W R Berkley Corp (WRB) 2011 Q4 法說會逐字稿

Good day and welcome to W. R. Berkley Corporation's Fourth 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 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 reports on Form 10-K for the year ended December 31, 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 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.

Thank you very much. Welcome to our year-end call. We're very pleased with our quarter and the direction of things. We think that our general expectations are being met. We'll start with Rob talking about our operating results for the quarter. Rob, do you want to go ahead?

Thank you. Good morning. For the industry, the fourth quarter seemed to follow the same pattern that it's been experiencing for the past several quarters -- noteworthy catastrophe activity, along with a continued deterioration amongst many of the casualty lines. While [CAT] events, such as the floods in Thailand, would seem to be exceptional or perhaps unexpected, this view is questionable given the recent industry experience over the past 18 months. Additionally, the eroding performance in several of the casualty lines should not be a surprise to anyone. There is a reality when rates are continuously cut over an extended period of time and terms of conditions are loosened, eventually it will end in tears. Having said this, it would seem as though, with every passing day, the industry continues to further set itself a for a classic hard market.

The attention of carriers is being forced to migrate away from reserve redundancies and redirected towards the need for additional rates and more disciplined with selection. In fact, there is growing evidence that some carriers not only have been aggressive in their underwriting, but also may have been overly optimistic in the reserve practices and may, in fact, be in for a rude awakening. Earlier in 2011, the spotlight was primarily on the need for rates in CAT-exposed properties and workers' compensation. More recently, it would appear there is developing recognition that broader action is required. Shifting to our organization, the Group's net written premium for the fourth quarter was $1.09 billion. This is an increase of 19% over the corresponding period in 2010. The breakdown of this growth is approximately 6 points associated with increased exposures of existing insureds, including auto premiums, 4.2 points of pure rates and the balance from new business.

As in the past several quarters, the Company's growth continues to come about primarily as a result of how we have positioned our operations more recently. Marketplace dislocation as many carriers continue to adjust their behavior. While the impact of these circumstances are felt group-wide, they are most visible in the Specialty and International segments. Additionally, continued gradual improvement in the US economy is providing further assistance to our insureds, which, in turn, we are benefiting from as well. The Group's price monitoring showed an improvement, on average renewal rate of 4.2% in the quarter and just shy of 5% in December. We anticipate this trend of building momentum of rate increase to continue well into 2012. Further, on the topic of price monitoring, it is worth mentioning our metrics do not solely focus on our renewal business, but also on new business.

Our data would suggest that the Group is achieving slightly higher rates on new versus renewal. This would be an example of one of the many metrics we have that provide comfort with respect to the margin in the new business we are writing. The renewal retention ratio remains again at approximately 80%, providing further confirmation that we are achieving rates without undermining the underwriting integrity of the books. The Group's loss ratio in the fourth quarter was 62.7 which includes 1.3 points or $15 million of storms. Approximately $13 million of the $15 million is associated with the Thailand floods. The Company's expense ratio in the quarter was at 34.1. This improvement is mainly due to the gradual growth of our earned premiums. We anticipate this trend's continuance throughout 2012.

The combined ratio for the quarter came in at 96.8; however, when a one adjusts for reserve development, as well as catastrophic events, the current accident year remains at approximately 99. Our balance sheet remains strong due to our sound investment philosophy coupled with effective capital management, as well as our thoughtful and measured approach to setting and maintaining loss reserves. As we have explained in the past, the Group's philosophy in setting loss reserves is to initially select cautiously and revisit these picks regularly through a rigorous actuarial process. This approach has led to 20 quarters in a row of positive reserve development. The greater property and casualty commercial lines market has clearly entered a time of transition. There is no doubt with every passing day we are witnessing an increasing case of change when it comes to carrier behavior. Market participants are not only looking to raise rates, but also narrow their risk appetite.

This is not only evident in the rate increases the industry is achieving, but also through the accelerating flow of business into the specialty markets, as well as the rapid growth we are observing in the assigned risk planned segment of the market. We have seen these changes in marketplace behavior accelerate through 2011 and anticipate it will continue further in 2012. It is very difficult for any of us to predict the future with any level of precision. On a macro level, things are generally unfolding, however, as we expected. The moment we have been waiting for is rapidly approaching. Years of underwriting discipline, along with tireless efforts of many, has positioned our organization ideally for a turn in the market. The fruits of these labors will become increasingly visible over the next few years.

