the fixed expense base of our startup. Having said all this, we are not naive to the realities of the current situation. It is our belief the Company's full year 2010 accident year combined ratio is approximately 100%.

On to reserves. Maintaining reserve accuracy remains a top priority for the Group. We continue to believe that our appropriate level of caution in collecting loss is advisable. Our speculation over the past several quarters regarding a potential uptick in frequency would appear to be well placed. Additionally, inflation remains a wild card as to whether it will eventually return to historic levels.

The redundancies we have recognized over the past several years may suggest the Group has erred on the side of caution in selected loss pay. However, we continue to believe a belts and suspenders approach to managing the business is appropriate given the leverage that exists in some of the unknown areas. Undoubtedly, the market remains challenging. A combination of current rate levels, modest investment returns, [rapid] inflation and a shifting frequency trends has dramatically changed the landscape from what it was just a few years ago. However, these fundamentals have now become a reality that is driving industry participants to pause and ultimately, we believe, will change their behavior.

The potential [double] leverage of an improving US economy along with a hardening insurance market is not a possibility that should be casually overlooked. However, if our speculation as to a shift in the market conditions is wrong, the Company remains well-positioned to continue to deliver satisfactory returns going forward. Thank you.

Thanks, Rob. Gene is going to now go through the financials and then I'll tie it all together, hopefully.

Okay, thanks, Bill. Well, Rob's already covered the change in premiums, so I'll just mention a couple of-- a couple more numbers in that regard regarding our startup companies, which are the new units that we started since 2006. So, of the $91 million increase in overall premiums this quarter, $60 million or about two-thirds, was from these recently started companies. And, for all of 2010, these companies wrote $600 million, which is right at 16% of our total premiums.

With respect to our underwriting results, our overall combined ratio was 94.1% and all five of our business segments reported combined ratios under 100%. We had favorable reserve development of $55 million, or 5.6 loss ratio points in the quarter. That gives us favorable reserve development of $235 million for all of 2010, up from $191 million in 2009. Most of the favorable reserve development in the quarter and the full year was in the Specialty and Regional segments and it was primarily for the five preceding accident years, more than half of it being in the other liability business. As Rob said, on an accident year basis, that gives us a combined ratio of 100%, is that's an accident year loss ratio of 66% including two points for storms and an expense ratio of 34%.

Our net loss reserves and cash flow were both down modestly in the quarter and that's due in part to two reinsurance commutations that we've completed in the fourth quarter. These transactions resulted in a $79 million decrease in cash flow, a $60 million decrease in loss reserves, and an insignificant book gain. Cash flow before the commutation payments was running slightly ahead of net income at $139 million for the quarter. Net investment income was $131 million, down $8 million, or 5%, from the prior year quarter. The decrease was attributable to the arbitrage account which reported a profit of $3 million, down from $11 million a year ago. The average annualized yield on the rest of the portfolio was 4.1% and the average duration of the fixed income portfolio was 3.6 years at year end.

Unrealized investment gains were $516 million at year end, that's up from $338 million at the beginning of the year and, in addition, we reported realized gains of $34 million and income from investment funds of $5 million in the fourth quarter.

Foreign currency losses were $8 million in the quarter and, although that's not too significant, I thought I'd explain to you why we do see this type of activity from time to time. We generally match our foreign currency denominated assets and liabilities so FX gains and losses tend to offset one another. But, for financial statement purposes, there is an anomaly where FX gains and losses on investments are reported as unrealized gains and losses on the balance sheet, at least until those investments are sold. Whereas, FX gains and losses on liabilities are reported immediately on the income statement. So, in this quarter, we had an FX lost on our Australian liabilities as a result of the strengthening of the Australian dollar in this accounting treatment.

Stock repurchases were approximately equal to our net income again this quarter. We bought back 4.8 million shares in the quarter at an aggregate cost of $130 million, and we purchased $17 million for all of 2010, or 11% of our outstanding shares at the beginning of the year. That gives us a net income ROE of 14.1% for the quarter and 12.5% for the full year and an increase in our book value per share of 14.3% in 2010.

