W R Berkley Corp (WRB) 2011 Q2 法說會逐字稿

Good day, and welcome to W.R. Berkley Corporation's second quarter 2011 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 the forward looking words including without limitation, believe, expects, 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 30, 2010, 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 it's 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.

Thank you. Well, good morning, everyone. I was pleased with our quarter. I think that all of our expectations for the turn and the cycle and for our own operations are coming about. Certainly things are happening a bit slower than we anticipated, and we're pretty excited about where things are going. I'm going to let Rob talk about our operations first, and then Gene will talk about our finances and I'll be then talking about overall the business and where we stand. With that, Robert, please.

Thank you. Good morning, everyone. Cash fee activity during the second quarter, following on the heels of the events of the first quarter, has served as a clear reminder of the values that the insurance industry brings to society. Additionally, the cat activity over the past 6 months has provided a strong wake-up call to the industry for the need to appropriately price for the infrequent event. The recent natural disasters have compounded the pressure that the industry has already been facing. This existing pressure stems from modest investment income, evidence of increasing frequency trend and an overall lack of underwriting discipline that has existed for the past several years.

The greatest level of competition continues to be found in accounts over $100,000. Additionally, excess casualty lines, in particular, excess Workers' Compensation, remains under significant pressure. These longer tail lines of business are typically slower to turn given the duration of the liability, and consequently it takes more time for underwriting missteps to be recognized. While industry conditions remain challenging, and certainly by no means are we in the throes of a hard market, there is a growing amount of evidence that would suggest we are in the early stages of a hardening market.

Much of this change is coming about as many standard markets, in particular national carriers, are actively adjusting their appetite as they feel the pain resulting from overreaching during the past several underwriting years. The greatest supporting evidence of this change is the return of pricing leverage without the sacrificing of a renewal retention. Additionally, our specialty companies are beginning to see some accounts they have not seen in years. Furthermore, in certain regions of the country, we are observing an increase in population in several assigned risk plans. Historically, this has been an early yet accurate sign of a hardening market.

The modestly improving US economy is also providing assistance due to fewer insureds going out of business, as well as a continued strengthening in auto premiums. Net written premium for the quarter was $1.06 billion. This represents an increase of 10% over the second quarter of 2010. While the main drivers of this growth continue to come from our younger operations, we are experiencing improving contributions from our more mature companies as the market begins to turn. The Specialty and International segments again led the growth as we continued to benefit from those domestic industries that have not been impacted by the slowdown in the general US economy, as well as our presence in the international markets, whose economies continue to prosper. The group's price monitoring report for the quarter indicated an improvement over the corresponding period in 2010 of approximately 2%. Though 2% may not be overly exciting for some, this is in fact the second quarter in a row that we've achieved an aggregate rate increase. Additionally, this represents more than twice the level of rate increase we achieved in Q1 2011.

Our renewal retentions remained in the 80s, consequently proving evidence of pricing leverage rather than adverse selection. The loss ratio for the quarter was a 66.3, which includes 6.2 points of storms. The unusually high level of storms contributed an additional $35 million of losses beyond what we would normally anticipate in the second quarter. The lion's share of the loss activity was in our Regional segment, which stemmed from PCS 46 in Alabama and PCS 48 in Missouri. Our expense ratio for the period was a 34.8. This result is generally in line with our expectations given the investments we have made in starting new operations, as well as where we are in the cycle. We anticipate a gradual improvement in the group's expense ratio as our earned premium continues to build, consequently enabling us to further leverage our existing platform.

All-in we delivered a combined ratio of a 101.1 for the second quarter. While this result is below our goal, we believe it is tolerable in light of the level of catastrophes during the period. Having said this, if you peel a few layers back and adjust for a normal level of cat activity, as well as back out our reserve takedowns, our current accident year combined ratio remains at approximately 99.

Our balance sheet remains robust and we continue to be convinced that the strength of our aggregate loss reserves are comfortably sufficient to allow us to manage our ways through even an unforeseen event. Overall, there is growing evidence that the moment we have been waiting for is approaching. Though the market does not turn overnight, there are ever-growing number of signs that we are headed towards an improved environment. Thank you.

Okay, Gene, do you want to talk about the numbers a bit, please?