Thanks, Rob. Gene is now going to talk about our financial results and then I'll try to bring it together with our general view of the industry and where we stand from positioning point of view with the Company. Gene, go ahead.

Okay, thank you. To begin with, Rob mentioned that net premiums were up 19%. Premiums actually increased for all five of our business segments and for 38 of our 46 operating companies. That growth, as Rob said, was led by the International segment, which was up 43%, followed by Specialty, up 21%, Alternative Markets 18%, Reinsurance 15%, and Regional by 2%. Changes in foreign currency exchange rates did not have a significant effect on those growth rates for either the Company overall or for the International segment itself. The increase in our overall combined ratio of 2.7 points resulted from slightly lower favorable reserve development, as well as modestly higher catastrophe losses. Favorable reserve development overall was $40 million, or 3.6 loss ratio points in the quarter, compared with $55 million or 5.6 loss ratio points a year ago.

Loss reserves developed for all five business segments and the reserve development was in line with reserve releases for the year, which totaled $183 million and averaged $46 million per quarter. Catastrophe losses were $15 million in the quarter compared with $6 million a year ago. The 2011 losses included the $13 million from the floods in Thailand that Rob mentioned; $5 million of that was in our own International business and $8 million was in the Reinsurance segment and resulted from our minority participation in the Lloyd's syndicate. The expense ratio improvement by 0.2 compared to the fourth quarter of 2010 and also compared to the third quarter of this year, as volume has grown and we expect that expense ratio to continue to decline as the recent increases in written premium become recognized as earned premiums over the following year. By operating segment, our combined ratios were 96% for Specialty, 93% for Regional, just under 100% for Alternative Markets, 103% for Reinsurance and 98% for International. The increase in the combined ratio for Specialty was due to lower reserve development for that segment and the increase in the combined ratio for the Reinsurance segment was also due to lower reserve development and also to higher property losses including the Thailand floods I referred to earlier. The accident year number that Rob referred to as 99% in the quarter is exactly where it was for all of 2011.

Operating cash flow more than tripled to $185 million; that's due mostly to a 10 point decline in our paid loss ratio. Our paid loss ratio was 59% in the fourth quarter and just under 60% for the full year. Turning to investment income, our net investment income was $117 million in the fourth quarter; that's down from $138 million in the prior-year quarter. The income from our fixed income portfolio was $121 million, down $7 million from a year ago. Despite the current interest rate environment, the yield on the fixed income portfolio has remained stable at 4% annualized for the fourth quarter of this year compared to 4.1% for all of 2011 and 4.2% for the full year 2010. Income from our merger arbitrage trading account was $7 million; that's an annualized yield of 8%. Our investment funds reported a loss of $13 million that was primarily related to the decline in market value of energy-related investments that are carried at fair value.

Those investments are reported on a one-quarter lag and based on the more recent information we've seen on that, we believe their market values have already recovered that loss. For all of 2011, investment funds recorded income of $11 million. Realized gains were $52 million in the quarter and $126 million for the full year; that's primarily related to sale of equity securities. At December 31, 2011, our unrealized pretax investment gains, including common stocks, were $660 million, up $144 million from the beginning of the year. You'll notice that be added a new scheduled to our earnings release that shows a breakdown of our foreign bonds by country and bond category. You'll also see that we've expanded our foreign bond disclosure by reclassifying approximately $230 million of corporate bonds into the foreign bond category, also by country. Our income tax rate was lower in the quarter; that's primarily due to the realization of previously generated foreign tax credits. And with that, we end up with net income for the fourth quarter of $118 million and an annualized return on equity of 12.7%.

Thank you, Gene. Let me just try and give you summary. First of all, I have to say that I am more positive and more certain about the turning cycle and where things are going than I have been in years. Cycles don't change instantly, they change slowly and gradually until further in events accelerate that change. I can't tell anyone what those further events will be. It could be a European insurer of size having difficulties because of the euro. It could be a US company who has reserve problems or an unforeseen event.

