W R Berkley Corp (WRB) 2012 Q3 法說會逐字稿

Good day and welcome to W.R.Berkley Corporation's third 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 a representation by us that the future plans, estimates or expectations contemplated by us will in fact be achieved. Please refer to our annual report on form 10K 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 materially affect our results. W.R.Berkley Corporation is not under any obligation and expressly disclaims any such obligation to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.

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

Good morning. We were very pleased with our quarter, more than just the quarter, all the trends we see continue to cause us to be optimistic about the balance of the year and next year. The world is not perfect, there are all kinds of things that are beyond our control, but we see nothing on the horizon that will prevent us from achieving improving rates and continued higher returns. That said, we would hope that we can achieve the kinds of returns we have targeted as we move into the next several years. With that I will turn this over to Rob to talk about our operations.

Thank you very much. Good morning, everyone. The third quarter offered further evidence that the property and casualty commercial lines market is going through a time of positive transition. Efforts among many carriers to obtain rate adequacy are becoming more widespread with every passing day. While this change in behavior is not occurring in all lines of business in perfect lockstep, there is a clear prevailing wind driving rates up. As we have discussed in the past and it remains our belief today, the catalyst driving this change continues to be carriers' increasing sensitivity over how prior years will develop. This concern is a consequence of an industrywide underestimation of loss trend, as well as loosening of terms and conditions combined with aggressive pricing.

Workers' Compensation continues to be one of the lines of business that is experiencing the greatest change in behavior. In addition to rate increases, the accelerating growth in several state assigned risk plans is also an important data point. The casualty market and especially the excess casualty lines are offering encouraging signs as well. Having said this, given how much underwriting discipline has eroded over the past several years, the market still has a long way to go. On the other hand, much of the professional lines market continues to be exceptionally competitive, but it is showing early signs that things have bottomed out.

The marine and aviation markets have also remained surprisingly competitive, even the level of loss activity that has occurred over the past several quarters. The group's rate monitoring for the third quarter indicated an improvement of 7% over the third quarter in 2011. While pricing does not move at the same pace across all segments or for that matter across all operations, our primary insurance rate improvement stood out at 7.5%. The renewal retention ratio continues to remain at approximately 80%, providing us confidence in our pricing leverage, as well as comfort that we are not experiencing adverse collection. This represents the seventh quarter in a row where the group achieved rate increases and the third quarter in a row where we also obtained rate on rate.

Net written premium in the third quarter was $1.276 billion, this is an increase of 13.3% over the third quarter of 2011. 39 of our 45 underwriting operations grew, which allowed all five business segments to contribute to the group's overall growth. The growth was driven primarily by rate at 7%, 5% of exposure and 1% audit premium. The group's loss ratio for the third quarter was 62.1, which is an improvement of 2.7 points over the third quarter last year. In addition, the expense ratio improved by 0.8 of a -- 0.8 of a point, excuse me. This gives us a combined ratio of a 95.8 or total improvement of 3.5 points over the corresponding period.

The Company's progress is primarily a result of higher earned premiums stemming from rate increases, our maturing start up operation, as well as lower CAT activity. Gene will be going into more detail on these topics shortly. The group's balance sheet remains robust. Our reserves remain strong, as demonstrated by 23 consecutive quarters with net positive reserve development. Additionally, our investment portfolio remains strong with an average rating of AA minus.

The market is turning at an increasing pace. Much of the change in behavior we are seeing today is a reaction to developments stemming from underwriting decisions made by some in the past. We expect more companies to report additional negative development over the next few quarters. Further, while the impact that the low interest rate environment has on the industry's economic model is widely discussed, we believe few have begun to appropriately factor this into their pricing. Having said this, while it is unclear how hard the market will get and how quickly it will get there, it is quite apparent that we have a great deal of runway in front of us when it comes to pushing rate.

Thanks, Rob. Gene is now going to try and go through the financials and then I'll pick up after that.

Thank you, Bill. As Rob said, we had another strong quarter in terms of both revenues and underwriting profit. And we also managed to deliver a modest growth in investment income in spite of the anticipated decline in earnings from investment funds. Our net premiums written were almost $1.3 billion in the quarter, up $150 million or 13.3% from a year ago. The growth was led by our specialty and alternative market segments, which were up 18% and 17% respectively. Business units that we started since 2006 grew by 34% in the quarter and now represent approximately 25% of our overall premium volume.