Thank you. I'll start with just a few more details on those catastrophe losses. As Rob said, the second quarter catastrophe losses were $63 million, or 6.2 loss ratio points. That represents our net loss after reinsurance recoveries and reinstatement premiums and compares with $30 million, or 3.1 loss ratio points, in the second quarter of 2010. Losses from the tornadoes centered in Alabama and Missouri were $36 million in the aggregate, and losses from 10 smaller but still significant tornadoes and hail storms in the quarter were another $27 million. We had originally estimated our losses could be $65 million for April and May, however our actual losses turned out to be slightly less than that estimate and fortunately the month of June was relatively benign compared with the first 2 months of the quarter. 4 of our business segments reported cat losses in the quarter, $44 million for Regional, $9 million for Specialty, $7 million for Reinsurance, and $3 million for International.

Partially offsetting the catastrophe losses was favorable reserve development of $35 million, or 3.5 loss ratio points in the quarter. The favorable reserve development was primarily related to the Specialty, Reinsurance, and Regional segments, and emanated from accident years 2005 through 2009. Our underlying loss ratio, excluding catastrophes and storms, was 63.5 points, down 0.5 point from the prior year. The Specialty and International accident year loss ratios before catastrophes were about 2 points lower due to the combined impact of rate increases and changes in the mix of business, and that was partially offset by a 1- to 2-point increase in the initial loss [picks] for accident year 2011 for the other business segments.

Our second quarter expense ratio was 34.8, that's up 0.6 of a point from the second quarter of 2010, and 0.3 of a point from the first quarter of this year. There are 2 reasons for that. First, written premiums were up 10% in the quarter, and only the part of the cost related to that increase goes into deferred acquisition cost; and second, we accrued higher profit commission for the Reinsurance segment as a result of favorable reserve trends. That gives us a combined ratio, including the impact of cat and reserve releases of 101.1 for the quarter, compared to 94.4 in last year's second quarter. Nonetheless, our paid loss ratio decreased to 59.6%, down from 64% a year ago, and our net loss reserves increased by $74 million. As a result, operating cash flow was up 25% to $161 million.

I have just one other comment to add to Rob's remarks on the premium growth, and that's with respect to the Alternative Market segment You'll see that the Alternative Market segment reported a 22% increase in gross premiums and a 4% increase in net premiums. We talked about this last quarter. That again is due to the increase in premiums on assigned risk plans that we manage for a number of states, and that business is 100% seeded to the respective assigned risk pools with no net retention for us.

Net investment income was $149 million, up 15% from $130 million in the prior-year quarter. The increase was attributable to higher income from investment funds and from merger arbitrized trading. Income from investment funds was $17 million, compared to $1.5 million a year ago, due to strong results for both energy and real estate-related funds, and merger arbitrage income was $4 million compared to $1 million a year ago. The overall annualized yield on the portfolio was 4.4%, up 50 basis points from last year's second quarter, and that represents an annualized yield of 4.1% for the core portfolio, 3.9% for the arbitrage account, and 13% for investment funds.

We also reported realized gains from the sale of investments of $23 in the quarter, and at June 30, our unrealized investment gains before tax were $600 million, and the average duration of our fixed-income portfolio was 3.5 years, down from 3.6 years at the beginning of the quarter. Finally our net income was $83 million for the quarter, which is an annualized return on equity of 9%, and after taking into consideration the repurchase of 1.1 million shares of our stock, our book value was $27.77 at June 30, up 6% from the beginning of the year.

Thank you, Gene. So I'm quite pleased with where things are going. As I'm sure many of you recall, I expected the cycle to start to turn in the fourth quarter of last year, in fact, pricing didn't really change until the first quarter of this year. It's continuing to improve, although at a somewhat slower rate. Part of that slower rate of improvement comes from this slow economic activity and the lack of the robust economic improvement. We still expect 5%-plus rate improvement year-over-year by the fourth quarter.

The one negative is you're also seeing this loss cost development, which has certainly gone from where it's been totally benign where you notice the trend is changing. It's not that we're seeing explosive trends, but it's now a noticeable trend in the wrong direction. So if I were to choose a number it might be 2% or 3% at the moment, but the signs of that trend cause you to pay attention. It's one of the things that we've tried to take into consideration when we're establishing our reserves, and looking at the adequacy of them to be sure that we reflect those trends and maintain reserves that assume those things continue. The one thing, a long-term benefit of being in the industry has gained for our Company is that you have to always try and look ahead for these negative things, because they always appear when you least expect them.