Thanks, Gene. Overall, we were pretty pleased with the quarter. I think that if you examine the details, we're probably more cautious in setting our reserve levels for the current accident year than some of our competitors. In part because we do believe the trend in frequency could adversely impact everyone's expectation for losses. And, we have a bit more concern about inflation on some of the longer tail lines of businesses. We look ahead. We do see opportunities to invest money in sort of off-center kinds of investment. Example would be municipal bonds that are backed by corporate securities, so we were able to buy, round numbers, $10 million of municipal's backed by a corporate credit. The corporate credit traded for the same maturity 150 over the comparable treasury. Because they were packaged as a municipal, we got the yields tax free and we got them at 450 basis points over in fact the comparable treasury yield. That was because nobody wanted to have anything that had the label of municipal on them. So, those kinds of opportunities exist and we continue to see them. We're willing to find and buy things that people think look ugly but when you delve through the appearance are much higher quality securities.

We continue to have a number of teams of people coming to talk to us, offering us opportunities. We look at them, we obviously have a larger share of the market place, covering lots of niches. So, there aren't as many things that are attractive but we still continue to meet a number of outstanding people and we're searching globally for those great teams of people where we think we can build franchise value. At this point in time, we believe those opportunities will continue and everything we see in the cycle are things are in fact beginning to change. There's no question about pricing, there is more discipline in lots and lots of areas. Not every place and we still, on occasion, lose business at huge discounts from what we think the adequate pricing is.

But, it's now unusual, as opposed to everyday occurrences. And, we think that most of the people we do business with the agents and brokers are searching for people who they know will be in business a year or two or three from now and that's a very important thing. So, our relationships our paying off. We continue to see opportunities and we would be surprised if the pricing changes do not continue in that three-tenths of a percent pricing decline doesn't turn into price increases. Obviously, the key element is how do we manage our business? And, we wouldn't be doing anything different if prices went down 3% this year, or up 3%, 5% or 7% or 10%. The difference is we'd probably be able to write more business if prices were higher. With that, John, I'd be happy to take people's questions.

(Operator Instructions) Okay and we'll take our first question coming from Ken Billingsley. Ken, please go ahead.

Hi, good afternoon, (inaudible) on the quarter.

Thank you.

One of the questions I just-- on the pricing that you were mentioning, I know it's hard to put a number on new business, but when you talked about the pricing is that just on renewal business or based on comparable policies that you would write?

Our pricing metrics attempt to look at new business and make-- and look at the comparable renewal business. So it's on all business across the board, new and renewal. It's not-- the answer is price measurement in this business is not as exact as you'd like it to be because terms and conditions vary slightly, coverages vary slightly, you may add a deductible, you may make slight changes. But to the best of our ability it includes new and renewal business aligned to be at the same level.

And in your experience then, would the renewal business be holding up little bit better based on your comments about brokers wanting to partner with someone that's going to be around and is it the new business that is a little bit more competitive?

According to our actuaries I it is virtually the same.

Virtually the same.

I would say in the marketplace though that people who shop every year are the price shoppers. I would probably say to you that the consistency of renewals that people have the vast majority of that business stays with you for an extended period of time. The business that moves around is moving from 1 company to the next company and it's always moving searching for price.

Very good. Just had one other question before I re-queue. Could you just-- on the Reinsurance business, can you talk about you're going forward with there being capital in the marketplace if economy exposure units start to increase? If you have the capital on the primary side, are you going to see that maybe the Reinsurance side of the business may not do as well in a hardening market if it's a slow economic recovery? Could you-- do you have any comments on that side?

I'm not sure I understand what your question is, could you try and--?

If the economy rebounds and your exposure units increase and you have the opportunity to write more business, will primary companies continue to hold on to more of their business as opposed to utilizing reinsurers going forward? And will that impact your Reinsurance business?

