W R Berkley Corp (WRB) 2014 Q1 法說會逐字稿

Good day, and welcome to the W. R. Berkley Corporation first-quarter 2014 earnings conference call. This call is being recorded.

The speakers' remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words, including, without limitation, believes, expects, or estimates. We caution you that such forward-looking statements should not be regarded as a representation by us that the future plans, estimates, or expectations contemplated by us will, in fact, be achieved. Please refer to our annual report on Form 10-K for the year ended December 31, 2013, 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. W. R. Berkley. Please go ahead, Sir.

Good morning. We were very pleased with our results, and I'll talk more about it. I think that as we move through the next period of time, we'll be able to demonstrate many of the things that we think differentiate our Company from many of our competitors. We will start with Rob talking about our operations.

Thank you. Good morning. Trends in the commercialized property and casualty insurance market and reinsurance markets remain reasonably consistent with what we have seen over the past two quarters. The two markets, while they are intertwined with one another, continue to march to the beat of a very different drum. The domestic insurance market, while modestly more competitive than in the recent past, still offers opportunities to raise rates beyond loss cost trends, and consequently, providing us the opportunity to expand margins.

In particular, casualty and workers compensation remain amongst the most attractive. Having said that, this can vary by territory or class. Professional liability, overall, is flat. Having said that, again, can vary by class. Non-cat exposed property is also, generally speaking, treading water, while cat exposed property continues to be under mounting pressure.

Commercial transportation continues to be the great puzzle to us. We talked about this a few quarters ago, how it is ripe for change and has been ripe for change for some period of time. When you look at the triangles for this line of business, it's hard to imagine that things have not changed more or hardened. Having said that, when we look at this line, it appears to have some commonality with what we saw on workers compensation a few years ago.

The insurance market outside of the US continues to be reasonably competitive, and generally speaking, has not benefited from the type of rate increases that we've seen in the domestic market. Having said, that there are some early signs in some territories that their market is priming for change.

On the other hand, the reinsurance market remains painfully competitive. The combination of an ongoing change in the approach the ceding companies are taking to buying, combined with the increase in participation from nontraditional capacity coming into this space, is putting a tremendous amount of pressure on the market. Traditional market participants are grappling with this new reality and trying to figure out what their model will be going forward. While this intense competition to date has been more focused on the US reinsurance market and the Western European reinsurance market as well as global accounts, it would seem as though this new phenomenon within the reinsurance space is spreading to other regions.

With regards to the Company, net written premium for the quarter was $1.53 billion, an increase of approximately 11% when compared with the corresponding period last year. Of the 11 points of growth, 4.6 were associated with rate increase, with the balance coming from exposure. Our Domestic insurance segment had a particularly strong quarter, growing at 14%, while achieving a rate increase of slightly more than 5%. Our renewal retention ratio for the group remains at approximately 80%, giving us comfort that the quality and the integrity of the book remain intact.

The Company's loss ratio for the quarter was a 60.3%, which includes 1.8 points of (inaudible) developments and 1 point of cat losses associated with Maine's storm. As Gene has defined for you in the past, we define cat losses based on PCS or Maine storm. Having said that, if you adjust that to include unusual losses associated with weather or not typical, one could more than double that number. So by example, in the month of January, in one day at one of our operations, we had the same number of slip and falls that we would typically have in one month.

Our International insurance operations overall showed some level of improvement from the fourth quarter. However, it continues to be unacceptable. Quite frankly, the performance of most of the segment was reasonably good. The issue lies with our non-Lloyd's European insurance operations. As I mentioned last quarter, we believe that we have identified the issue and have taken the action and are in the process of fully exempting what has been the root of the challenge or the problem.

The paid loss ratio for the group was a 50.7%, which we believe is a very positive indicator for what the future may hold. The expense ratio for the period was a 33.6%, which is an improvement of more than 0.5 point when compared with the same period in 2013. The expense ratio continues to be a priority for us as an Organization, and we expect this improving trend to continue, although it may not be a smooth curve.

When we put all the pieces together, the Company achieved a combined of a 93.9%, and on a accident-year basis, a 94.7%. Obviously, those numbers would improve on an accident-year basis depending on how you handle the cat number.

Our balance sheet in general remains in very good shape, and I will leave the discussion around that to others. However, I would make the comment that the first-quarter 2014 represents the 29th quarter in a row of net positive reserve development, and more specifically in the quarter, we net positive development of approximately $25 million.

When we look at our policy in numbers in combination with the fact that we are still able to get rate above loss cost trends, we are very encouraged. We continue to focus on making sure that we optimize the balance between pushing for rate versus adding to exposure count. Thank you.

Thank you, Rob. Gene, do you want to take us through the numbers?

Okay. Thank you. As Rob, said we had another solid quarter, with strong premium growth, continued improvement in our overall combined ratios, both on and accident-year and calendar-year basis, and significant increase in our operating income and net income compared with last year. Overall, our net premiums were up 10.8% to over $1.5 billion.

