W R Berkley Corp (WRB) 2012 Q1 法說會逐字稿

Good day, and welcome to the W. R. Berkley Corporation's first quarter 2012 earnings conference call. Today's conference is being recorded.

The speakers' remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words including without limitation believe, expects, or estimates. We caution you that such forward-looking statements should not be regarded as representation by us that 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, 2011 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 very materially affect that result. W. R. Berkley Corporation is not any 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. Good morning, everyone.

We were pleased with our quarter. We were pleased with how business is going. We are glad all of you are here so you will get the opportunity to hear about our loss reserves and so forth. We don't put it on our press release about our development in order to get a better audience on the call. With that, we will start with Rob talking about operations, and then we will follow with Gene talking about the financials, and then I will talk a little bit about what is going on and then we will take questions. With that, Rob, why don't you go ahead.

Thank you. Good morning.

Market conditions continue to improve during the first quarter. While the cycle turn may not appear visible during any 90 day period, when one reflects back on where we were a year ago, it is clear there has been significant improvement. Evidence of this change can be seen in many ways including the increasing number of carriers publicly announcing significant rate increases. Additionally, we are seeing many market participants adjusting their risk appetite resulting in a gradually increasing flow of submissions into the specialty market. This increasing flow predominately tends to be risks with poor loss experience or other complications. Furthermore, the distribution system seems to have recognized and accepted that we are generally exiting the soft market. Consequently, they are becoming ever more successful in selling the rate increases that many carriers are requiring. Lastly, the continued accelerating growth of the state assigned risk plan populations clearly supports the notion that market discipline is returning.

Having said this, life is not perfect and that includes the insurance industry. There are a few carriers in both the standard and specialty insurance markets, as well as the reinsurance market, that don't seem to fully appreciate that things are changing. As a result of this circumstance, there is somewhat of a lopsided barbell in the marketplace between those that are seeking late adequacy and those that don't get it. Having said this, the market is turning in spite of this limited number of irresponsible companies that are serving as a hindrance, not a barrier.

Primary workers' compensation and CAT exposed property continues to lead other lines with regards to rate increases. The reality of increasing lost cost combined with CAT activity over the past several years has clearly caught people's attention. Additionally, the impact of recent revisions to CAT models, as well as the growing consequence of lower new money rates, continues to apply added pressure. While changing behavior may vary by territory and product line, clearly the general trend is definitively upward. Having said this, for the moment, there are certain lines such as excess workers' compensation and parts of the professional liability market that have remained more resistant to increased pricing. Fortunately, however, it would seem as though pricing has bottomed out in many of these lines and is generally no longer deteriorating.

As we have suggested in the past, there is a correlation between the duration of the tail and the time it takes market participants to recognize a change in behavior is required. Additionally, the lack of frequency can also experience a similar delay in recognition of underwriting issues. However, even longer tail lines of business that has become exceptionally competitive can overshadow these rules of thumb. As our Chairman says, even long tail lines of business can become short tail if they are sufficiently under-priced.

The Company's net written premium for the quarter was $1.2 billion. This represents an increase of 11% over the corresponding period in 2011. While more than half of this growth came about as a result of improved rates. While all five business segments grew during the quarter, the lion's share of the increase came from our international and specialty segments. The performance in these two segments continues to be driven by their exposure to strongly performing industries as well as strongly performing economy. Additionally, some of the operations in these two segments are amongst the most leveraged in the group and greatly benefit from a hardened market. Finally, a significant number of our younger operations are in these two segments.

The Group's rate monitoring for the quarter indicated an increase of approximately 6.5% over the same period in 2011. It is worth noting this is a significant increase from the 4% that was achieved in Q4 of 2011. Furthermore, it is also worth mentioning that this is the first time in several years the Group has achieved rate increase on top of rate increase for corresponding periods. This is significant given it suggests we have reached a new level of momentum where it is truly beginning to build upon itself.

Additionally, with our renewal retention ratio remaining at approximately 80%, it provides comforting evidence that we are not sacrificing the quality of the book while achieving improving rates. Margin on new business also appears to be headed in the right direction. The Company's new business rate relatively metric would suggest we are charging 104.2% for new versus renewal business. Put another way, with like exposures, we are charging 4.2% more for new versus renewal business. The Company's general philosophy continues to be that one should be charging more for new business given the additional knowledge we have about our existing books.

Our loss ratio for the quarter was at 61.8%, while this is a similar performance to the first quarter of 2011, the result was achieved in a different manner due to varian contribution from the different operating units in the group. This result also includes $4 million in natural CAT losses, in addition to $2.5 million associated with the Costa Concordia loss. The expense ratio for the quarter was at 34.7%; while this performance was in line with our expectations, we anticipate it will improve as the year progresses. Gene will be providing more detail on this topic along with others, shortly. In the aggregate, the Company delivered a combined ratio of 96.5%. This result was achieved through the contribution of all five business segments generating underwriting profits. However, when you adjust for the performance to an accident-year basis, we believe the business is running in the high 90s.