Our businesses are gaining traction. People are thinking about why they buy insurance and who's going to be there. People are beginning to recognize expertise is really important. People are concerned about financial strength, stability. People are concerned that you have a consistent approach. And brokers and agents are conscious of the fact that they need a ready market. And as people start to withdraw here and there, they step back and say, who's going to be around? I don't serve my customer well if I have no one who wants to provide them coverage. And those thoughts are beginning to enter people's minds. It isn't a trend. It isn't where everyone is worried, but there are a number of places where people are asking those kinds of questions. And there are a number of people who are still searching for price, especially in large-risks, but as many of you remember, we've lost most of our large-risks a long time ago, so it doesn't affect us much, but in large-risks, it's still a very competitive world.

I think that our International business is doing especially well. We're quite pleased with our ability to seek out opportunities, and we continue to think that there will be more opportunities that we'll be able to find in that area. The most difficult part of our business, the moment the most competitive has been our facultative business, where the people just don't want to pay an appropriate price and we're really pleased in our fact people have been disciplined, and we're perfectly happy to provide our expertise, but only if we think we can make money. Some people value that and are prepared to pay a fair price, but we can't offer our expertise and our capital without it, and our fact markets have suffered in this market, especially, and that's one of the reasons our Reinsurance area volume is down substantially.

From looking at the rest of the world from our perspective, we think that we haven't gotten to the hurricane season. A tough hurricane season can clearly have a real impact on a lot of people who may not have the ability to buy another reinstatement, who may not, in fact, have the capacity to meet their liabilities. So we're here, we're well-positioned. We think the world is playing out pretty much as we thought, although at a slower pace, and we're starting to get the traction that we expected. So with that, [Operator], I'm happy to take questions.

(Operator Instructions)

Michael Nannizzi from Goldman Sachs.

Just, Gene, I had one quick question if I could. On the development, it sounds like that would be about 3.5 points, but my math would get that to about 98.3 on an ex-cat ex-development combined. Is that right, or am I doing the math wrong?

You're talking about combined ratio for the quarter?

Yes.

Yes, about 98.5, exactly.

So it is 98.5, okay, got it. Just one question Bill and Rob, if I could on --

Wait a minute.

The combined ratio without the benefit of reserve releases and without the cost of catastrophe losses is around 98.5, 99.

Okay, 98.5, 99 okay. And then just one question on International, if I could, for Bill or Rob. What type of insurance is driving that growth, and is it these newer ventures primarily just further coming online and is there an area or, without obviously giving away too much, but is there an area you are focused on that you feel is continuing to allow tailwinds to grow more.

Rob will give you the specifics, but I'm going to talk in the broader sense, and part of it is the general economic environment. So go ahead.

Well, I think it's, what was just suggested a moment ago, it's the economies that we operate in outside of the United States that enjoy the most momentum. And it's predominantly focused around commercial lines, and if you look at where we do things outside of the United States and you look at what economies are prospering, you're going to see this. So whether it be Canada or Brazil or Australia or parts of Asia, those are places where we are benefiting from the macro underlying economy, and our insureds are doing well and the economies are growing, so we are able to grow along with them.

Our operations in Europe and specifically the UK, as far as they have felt a little bit more of a headwind with the exception of parts of Europe that they serve, such as a market like Norway, which, because of their natural resources, continues to boom. Then, of course, our Lloyd's operation is doing well. Part that have has to do that it's still getting traction because it's relatively young, and part of that has to do with the lines of business [out of office].

So is that -- you're about 15% to 20% of premiums there on that line. Do you feel like that's a number that you could see grow? Would you want to see that get 20% to 25%, 30%. And second, real quick, are all those risks written outside of the US on risks that are also out? So written within subs outside of the US on risks that are non-US?

Yes. Yes, they are. There may be 1 off that doesn't, but in principle, some of our business at Lloyd's is written -- writes US business but all the rest is outside the US. Then I think that -- I would expect that our US business, which is where we've added many of our new specialty units, will start to grow. Therefore, while the International business will probably be somewhat of an increasing portion of our business, it won't grow to be as much of an increase as you might think, because we would expect our domestic business will start to grow a lot more rapidly. So I would be surprised if it got to be 20%.