Changes in foreign exchange rates compared to the third quarter of last year added about 0.5 percentage point to the overall growth rate expressed in US dollars. Underwriting profits were $50 million in the quarter, that's up from $8 million a year ago and an overall combined ratio that decreased 3.5 points. Three main reasons for that. First, the underlying accident year loss ratio before CAT improved by 1.6 percentage points to 63.7, as price increases over the past seven quarters are beginning to have a meaningful impact on both earned premiums and underwriting income. In addition the regional segment benefited from very benign loss activity in the third period compared with a year ago.

Second, catastrophe losses were just $9 million in the quarter, that's down from $51 million a year ago, which is a further improvement of 4.1 loss ratio points. And third, the expense ratio improved by 0.8 of a point to 33.7, also largely due to the impact of rate increases. Four of our five business segments reported lower expense ratios on both in earned and written basis. The regional segment expense ratio was flat on an earned basis, but down 0.5 point on a written basis, that's before DAX. That adds up to an accident year combined ratio before CATs is 97.4, down 2.5 points from a year ago. In addition, we reported favorable prior-year reserve development of $28 million or 2.3 percentage points, loss ratio points. That's down from 5.3 loss ratio points a year ago, but right in line with the reserve releases of $25 million and $30 million in the first two quarters of this year.

Prior-year reserves developed favorably for all five of our business segments. The calendar year combined ratio was reported at 95.8, down from 99.3 a year ago with all five business segments reporting combined ratios under 100. Although the specialty segment's reported combined ratio was up from a year ago due to lower reserve releases, the accident year combined for specialty also improved by 2.5 points. Investment income was $116 million, up $2 million from the third quarter of 2011. Income from our core portfolio, which includes fixed income, equities and real estate, was up $2 million to $127 million, with an annualized pretax yield of 3.7%.

Income from merger arbitrage was up slightly to $2.5 million and income from an investment funds reported a loss of $13 million, which includes energy-related losses of $21 million that we had already announced in our second-quarter 10Q. The year-to-date annualized yield on the overall portfolio was 4%, unchanged from the year-to-date period in 2011. And on a tax equivalent basis adjusted for the tax benefits of the municipal portfolio, the annualized return on investments was 4.6% year-to-date. We reported realized gains of $22 million in the quarter and had unrealized gains pretax of $856 million at September 30, 2012. At the end of the quarter 85% of the portfolio was invested in cash and fixed incomes with an average duration of 3.3 years at an average credit rating of AA minus.

We repurchased 2 million shares of our own stock in the quarter, which brings us to 3.3 million share repurchases year-to-date at an aggregate cost of $121 million. Our net income was $101 million in the quarter, which is an annualized return on equity of 10.2%. And we finished the quarter with book value per share of $31.81, which is an increase of $3.06 for the year-to-date period and an annualized increase of 15%.

Thanks, Gene. Well, we were pleased with the quarter. On the investment side our duration was reduced from 3.4 to 3.3 years in the quarter, primarily as a result of the duration of our mortgages and prepayment rates in our mortgage portfolio declining and the ordinary attritional impact of time passing by. We've chosen not to be aggressive in extending our long-term size of the investment portfolio because we are concerned that inflation is out there, although clearly the short-term time horizon appears to be benign. That's a balancing effect that we are concerned about. And the way to push that duration out is to go out, at least on a port of your portfolio, substantially more than 10 years and that's just not something we want to do.

The investment side also has benefited from our continuing ability to find niche opportunities, but unfortunately they keep disappearing. A good example of those would be we were able to invest roughly $200 million in mezzanine mortgage obligations where the collateral protection was still less than 50% loan to value and with a return of 6%. But as we approached the end of the third quarter the yields on those securities declined sharply and the current returns are more like 5% and another niche went away as we search for more opportunities that fulfil our security and quality requirements in spite of how they may appeared because of the category. We think we can still come close to holding our existing rates to right around 4% pretax, after-tax will probably decline a little, but we are optimistic at least through the end of the year. Our cash flows, if they accelerate dramatically, would cause us to question that.

Overall, you are seeing a number of our competitors, especially the midsize competitors, having to face up to the reality of efficiencies in prior years and they are coming out. We think that this is like a snowball going downhill. A number of these companies are going to have to make up for the deficiencies. They're then going to face issues as to their ratings and their abilities to continue on their own will diminish. So, we are very optimistic. We see more and more opportunities. We think we are being rewarded for the five years plus of investment we've made in setting up new enterprises and we expect that will allow us to grow in a time when others are just trying to hold their own. So with that, I would be happy, Allie, to turn this over to questions.