I can't tell you precisely what it will be. But, there's no doubt that a number of companies have not faced up to all of their problems or potential problems, in this difficult environment, both financial and industry. We think that the cycle continues to move along in the increasing pricing, better terms and conditions. It doesn't always get measured. December, as Rob said, we were just shy of 5%, average price increases for the quarter of 4.2. But that doesn't tell the whole story. There are lots of people who misclassified business and wrote excess and surplus lines business as box.

A 5% or 8% or 10% price increase doesn't solve the problem when they really need a 30% or 40% or 50% price increase. So, we might write the business, but at a totally different basis. Some of these numbers are a little misleading when you hear about price increases. In addition, you have to keep in mind that price increases go back to the price they you charged originally. So if you misclassified excess and surplus lines business as standard market business, you can't charge enough marginally additional pricing to have the business become profitable. It's in a different class by itself. You have to be careful what you hear and how you react to that.

There is no doubt people are looking at the past several years' results and their recent years of loss reserves and asking whether they're adequately reserved, what their accident year picks have been. We don't believe our businesses is worse than any other company's, even though our accident year loss reserve picks, our combined ratio picks are 98, 99, give or take. We think we are a bit on the conservative side, but that's a strategy because we can't judge with a certainty about loss cost trends or when and if inflation is going to be around the corner. We're more confident today than inflation is certainly a few years away and we will be able to review our reserves with a more positive outlook going forward through 2012 because of that. We're optimistic that just as we were able to deliver double-digit returns this year, that we'll continue to do so. We're still able to define some opportunities to invest that give us reasonably good yields. Common stocks don't represent much of our portfolio and that will probably -- dividend-yielding common stocks are likely to represent a bigger portion of our portfolio.

We're, in all likelihood, going to buy very high-quality commercial mortgages, 50% 60% loan-to-value that we think are very well -secured. We're constantly looking for things that where you don't get instant liquidity, but not very long durations still. We're not interested in having our duration go out substantially overall. We think that the cycle pricing-wise will accelerate slightly. I have been optimistic. It took until December until we touched the bottom of my pricing expectations at just about 5%; in fact, it was just about, not quite. But the signs are that those pricing expectations are going to look better in 2012 and along with that, we're finding people are coming to us because of our consistent approach.

So even when we maintained our underwriting standards, even when we maintained our pricing, we were always there as a market. When we brought in new teams of people, they didn't close people out. They gave quotes even if they didn't write business. We have teams of people who came to us having written $200 million, $300 million, $400 million, $500 million before and for us, they wrote $20 million or $30 million of business, while they're sitting there well armed with capital and having maintained those great relationships. People are anxious to do business with them, because they are always there, they were always polite, they always quoted. We think that we're going to get the benefit of that. It's not going to be the 26 companies we had five years ago, it's the 46 companies we have, the core old company's we're made up of, Berkley Corporation's shrank by 20%. While you may have seen Berkley Corp get somewhat smaller, the older companies shrank by 25%; not many of our competitors did that.

We think we'll regain that business and then some and we'll have the benefit of all the new business. We think we have a great run ahead of us and we're extremely excited. No doubt investment income is going to be a challenge. It's the challenge we are most concerned with. But we're pretty confident that we can find opportunities at this point in time to do not quite as well that we may have done 18 months or 3 years ago, but certainly as well as we've done in the past couple of years, keeping that yield around 4%. With that, Mary, I'm happy to take questions.

(Operator Instructions) Amit Kumar, Macquarie Research Equities

Just going back to your comments regarding new business pricing and renewal business pricing, can you talk about other leg which is the lost cost trends and assumptions that you have for 2012?

First of all, I think that we would say loss caused trends are 2% to 3% is our estimate. We think pricing now significantly exceeds loss cost. Number two, we think we have built-in to our prior-year loss costs an inflation rate higher than what we have realized. In fact, it's one of the reasons we are very comfortable with our reserve position now because it clearly doesn't appear, at this moment, that we're likely to have consequential inflation. We were more conservative than many of our competitors and we felt it appropriate to build in a loss cost level for that possibility. I think that we would probably see, even considering medical inflation, certainly less than 3%.

Okay, that's helpful. The other question I have is you talked about business moving back to Specialty. I know that in the past, you have talked about losing a lot of the larger accounts. I'm just wondering, has that behavior changed this quarter? Are you seeing any of that flow coming back to you on the larger accounts?