We continue to have great confidence in the soundness of our balance sheet, and in particular, the strength of our aggregate loss reserves. As we have explained in the past, the Company reviews each of our operations reserves in a detailed manner every 90 days. This allows us timely insight into how the book is performing. We would caution observers not to leap to the conclusion that the lower level of reserve redundancies recognized in the first quarter will be the new norm going forward. While it would be premature to declare we are in a hard market, there is undoubtedly sufficient evidence, both in our results as well as those of others in the industry, to support our view that we are clearly in a hardening market. The underwriting discipline that our organization has exercised throughout the soft market, combined with the investments we have made in new and existing platforms, will undoubtedly offer increasing returns as the trajectory of the market turn continues to seep in and accelerate.

Thank you, Rob. Gene, you want to go through the numbers now, please?

Okay, Bill.

I'm going to start first with a brief summary of the impact of the change in accounting for deferred acquisition costs. I'm sure you've all heard enough of this by now but the FASB issued new guidance that limits the deferral of acquisition costs to those costs that are directly related to the successful acquisition of new and renewal insurance contracts. We adopted this guidance on January 1, 2012, and we retrospectively restated our previously issued financial statements to reflect the change in accounting. The impact of that changed to our balance sheet at December 31, was a reduction in the DAC asset of $84 million and a reduction in our common stockholders equity of $55 million, or $0.40 per share. The impact on our income statement for the first quarter of '11 was to increase underwriting expenses by $1.3 million and to increase our overall expense ratio by 0.2 of a point. There is a schedule on the Investor Relations section of our website that shows the details of the impact of this change in accounting on our financial statements for each of the past four years.

We expect this accounting change to cause some delay in the improvement in the recognition of improving expense ratios especially when business is growing and to have the opposite effect when business is shrinking. I will cover this further when we get to the details of our expense ratio for the quarter.

Turning to our results, it was a solid quarter with respect to both underwriting and investment income. Our net premiums written overall up 11% to $1.2 billion. As Rob mentioned, that growth was led by the International segment, which was up 50% with strong growth in the Asia-Pacific, European and Lloyd's businesses. That was followed by 9% growth for Specialty, 6% for Reinsurance, 4% for Regional, and 1% for the Alternative Markets segment. The overall loss ratio was unchanged from a year ago at 61.8%. Losses from natural catastrophes were $4 million, it doesn't include the Concordia loss, compared with $24 million a year ago, which is an improvement of 2.1 loss ratio points. Prior year reserve releases were $25 million, down from $51 million a year ago, which is a difference of 2.9 loss ratio points. Most of the favorable reserve development in the quarter was related to the Specialty and Reinsurance segments and was related to accident years 2009 and prior.

The 2012 accident year loss ratio, excluding CATs and reserve releases, was 63.7% in the first quarter, down 0.9 of 1 point from a year ago, as price increases exceeded our reserving assumptions regarding loss cost trends. In addition, our paid loss ratio was down slightly from 59.1% to 58.5%, but it's a good sign that that's beginning to move in the right direction. The expense ratio was 34.7% in the quarter, unchanged from the restated expense ratio for the first quarter '11. As I mentioned, under the new DAC policy, expenses are recognized earlier than before, which will slow the recognition of improving expense ratio somewhat. Another way that we look at expenses internally, and I know some companies actually report this in their earnings releases, is on a written basis, which compares expenses incurred during the period without any DAC deferral with business written in that period. This takes out the process of trying to reallocate expenses from one quarter to another in an attempt to match them with earned premiums. The written ratio varies a little bit more for one quarter to the next due to the seasonality of premium writings, but it provides a very objective measure of the year-over-year expense trends.

On a written basis, arch bench ratio was 32.7% in the first quarter of 2012, down 0.9 of a point from 33.6% in the first quarter of '11. Net investment income was $158 million, up 8% from a year ago. Income from fixed income securities, including cash, was $119 million, that represents an annualized yield of 3.9% compared with 4.1% in the first quarter of 2011. Income from investment funds was $28 million, up $16 million from a year ago, with strong earnings from energy and real estate funds. And, the merger arbitrage trading account earned $6.5 million, which is an annualized yield of 8.5%. Realized gains, primarily the sale of equity securities, were $47 million in the quarter compared with $29 million a year ago. And, unrealized investment gains after tax were $452 million at March 31, up from $430 million at the beginning of the year.

We have a summary of our investment portfolio on pages 9 and 10 of the earnings release. You will see that total invested assets were just over $15 billion at March 31 and were up $555 million from the beginning of the year. That increase includes $350 million of proceeds from a senior debt offering that we completed in March, and of that amount $200 million will be used to repay senior notes that are maturing in February of 2013. So, all that adds up to a very solid quarter with net income of $135 million, and annualized return on equity of 13.7%, and an increase in our book value per share of 3.8%. Thank you.