We have said we would be really happy if our International business represented 20% of our overall, but I think that in the next couple of years, we think our US business is most likely to grow substantially. So our international business is not likely to be a huge increase in its proportion.

Keith Walsh with Citi.

Just first for Rob, in your commentary you mentioned you're getting price without sacrificing retention, I believe, and it seems new business is very strong. Maybe if you could talk about how the hit rate on quoting a business has trended over the last several quarters, and then I've got a follow-up.

I didn't mean to suggest to you that new business is particularly strong. I was suggesting that our renewal retention is particularly strong even though we're achieving rates. The growth that we're seeing as a group in 10%, that is pretty concentrated amongst certain operating units that I tried to at least suggest with some of our newer companies in the Specialty segment, as well as outside of the United States.

So I don't think that newer business is plentiful across the board. I think, once again, I think it's pretty concentrated.

Okay, very helpful. And then, Bill, just getting back to lost costs, where are these loss costs specifically? Can you give me a little more detail where they're coming from, and just historical view, are higher loss costs consistent with a sluggish economy? If you could talk to that a little bit?

I think loss costs are trends that our actuaries have pointed out to us that directionally, loss costs have turned from what's been a long-term decline to where they've directionally moved upwards slightly. Not a lot, but definitely a directional change. And, no, they generally don't move in this sluggish economy.

On the other hand, when we were having a very good economy, they were coming down, which isn't something one would have expected, either, Keith. So I think that loss costs are seeming to move in ways that we can't predict at the moment. It's no different than inflation. We didn't have inflation when the economy was doing well mainly because effectively Chinese low-cost production was subsidizing our cost of goods here and at the same time inflation was being eaten up by people who were willing to invest in US securities, which may not be of our concern.

But the fact is that I wasn't suggesting that I know, I was merely commenting of what the numbers are saying at the moment, and we're cautious. I think that if you look back at our annual report from the first one to now, we always have said what you worry about is the unforeseen event. You look at the numbers and say, what may they be telling me that I can't see out there? And I would say we don't have any worry about inflation. That it's just not happening. The economy is crummy.

But that's the unforeseen event. That's why we're not buying long-term bonds, that's why reserving saying loss costs trends based on the numbers have turned the corner and started to move in the other direction. I wish I could be more specific because I'd love to be more specific. And this is not a case of me trying to keep information for competitive. I'm telling you everything I know at the moment.

Mike Grasher with Piper Jaffray.

Just a couple of questions, just with regard to the loss costs issue. Can you share with us in terms of, do you believe it's driven more by the duration of claim or is it more of a frequency matter?

This is Rob here. Our view at this stage is what we're seeing is a tick-up in frequency. What we've had all along particularly in Workers' Compensation is you have this medical trend or headwind that we've been fighting for a while, and it's a social issue, a political issue and an industry issue as well.

But really the change that we're noticing most recently would have to do with frequency. It's rearing its head in a more clear way in Workers' Compensation, but we are seeing signs of frequency just in the general casualty lines overall ticking up as well. But it's really comp that we're seeing the greatest level of activity.

And then if you look at your accident year combined ratio at 99, would you all agree that the industry probably is tracking closer to a 107 to 110 range?

I would actually say the industry is probably higher than that. If you'd look at the numbers and where the industry is in a mix of business, I would say the industry is probably closer to 110 at this point. And the reason for that is we've lost all our large accounts. Large accounts are probably doing significantly worse at this point in time.

So I would think that our spread right now between what we do in the industry is probably at the maximum, so historically that would be 10 points. When we're doing average industry business, we'd be about the same, which would be 5 or 6 points. Rob would like to add.

One comment that I would add is that if you look at the commercial lines space, and the largest line in commercial lines is Workers' Compensation. According to the NCCI, 2010 combined ratio ran at -- it was somewhere between 110 and 115. I believe it actually was a 115 combined ratio for the accident year. So that on its own is the largest commercial line is probably pointing in a direction that things are running hot.

And then with regard to Workers' Comp in the pricing environment there, obviously driven by the states, but relative to the class of risk, what do you experience there in terms of the change in the pricing dynamics?

You mean price dynamics today?

Yes. Relative to the class of risk that the Workers' Comp would be -- the exposure would be to.