(Operator Instructions)

Amit Kumar, Macquarie

My first question relates to capital management. With the impending fiscal cliff versus the insider ownership, can you talk about how do you view a special dividend before the year-end?

It is certainly something that we are thinking about. We are considering. We will probably make a decision as we head to the election. But I think that that will certainly have an impact on what we do. But if in fact we think rates are going to change dramatically, it would take on a serious issue that we'd considered.

And the only other question I have is on pricing. You are talking about pricing going up. And I'm curious, and maybe this is a bit too early, if you thought of fast forward to year-end 2013, all of being equal, do you expect the rates to be up double digit at that time, or do they sort of trend up in the next few quarters and then in the absence of any industry event do they start trending down?

I think that what we're trying to get across the message to people is that with interest rates where they are if rates go up 10% next year you are still going to barely have adequate returns. It takes a lot of increase in rate to offset the decline in investment income.

So, as people's portfolios run off and the duration of portfolios are probably between two and four years, you are going to start to see people need rate just to have mid-single-digit returns at the current time. So, I think that our view is you'll see, if not double-digits certainly very high single-digit returns by the end of the next year and we don't see them falling off.

That's all I have. Thanks for the answers.

Thank you, Amit.

Vinay Misquith of Evercore Partners.

The first question is on rate increases. Now we've seen some from your Company as well as some admitted carriers out there, that rates have accelerated third quarter versus second quarter. Just curious from your perspective, what do you think are the drivers? So, are the large admitted carriers be more disciplined or do you see the smaller players also be more disciplined. And I think that within your regional business your top line picked up. So, just curious about that, too.

I am going to let Rob take this.

As far as the regional growth goes that was primarily from rate. Really not so much exposure count. But putting that aside, I think there are large companies and there are small companies out there that are disciplined and some that aren't disciplined. Clearly, some of the larger national carriers tend to have a lot to say as to what the tone is of the marketplace.

I think ultimately what is driving the change in behavior, as was suggested earlier in the discussion, is that people are seeing things develop out from as far as prior-year goes and they are concerned as to how things look as they come into focus. And they are taking action as it relates to that.

So the rate activity that you've seen so far, again in our opinion, is because people are observing and extrapolating how prior year's going to develop and, also as we suggested, the level of anxiety as it relates to what was also discussed a few moments ago around the impact of investment income, I think, is on people's minds and that is probably the second shoe to drop in what will be the catalyst for further rate increases, as also suggested a few minutes ago.

The second question was on loss cost trends. Your pricing is rising 6% to 7%, margins improving about 160 basis points. Curious as to what you are booking as loss cost trends right now.

Yes, quite honestly, as you would expect, it varies by line of business. I would suggest, though, in the aggregate for the group it is north of 2%, probably certainly not above 3%. And having said that, perhaps extrapolating a bit, given the rate increases that we are achieving at this stage, we have a reasonably strong degree of confidence that we are adding to underwriting margin at this stage.

Okay, fair enough. Just one last question if I may. Your expense ratio actually declined this quarter year-over-year, which is good. Do you think that you are at a point where more premiums would now add more to your leverage on the expense ratio versus the past?

Yes, absolutely. This has been something that we've at least been trying to highlight for folks over the past couple of years. What has happened is the written has grown and finally the earned is coming through and many of the businesses that are at different points in their lifecycle are the startups that are transitioning out of their infancy, if you will. They're getting the critical mass, the earned premium is coming through, and you will observe the operation being able to leverage those expenses more and more over the next many quarters.

That's great. Thank you.

Thank you.

Greg Locraft of Morgan Stanley.

Just to follow-up on the last one. So, Rob, if I was understanding you correctly, pricing up 7%, and loss trend up 3%? So should we be seeing the core margins increasing by 300 plus basis points in future periods year-over-year? So, double what we've just seen?

So, I think that -- a couple of comments. First of all I think the simple math would suggest that it's going to improve by 4%, but obviously it takes time as you know, Greg, for that earned premium to come through. And in addition to that something to keep in mind, obviously, we all historically and expect we will continue to err on the side of caution as we adjust those design loss picks down, but certainly the back of the envelope math I would suggest is trend 3%, rate achieved 7% and that gives you 4%, but that will take time to come through.

I think you also have to recognize that the past redundancies means our loss ratio pick for prior periods, as Rob suggested, may have been more than adequate. So, we will have to examine that pick each year since the pick is made on a waterfall basis looking backwards. So that also could have some benefit.