Thank you, Gene.

Overall, we are pretty happy with the quarter. Our results are reflective of what I think are the discipline we've shown over the prior years and substantial improvement in our performance as we gain market position. We are pleased with what we see. We measure our reserves carefully, as both Rob and Gene mentioned. We are comfortable. In fact, our reserves as we measure them, which is we look back at the prior three years earned premium and then look at our total reserves outstanding, we choose three years earned premium because that serves as duration of our loss reserves and our reserves are at an all-time high compared to where they have been at any measuring point we've used in the prior periods. So, we are pretty happy about where we stand reserve-wise.

Inevitably, our ongoing accident year loss ratio is going to improve. It's going to improve only because of price increases exceeding loss cost. So, as that 4% from the fourth quarter starts to come into earned premium and 6.5% from the first quarter, as it becomes earned, we are going to see improving results. By the end of the year, we would expect 3% or 4% improvement in the underlying accident year loss ratio. That's setting aside all the unusual variables you can see quarter to quarter in the property-casualty business. In fact, with price increases where they are, that improving loss ratio is certain to come into play.

We think that while in individual lines of business you still are seeing people compete aggressively here and there, it doesn't take long before people figure out that what they are doing is stupid. Stupidity is not limited to any one company or any one underwriter; it pops up in all markets. We just notice it more when most companies are beginning to be disciplined and understand what is going on. So yes, the unusual behavior becomes more visible. I think that the cyclical change is always the same, exactly how it is implemented may well be different, but it isn't going to be a hockey stick and it never has been a hockey stick until some particular event happens, which drives the dramatic change. It can be a hockey stick dramatic rate increases in a particular line of business or a particular segment of the market; but overall, we are seeing good strong price increasing and the business is moving towards profitability.

We don't think interest rates are going to dramatically move up. We think it is still one world, and the difficulties in Europe are going to impact the investment opportunities. And, we think lots of the marketplace has capital embedded in Europe, so it's going to keep pressure on the overall market. We are excited; we think we will have an excellent year. We would expect that we will be able to deliver on our book value increasing by 13% to 15% for the year. And, we expect that we will be able to have additional capital gains, that some of things will be capital, and some of our other investments will deliver realized gains in the balance of the year.

With that, Kevin, we will be happy to take questions.

(Operator Instructions)

Amit Kumar, Macquarie.

Just going back to your comment regarding pricing versus loss cost. Did I hear that correctly? Did you mention a 3% to 4% delta, maybe just expand on that in terms of your thoughts on the earned premium rates versus loss cost? And how you got that?

No, I don't think it was the delta. I think what I said is we would expect that by the end of the year, we would start to see an improvement in accident year loss ratio, possibly as much as 3 to 4 points.

For example, by the end of the year -- if my expectations are correct, let's just say by the end of the year you have 8% or 9% increases in your premium rates. If you have 8% or 9% and you have, let's just say a 3% loss cost increase, part of that would come through and then you'd weight it for each quarter prior to that. And, I am just saying that that's likely to give you, by the fourth quarter, a 3% to 4% increase or decline in your accident year loss ratio.

Thanks for the clarification. Maybe touch upon California comp, and where do you think those trends are now as it relates to workers' compensation? Do you think the rates are finally increasing loss cost?

I'm going to let Rob talk about that.

I think the answer is trying to get your head around -- California comp loss cost is a pretty slippery slope given that they're willing to change benefits at a drop of a hat and make it retroactive.

Having said that, I think the market realizes that they have significant catching up to do. I think the rate increases that we are getting at this stage in that book are certainly keeping up with our belief as to where loss costs are going, or will be, over a period of time, and we are reasonably comfortable.

Having said that, I think that the average pricing in the marketplace overall, they find themselves in a hole, and even the rate increases that they are trying to get today I don't think is getting them to an underwriting process in general.

That's helpful. One other question, just going back to your opening comments regarding increasing flow in Specialty. In terms of -- can you talk about what the pricing differential between E&S versus non-E&S entities for W. R. Berkley companies on average?

I think the tricky part here is, it is not just about if it is an individual risk, what a regional company would price it versus a specialty company because it's terms, it's conditions, it's a lot of moving pieces; it's not just purely price.

What I would suggest to you is this, and I'm not just speaking about our businesses, but I'm speaking about the marketplace, if you will, is that, as I suggested earlier, it is the risks that have a bit of hair on them, whether they be property or casualty. For whatever the reason or other issues or complications with them, that they are looking back over the wall into the specialty market, and to the extent that they actually drift all the way over into the E&S market. The rate increase that exposure would be experiencing is quite material.