Our Reinsurance business is not really across the board Reinsurance business. We do business with smaller specialized companies where we have relationships and by and large I don't think it will particularly impact us as much. We're particularly well capital-- I think the most interesting thing that's going to happen is in fact, smaller high-quality companies are going to need reinsurance more as the market changes, and I think it probably will give us the kind of customers we do business with really a competitive advantage. I would add, I think across the board for the very large reinsurers, your statement is likely to be more true.

All right, but you think your focus is more on some of the smaller insurers that will not have as much access to capital?

Yes, I mean I think that our average reinsurer is a company with less than $1 billion of surplus and is a company that buys reinsurance because it's a necessary part of their financial strategy.

And any comments on why there's been on an [LTN] basis that the premiums have declined there? Is it a focus of the pricing or is it--?

Talking about our Reinsurance business?

Yes, sir.

The reason why the premiums have declined is because-- well really twofold. One quite frankly the Reinsurance market believe it or not has actually become more competitive over the last 12 months and so consequentially, we're willing to walk away from business if we think that we are not going to get an accurate rate for our capacity. And secondly, obviously there are many seasoned companies out there that are looking for ways to bolster their top line and one of the easy ways to do that is to increase their retention.

I would add a third piece, and that is we really enforced our view that Reinsurance is a partnership venture and that really means a number of very large companies who don't view the insurance in that way don't fit as places where we should use our capital.

Well again congratulations on the quarter.

Thanks.

Okay, thank you. And we'll take our next question coming from Josh Shanker.

Good afternoon, everyone.

Hello, Josh.

Bill, I know that you're a pretty smart buyer in Reinsurance and you're also a player in the Australian market, so given that you maybe don't have a dog in that fight maybe you can tell us what's going on with the losses there in the first quarter?

Well first I should say that my lawyer's looking at me carefully now, Josh. First, we do not have big losses, we're not a property writer, and we think we have quite modest losses from the floods and we expect at least in the ordinary course to have a reasonably modest losses from the cyclone although obviously that's an event we have not heard any information about. But as a matter of what business we do, we're not a property writer. And the reason we're not a property writer is because lots of parts of the world have extremely low prices for property exposures. And the reason for that is because the exposure inconsistency of the loss for US wind and English European wind was such that companies try to diversify their capital exposures so they try to write global exposures and the prices for those global exposures have become very low.

So when we look and enter the Australian market, everybody thought that kind of limits we were prepared and could afford to put down made no sense because people bought wind protection, cat protection of $1 billion, $2 billion, $3 billion, $5 billion of protection, and we look at our Company and we're talking about putting maybe a $10 million line down, maybe a $20 million line, it just doesn't make any sense in that marketplace. So there are lots of places in the world, Australia being one, where the scale of the property Reinsurance market for casualties was huge, the prices were relatively low and the requirements to play were very very high. We would expect the losses to be quite substantial and I think it's going to be a very significant loss.

How much it'll change the market, I think the floods alone would've had an impact on the market but not be what I call dramatically market changing. I think that the cyclone in addition could have real adverse impact (inaudible) and it could really make quite a difference. But the magnitude of the reinsured losses is certainly going to be in the multi billions of dollars.

How many events are we talking about here?

I'm not an expert at defining events, but I think it would have to be at least 2.

Okay, thank you very much.

Yes, sir.

Okay, thank you. And we'll take our next question coming from Vinay Misquith. Please go ahead, Vinay.

Hi, good evening. The accident year loss ratio has stayed very favorable for the last 3 years and it's been relatively flat. Should we start to see an uptick in that for next year, that's for 2011, since pricing has been flat? And your comments on frequency and severity trends.

First, we didn't say anything about severity trends, we said something about frequency trends, at least I listen to what I say. The fact is that our accident year loss ratio is conservative compared to all of my competitors. In fact I actually must say we really look like we're pretty crummy underwriters compared to everyone we compete with, so I'm not sure I would think it would get significantly worse because I think we've tried to take into consideration those trends, which means we're always looking ahead. If we were to see severe inflation start to develop, yes you'd be correct. But because of how we have our loss picks, which is a waterfall process, we always have somewhat of a cushion because going back 4 or 5 years, we were more cautious than we thought we were.