Generally speaking, we don't get into the specifics of class of business within a line of business as to what we see going on, and we don't necessarily get so granular as to telling the specifics as to what rate we're achieving within classes within a line. But what I can tell you is that we are seeing certainly encouraging signs in the primary, if you will, or comp market, as opposed to the excess comp market, which seems to be a very different circumstance where there doesn't seem to be any noteworthy disciplines entering that part.

In the excess comp market people are just making incredibly optimistic statements or assessments as to what they think future interest rates should be used to discount their loss pick. So we're having people use 5% and 6% discount rates on establishing loss reserves for excess comp, as opposed to the current interest rates on 30-year treasuries or anything even shorter. So we think excess comp is still incredibly competitive.

As far as primary comp goes, the market does not march in lock step. It really depends on the territory, if you will, how the market is shifting.

Josh Shanker with Deutsch Bank.

Sorry to keep on this loss cost thing, and I realize I'm splitting hairs a little bit, but if your rate is up 2%, and loss costs are up 2% to 3%, is it right now at this moment loss costs are exceeding rate, or are they about the same? Where are we right now?

I think you're trying to be more precise about loss costs than I can be, and loss costs aren't something we can measure, especially because the loss costs trends are based on frequency and it's literally one quarter. Whereas for pricing, we have quarter-to-quarter measures with a lot of consistency. Those numbers have some level of accuracy. And loss costs, as I said, you look at a trend and the directional change is what I'm really telling people, and I would say that, we're gaining a little, we're losing a little. I'm not excited about pricing because loss costs directionally are going the wrong way. So, I would still say we're net price positive, but it's not significant and I'm concerned about loss cost directionally.

But you're asking for precision, Josh, where I don't have any yet, and I'm trying to tell people who follow our Company about why we're a little more cautious in our reserve and why we're a little more cautious about how good the pricing is.

That's totally understandable. Can you give a little detail on the excess Workers' Comp market that you already did -- If you listen to a lot of primary layer comp writers, they're talking about rate increases and the brokers surveys seem to confirm that. But obviously one of the primaries is that these loss costs are rising at Workers' Comp, they took a small charge on it. What is going on in the excess market and how does pricing compare in the competitive marketplace?

Josh, it's Rob. The excess market -- the primary comp market and the excess comp market, while they may be to a certain extent serving the same underlying exposure, if you will, and in many cases the same customer base, the fact of the matter is that the markets do not march in lock step at all. Clearly there are regions within the United States where the comp market is beginning to turn, in our opinion. Having said that, once again, it is our view that the excess comp market has yet to show any signs of turning and it remains a very competitive segment of the industry.

Along those lines, if people say that primary is up 1%, do you have an idea about pricing the excess market, the rate move at this point?

The answer is that we're seeing many, without getting overly specific, we are seeing many competitors in the excess comp space operate in a more aggressive way today than they did yesterday.

I think also the customers in the excess comp market are widely varying. It's a very long tail line of business, and there are some modestly aggressive, well-established companies, and then there are new people who are wildly aggressive. So I think it's a very wide range of competitors. Some who think it looks so attractive because you get to hold the money a long time, and some who are just making what I define as irrational, but judgments as to interest rate returns.

From our point of view, I think prices are just inaccurate. When you compound interest rates at 2 points higher for 17 years, which is the average duration of excess comp, it's a lot of money in pricing.

Bob Farnam with KBW.

Talking about the new ventures, how much additional momentum should we see from the new ventures? I'm trying to get an idea of how much capacity is being used for the new ventures thus far.

I'm sorry, what --

When you mean additional capacity, I'm trying to understand, what are you trying to answer, Bob?

You're getting pretty solid growth from the new ventures. I'm trying to figure out, will that continue? Will it grow even more?

Yes, the answer is, I guess we need to define the environment, Bob. Are we talking assuming there's no turn in the market, even though it is our belief that the market is in the early stages of turning, but for purposes of discussion, let's assume that there is no turn in the market. It is our expectation that you will see some reasonable level of growth, certainly, for the balance of this year. Having said that, as we get into 2012, if we do not see a turning in the market, and we do not add additional new ventures to the group, I think while I will I would not suggest we will plateau or shrink, I think it is likely that our growth rate would slow. Having said that, I think our expectation is you are going to -- we are in the process of a turning market and we would expect the growth rate to continue well into next year.