I think, Amit, you have to understand how we got here. And, that is -- what really gets us to a softer market is standard market rates. First, they get cut a bit. Then, what happens is they loosen their underwriting standards, so they say -- ah, we are writing all this business and not cutting rates anymore.

And, what they're doing is they have loosened their underwriting standards, so business that historically was in the E&S marketplace or otherwise starts to move to the standard market. Then, to add insult to injury, then they cut prices even more because they compete for their crap.

So, the sequence of things that happen is first people start to raise their rates, and then they figure out they can't raise their rates enough to pay for this business that never belonged in the standard market at all. Then, they tighten their standards and it goes back.

So, that's how it got there and that's how it reverses itself. That's how the cycle moves, and the cycle moves as far as terms and conditions, all of a sudden because when you realize you can't charge enough, you just stop writing the business. So, it represents the worst business in the standard market, and it's the business that they don't want to renew.

Okay, thanks so much for all your answers.

Keith Walsh, Citi.

First question for Gene. You alluded to this in your commentary around expense ratio. Maybe if you could talk about when do we start to see more leverage in that number? And, maybe if you could even talk about that number currently, excluding the startups. Are we seeing leverage there currently? Then, I've got a couple of follow-ups for Rob.

Yes, well we are already seeing in our written expense ratio the leverage come through. I think, like I said before, that DAC calculation and DAC policy slows that down a bit. But, we are seeing it today and expect it to continue, not so much as a result of the startups any more, but I think more so as a result of the fact the top line is growing as much as it is.

Keith, in some ways growth now with this new DAC calculation is a penalty again. And that is, you are not even recovering all of your costs on the financial statement basis. So, growth is now once again, especially real growth, significant growth, is not only not beneficial or breakeven, it is a penalty. So, the faster you grow, especially once you pass some single-digit number, it starts to have an adverse impact because you're not deferring even your real costs. The faster we grow the more adverse that is going to be, at least for the short run.

Okay. Rob, I'm just curious, why is the net earned premium growing faster than the gross and the net written if rate continues to improve sequentially? I would have thought the opposite.

Could you repeat the question? (multiple speakers). Why is the net written different than the gross written as far as growth rates?

No, the net earned is growing faster than the net written, and I would've thought the opposite if rate is improving sequentially quarter-over-quarter.

The earned is a reflection of the growth not just in the quarter but over the last 12 months of the growth rate.

Different reinsurance treaties --

We have some policies that are even longer than 12 months, so you can't really tie them directly to the change in the written in the quarter.

There is nothing that is changed, if that is what you are asking, Keith. It may be because of a reinsurance treaty --

I would say reinsurance is probably the big differentiator because, as Gene suggested, obviously the timing of the earned coming through versus the written and we will change our reinsurance purchasing over a period of time.

We have walked in different kinds of reinsurance coverage this year, which may have had an impact on it --

Yes, that of course, will impact the difference between the written, gross written and net written, and we have had some of that. But, in terms of the earned, that's more just a different time period that we are measuring there.

Okay. Then, just last one for Rob. In your commentary, still a few carriers don't get it. Does that imply a highly competitive market for new business? And, would you your retention as a result of that to dip below the 80% level it's been running at? Thanks.

When I say a few carriers, I guess what I'm trying to suggest is that they are the minority and the greater marketplace, if you will, is not only has it realized or recognized action needs to be taken, but it is actually translating into their behavior. From our perspective, you are seeing a change; and, they are serving as, some of these folks are serving as an obstacle.

As far as -- I think the reason why you're seeing renewal retentions hang in there for ourselves and presumably for some others is because the distribution system recognizes the market is changing and they are less inclined to try and shop business solely on price. I think all things being equal, it is becoming a less competitive or aggressive market compared to where it was. Having said that, it can vary by a line of business.

Josh Shanker, Deutsche Bank.

I wanted to talk a little bit, Bill, for a couple years you have been concerned about the industry's reserves. When we look at competitors and peers in the industry they still seem to be releasing a lot of reserves. Do you stand by your concerns about industry reserve positions, and when do you think that starts to become an issue?

The answer is, I think that some people in the industry have been more aggressive than they probably ought to have been. I don't know that I can tell you when that's going to happen. I think you have already seen several companies have deficiencies, and by and large, smaller companies have already had to address those. AIG had to address it and has. But, my guess is there will be more to come, but I can't tell you how soon that will happen.

Do you have an opinion on the pace of loss cost trends? Where we have been one year ago, where we are today, and where we will be in a year? You can talk to your book or you can talk to the industry broadly, depending on how you think it is appropriate.

I think loss cost trends are no longer totally benign. They are certainly increasing modestly. The global economic picture always has an impact on how these things happen and come down; and clearly, I think that the issues being faced in Europe overall will impact the economic picture every place.