And that caution, even though we tried to wean it out as we see those years develop, it takes time because you don't want to be so aggressive that you overstep. We've done that. The only advantage of being old is you've seen it happen before, and I can promise you it's probably the only advantage. So we're not going to make that mistake again. So I can't tell you that our accident year loss ratio will get worse, I think we have been a little more cautious than we might have been. So I wouldn't reach that conclusion, I wouldn't discount it either. It's not an unreasonable thing to think but we've had a lot of favorable development and my guess is that those past lost year picks may have-- may still result in the more recent years being more cautious than they should have been.

Okay that's great. You mentioned about frequency trends, if you could just elaborate on that, that'd be helpful. Thank you.

All right, I'm going to let Rob talk about that. Go ahead, Rob.

Yes, without getting into too much detail we are seeing early signs of frequency having, in all likelihood, bottomed out for the casualty line. I'm not talking about comp, I'm not talking about property, I'm talking purely certain casualty lines we're seeing once again frequency it would appear that bottomed out and it's starting to move up. Although while it's not racing up, it is certainly a shift in direction from what we've seen over the past several years.

I think that goes with the prior question also. I think that we weren't as optimistic about declining frequency as the number of our competitors and they proved to be right and we were too cautious. We now see those things changing and again we may be a little ahead of the curve but there's no question directionally about that change.

So fair enough. And one last question if I may, on the expense ratio this year that was 24% roughly, do you think with higher earned premiums next year that it could go to roughly the 33% that it was in 2009?

The answer is we can't give you a single number just like we can't tell you what the number is. We've always had the view that having the best people in this business gives you a huge competitive advantage. And if in any year or 2 year expense ratio is out of line we were prepared to live with that. I think as the cycle turns the expense ratio will go down dramatically because a big part of that [cushion] expense ratio is additional operating units that haven't fully utilized and achieved scale with the number of people we have. We think with the numbers of people we have we can really grow dramatically without any really consequential increase in our overhead.

I would hesitate to choose a number at this point. I would-- I'll feel a lot better after I have another quarter or 6 months under our belts. This is that moment where things are starting to fluctuate and you're starting to see some of those changes. But the changes aren't here, I was early in my prediction. My facts were all right, but the people's state of mind and my facts weren't aligned.

Okay thank you.

Yes, sir.

Thank you. And we'll take our next question coming from Jay Cohen. Jay, please go ahead.

Thank you. Most of my questions were answered. I have 2 other ones. The first is the Alternative Markets business, the premium growth jumps around quite a bit quarter to quarter. Can you talk a little bit about what's happened there and what drove the growth in this particular quarter?

Well, there's some things that are happening there, a couple of different things. There's some accounting things and then there's some business things. So I'm going to let Rob talk about the business things and then Gene will talk about some of the accounting things, and then I'll probably try to screw things up totally. Go ahead, Rob.

Hi, Jay. I think the simple answer to your question is that the growth in the quarter was predominately coming out of our [AMH] business and that was really the major driver in that segment.

Yes and the only thing I would add on the accounting change, Jay, if you're looking at the net written you're going to see the growth that Rob's talking about and it's-- and where it came from. It looks to be a little bit higher on a gross basis and that's because, I think we may have talked about this before, we write this-- we service this assigned risk plan business as part of the-- the way that's done is you actually put it on your paper and then reinsure it back to these [NTCI] pools. So it goes in and out on the gross basis. And we had been writing some of that business on Regional paper and it was in-- so some of it was in the Regional segment. We've been moving it over to the Alternative Market segment because that's where the servicing is done. So you're seeing some of that business move out of the Regional segment into the Alternative Market segment, but it's not business that we keep net.

So there's a lot of noise because of this change in where we write the business but in fact none of that sticks with us, it's all business for assigned risk plans that come in and go out, comes in on a gross basis and it goes out. And then the real growth that you're seeing is the accident help business, which is mainly stop loss business and it's in the AMH business.