And then back to the special dividend, which was sort of an interesting question. Would you all consider adding debt to fund that? Or would it be contained within earnings? And obviously that's pending the election as you had mentioned (multiple speakers).

We wouldn't have any need to add that. We have lots of cash at the holding Company and have lots of dividend capacity at our operating and so it's -- it wouldn't be our plan to add that.

And then shifting gears to the private equity portfolio. On I think it was the last call, you had mentioned possible monetization of $100 million or so in gains. How is that trending and what is the use of proceeds?

I think what I said in the press releases, we would expect at least $75 million of gains in the fourth quarter. That really meant to try to be a little more specific in that issue. And that would point to our thinking about all our capital management can repurchase stock to special dividend, but we also have additional realized gains that we expect next year.

And then one last, and I apologize for the rapid fire nature, but on the pricing side for the longtail lines, this is more I guess for you guys, just how it really works. Do you all take the embedded 4% in the portfolio. Do you take the risk free rate.

How do you think about the investment yield assumption in your models as you go out two, three, four, five years in your pricing model? So how does that work for Berkley Corporation? And then how does the competition view it from a pricing perspective?

Greg, it's Rob here. As far as pricing new business, we it's a little bit of a complicated answer, but I guess the simplified version is we are very cognizant of what our new money rates are at the time. Obviously, we take into account duration and so on and so forth.

But as it relates to new business that we are writing, we are focused on the new money rates and the premium that comes in and the reserves that we set through our design picks that are associated with that business. We are focused on what type of return that money can achieve if -- when we put it to work today.

I think a good example of that would be what happens in our Excess Comp business, where we affectively lost a third of our business, maybe even a bit more, because there is a place where our pricing has literally a discount rate built in because those reserves specifically are discounted, and the discount we use reflected the current rate on long-term securities.

And a number of our competitors use their average portfolio return as the discount rate. We use the current available rate for new money. So, the end result of that with a 17 year duration of those loss reserves is that our prices were substantially higher than those competitors and we lost a lot of business to those people.

But the fact is when that money flowed in, they had to invest it in the same way we did at whatever the current new money rate is. So, in some areas, especially active comp, it's a very specific impact Greg. In other areas it's talking to the underwriters about the profitability of the business and being cognizant of these loss ratio picks that you can have given lower rates of return.

Some of your competition has said exactly that, which is that they are using sort of a blended interest rate assumption or return assumption, as opposed to exactly as you said, which is that you guys use new money yields. In a way they're seducing themselves. They think their pricing is adequate and overtime their returns just won't be there.

In fact, it only works when you're going to sell the Company. And then the problem is someone else's.

Okay. Thanks for the clarification.

Josh Shanker of Deutsche Bank.

Two questions for you. The first one, I want to talk a little about the acceleration of rate and the deceleration of net written premium and what's going on there. And two, --

Wait. The deceleration of net written premium?

Yes, you guys were doing mid-teens -- it's 14 in 3Q '11, 13 in 3Q '12. I realize that's small, but given that you have had a significant rate bump since that time, you would think that net written premium growth would be accelerating at this point. Maybe the startups were writing more business. I'm sure that there's a very reasonable explanation for that.

Candidly, startups vary, new business varies. It's -- quarter to quarter varies. We don't view those changes as particularly material.

And the second question involves when can we really expect expense ratio to start coming down given the higher volumes?

It's come down. It will come down quarter by quarter. You have to understand it converts into earned premium, that takes five quarters. The other thing you have to remember is the whole change in DAC calculation doesn't give you the benefits of growth until it convert to earned premium, so this whole new accounting change in DAC effectively penalizes you for growth. So we are going to -- it is going to come down slower for us than it will be for companies that might not be growing as quickly.

Okay, appreciate the answers.

On a written basis one of the things we've talked about when this DAC pronouncement first came out as we also look at the declinings best ratio on a written basis, and for us the quarter to quarter last year to this year is down 1.4% points and down 0.8 points on an earned basis. So, that gap will close, and in addition as we continue to grow it will be that much better.

You've got earned premium that -- there is still doing growth and earned premium that is going to make that continue to decline. We would expect there would be substantial declines in that over the next, certainly, at least five quarters that are baked in already.

Think you very much.

Michael Nannizzi of Goldman Sachs.

One question I had was on the $75 million in gains. Was that specifically related to the private equity portfolio or is that relate to the more - or is part of that related to the more traditional fixed income book?