That being said, I think we have passed through the period in the United States, at least, with the benign loss cost picture. But, I don't see anything running wild. So, if you saw loss cost grow at 2% to 3%, I think that would be my expectation. At some point, the United States just like the rest of the world, is going to have to face up to the ultimate issues of how do you deal with deficits that have accumulated over a long time, and inflation, and all that goes with that. But, at least sitting here today, that is certainly more than 18 months away.

Vinay Misquith, Evercore Partners.

The first question is on the top line. While it's strong this quarter (technical difficulty) seemed to sequentially decline. For their sense of a one-time items this quarter, and how do you foresee your top line over the next two quarters?

First of all, last quarter there was a particularly beneficial item that caused some of the increase. I think the turn in the cycle is not a nice, predictable straight line. Candidly, we were more optimistic about that growth at the beginning of the quarter than we are today. We didn't know why. We were surprised that it wasn't a point or 2 higher. Only when you sit and write numbers on a piece of paper can they be very predictable, Vinay. I'm not trying to be cute; I don't really know precisely why or where.

We had some companies that grew much faster in the first quarter than in the fourth quarter. Then we had some that sort of seemed to stop their growth. We had a couple of companies where because they were disciplined in their pricing, and we were really pleased they were disciplined in their pricing, they actually contracted in the first quarter, and we were okay with that.

It only takes a couple companies in a narrow marketplace on one line of business or another to make the business competitive for the short run. That has happened in a couple of lines of business. I don't think it is a trend, and if we are in a position where we saw growth at this level, we'd probably be more aggressive in buying back our stock, for instance.

But, we are going to have to wait and see ourselves. We are at this turn in the cycle, and at that moment in time predicting how much you're going to grow and how much price increases are going to happen, it is hard to tell. We are still very positive and we would still expect, certainly, growth at least the level we are at now and maybe a little more.

Fair enough. The follow-up is on the loss cost trends. You mentioned Berkley is looking at 3% loss cost trends, some competitors out there are saying it is about 4%. That still seems to be not very high. How would you look at pricing in the industry, going forward, and I believe you mentioned about 8% to 9% in the next few quarters? In the absence of significant spike in loss cost trends, do you still see pressures building within the system for rate increases?

First of all, I said I feel loss cost trends were 2% to 3%. And, I thought that by the fourth quarter, I thought price increases would be in the 8% or 9%. I don't think they are there now; I think that they'll continue to get a little better.

I might point out that every 1% decline in interest rate, for the Reinsurance business you need 7% on price; for the Standard Property Casualty company business you need about 3.5%. You have had 150-basis-point decline in interest rates over the past two years, maybe more; it depends who you want to use and how you want to measure and what you want to pay.

But, just to offset interest rates, you need substantial rate increases without giving consideration to the fact that in specialty lines prices had to come down 25% and in standard lines, probably 15% or 17%. I think that right now if people were to print their accident year results honestly, a lot of people would have for company results, operating losses on a marginal basis. So, yes, I do think you're going to have to have pretty significant price increases for awhile before the companies get to where their marginal base is making money.

You can't look backwards at your portfolio; you have to reinvest money each day and you have to look forward. Some of the people who are going to be in the most trouble are the people who priced their underwriting margins and built them based upon their average portfolio yield, as opposed to the marginal portfolio yield, and they are going to find out their companies are losing money. I think price increases are essential for the industry just to get to break-even.

Larry Greenberg, Langen McAlenney.

I'm just curious, with the new business pricing at 104.2% versus renewal, does that allow you to basically make loss picks consistent, new and renewal business?

I will let Rob answer that. I think that precision is something that we'd like to have, but I'll let Rob answer.

The answer is that what you're suggesting is what we target, and when we think about our design loss picks, and we revisit them every 90 days, we certainly contemplate what the mix and the contribution is in new to renewal business.

Having said that, our approach to erring on the side of caution a bit with new business versus renewal business is not just in how we price the business but also in how we book the business. From our perspective, as I suggested earlier, you know a whole lot more about your in-force book than you do about new business. So, we look for a higher rate for new business and we probably err a bit on the side of caution as to how we book it from a design ratio pick.

Having said that, when we look at the book that has been written, we are cognizant of what percentage is new versus what is renewal as we revisit those loss picks, once again, every 90 days.

That's helpful. With regard to your comment on the reserves, the favorable reserve development for the quarter, and that we shouldn't assume the drop this quarter is indicative of anything in the future. Was there anything unusual in that or is it just to suggest that one quarter doesn't make a trend?

I think we were trying to get across a message. And, the message is, which I followed up on when I made the comment, that our reserves relative to the average three years earned premium is at as high a level, or higher actually, than they have ever been. And, they have gotten higher in each successive year for the past five in spite of reserve releases.