And just to follow up on that. As I look at 2011, presuming that the AMH business has gained a little bit of traction should we see kind of another up year, not wanting any details as far as how much up, but would you expect that premium to be up in 2011?

Jay, I think obviously our expectations are that that business is going to continue to grow and develop over a period of time. There are no guarantees as to what the market is going to be tomorrow assuming that the market continues to cooperate we will try and find ways to grow that business.

We've gotten some terrific new people there, and we think that's a good opportunity for us.

Great. The second question was on the exposure growth. You're the I guess the third Company I've heard that suggested things look like they're bottoming and beginning to improve from an exposure standpoint. And I guess my question is, is that good? If the price per unit of risk is inadequate or hasn't budged much, does growing exposures help or is it in fact possibly a negative?

I think the answer is that if you're getting an adequate rate and you're making a decent margin exposure growth and assuming you are actually charging for that additional exposure growth, it's a good thing. If you're underpricing the business and not making a reasonable margin and you think you're going to make it up on volume, you're probably going to be disappointed with the outcome.

Got it. Okay, no I see where you're coming from. Very good, thank you.

Okay, thank you. And we'll take our next question from Meyer Shields. Please go ahead.

Thanks. Good afternoon, everybody.

Good afternoon.

Bill, you mentioned-- I think you've said that for years that you view Reinsurance as a partnership so you don't shop around for cheaper reinsurance.

No I said-- no, we have partners and we have shoppers. So there's a big chunk of our core business where we look for partnerships for long term. Then there's opportunistic things that you buy because the market is soft. So there's layers. I think when we sell Reinsurance we're interested in finding the partnership relationships not the opportunistic ones.

Okay, so that-- yes, that makes more sense. When you talk about how it's becoming less common to lose business, does that have any commodity issue implications going forward?

Does that have any, I'm sorry?

Commodity issue implications. I know in personal auto there is this expectation that business will season favorably, I don't know if that-- if we can extrapolate from that to your casualty lines?

I think that by and large stability in the business improves the outcome, because you understand the business you're writing, you understand what it is. And experience with customers lets you better tailor the product to especially through the specialty area where you better understand the exposures. So I would say that longer relationships result in better results. So the answer is in the long run the higher the retention the better your combined ratio should be, or the better your loss ratio should be.

Okay. And Gene, if I can just throw 1 question your way. Do I understand the effect impact of saying that there's a $0.03 hit to-- on an accounting basis, but not on an economic basis?

Yes, right. So that $0.03, $8 million, went to the income statement and we do have assets in Australian dollars that appreciated as a result of the strengthening of the Australian dollar and that went through equity to unrealized gains.

In essence, unrealized gains and losses offset the loss of the $0.03, and if it went the other way, we'd show the $0.03 gain and we'd have an unrealized loss. But accounting rules are such that they don't always enhance one's ability to understand what's going on in the business. This is the case here. We match our currency for the most part. In the cheapest way we can which is in the investment portfolio. So if we have $10 million of liability and ex currency, we'll try to have $10 million of assets invested in that currency. The consequence however from a financial point of view is that it comes through our income statement if it's up or down and it goes into our balance sheet going the other way, so it's not matched in how it appears.

Okay.Thanks, that's very hopeful.

Thank you. And our next question is coming from Bob Farnam. Bob, please go ahead.

Hi, thanks, good evening. The regional expense ratio went up a bit like about a point and I'm wondering if that's related to the shift in the assigned risk business from there to the Alternative Markets?

No.

I think it's just that earned premiums were done, yes.

Okay. And maybe a question for Rob, with the excess workers comp competition being up, is that competition from existing carriers or is that from new that are coming into that market?

Predominantly from existing carriers but the greatest level of competition is coming from an isolated number of carriers some that have been there in the market place for many years and others who have entered more recently and it would not appear as though they have the command of the subject matter that they might.