We are just leaving it as is. Generally, we are just letting people know that that's what we are going to have. And the answer is we have -- we expect it to be probably private equity, but there is a lot of places that there are gains in the portfolio that will be realized.

So the question is if you are selling fixed income to --.

It's not fixed income.

Okay, it's not fixed income. So we shouldn't interpret the press release commentary to imply that you're harvesting some gains on the fixed income side. Okay. You talk in the past about this notion of fear or greed turning to fear when inflection, pricing inflection points happen. How would you fit that to the environment that you are seeing right now?

I think it really happens Company by Company. When people stop seeing redundancies in their reserves and start to see deficiencies. When people stop seeing those cushions that they had now for many quarters. I think that you've seen it happen in a number of companies. I think there were over 30 companies had deficiencies last year.

I think that the fact is that as people who think they then fixed their problem of deficiencies by putting up money find out, oh, my goodness, another quarter and we look at our reserves and there's another deficiency, people start to get afraid. And when they start to get afraid they push on price, they get more disciplined on terms and conditions.

I think you're going to see that in a lot of people who were aggressive in writing Workers' Compensation, especially like California places, where people didn't know what they were doing and thought this was such an easy thing. And I think there's a lot of lines of business that are like that.

I think you will see a number of people in long-haul trucking thought that was a line of business that was so easy and they've managed to make a mess of it. It's not really a very longtail line, so they are finding out quickly. So, I think that's what happens with fear. You think you fixed your problem. You said, ah, it is behind us, we fixed the deficiency and then the deficiency comes up again.

Just one last one maybe for Rob, if it is okay is you made a comment about rate and exposures and translating that to the top line. If we were to look at the regional segment, I'm just curious, if rates overall were up 7% or 7.5%, where does regional -- where does a regional segment fall in that spectrum and what is the rate versus exposure on the US regional business? Thanks.

Mike, just want to make sure as it relative to the question, so as far as the regional piece goes you would like to understand what the relationship is between rate versus exposure versus auto premium so on so forth. Typically we don't break that out by segment. Having said that, what I can tell you the simple math is that it is, again, it is really it is all rate and plus a little bit and exposure is not -- is flat, quite frankly.

So, it's mostly rate and exposures are flat. And on a relative attractiveness in terms of the rate gains you were seeing versus loss trend, or just in absolute terms, in the regional segment versus the other areas or the other segments, and I realize it is a broad question because there are a lot of businesses that roll-up into each of them. But are you seeing more or less opportunity for rate in the regional segment versus the others?

I think certainly from our perspective we are quite pleased with the rate that we are achieving in the regional group. So, we don't have any reservations about the rate that we are achieving in the regional group, I guess, to make a long story short. Are they outperforming other segments, so to speak?

They are doing a little bit better than some. They are not doing quite as well as a couple of others. But the rates that they're getting there without a doubt, clearly they are adding to underwriting margin and we're very comfortable with both the pace that they are moving, as far as achieving more rate.

Great, thank you very much.

Meyer Shields of Stifel Nicolaus.

Rob, in your introductory comments you said you think that current rate changes stem more from reserve problems then from interest rate recognition. And I'm wondering what is it that you are seeing that makes you think that it is the reserve issue and not the yields impacting current behavior.

Quite frankly, it's more anecdotal, but my sense is from visiting with people in the marketplace, and you hear what their focus is and what is really in the immediate term on their mind and what they are trying to address, it is pretty apparent that they are focused on how they see prior years developing. There is a lot of discussion around, quite frankly, the impact that investment income is going to have, but quite frankly in our opinion if they're really focused on investment income as well there would be a more of a sense of urgency in getting even more rate than they are.

I think you know we've talked to people every place from agents to presidents of companies and the thinking and the concentration is inadequate underwriting margins. And no one talks about the impact of lower investment income. It's just not a topic in the front of peoples' dialogue or in the front of their minds.

That's very helpful. Bill, are you seeing any of the same trends in terms of reserved problems driving rate increases on the international front?

I think that we would suggest that it's not as easy at this point for us to see those trends internationally. The same information and the same format is not available for us to look at. I think that there is certainly are a number of global companies that have similar problems.

So, I would suggest that a number of the larger global companies have reserve problems, but in some of those cases bigger problems for some of those companies would be balance sheet problems related to their asset makeup. So, we think the issues exist on a global basis. Some of them because of reserve shortfalls and some of them because their carrying values of investment assets, which are probably not reflective of the real market.