I think, in general, you don't see behavior changing in the broad-based way. I'm going to let Rob comment because he can talk about the graphs.

I'm not sure if I would solely differentiate it by scale of account, even though that's certainly one factor. I think I would choose to define it that accounts that seem to have more hair on them, those are the ones that are more quickly turning up in the Specialty market and probably never should have left to begin with as some of the standard markets are combing through their book and reacting. The competition around larger accounts, that continues to a certain extent because it helps people make their budgets. Having said that, I think the great differentiator is really whether there is an issue as far as loss experience goes or the complexity of the account.

Got it. Then finally, you didn't buy back a lot of shares in Q4. I'm just wondering, just based on what you're saying about the market conditions, would it be fair to assume that, that's something which is somewhat in the background, just based on the new opportunities you're seeing going forward.

It's always nice when a friend asked that question. Let me take you through the whole story about it so then maybe we won't have another person ask the question. First of all, you know we paid just a little over $28 a share for the stock we bought back, less than book value. We were happy with the stock we bought back and would have bought more back if we could have at that price. We always try and buy stock back at an attractive price. Even if it stretches our capital position, we would buy back stock.

If we could have bought $100 million of stock back at that price, we would have bought $100 million of stock back at that price or a price near that. We couldn't, unfortunately. We're price sensitive to what we pay. What we do is, each quarter we sit and look and look at where our premium volume is going, how much excess capital we have and we anticipate we have, what our dialogue is with rating agencies and where we're going and ensure how much capital we have that we think is excess capital and then we move forward from there. I could easily see if the stock sold at a big enough premium for an extend period of time, deciding to pay a dividend; a special dividend, even though in some ways that's sort of wasted money because it doesn't help out people.

It's a way to get money back to our shareholders and it certainly is something we would consider. I think giving shareholders their money back if we're selling at a particularly high premium is better than buying stock back, if we have a lot of extra capital. At this moment in time, I think we will continue to look to buy back stock. It's not that out of our price range. It's somewhat of our price range, but there is a lot of opportunities. We think there is a lot of opportunities for growth and expansion and I'm hoping I'll be able to need every dollar of capital I have. That's a little more optimistic than even I am at the moment.

Got it. Okay, thanks. Thanks for the answers.

Vincent D'Agostino, Stifel Nicolaus.

First, starting off with a loss cost tend question and one follow-up if I may. Looking at workers comp medical loss cost inflation from the likes of NCCI, it looks like medical loss cost is running somewhere in the low to mid-single-digits you talked about earlier. That compares to an accelerating pace in the low to mid-teens in 2001, so my question is, does a lack of rapid medical loss cost inflation acceleration imply less industry reserving angst compared to what we had seen last time versus now going into the next hard market. Does that imply us upward pressure on work comp rates as we accelerate from here?

I'd like to make sure that we understood the question. Earlier you had referenced some NCCI statistics, could you share those once more?

Sure. Looking at the different industry stats and what some of the participants are talking about, medical loss cost inflation in the say, 3% to 5% range. If we look back to what was happening say 1999 to 2001, we'd seen a quite aggressive acceleration of loss cost trends up into the low teens. If we're only running at, let's say, a rather stable low to mid-single-digit range, I'm just curious if, without that accelerating, very high inflation rate, does that mean that we won't see the same level of adverse development pushing the industry higher on work comp rates as we go into the next hard market?

Clearly, the medical inflation is very relevant to many lines and few more so than workers' compensation. Having said that, I think the fundamental issue that is driving the change in workers compensation really has more to do with how many dollars people were collecting per unit of exposure. And while clearly medical is a significant component and people need to contemplate that appropriately in coming up with their pricing, quite frankly, putting that aside for a moment, people just got overly aggressive as to how they priced the business beyond just the medical component. I think in addition to that, other trend factors such as frequency probably stands out, in particular, as far as something that people were overly optimistic about and is probably one of the leading drivers as to the change in appetite and behavior that you're seeing in the marketplace today. While medical is an important component, I would not solely hitch my wagon to that assumption as to what's driving the change.