You have to understand about this business because it's a long tail, there's only one critical assumption here, and that critical assumption is how you want to assume your interest rates. So you can-- you make optimistic assumptions about returns and you can justify almost any price at all. We think that that's always a danger and it's-- this is a line of business that many companies have come and gone.

Okay, very good, thank you.

Okay, thank you, sir. And our next question is coming from Michael Nannizzi. Michael, please go ahead.

Thank you, thanks for taking my question. Just a question about the new business, could you talk a little bit about whether or not that increase is coming from either more exposures on existing policies, new policies to customers that may be just had only 1 or 2 coverage types or how much is completely new business? I just have 1 follow up, thank you.

Rob?

Well it's a mix of both. Many of the startups they do not have a large portfolio to begin with even though it's building. So it's really a combination of all of the categories. It is our efforts to offer, as I suggested earlier, a multi-line solution as opposed to a mono line solution to some of these customers. In addition to that, it certainly as these businesses getting more traction, reforging those relationships that they may have had at prior organizations and there certainly is a renewal for as many of these companies at this stage that continues to build.

Got it. And I mean when you think about the producers that are producing that business, relative to their old books wherever they were before, is that new business to them or is it really kind of as you say like new business to you just because they're resetting those relationships.

I think typically what it is a group of people that have a long-standing relationships with both insurers as well as the distribution system and they have a following if you like. And some percentage of the business that they may have had at a prior employer would seek out the opportunity of doing business with them again merely because it still is somewhat of a people business and relationships make a difference.

Got it, great, thank you. And then I just had 1 question on investment income and the arbitrage account. Where would you like to see that, those accounts or that segment of the portfolio generate returns and where do you think that can get and do expect that you'll continue to keep your allocation to that business in this environment?

The answer is we've had a consistent good return in that business based on our investable assets. There's no question in the past couple of years there's been more volatility. When I talked to the guy who runs it for us, he's-- and I complained to him about more volatility, he said to me well it's not fair for me to say. And then he said the problem is you all extrapolated when I have a good month (inaudible) you then tell me I should make ex every month, but if you look at what I do over a year it's pretty consistent. And he's right. He's met the bogey we generally set, which is he only gets rewarded if he gets based on how much we do over the risk free rate of return plus a bogey. So we've been able to do that. It's a very liquid portfolio. We have lots of liquidity.

I think that if we had it just an overwhelming number of opportunities that gave us great returns, we would probably face the decision of how are we doing there. Right now, I can't find returns that give us anything approaching what we get in the arbitrage account. So from our point of view, we've got 6%, 7%, 8% a year over a long time and there were years where we got 15%, 18%, 20% a year. So for us it's a good return, we're happy with what they do. We've known them, they've been with us for more than 20 years. We value that consistency, that relationship and how they do. So it's not something we have to worry about now because I'm not overwhelmed with wonderful investment opportunities, Michael.

Fair enough, fair enough. Thanks so much, Bill. And then just 1 last one if I can just-- broader in the lines that you, and I think, Rob, you had mentioned lines that are very competitive and others that are maybe more attractive, in the competitive ones, what has to happen for pricing to improve there? Is it lost trend or capital or is it just that some people have to decide at some point that they shouldn't be writing the business or they can't really write the business? Like how-- what's the path in those overly competitive markets to get to what you would consider to be adequate pricing? And thank you so much for answering all my questions.

I will let him answer first and then I'll add my comments.

Okay.

I think the answer is what needs to occur is losses, if the losses from poor decisions that have been made are going to have to come through and whether the actually are fully experienced or the actuarial analysis just points in the direction of reality, once that comes into focus people will become scared and their behavior will change. Now whether they will elect to take a different approach in how they price and select risk or whether they will choose to withdraw all together, my ability to predict is no better than anyone else's. Oftentimes it depends how deep a hole they have dug themselves in. If it's deep enough, they may throw their hands up and run away from it all together. If they've just injured themselves modestly, they may decide to try and find ways to adjust and carry on.