And last question, I guess, probably for Gene Can you give us a sense as the overall percentage exposure to property, I don't know if it crept up in the quarter, but it has in the recent past. Can you give us a sense about what the CAT load is for the pricing that you're using?

I guess before Gene tackles the question, one piece here that I would add is, I think it would be a mischaracterization to suggest that we have dramatically increased our CAT-- or our property CAT exposure. In fact, what we have done is increased some of our exposure to some of the shorter tail lines of business, but property CAT is not something that we have increased our focus on. Gene?

I don't really have a number I could give you. It depends on what line of -- what part of the business you are talking about and it is a pretty complicated exercise to figure out what CAT load goes into each policy in each line of business. We don't have like an overall CAT load for the book.

The fact is what we do is we examine our book of business. We examine total insured values, assess the CAT value by area, by storm, by line of business and then protect ourselves accordingly. But we are -- even though we are now writing, as Rob said, more short-term business, even the property business that we are writing is not CAT exposed particularly.

That's very helpful. Thank you.

Jay Cohen of Bank of America Merrill Lynch.

First a numbers question I guess for Gene. Gene, can you give us a more precise breakdown on the investment income with some of the other ways you typically break it out in the Q with real estate and equity securities?

In terms of their yields or -- their returns, Jay, are not changed so much from where they've been in those lines of business. The overall --.

I'm just thinking the numbers for the quarter, what those classes --.

Even for the quarter. The core portfolio was up, which are those three pieces, is up $2 million and there is no movement within any of those categories you mentioned significantly one way or the other.

It looks like then that the fixed income portion was up from the first half into the third quarter.

The fixed income was up from when?

From the first half run rate. It looked like it improved in the third quarter.

I think it's very, very stable. The core portfolio has been at 3.7, about that.

After DAC.

Well, it is on a tax equivalent basis. Pretax but not on a tax equivalent basis. We've had some cash flow. Our investment portfolio has grown, so we're seeing a little bit more investment income come through, but the yield has been pretty flat.

Second question. I guess when you're looking at price increases versus claims inflation, obviously, driving margin improvement, I assume that is on the renewal book of business, that 7% price increase. But if your renewal is -- retention is 80%, then clearly, obviously a lot of this premium is new business, as well. Does that --

That is accurate, but our renewal business actually, as we said, is about 7% and then we do a new to renewal pricing relativity, which we're actually getting a bit more on our new business than on our renewal business, if you will. I think we're getting about 3.5 more on new versus renewal.

I guess your new business than would not necessarily detract from the margin improvement that you expect on the renewal book.

Now, please understand it is a bit of a process to make sure that we are getting apples to apples new versus renewal, but our best estimate is in fact we are getting higher rates on our new business than our renewal business. And quite frankly, when you take a step back and you think about it, it is kind of logical.

You know more about your renewal book than your new business, so you should want to surcharge the new business. I know that we are a bit of an outlier based on what we see our many of our competitors doing in the marketplace. But that is our philosophy and that is coming through in our results.

Yes, that makes sense. I guess it is just harder to attract new business if you're getting even a better price for that business. It is attractive if it is through someone else, but obviously you are able to do it.

Certainly, it does not make it any easier. Having said that, when you are focused on long-term underwriting margin we think it makes sense.

Frequently the business that we find that is most attractive to us is people who have had an unpleasant claim experience with someone else. They then value the person they do business with.

And then the last question is with the reserve development for the industry you certainly see these isolated incidents adverse development. Look at just Meadowbrook this past quarter and there's a bunch of those. They seem to be different companies every quarter practically.

If you look at some of the larger companies, public company's anyway, that favorable development has continued to be an important source of earnings, including you guys. Do you need to see bigger companies essentially face more pressure on reserves to get a more dramatic turn in pricing?

Jay, I think what really happens is big companies are able to hide the problem for a longer period of time, which I think is happening. And then I think what really occurs is some individual big company breaches the dam, if you will, and then everyone else says, okay, let's just get it over with.

So I think that there are a lot of companies -- and by the way, I don't think companies are short monumental amounts where they are in jeopardy of survival, but I think what it does is it points out that their pricing is inadequate. And I think that the hiding of shortfalls is a reflection on their operating statements that the pricing is inadequate, not that they're in danger of insolvency.

I think the middle size and smaller companies have insolvency issues. The bigger company shortfalls are just they are not facing the issues of getting their prices to be adequate. And I think the moment the first one of those big companies that bites that bullet, I think you're going to start to see a bunch of others follow suit.