For the Domestic segment, premiums were up 14%, primarily as a result of growth in our two largest lines, other liability, which increased 15%, and workers compensation, which was up 16%. For the International segment, the premiums increased 18% in terms of original currency and 10% when converted to US dollars. And our reinsurance premiums decreased by 6%, as a decline and our Asia-Pacific reinsurance more than offset growth in our US and UK reinsurance companies.

Our underwriting profits increased 28% to $83 million. The accident-year loss ratio before cat losses improved by 0.8 point to 61.1%, due primary to higher prices. In addition, our overall expense ratio improved by 0.7 point due to premium growth as well as the benefit of various initiatives underway to reduce administrative costs. That gives us an accident-year combined ratio of 94.7%, down 1.5 points from a year ago. The pretax accident-year combined ratio for our Domestic segment, which represents 74% of our Q1 premiums, was 93.7%. And for the International and Reinsurance segments, it was 97.2% and 97.1%, respectively.

Cat losses were $14 million compared with $5 million a year ago. Most of the 2014 cat losses were actually from two winter storms in the first week of January. And as Rob said, we also experienced more than usual losses in the first quarter from freezes and other unnamed weather events that are not included in the cat loss number.

Prior-year reserve releases were $25 million this year, compared to $23.5 million a year ago. Favorable reserve development of slightly more than $25 million for the Domestic segment was partially offset by very modest increases in prior-year reserves for the International and Reinsurance segments. Again, Rob mentioned the paid loss ratio at 50.7%. That's actually the lowest it's been since the first quarter of 2008.

Our investment income was up 24% to $169 million due to a significant increase in income from investment funds, specifically, funds that are invested in real estate, energy, aviation, and railcar businesses. And the annualized yield on our overall portfolio was 4.5%, up 0.8 point from a year ago.

Realized gains were $53 million, up $20 million from a year ago, primarily from the sale of commercial real estate, and unrealized gains increased over $100 million to $510 million at March 31. At quarter end, our average portfolio duration was 3.4 years, and our average credit rating was unchanged at AA minus.

You'll see our effective income tax rate increase to 30.5% in the first quarter from 26% a year ago. That is due to entirely to significantly higher income from investment funds and investment gains, which are generally taxed at the full 35% tax rate.

We repurchased 4.8 million shares of our common stock in the quarter for one $193 million. I look back, since 2006, we've now -- actually, since the beginning of 2007, we've now repurchased over 76 million shares of our stock, or about 40% of the outstanding stock at the beginning of that period, and over the same time, our shareholders' equity has grown by 30%.

So for the quarter overall, that gives us 45% increase in net income to $170 million, a 51% increase in net income per share to $1.25, and an annualized return on equity of 15.7%.

Thank you, Gene. We are very enthusiastic, although many of you might say I am always enthusiastic, which would be absolutely correct, but who would want a company run by a pessimist? The fact is, we have had over seven years of positive development, which I might point out is twice the average duration of our loss reserves. It would be hard, in spite of at least one person pointing out that they think we are short of reserves, to continue that process if that were the case. But there are people who wright fairytales as well as historical facts.

We're enthusiastic because the paid loss ratio over time has come down, which reflects reality. We did have a period of time back over 10 years ago where we were concerned about our reserves, and we changed everything we did about our reserving process and practices. So now, we have a tendency to be more conservative, which, in fact, over the long run, is probably an additional problem because we end up being more conservative than we'd like to be.

Overall, our insurance operating business is good to very good. We continue to get rate increases. When you have 52 operating units, you will always have a problem someplace. But overall, we see continued improvement in our underwriting results and a continued decline in our expense ratio, so we are very optimistic for our operating results for the year.

As to the investment front, for now several years, I have been suggesting we would have improved gains. Improved gains in our portfolio are not a reflection of, gee, weren't we lucky something happened. It was a reflection of our dissatisfaction with fixed income returns and our efforts to find other alternatives. We do not invest in hedge funds. We have one modest investment in what would be considered a hedge fund, less than $100 million in our $16 billion portfolio. All the other investment funds are asset-based funds, lending, or some other type of asset-related income.

We sold a building; we made a gain. We've sold some other things, airplanes, which were in a fund and had depreciation. Thus, a large portfolio of airplanes, which gave us no income, suddenly gave us income as the planes were sold. It wasn't a sudden change. Accounting rules said you have to depreciate the airplanes, and when you sell them, you recapture the depreciation, plus you get an equivalent return.

So we continue to do those things, and while we believe this quarter, in some ways, was better than we might have expected, it is in line with our expectation. We continue to believe we can achieve our 15% return.

We're optimistic about all aspects of our operations, and we continue to believe our investment portfolio will generate increased gains as we go through this year and next year. It is going to be a bit more lumpy than portfolio yields from bonds. On the other hand, we think that people who have tried to get yields by extending their maturity are taking risks that we think are hidden today but are real, because our view is inflation is out there. We don't know whether it's around the corner or a mile away, but it inevitably is there.