No one should think that the amount of reserve releases was indicative in some way or another of our concern about reserve positions. We do a review, we conclude where we think we are, but we didn't want people to get the wrong impression, and frequently people think that the amount of reserves you release is a reflection on your reserve position.

I now think I can speak for our Company as well as a number of others; I don't think it necessarily is. Some companies who are deficient still release reserves; they even may release record amounts of reserves. It doesn't change the fact they are deficient, it is just they are more anxious to show better earnings. Some companies that are redundant are cautious in what they release, and they may be getting more and more redundant. I think investors tend to read too much in about reserve releases reflecting upon a company's overall reserve position.

Great, thanks. Finally, just reading between the lines, Bill, I know you're talking about a gradual uptick in pricing this year. It's still relatively moderate loss cost growth, but I sense that you still believe at some point in time this is going to turn into a more traditional hard market. Is that an accurate perception?

Hard markets always start this way. Then, something happens. Something happens because someone cheated more than they thought they were and gets into dire financial difficulties. It happened to AIG, but AIG got bailed out by the government. Look at all the billions of dollars of deficiencies they had to make up for, and we don't know if that's done or not. They do have very honest guys running the business now, and I'm sure they will get there.

But, the fact is none of us know where and what is sitting out there. And, all I can tell you is that every time we go into the beginnings of an upward cycle, it takes people a long time to get through paying for their past sins. Usually, someone doesn't have the ability to make it through. I don't know who that's going to be, and I can't tell you for sure. There certainly are lots of issues and risks to that situation.

I think you can have other kinds of problems out there. We certainly don't know who might be impacted by the European issues and the financial issues of the European banks. Lots of the capital that supports the overall industry is based in Europe. I think there are a lot of uncertainties.

I think that the fact is profitability increases very dramatically with 8% or 9% price increases in this year. With the same next year, you see dramatic increases in return on capital. Return on capital in the high double-digits, certainly for us -- excuse me, high-teens and certainly in the second year at 8% or 9% price increases our returns would be in the 20s.

I can't tell you any more than that. But, yes, I do think prices will continue to go up, and I think those price increases will get to be more substantial. Just like today, a few companies can restrain price increases by their aggressive behavior. Those few companies end up going broke.

It's what happened with Reliance and Frontier. They cost a lot of people a lot of money because they restrained prices in a couple of areas, and when they went broke and then literally in one month prices in commercial transportation in October of 2000 went up 28% on average. That will happen. There will be a couple of, what I call, smaller to midsize companies who go out of business.

Great, appreciate your thoughts.

Michael Nannizzi, Goldman Sachs.

The first question is, so if we back out the International segment, trying to understand what happened to exposure trends relative to that, to the pricing change. I'm assuming, and this may not be right, but I'm assuming that price change outside of International in your segments was better than the pricing change in International?

We typically don't get into the detail of the pricing, so to speak, by segments. I will tell you, though, the International segment, while rate played a component, it had more to do with additional units, if you will, of exposure driving the growth there, as opposed to some of the other segments where rate played a more significant component in the growth.

If we back out the International entirely, and we just focus on everything excluding that, I think net written premiums were up just under 5%. So, if the 6.5% price change that you saw year-over-year -- I'm just trying to figure out how to think about what happened to exposures? Whether it's Regional or Specialty given those are the bigger of the remaining segments?

Say that one -- I want to make sure I was following you. Gene was sending me a piece of paper, which was not much help.

If I take the consolidated results and we take out International written premiums, if my math is right, net written premiums were up 4.7%, excluding International. You said that in International, more of the growth was exposures, not rates, so I'm assuming that 6.5% is probably just fair as a starting point for the business outside of International.

So, it looks like if rates were up, if you were at $100 of business last year and then you lost some and then you wrote some new business, you're getting 6.5% rate on the business you kept. I'm just trying to understand why the exposure line actually increased less than the rate change? So, 4.7% versus 6.5%, I guess, is my question.

First of all, I think you have to break out it a little more and it's a longer question than we can answer here. A big part of that is impacted by alternative markets which grew at a very low rate, barely grew at all. And, that was because of one particular area that, in fact, declined because how a competitor priced their business, and we had substantial decline in premium in that one area. When you take that out, I think that is probably a little misleading. For example, Specialty grew at roughly 9%.

It is a lot more complicated than we can answer on this call. Your underlying assumption is like adding up how many dogs do you have if you have 17 animals, it is hard to give you an answer that will make sense. But, I think in the Specialty business -- and by the way you also have the weighted by amount of premium, and it's not just adding up the pieces. I think that the answer would be that the units of exposure in the alternative markets declined and despite increase in Specialty business, but price increases still drove most of it.

As I said, I'm sure if you want to go through the details of it, we can try and do that and Gene will go through it with you, Michael, later on. It's not something you can aggregate and add up, it's a fairly detailed thing. It's one of those cases where the mathematical conclusion is correct, but I think it doesn't give you the correct aggregate conclusion. Because, as I say, the biggest section of Specialty prices -- volume was up 8.8%, and units of exposure were up slightly.