Yes. I mean I think that the critical moments here have to do with both the economy and the insurance marketplace, so at this point, our best judgment is growth continues as it is, maybe even accelerating. However, it's a lot of uncertainty and there's no question with the economy on edge like it is, you can't feel good about where all that takes us for the moment. And, therefore, we'd be stepping in the wrong direction if we continued our expectations unchanged, as we feel a bit less certain about economic activity.

Fair enough. And a question on any change in terms and conditions? I don't know how that -- terms and conditions have held up over the past couple of years. Are you seeing them starting to tighten or are they still deteriorating?

It's Rob again. As far as terms and conditions go, the places that you're seeing them tighten a little bit is just when you see business migrate from the standard market into the specialty or non-standard market. Inherently in that transfer or shift you're going to see terms tighten up. We're seeing a bit of that, but not an overwhelming amount of that. Putting that aside, we're not seeing a tightening of terms in a significant way from where it has been recently.

By the way, I would add, Bob, a little to that as part of the reason we've been losing business in our Specialty business, especially places like the Admiral, is because we haven't been willing to change our terms and conditions, and we've lost business because of it.

Meyer Shields from Stifel Nicolaus.

I was hoping we could, I guess this is for Gene, the reserve releases and reinstatement premiums by segment.

The reserve releases, we don't normally talk about that on the call. We'll have that in our 10-Q.

With regard to the quarterly results, did the natural catastrophes you incurred have any impact on acquisition expense?

Did the catastrophes?

Right. In other words, basically did the division compensation change because of the outside level of catastrophic losses?

No.

No.

One big picture I was hoping to run by Bill, is it too early to tell how good this market will ultimately get? You've given your expectations --

I think honestly the biggest issue that's sitting out here is the economy as a whole and where we all stand. I think that we're going to have a -- I mean, every cycle changes gradually until some events take place. Whether it's 9/11 or Reliance and Frontier going broke. If we were to have 2 severe hurricanes, you change this market dramatically because reinsurance capacity would disappear because there are a number of people who have no capacity to buy reinstatements who are in the insurance business. They use their 1 reinstatement after what's out there already and there is not a market for it. And, therefore, that would change the market dramatically.

It's clear that if you look at Katrina, a number of re-insurers in fact really went bankrupt and they forgot to tell anybody and investors put a lot of money in. Between the time they decided to tell people they were bankrupt and the time they raised the money, somehow they forgot.

I think that there's a lot of stuff out there and I think that we sit here and wait for the unforeseen event and hope that it hurts our competitors and doesn't hurt us, because we hopefully are prepared for it, and we go forward. But I think that based on pricing and pricing alone, you need 15% increases in the average price -- 20% increases in the average price. And even then, the return on capital in industry will be probably only 8% after tax. That's based on where I see the combined ratio now for the industry.

And there are lots of companies that are doing better than that and there are plenty that are doing worse. So if I were to give you a forecast, I would say that by the end of 2012, we'll get 5% this year, and we'll need 10% more next year, and then maybe even a little more, certainly by the rate of change by end of next year needs to be higher.

Jay Cohen with Bank of America.

I've got a couple questions. The first is, you mentioned in the Specialty business the accident year loss ratio ex-cats improved by a couple points, and I guess I'm assuming that the earned price impact is still either flat or negative, and you mentioned claims beginning to go up. I know the business mix is changing. Maybe that's a big part of it, but if you could explain that. And the second question, I'm wondering, Bill, if you could comment on the debate now about the debt ceiling and how you see it playing out?

First of all, I think that the comments are pretty straightforward about the Specialty lines business. I think that business is increasing, volume is increasing, mainly from new businesses, and pricing is up a little bit. That's one of the places where we've had some positive impact on pricing.

I guess I just wouldn't expect the earned effect of those price increases at this point to be outpacing your loss costs, especially when you say loss costs seem to be increasing, maybe it's just too modest at this point.

I think what I was trying to say are loss costs are giving us signs, and signs give us concern because they've changed directionally. And we always have taken the view -- I shouldn't say always, but certainly for more than the past 10 years we've taken the view that you don't do better than everybody else by retrospective analysis. You do better than everybody else by looking for signs that give you a directional point of view. So we got a little bit cautious. We can always become less cautious if 3 or 6 or 9 months down the road we were too cautious. For the moment, we'd rather be a little more cautious.