I think that one of the things, Michael, that everyone has to recognize that those fundamental things that change business behavior are fear and greed. And pricing models change when fear overcomes greed. Fear overcomes greed is the point in time where you can't hide in this case from reality. So be it pricing trends, be it paid losses, be it someone going bankrupt, when Reliance and Frontier went bankrupt, what everyone else who was competing with them said is there could be me. And everyone decided they better change their behavior or there would be them. And I think that's what you are really talking about.

So my guess is we've got a few people out there, some of them of some size that are way too aggressive. And then there's a lot of companies who are doing okay, whether they're doing as well as they say or not, they're not going to go out of business but the management is going to say it's not worth it anymore, I'm going to have to do something different. But in the meantime you've got to get to that point where you're afraid your results will be so bad that that overcomes your desire just to grow and write more business because the risk is too much. So whether it's declining surplus, operating losses, a lack of investment opportunities or whatever, that fear has to enter the psyche of the management of the enterprise.

Got it. Great, thank you so much for the answers.

Thank you. And our next question is coming from Amit Kumar. Amit, please go ahead.

Thanks and good afternoon. I guess just 2 quick follow-up questions from previous comments. You talked about Australia, can you sort of talk about the other hot spot in terms of Egypt and Middle East? I mean it's too early, but does this sort of alter buyer behavior and does this even end up becoming a big deal for the market place?

Well it's rare that I hesitate to talk about almost anything. I think that it's very hard to say what this all means. I think that there are some really fine companies and businesses in that whole territory, I think the lack of stability and the uncertainty is very great. I just don't think it's-- and we, I certainly-- I'm in a position to foretell what's going to happen. It's a part of the world that's undergoing change and I think it's hard to predict where and how that change comes out and we have to sit back and from our point of view it's sort of sit and wait and see. And I think of-- in all likelihood, things will get more difficult before they get better however.

And do you have any exposure through Lloyd's to Middle East?

I'm sure we have some, but we don't think there'd be anything of-- nothing consequential.

Okay, that's helpful. And just 1 other question. Going back to the growth in your International book, obviously we've seen a meaningful double-digit growth over the past 3 or 4 quarters and I know you mentioned Australia and Nordic regions and South America, does that growth sort of taper off as we head further into 2011, 2012, or do you think that it's such a big enough market that growth can be sustained going forward?

I think it is unlikely that the growth rate that we have seen in this quarter will continue on for an extended period of time. Having said that obviously when you're operating in economies that on their own have a great deal of momentum you benefit from participating.

I think you also have to remember when you're small to start with, you don't have to add a lot of business to have a significant percentage growth. So those businesses aren't giant businesses. And while in some markets that they're significant for the market place overall, when examining the marketplace we're not that large a participant.

Okay, that's very helpful. And 1 quick question if I may. Just on your comment of the buyback, I think you mentioned the buyback equal to the income in the quarter. Just based on your comments regarding the pricing perhaps getting modestly better than what it was previously, do you think it changes your view on capital management going forward or it sort of stays the same in the near future?

Well what I want to be sure is that we don't get short of capital. And the one thing we've seen in the past 2 years is that capital markets aren't as predictable as they were, as we thought they were at least a couple of years ago. So while we would like to buy back stock and buy back stock as aggressively as we can, we want to be sure we maintain enough powder that we can grow for a year or 18 months or 2 years without the need to raise additional capital. So we're not quite as aggressive as we might be.

Historically, when the cycle turns you've always been able to raise capital at attractive prices. So on a historic basis, I probably should be more aggressive in buying back stock. But I've been in this business a long time and I've never seen what happened in capital markets in the past couple of years. So I don't want to base my life on those long-term histories and we've made a commitment to our marketplace that when business is well priced, we will never turn it down. So we're going to continue to use whatever we earn to buy back stock and maintain our capital ratios that we have lots of flexibility and we want to be sure that's the case. And that may be slightly more cautious than I should be, but when you're my age and you see things you never saw before, you at least have a good enough memory to last you for a couple of years.

Got it, that's helpful. Thanks so much.

Thank you.