I'll follow-up later, thank you. Just one question about some of the new businesses whether in Specialty or International, did you add any new teams or new platforms during the quarter? And, in terms of the capacity of folks that you've brought online, I guess particularly in International where we're seeing the most growth, what percentage of the business that they were writing before they came online here are they writing now? Just to get an idea of pipeline of potential business there? Thank you for your answers.

Mike, we added one new team and they are going to be focusing on the public entities space; and at this stage, they have not even begun to write business or there is nothing that has been bound. We expect that to be happening later this quarter. There has been no impact from what we did as far as starting new businesses in the first quarter on the income statement. We do think that over time it will be a meaningful contributor to the Group, but certainly at this stage, there has been no impact.

Doug Mewhirter, RBC Capital Markets.

I have just two quick questions. First, I noticed, if my calculations are right, your wholly owned investees reported a pre-tax loss. Is that a seasonal swing, or is there any particular --?

Just seasonal swing. They expect to meet their budget for the year.

Okay. My second and last question, you talked about how primary workers' comp rates have been going up industry-wide, although loss costs have been unpredictable as well. But, you said that excess workers' comp isn't following, and you talked about how there's still some competition in your alternative markets. Why do you think there's a disconnect and do you think that logjam would eventually break loose this year or do you think it will take a while?

(Multiple speakers) I think what you're really seeing is just the, as we had suggested earlier, the difference in tails or duration of tail as we had suggested earlier. Excess comp has a much longer tail than primary comp. And, as a result of that, it takes a bit more time for insurance carriers or market participants, if you like, to recognize that they have an issue.

I do expect that you will see a shift in excess comp and as we also suggested earlier, it is probably give or take bottoming out, but there is a bit of a lag or a delay before the reality comes into focus and you'll see the same type of momentum building in the excess comp line that you are seeing in primary comp.

Okay, thanks. That's all my questions.

Meyer Shields, Stifel Nicolaus.

Two quick questions, if I can. First, for Rob, when you cautioned us not to extrapolate too much from the first-quarter reserve releases, were you saying the $25 million is lower or higher than the expected run rate?

I think I was trying to suggest to you that I wouldn't hang my hat that that is the number or the level going forward. I think it would be very problematic if I answered your question more specifically.

I think if you put that together with what I said you should have the answer. Which is our aggregate reserves have never been stronger.

I think I misinterpreted Rob the first time, that's why I was asking. In general, Bill, when you think about the mix between property and casualty, it looks like you're a little bit more heavily focused on the property side than historically. Is that a reflection of rates, or a change in approach because the larger companies can afford a little more volatility?

I think there's several things that are happening. First of all, with interest rates down, the difference in expected return for short-tail lines, and I don't mean property lines, but short-tail lines, is changed because you're now no longer getting the benefit of that higher investment return on longer-tail reserves. So, on marginal business that we write new business out, the improved return from casualty business is less than on shorter-tail lines of business.

Yes, we have shifted whereas longer-tail lines of business used to represent, let's just say between 85% and 87% of our business, today it probably represents 82% of our business. Still very predominately casualty focused, very predominately long-tail, but yes consciously, a decision that says we are willing to shift. Number two, pricing on some of those lines of business have gotten much more attractive.

Number three, some of those specialty lines in fact do have some volatility that when we were a lot smaller company we couldn't take and now we can afford to take it. Things like Marine business where we can afford to have an adequate net to make money on the line of business.

So, all of the above that you mentioned.

Jay Cohen, Bank of America.

Just one question to something you guys had talked about. And, that was in the quarter the underlying loss ratio was better than the year ago. As I thought about it I suspected that the earned premium for the first quarter still reflected, obviously, business written last year when price increases did not keep pace with claims inflation. So, while I think you're right you certainly should see a improvement later in the year, I was surprised to see it in the first quarter. Anything else going on there?

Jay, there are a couple things going on there but probably the most noteworthy would have to do with a pretty benign first quarter as it relates to property losses. And obviously, that drops right through so relative to what our expectations would be for property loss activity in Q1 versus what it turned out to be, things were a little bit better. While there were a couple of moving pieces, I would suggest to you the lack of property loss activity was the leading contributor.

That was my second question --

But overall, I think the trend loss costs again were less than 4%, probably slightly less than 3% of the third quarter, so there's a slight benefit from those price increases in the third and fourth quarter of last year.

Got it. Then, on the fixed income portfolio, can you talk about the difference between the new money yields and the expiring yields, or your book yield, I should say?

First of all, we have been pretty cautious about reinvesting. In the past 45 days, you could in a 10-year get anywhere from 240 to 197. We have been cautious in what we've done, so we have more cash than we have ever had. I shouldn't say ever had, we have more cash than usual. We have $1.4 billion of cash, give or take.