As to the debt ceiling, I chuckle about our president who voted against raising the debt limit along with every other democrat on a number of occasions. It's just a little worse and, he pointed out that we had 17 votes to increase the debt limit for Ronald Reagan, which tells you that Congress only gave Ronald Reagan a little bit at a time, but this president doesn't want a little bit at a time. Look, it's a terrible problem. We've become so politicized that no one seems to put our nation's interests first. Individually, you talk to these people, I think Congressmen, Senators are really extraordinary people who are devoted to our country, and then they all get together and they're worried more about re-election, and it's unfortunate. I think it's a serious issue.

I'm optimistic that we will get at least some temporary solution. It is a philosophic breakdown of the 2 extremes in our nation and not much from the middle which says, hey, get this solved. No one is talking about the fact that every other nation restricts healthcare costs through restricting funding. Every other nation restricts their expenditures by controlling how much they spend.

I don't mind about taxes, if they want to raise taxes some, that's fine, but the fact is it has to be rational taxes and it has to let our country be a competitive force in the world, which we're becoming less and less of. But right now, we need to snap to and act like a single country that's sophisticated and intelligent. And that means we should get together and ask something and have a plan for how we're going to resolve this. And I thought Warren Buffet had a great idea that said if we had a deficit more than a certain amount, no one in Congress should be allowed to stand for reelection. I though that was a wonderful solution.

Brian Meredith from UBS.

Bill, I just want to follow on Jay's question for a second there, if the US credit rating is downgraded from a triple-A to a double-A-plus, what would be the implications for the property-casualty insurance industry and also on W.R. Berkley. Specifically, you do have municipal bonds, some probably triple A rated, what are your thoughts on that?

First of all, we have a relatively -- our duration is not long and we haven't been tempted to go out and buy yield by going out long or buy yield by getting lower-quality securities, so I don't think that that's really going to be a significant issue for us. We have lots of liquidity and it's kept in places that we won't be restricted from having all that liquidity.

I think that the issue will be the same severe issue that we all face, and that is that today, America and treasury securities are the reserve currency of the world, and it's an unquestioned issue, and all of our securities are priced off of that. I think it will raise the issue about the quality of all securities. But from a real day-to-day operating point of view, since what comes in every day is more than what goes out everyday, it shouldn't have any consequence. And while in the very short run there might be a slight hiccup, I don't think it's going to be a consequential one. There aren't very many triple-A securities and I just don't imagine it would have a very significant impact.

And then for Rob, are we seeing any impact at all from RMS 11 on some pricing in the industry yet, on the primary side?

I think we're certainly seeing it in the reinsurance marketplace and you're seeing attempts of folks to try and push rates on the primary side, but it's not material at this stage, in our opinion, certainly not significantly material as far as changing market conditions or rates for property. But we'll see as the year progresses and rating agencies take more of a position as it relates to RMS 11.

Scott Frost with Bank of America.

I was wondering if you could go over any exposures to European credits, specifically peripheral's. I saw the foreign government agency exposure, but I was curious about your corporate portfolio, if you have any credits in the Euro zone that you're worried about?

No, most of our credits are really -- the answer is no, we don't. We have none that we are concerned about at all, and most of our non-US credits are Australia, Canada, UK and Brazil.

Follow-up from Michael Nannizzi from Goldman Sachs.

If I could, 1 question on you mentioned the facultative market is tight, is that on the property cat side or just general facultative?

Not tight, it's very soft.

Soft, sorry, right.

It's very soft, and it's soft on both, less soft on the property side than on the casualty side. The casualty side is very soft because the problem is on facultative business you price it independently of the originating price. So if you charge a rate of 2% and the facultative people think the rate should be 6%, they give you a quote of 6% for whatever they're taking, which may leave you nothing for your primary business. So you say, I can't buy it, I can't afford to, I don't get paid anything for what I retain. So that's the problem.

On the property side, frequently people get the property quote before they make their primary property quote so they take it into consideration.

I see. So what would have to happen on the property side for you, or is there something that could happen on the property side that would cause to you take more property cat risk or is that something that you don't want to do?

I think we're prepared to take more property cat risk but not domestic property cat risk. We think on a global basis we'll consider it. But we're not going to do it domestically. We have plenty of property cat exposure on a primary basis. So on a reinsurance basis we wouldn't take it domestically at all.

Gregory Locraft with Morgan Stanley.