Okay, that's very helpful. This is kind of following along the rate topic here, I don't think the lack of adequate underwriting profitability or poor net investment income yields, it doesn't seem like that is a surprise there when I think that's broadly excepted. I'm just curious if you see any risks pushing the market back into soft territory if everyone's acutely aware of the poor operating environment. What I'm asking is, if irrationality can persist in this sort of environment if we're all operating in the same environment expectations?

There's no one who can dial a phone that doesn't know that irrationality can exist in anything at any time. I can't comment on that. But I will tell you that if anything, at the moment, people have not even begun to feel the pain of the underpricing that took place in 2009 and 2010 and certainly in the beginning of 2011. Irrationality aside, I would expect that there will be a lot more pain. If you go back in history, at the turn of the cycle, it always looks like we did worse than everybody else by printing a 99 accident year when other people are printing 95s, 92s.

Everyone says, what happened to Berkley underwriting? They really have gotten sloppy. The answer is, we haven't gotten sloppy, we just have printed the numbers more of a reflection of what they are. I would suggest that many people in the industry have probably not adequately reflected the current accident years vis-a-vis their pricing and I think the pain is just beginning. I would be surprised, but you can't ever bet on how foolish people can be.

In terms of that pain coming down the pipe, would you venture to take a guess on how long it is before we start to see some insolvencies popping up? Or does that really just depend on what reserve numbers companies feel like putting up?

I think by and large the industry is well-capitalized. I think if you're going to see an insolvency, it's going to be for something coming up that we didn't foresee, someone who had a cap on the reinsurance and they grossly underpriced their business or someone who's a more modest-sized Company with $1 billion of capital and just wrote more than they could understand or someone who has investment problems because they were too aggressive. I'd be surprised if there were any [puriel] insolvencies with the exception of the exposure, somehow or another to currencies or foreign exposures that people don't want to anticipate.

Great. Thanks for all the answers.

Vinay Misquith, Evercore Partners.

Just wanted to get some more clarity on the transition of business from the standard market to the E&S market and I believe you mentioned that was because of risk selection rather than just pure price. Just around that, is Berkley able to charge a higher price versus the standard markets? And also why aren't standard markets taking that business if pricing's up maybe 15% to 20% as you would be charging because it's an E&S market versus standard paper?

Okay. I think there were a few questions in there, so let me try and address them one at a time. I think first of all, the observation that we have shared and we have seen over the past several quarters is the migration of business back from the standard market into the specialty market and obviously, a significant component of that is the non-admitted market. The driver of this is just the realities of the standard market's appetite becoming somewhat broader than perhaps it should have been or in its own best interests is beginning to change. And not only are the standard markets looking for rate increases, if you will, but they are also examining their portfolio and taking note of certain classes of business or exposures that don't really fit within their appetite or their comfort zone. As a result of that, they're coming through their book and they are driving the business to seek another alternative in the specialty market and oftentimes the E&S market. I would suggest to you that, by and large, the specialty market is commanding a higher price than the standard market is seeking and I would suggest that the E&S market is an extreme, if you will, both in the terms and conditions, as well as the pricing perspective. I do believe the business that is leaving the standard market into the specialty market is commanding a higher price be written, terms and conditions are beginning to tighten and our expectation is that this flow of business from standard to the specialty market will continue to accelerate.

I think I would add one thing and that is, the underwriters who have this business and who are looking at it on renewal in the standard markets aren't equipped to deal with changing hats and becoming E&S underwriters. An underwriter at XYZ Company who's written it as a BOP doesn't have the beginnings of the knowledge necessary to write it and price it appropriately. They squished it and [mushed] it so it would fit in their box as a BOP policy, which never should have happened. The fact is the risk can't fit in their area at all. It's not like, we're a BOP underwriter and we're going to write something. They just don't have the expertise.

Okay, fair enough. I shouldn't be looking at the plus-5% saying pricing's not up all that much, why are you guys writing business? It's really an apples to oranges, correct?

Yes, sir.

Okay, fair enough. The second question was, you certainly seem to believe that pricing will rise more this year versus last year. Just trying to get a sense of what the opportunity cost is awaiting so rather than growing 19% fourth quarter, why not wait for a few quarters until you get more appropriately priced product to write this year versus last year?