I would say a couple things we are doing, Jay. Number one, we're looking to try to buy highly protected mezzanine mortgages where we can get 5% or 6% that have a 3- to 4-year duration, 5-year at most. That will help us. Offset by lower yields on our fixed income marketable securities. Overall, we are sort of investing between 3.75% and 4.25%. We think it is going to have slightly adverse impact.

We hope that is going to be offset by common stock dividend yields, which we've invested probably $400 million in common stocks based on dividend yields and attractiveness for what we think will be gains, but not what I call a dynamic stock portfolio but a conservative one.

In addition, finding these particularly small niche things. We bought some housing bonds to give us tax credits that will give us effectively a 7% or 8% yield, but it doesn't appear in the investment income. It's going to appear in a lower tax rate. For now, we think we are okay still maintaining this give or take 4% bogey on our yield.

I'm very comfortable at the market changing. There's no doubt in my mind about price increases and where they're going. My biggest concern is the harder the market turns and the greater our cash flow, will we be able to keep finding niches to invest in and opportunities to invest in at the current portfolio level?

I think certainly the situation we are seeing in Europe, which is the populist movement not the face facts of economic discipline and physical discipline is an issue we are going to face here. If we don't, we're going to have inflation, and with inflation you don't want to lock in higher rates for longer terms, which we've actually not done.

Got it. One last quick question, I guess for Gene, can we assume that the catastrophe losses were all in the Regional segment?

That's right.

Great, thanks a lot.

Bob Farnam, KBW.

Question on the excess workers' comp piece. So, with AIG pulling back in that space, have you seen any changes thus far? And, do you see that as a good opportunity to have that market change more quickly?

AIG has reduced their relative competitive position before. They have gotten more sensible, their pulling back was certainly helpful. There is one company that we think was a very aggressive price in the business, they didn't price their discount on their investment yields, and excess comp is -- the average duration of the portfolio is 17 or 18 years. It's an enormous impact with interest rate assumption and they base their discount on their average portfolio yield, not based on current marginal interest rates.

Because of that, their prices were from 20% to 40% less than ours, and that's the one place in our industry where we lost substantial business. That company is in the process of being sold, so hopefully their new owners will get sensible.

Sameer Kher, Capital Returns Management.

I just wanted to ask about the 4.2% higher price increase you are achieving higher than your renewal business. How is that comparison of pricing for these two buckets trended over say the past four quarters? Could you also comment on what the bound versus quoted trend has been doing in the same time period for the new business?

Let me answer the first one, and then I will -- then if you could ask the second piece, I didn't catch the whole thing. Relatively speaking within a certain number of basis points, the delta between new versus renewal has been pretty consistent over the past several quarters.

That is not a new phenomenon. We just decided to start to bring that to people's attention because -- a, we think it's relevant and -- b, it surprised us how the industry in general doesn't really seem to talk about new pricing, they tend to focus only on renewal pricing which we didn't feel was appropriate. The short answer is that is it has been pretty consistent.

Okay. And, the second question was actually just how is your bound versus quoted metric has been trending in your new business in say the same time period, let's say four quarters.

As far as those ratios by the group, or by segment or by operating unit, that's just not stuff that we typically get into. I would tell you that new business is a bit more competitive today than it was in prior quarters. At the same time, we are finding opportunities. Once again, it has become a bit more competitive for new business and that is more, I think, a reflection on the change in the attitude of the distribution system, as much as anything.

Dan Johnson, Citadel.

Surprising, almost all of them answered. Maybe just one question, as you move more into mortgages on the asset side, you gave some good statistics there, but what sort of loss assumptions do you use in those sorts of assets relative to what you might be using when you think about corporate investments?

The mortgages we are buying are all less than 50% debt to value. We are not really using anything with significant leverage. The mortgages we are buying have relatively short duration. The things we are using, frankly, we don't think there is any consequential risk of loss. We are not in the open market. We are not buying just stuff in the marketplace.

Do you have a team underwriting these, or are you buying --?

I'm not going to talk about the specifics. We have had relationships with people and we've done this for a while.

I'm not showing any further questions at this time. I'd like to turn the conference back over to the host for closing comments.

Thank you all very much. We are very enthusiastic. While clearly we thought we would grow more this quarter than we did, I think one of the things that happens in the cycle turning, the distribution part of our business is sitting and adjusting to price increase environment and they are not out shopping their business. That also means until some of the companies start to set higher standards or terms and conditions, there's not as much business out loose. I think that is going to start to change more dramatically.

I think right now we would expect price increases continue and to accelerate somewhat. And, as we said, by the end of the year we expect 8% or 9%, maybe even a little better. We would expect our growth to get somewhat better than it was in the first quarter. Thank you all very much. Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.