I wanted to just better understand, I'm having a hard time modeling the investment funds side of the equation, and I know roughly half the portfolio is in real estate and about a quarter is in energy. What would you do if you were in our shoes to try to get a handle as to modeling that? Obviously it's going to be somewhat lumpy, but any help would be appreciated in terms of how you think about it.

I'm sure, Greg, that Gene will be happy to go through with it, but it's not very easy to model over a short-term basis, because, first of all, oil prices are volatile; and as to the real estate, that is more predictable and Gene can go through it with you. We don't mark our real estate to market, so that's a bit more predictable. But the energy funds, the volatility in the marketplace for energy-related things, but I'm sure Gene will go through as much detail as you want, but it's very hard quarter-to-quarter to build a model.

So I guess, Gene, should I just follow-up offline then?

Just give Gene a call offline then and he'll go through as much detail as he's able.

I'd be glad to, and as Bill said, it's hard to predict, but we can go through what we have.

With regards to real estate, do you have visibility? Do you sit in the third quarter and have an understanding as to what the fourth quarter is somewhat looking like for that part of the portfolio?

To a degree. We've booked these funds on a lag basis, a 1-quarter lag basis. We talk to them all the time, but we don't really have their actual earnings until the subsequent quarter.

Another question, just shifting gears a bit. On the reserving side, the reserve releases dropped from the 4, 8, and 12-quarter averages. How does that tie to your loss costs commentary? Did you all change anything in the reserve --?

The answer is I think that we became a bit more cautious until we see how loss costs develop further.

So that is a sustainable, the trend which you've called out, you've actually reflected in your reserving, that resulted in less releases, and therefore that's probably the new level that we should be assuming?

I wouldn't say we've changed trend. I would say that we've said let's understand this a little better, let's see where that takes us. It's better in any quarter to be cautious and get your footing and understand the knowledge you have, then to continue blindly moving ahead. So I would have said that we're just examining everything. So I don't think we've directionally changed anything except to say let's be sure we understand what's going on, does it change it?

Better to be cautious at the moment, there's so many uncertainties out there, caution is better. We think we'll have a better understanding at the end of the next quarter, and we may revert to back where we were, we may stay where we are, we may get more cautious. It's a constant reevaluation. Our job is not to be the same, our job is to use our best judgement each quarter.

Amit Kumar with Macquarie.

Just 1 quick question in regards to capital management. [W.R. Berkley] had a modest buyback, and I'm wondering, based on where the stock is trading, should we expect that going forward or has been any change in the capital management philosophy here?

Mr. Kumar, have I ever told anybody what I'm going to do about buying back stock?

I want to keep on trying.

The answer is it's always a balance between what we see our needs for capital and the price of the stock at any moment in time, and we'll have to make that judgment, and we do each day, where, how we see things coming along. For the moment, our views haven't changed but they didn't change, but they did change in the first quarter and we didn't buy stock.

Meyer Shields with Stifel Nicolaus.

Bill or Rob, are the early signs of an uptick in Workers Compensation frequency, are you seeing anything like that in Medical Malpractice?

Well, I think the difference is Medical Malpractice has been an incredibly profitable line of business, far more profitable than we would have expected. And while it's been competitive, Workers' Compensation never got to the levels of profitability you got from Workers' Compensation. It was just never as profitable as Malpractice. I think that Malpractice business is seeming to be getting a little more stable at the moment. But there's not any dramatic increase in pricing happening.

And the liability property split right now, is that about 60/40?

No, we're still probably -- I would have said 75/25, and that's from down from probably where we were probably 80-plus casualty 3 years ago, we were probably 82%, 83% casualty 4 years ago. And today we're probably 75% casualty.

Kenneth Billingsley with BGB Securities.

Just a question for Gene. Looking at the diluted share count for the second quarter, it went up from the first quarter despite the little over 1 million share buyback. Can you just talk about what else is going on in that line?

Well, a lot of that just has to do with timing of when share transactions take place. So we did have some option exercises in the first quarter that took place late in the quarter. So came through on a full quarterly basis in the second quarter and some of the buybacks of the same token in the second quarter came in later and didn't get reflected. So it's really just more the timing of those transactions.

I'm showing no further questions at this time.

Well, thank you all very much. We are concerned about the economy, concerned about Washington, but enthusiastic about our business and the position we're in going forward. So thank you all very much, and have a great rest of the summer.

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