First of all, if you look at every market turn, we always start to grow before the dramatic increases in price, because it's easier to renew business once prices start to change. This is that it speedboat, this is not a boat that turns on a dime and you say, okay, wait, wait, wait, go and then all of a sudden, you change how you behave. As you start to see these things changing, you've got to persuade brokers, you've got to persuade agents to start to give you the business. If I thought I could wait, it would be better to wait until that moment happens, but that's not how the real world works. It isn't like buying a security and selling it. You're starting on the parade to build a business which you then, hopefully, will renew at a higher price next year. We have the capital to do it and we don't write any business that we don't think it's profitable.

The fact is that we started growing in 2011 because we thought the pricing was beginning to be profitable and we think that's continuing to be the case. We will renew the business that we wrote in the first quarter of last year at a slight increase at an increase on top of the increase and so forth. It's just how we believe how you optimize the results for your business. It just doesn't turn around. You just don't go into an agent or a broker and say, give me the business now, here it is. We just don't think that's how you run a business.

Okay, fair enough. In terms of profitability on the new business, what ROEs do you think the new business is being put on your books right now?

We would hope that we would achieve our 15% return. That's our expectation. Every piece of business that we write, we target that. Now that having been said, their may be one area or the other that doesn't get us to there, but that also depends on the investment returns we can get. It depends on a whole lot of things. But I can assure you that, if we're going to look back at the business we wrote at the end of 2012, you're going to see certainly an expectation that we will have had a return that would average 15% or more.

Okay, thank you.

Greg Locraft, Morgan Stanley.

Actually, just wanted to follow up on the ROE, can you do a 10 ROE in 2012? If so, how will you get there?

I think that we did more than a 10 this past year. As we have said, we've shifted some of our investment portfolio to realize gains, so some of our investment returns are going to come as gains as well as -- not gains in the bond portfolio, also gains in common stock, even though we're not investing big amounts of money, we've been pretty successful in that. I think we will. I think that the combined ratio is likely to come down. We think that we still have some level of redundancies and we're not sure how much that is. But we're going to reconsider where we think inflation is going to be in our reserves as the year goes on. But yes, we expect to have double-digit returns.

Okay. Actually, I have the ROE this year as an 8 and change, not as a 10. But you're saying include investment gains? With a net ROE, is that what you're saying, not an operating ROE?

Yes, because we've taken out all of our funds and so forth and taken them out and we've told people two calls ago, I believe, maybe three calls ago, that given our investment strategy, which is shifting, we think net/net income is a better measure. But I think our operating ROE was a little over 9 for the quarter, I think 9.1 for the quarter.

Okay. Okay. Then again, to the last question, you mentioned 15 on new business.

No. The question was how did we price new business. The answer is we priced new business with a target of 15.

Okay. When you priced it at a 15, are you picking it? It seems to me that you're philosophically, given how well the releases have continued, you're pricing it for a 15 and maybe picking it much lower and that's why the reported ROE is significantly below the new business ROE after -- new business target ROE after several quarters of growth? I'm trying to figure out what's holding back the reported numbers from the target numbers?

When they price the business, they're not pricing in cushions on reserves and so forth, the caution that we build in, as well as a lag. It takes time. The results you see now are results from probably 2010, 2009. It's a blend of years. What's reported in 2012 will be a combination of 2009, 2010, 2011, 2012. It'll be a combination of those years. It'll be a combination of reviewing reserves as we set them up. You have the unfortunate job of trying to make an extremely complex business into something that seems easier to analyze. But, as you well know, this blend of accident years that makes it a little more difficult. I'm sure if you'd like, Gene and Karen would be glad to go over how that blends in.

Okay.

It's just not one accident year that gets reported obviously.

Okay, great. Last one is just flexing the balance sheet, you guys are crushing it at the top line now. The market's getting better. You've obviously built the engine for this kind of a situation. How do we think about the upside to your top line? If you continue this, you'll be at 1.2 plus premiums to surplus by year-end. How much can you do if you love the business on the front end?

First, I don't think we will. If we grow at that rate, you have to remember we have retained earnings regenerating. If we do, even taking a 10 or a 12, because net income is what generates capital. If you do that, we're only going to be about 1.1. But the fact is, I think that if we're generating high returns and we love the business, we can probably run at 1.5 to 1 for a period of time. The cornerstone there, Greg, is what kind of return we can get. We're not going to get over 15% reported returns of net income. Clearly, we're going to be constrained to grow at 15% or 20% after a couple of years. But we think our returns will be good and we think that we'll have capacity to grow as much as we'd like.