Thank you. And we'll take our next question from [Scott Frost]. Scott, go ahead.

Just to clarify I want to make sure I heard correctly on Australia exposure, are you saying that you expect the cyclone in the Aussie coupled with the previous flooding could have a real adverse impact on the industry, but due to your business profile, neither is expected to affect your results in 2011, is that accurate?

I said it-- what I said is I don't think it'll have a material impact on our results.

Okay. All right, thank you.

Thank you. And our next question is from Brian Meredith. Brian, please go ahead.

Good evening. Most of my questions have been asked, but just wanted to follow up 1 quickly. Bill, talking about the whole capital management situation and then trying to be conservative with leverage, typically you said the high end debt to cap 35%, how close do you really want to get to that, I think you're around 32% right now?

We're at 32% including preferred.

Got you.

I think that it would be unusual for us to take on any more debt than we have now. Now unusual is a funny word because we're in an environment that things happen. I think that our capital account is better than most people thought at year end and I would expect we'll continue to have some positive surprises for people. We think our balance sheet is conservative. But that being said, I don't think we're going to push that edge any further unless some unusual thing happens that would cause us to reconsider. I think we've got about as much leverage as we're planning to have at the moment.

Great, thank you.

Thank you. And we'll take our next question from Michael Grasher. Michael, please go ahead.

Thank you, good evening. Congratulation on your quarter. Follow up from previous questions just on the improving exposure units, can you highlight particular lines of business that that's occurring in or that may be occurring in? And then also if it's related to any particular region of the country?

It really isn't Michael. It's sort of-- I think that the point we were trying to make is unlike prior periods, the general economy's improvement is resulting in positive ordered premiums, is resulting in additional premiums [for policy] and new business. So it's not any one place here or there, it's not anything that's dramatic, it's just generally across the board. And by the way, additional units of exposure it's a small number, it's between 1% and 2%, so it's not something that's going to knock your socks off. I wish it would, but it isn't.

Understood, thank you.

Thank you. And our next question is from Jay Cohen. Jay, go ahead.

Just one quick follow up. When you talked about the higher frequency that you are seeing, or I shouldn't say higher, the stabilization in frequency, does that make you rethink the loss picks or did you already account for that in your loss picks anyway so it doesn't necessarily make you change those picks?

No, I think as I said we're already took-- take into consideration the trend of flattening our increasing loss picks, it's already built in. That probably is one of the reasons we have higher accident year loss ratios because we've already anticipated that.

Got it. Thanks.

Thank you. And our next question is from Vinay Misquith. Vinay, please go ahead.

Hi, just a follow up on a numbers question. Just wondering what the dollar amount of your net investment income from fixed maturity securities was this quarter?

Just 1 second, somebody is going to look into the sheet of paper because I don't have all that off the top of my head. I think it was $131 million.

For just fixed income alone is $128 million.

Right, and that's--.

Equity.

Just curious why that increased so dramatically from last quarter when I think it was $123 million?

Yes, there is an increase there I mean the-- I think the average, I'd have to double check, you may want to give me a call I get back to you, it may have to do with reallocation of the investment to some extent. But I don't have that right offhand.

Okay, thank you.

Thank you. And we have 1 final question at the moment coming from Meyer Shields. Please go ahead.

Thanks. I was just hoping to throw in a couple questions on the segments. I was wondering whether Gene could break down the $65 million in reserve element?

Yes, we basically do that, if you want those details you can give Gene a buzz either later tonight or in the morning.

Okay, I can do that. Is there any significance to the fact that we're seeing a divergence of (inaudible) by segments more than we've seen in the past few quarters?

I think more than anything else it just happens to be where the development happens to come. It's not the underlying accident year loss ratios ex storms so are much more stable that what you'd see on a reported basis.

Okay, perfect. Thanks so much.

Okay and at the moment, I'm showing no further questions.

Okay, thank you all very much, I appreciate you spending some of your evening time listening. I know you'll be busy tomorrow, so have a good evening. Thank you.

Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.