Great, thanks for the thoughts.

Kenneth Billingsley of BGB Securities.

One for Gene. Could you give us year-to- date reserve release numbers again by quarter?

The year-to-date by quarter it was -- so, we had $25 million in the first quarter, $30 million in the second quarter and $28 million in the third quarter. Total of $83 million year-to-date.

And I realize that you have talked extensively about reserve releases and the way it compares to the market. Just to add to that, it seems like a lot of the increases that we are seeing outside of you is a lot of this 2009 to 2011 accident years. And I know that your mix of business may not overlay exactly with where some of these other people are taking some of these increases, but could you just talk about what is different in your observations that you're reserve estimates, obviously, were set a little bit different.

It seems like some of these guys that are taking the charges were growing pretty heavily in '09, 2010 when you weren't. But obviously, 2011 seems to be creating problems for some of the players out there and that is where you did start to grow. Not necessarily in those direct segments that they may be in, but could you just talk about your observations and why you may not feel you're going to run into some of the same issues, at least for that 2011 accident year.

I think that by and large we don't expect problems in our current accident year, in essence because of how we establish reserves. If you look at '09, '10, '11, they've proved, if you look at them, they have proved to be more than adequate. And we expect that will continue.

I think the people who have found themselves deficient ended up being aggressive in lines of business that were most competitive and they generally followed the old saying that the grass is always greener. And that as they grew or expanded dramatically in lines of business where they had no experience, no knowledge and no base of data.

And I think that the surest thing to do is say find a company without any experienced personnel and that is the kind of thing where they are looking for trouble. We think that the nature of how we've chosen to grow, which is don't choose a line of business you want to get into, find a great team of people is for exactly that reason. We are not interested in getting into a great line of business. We are interested in having great people who will allow us to get into a line of business.

And just last question on this. It seemed that some of the industry was releasing reserves from more recent years a lot sooner than they had in prior decades and years. Much more -- quicker to release reserves that were only 1.5 to 2 years developed.

Are you seeing that as maybe in some of the issue as well. Not only were they aggressive, but then they still thought they did well and now they're having to sell that whole. And where are your reserve releases coming from? Are they backend loaded or are they in the 2009 to 2011? And are they more heavily weighted to '10 and '11?

They're in the more recent years. I would say, '08, '09, some '10. '11 is really green. But remember we are only talking about $28 million in the aggregate so there is not any one year where you're going to see anything that meaningful.

Is a very small percentage of our reserves, especially relative to a number of our competitors.

Sure, but were you shocked to see that some of the competitors were releasing more sizable amounts in comparison to their total reserves from these more later years?

Sorry, it's Rob here. I think fundamentally, as we've referenced for a couple of years now on several of these calls, we observe what others do, but we can't crawl inside of their minds and don't know what's going on specifically in their organizations. What we can tell you is that we feel as though it is appropriate, prudent to take a cautious approach to both pricing, setting reserves, and then to the extent that there is reserve development in a positive direction, recognizing that in a thoughtful and controlled manner. Controlled in the sense of making sure that you have a clear understanding as to what the outcome is going to be.

From our perspective, as we have also suggested in the past on these calls, there are some folks that we feel as though have been more optimistic in their loss picks than we would have been, and a lot of that stems from their assumptions around certain bits and pieces that go into a trend, whether it be medical trend or whether it be inflation, whether it be assumptions that people make around investments income, as we discussed earlier on this call.

So, we have an approach, we have a philosophy where we are interested in being cautious early on. As more data becomes available that outcome will come more into focus and we will adjust reserves appropriately. But what other people do -- would it appear as though they been more optimistic in their assumptions and quicker to release than we have been, perhaps in some cases. But again, we are focused on what we do, we are not preoccupied with what others do.

I think the discussion we had briefly about discounts and longtail lines really goes to the heart of this complicated question, how would impact income statement. We lost 35% of our Business because we priced using the discount rate of marginal return versus average portfolio return. They look like they were brilliant. They grew a lot. And as that develops over the years and they had to reinvest the money at lower marginal returns, they will pay for that mispricing over a number of years.

It all goes to the pricing you set. So, if you set high pricing you may show bigger or a lesser price increases and you may show more or less redundancies. Again, it goes to the price you initially set. It's one of the reasons we think we are in a better competitive position because we've been more disciplined in the prices we originally set. At least we think we have been.

Thank you.