Okay, thanks a lot.

Michael Nannizzi, Goldman Sachs.

On the Regional segment, I'm trying to reconcile written premium trends there to some of the commentary. First off, what was the rate change, if you could, in that Regional segment to pure price or pure rate?

We don't give it out by segment, certainly, on the call. We prefer not to.

Okay. But it sounds like it was positive.

All segments had positive rate direction.

Okay, and then exposures were also positive?

I think exposures in Regional, I don't think they were positive, I would say maybe even down a little bit.

Listening to other folks and trying to digest what we're hearing, it seems like US commercial line pricing particularly at the small end is where you're seeing some of the better pricing and some exposure growth. But it sounds like you're seeing rates, but not exposure growth. Just trying to reconcile those trends in terms of how -- are you seeing that in your book or are you not?

Mike, it's Rob. Let me take a crack at this. We certainly are seeing rate in the Regional book. Exposure growth, it is there, but new business is very difficult to come by given what our view is to what rates need to be. We're able to get the rate that we would like on our renewal book which is, give or take, running around 80% plus in the Regional group, exposures may be up a little bit and that's coming through in our audits as far as the renewal book. New business is probably the challenge, really across the board as people are trying to hold onto their books. Quite frankly, the distribution system, given the change in market conditions, is reluctant just to be moving accounts around.

Okay. I see. I see. Then Bill, you talked a little bit about your outlook for rates, talking about pricing and earnings through. How should we think about the impact of higher prices earning through and offsetting the negative impact of investment yields on earnings? Are we at a point where that they should offset each other in '12 or are do you think that the earns through of pricing is going to overcome the negative impact of investment yields on earnings?

First of all, our fixed income investment yields remain virtually flat, 4.1% down to 4%. We've been able to find places where we've been able to maintain the fixed income yield. The return on the portfolio was purely from investment fund returns. And I think Gene already said that, in fact, the loss on investment funds on those that impact our reporting the delay of the quarter already have been made up, so we know the first quarter investment funds are going to effectively offset the loss so they're going to be positive. I don't know, what's the number, Gene? The ones we know about?

Yes, the loss for this quarter was 13, so it will be something less than that. But a lot of that's already been recovered.

Right. The fact is that the funds that we report with a quarter lag effectively are going to be $13 million, positive. That's going to swing investment yields, for example, in the first quarter. It's one of the problems that you have with some of the various accounting changes that are being impacted. In addition to that, we've been able to be opportunistic and while we have good cash flow, it's still not overwhelming us yet. We've been able to find things to do with the money at this point in time. I don't think investment income is going to suffer, at least in the first six months, which is a plus because the pricing impact, as you well know, takes five quarters to be fully reflected. They get partially reflected each quarter a little more.

It'll be the third quarter before they're mainly reflective and the fourth quarter until they'll be fully reflected. Investment income will be good. There will be modest impact, but very modest in the first quarter of pricing. Hopefully, expenses will be better because volume will increase of earned premium, because that comes in right away. I would think that it would be an accelerating trend, so by the end of the year, things will be better. The risk by the end of the year is the cash flow is such that we can't find places to invest the money. The positive is you will have all of those price increases having a greater effect, plus what I expect will be substantial ones this year.

I would expect, though, it's an improving trend. Investment income is doing well and certainly not going down because we're not investing for in short-term stuff in for the most part. It will be marginal new investments. I don't think that would be the case. And I think we only have about $1 billion, $800 million that sort of rolls out the next 12 months.

Okay, great. Okay. Thank you.

Doug Mewhirter, RBC Capital Markets.

I had a question for Gene -- you gave your yield, is that a book yield? Also, does that approximate new money yields, notwithstanding all of the previous comments that Bill has made?

Yes, it is a book yield. It has approximated, as you can tell by the face that it just hasn't changed that much that we've been able to achieve nearly that kind of a return on our new investments.

Okay, great. Thanks. That's all of my questions.

Josh Shanker, Deutsche Bank.