Larry Greenberg of Langen McAlenney.

Good morning and just staying on the topic of reserves, I'm just wondering if you could give us any color on how your Workers' Comp business is developing? And I'm more interested in -- on the primary side, but maybe some differentiation between primary and excess. Thank you.

As far as the development goes, we typically on these calls we don't get into a lot of granularity by line of business or by operations, so to speak. Having said that, there is nothing that we see as it relates to our Workers' Comp reserves, either on an excess basis or a primary basis, that give us any reason to pause. We have been pushing very hard for rate for an extended period of time.

We have a great sensitivity to trend, particular medical trend. And we certainly are not blind or naive to local state comp benefit rates and what's going on there. We pay a lot of attention to that. So, many of our comp-related businesses or comp-focused businesses, if you well, have been shrinking over the past several years.

There are others that had what seemingly is an unquenchable thirst for premium. As presumably everyone on the call understands at this stage, appetites have changed and we are seeing more opportunity going forward, hopefully. But to your specific question as it relates to our reserves in both primary and excess comp we feel that we are on firm ground.

Great, thank you.

(Operator Instructions)

Michael Nannizzi of Goldman Sachs.

Sorry for the follow-up here, but in the alternative segment I just wanted to understand what drove the increase in premiums? I know in prior quarters there was some, I believe I may be mistaken, but there was some reclassification of some premiums out of alternatives or into alternatives or something. But I'm just trying to understand what is driving that? Is a primary or access --?

On a gross basis or a net basis, Mike?

I mean I think it's both I think. So, net you're up about 18%, gross it looks like maybe it's about the same, maybe a little bit less.

You're talking about the quarter or the year-to-date period now?

Just the quarter. You are up 20% in the second quarter year-over-year and then 17% net year-over-year in the third quarter. And probably just curious, it looked like primary comp was a big driver in the second quarter, we don't have the data now, but I'm just trying to understand what --?

The main reason there is that we have got one -- a couple of startups that have done particularly well. One in the Accident and Health business and one in the Workers' Comp business.

So that A&H would roll-up into the other piece then?

Yes, part of it also has to do with, quite frankly, just what the trend assumption is there and how much rate that we are getting and what we need to get as far as rates to keep up with loss trends. So, for example, some of these lines of business that because of the exposure to medical trend that fall into the alternative market, we are pushing for more rate there because we have got to keep up with medical trend and then some.

So, the thing where we're getting medical trend is a big issue. We could have 16%, 17% rate increases.

And so is that kind of where you expect -- the third quarter indicative of where you expect? There are no one-offs there. You've got the --.

There is nothing unusual there.

Thank you.

Meyer Shields of Stifel Nicolaus.

There is sort of a relatively rapid slowdown in the international segments gross written premium growth. And it looks like the base wasn't all that different from the base in the second quarter, so I'm wondering if you could talk about why that growth is slowing down a little bit.

Yes, Meyer, it's Rob here. I think certainly a lot of it has to do with some of the start of operations having, I wouldn't say plateaud, but the growth rate is not what it had been in the past and so that's really probably the biggest piece of it, if you will.

Having said that, there is a little bit of seasonality to it. So, do I think that you're going to see a slowdown, so to speak, further behind what we've seen? Not necessarily. But I don't think that you are necessarily going to see the pace of growth that you've seen over the past several quarters. At some point that curve may not flatten out, but it's not going to be quite as steep as it has been, as we have also suggest in past discussions.

You've also seen some currency issue.

Great, thank you.

Howard Flinker from Plinker and Company.

Yes, what did you pay for the 2 million shares you bought in the quarter?

Round numbers $37.

Okay, that's all I wanted to know. Thanks.

And I am showing no further questions at this time and I'd like to turn the conference back over to Mr. William Berkley for any closing remarks.

Thank you very much. We are very enthusiastic. We think that as we've tried to signal people the quarters are moving as we expected. We would expect our expense ratio to continue moving downward. We would expect our loss ratio to move downward also as increased pricing moves through our earned premium at increasing levels. So we are very optimistic about our fourth quarter.

The one issue nobody raised that I want to point out is, as we invest our money in other things other than fixed income securities, you are not going to see that income come through what everyone calls operating income. It's going to be lumpier. We think it's just as good for our shareholders as having income from bond.

And we think in this bond market where fixed income returns are definitively less than even our modest inflation levels, that is a better thing to do for our shareholders. So, thank you all very much. We look forward to our year-end call and having great results. Thank you.

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