I'm trying to understand Gene's methodology on ROE. You said12.7% ROE. I'm trying to get there myself, can you walk us through it a little bit?

That was net income, that was not operating income.

Yes, I'm still getting only about 12% though.

I think we will let Gene and you go through this. I don't think we serve the purpose.

The only point I'd make is we used beginning of the year equity.

Maybe that's it. Okay. That resolves it. Thank you very much.

I might add, we have, for 40 years, used beginning year equity. I shouldn't say 40, at least 15 or 20.

Jay Cohen, Bank of America Merrill Lynch.

Gene, I'm wondering if you can just give us the reserve development by segment? I know that comes up in the Q and the K, but do you have those numbers?

Jay, I think he'd be glad to go through them, but they don't get tied out until the end of today and I'm sure they can go through them. We have them in the aggregate, but they don't get fully tied out until the end of the day with KPMG signing off. Given it's year-end, I'd appreciate if you'd understand and let them give them to you at the end of the day.

I do understand. Thanks a lot.

Howard Flinker, Flinker and Company.

One, an extension to your comments about possible bankruptcies would be that the markdowns on sovereign bonds in Europe could put tremendous pressure on some of those companies. We just don't know how big the markdowns are going to be. And the second, when it comes to return on capital and return on equity, Warren Buffett would have lousy insurance businesses if we did not include his capital gains. The use of the money is part of your business. If you included, it seems realistic to me. The first question is you had a lower tax rate in the fourth quarter, did that come because of capital gains or immunity bonds?

No. It came from foreign tax credits that effectively came in, in this quarter, for various technical reasons. But that's all. But, in fact, the capital gains for us tax the same as regular, municipals do give us a big benefit.

Okay.

But it's foreign tax credits and likely foreign tax credits will continue to be a benefit as our foreign businesses are expanding.

Yes, sure. Second, I'm curious about what I thought was a terrific gesture two years ago when BP had that blowout. You paid your clients' claims, I think, within three days -- something like that. Now, it's almost 2 years later. What kind of response have you had from those or other clients? Have you been able to acquire other clients?

I will comment philosophically after I let Rob will talk about the actual business.

Yes.

I think the answer is that the response from the marketplace was positive. I think people appreciated our timely reaction in getting them the funds that they were entitled to, quickly. I think incrementally it helps us build our brand and build our relationships and reputation. I believe it's appreciated, both within a relatively small community, that being the oil and gas states, by insureds as well as the distribution system, and us being able to empower them to provide this service to their clients in a timely way.

I talk to people about why customers are willing to pay a higher price. With the hesitation of giving a pat on the back to one of our competitors, why do people pay a positive premium to buy their homeowners from Chubb because Chubb pays their claims promptly and if you bought a homeowners' policy from Chubb, you have a greater degree of confidence of being treated fairly. Building a reputation takes a long time and doing the right thing is what we think you do and we've been trying to do that for a long time. That was just an example. You do the right thing and people eventually figure out that it's worth paying a little bit more to do business with people who, in fact, deal with you in that way.

No doubt. I was just curious, without mentioning names, that some actual oil and gas companies or drillers come to you and say we'd like to change.

We deal through brokers and agents. But it's a small community and I think that all else being the same, people know who has good reputations and bad.

No doubt. Okay. Thank you.

Bob Farnum, KBW.

How has your premium retention been when you've been raising the rates? Have you been able to retain the accounts that you've been raising rates for?

Yes, the Group's renewal retention ratio is running at about the 80s, which is, give or take, a similar for what's been running the past couple of quarters, which obviously gives us further encouragement that we are able to push rates potentially further and also gives us a level of comfort that the underlying book is not being eroded from a quality perspective.

I might add that if you go back a couple of years ago, when we were standing firm about pricing, we were in the 70s for a while and we were losing business. Not because we were trying to raise rates but we were trying to maintain rates and our renewal retention levels were lower; 75% or so.

Okay, thanks.

Thank you. I show no further questions in the queue and would like to turn the conference back to the speakers for closing remarks.

Okay. Thank you all very much. We're very enthusiastic about where the marketplace is, where things are. Obviously, there's plenty of things that can go wrong in any environment that's as volatile and uncertain as the economic climate we're in today. But certainly, we think that in the foreseeable future, things are looking very positive. Thank you all very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.