So overall, very positive about the year. Don't see anything on the horizon at the moment that's going to hinder us from having an outstanding year. We continue to be able to grow, take market share because of service and focused expertise, and people want that. People are much more conscious of the value you deliver through both claims and underwriting expertise. So with that, Nicole, I'm happy to take questions.

(Operator Instructions)

Michael Nannizzi, Goldman Sachs

Thank you. I think as Bill -- looking out from here, where do you see the environment shaking out for the rest of 2014 and into 2015 in terms of rate versus loss trends in your domestic book?

Why don't I let Rob talk, and then I'll add to -- go ahead, Rob.

Good morning, Mike.

Good morning.

I think our expectation is that we should be able to continue to certainly keep up with, and in all likelihood, exceed loss trends for the balance of the year. The only reason -- or caveat I would throw out there is, there are parts of our book, and we mentioned this on the fourth-quarter call, and I probably should have been more specific about it today, where we feel on a policy-year basis, we are making high teens or into the 20% returns. And as a result of that, we aren't going to just keep our foot down on the rate pedal as hard as we possibly can because we will be coming more focused on adding to policy counts and increasing share.

So I think that the market conditions are not going to become terribly more competitive through the balance of the year. And there are some folks that have theories that would suggest that it will become less competitive between now and the balance of the year, depending on certain things that could unfold. But as far as our numbers, I think you will see us be able to keep up or outpace loss cost. And to the extent that you see us really just keeping up or below loss cost is going to be because we are so pleased with the policy of returns we are able to achieve.

Got it. And when you talk about those high teens ROEs, is that mostly on the comp side, or are there other long-tailed areas where you are seeing those sort of returns?

I think the answer is that as we suggested earlier, we think the casualty space, and in general, and perhaps parts of the workers' compensation market are particularly attractive. At the same time, I would caution one not to use too broad of a brush because it can vary by territory and can vary by class.

Mike, this is Bill. One of the things that's particularly interesting is, people see classes of business that look attractive, and then they find ways to enter. And then they tend to enter the least attractive places for the business because that's where you can get in. So it may be a line of professional liability, and say, oh, professional liability looks great, and where can we get in? And they find where they can get in the easiest is exactly that part of the business that's not attractive.

The same is true of particularly states for workers' compensation, in particular areas of the country for other lines of business. So one of the things, and final answer to your question, is the differential between good places and good niches and bad has never been greater.

Got it. Thank you. And maybe, Bill, you mentioned your 50% ROE goal.

Not 50%. 15%. 1-5.

No, that's what I said. Sorry, I have a cold, so maybe that came out like 50%. Sorry about that.

But -- so if we look at your -- the first quarter, we normalize investments, it looks like you're closer to that 10% range. How do you get there? Given the environment you see, is it -- ?

I don't think you're at 10 if you normalize. You can't take -- what I've said to people is we'll have $25 million plus of gains and our partnerships are going to do better than they had. So for instance, we had a railcar leasing business that had an especially good quarter because of marking to market the value of the rail-cars since we got into that business early.

Right.

But there are a lot of -- it's not going to go back to the same level we were at in prior quarters. I think all of that is going to be better, and we're going to continue to have gains, and I would consider the base level of those gains $25 million.

So I would say with no improvement in expenses or underwriting, we are probably, today, at $13.5 million, and I think we'll have improvement in underwriting and expenses, and I think between now and the end of the year, we'll have at least one or two more significant realized gains. So I'm pretty comfortable about that. And the answer to that also is, we bought back a lot of stock in the first quarter.

Great.

So that helps us a little bit also.

Got it. Great. And just last quick one if I could.

Rob, on Europe, and you mentioned the non-Lloyd's Europe insurance operation where you were making some changes or taking some re-underwriting actions. Can you talk about where you've seen the growth in that International book recently? And how -- what's the overlap with the area that you were talking about?

Let me first talk to a little bit about where we've taken the action and what those areas are. One is within the UK, a part of the professional liability space, that particular class in that. We also -- there was a subclass in Spain within the professional liability space as it relates to healthcare, and in that subclass, we have taken action there as well. And finally, related to the surety line in Europe, specifically Germany, and we have taken action there.

As far as the growth opportunity, probably the leading growth opportunity there is coming out of Australia.

I see. Got it. So not within that area of business?

No. The places that we are taking action to eliminate, we are reducing or eliminating, we are not increasing. The growth is coming from places like Australia. We are having some growth in the Scandinavian territory, not in some of the professional lines within Europe and UK.

Great. Thank you very much.

Amit Kumar, Macquarie

Just two or three quick questions. First of all, going back to the discussion on capital management, does the big ramp up and buybacks suggest that perhaps you see better value in your stock versus writing more business going forward?

No. What it suggests is we think we'll have a lot of capital gains that will generate more capital than our planning anticipated, so we have more resources to buy back stock. We think our stock is attractively priced now.

As we have said a number of times, we think that our balance sheet is very conservatively stated, both because of our reserving and because we have assets that we parry at cost because of the nature of the accounting rules that we think read value, and therefore, we think the stock is attractively priced. And given that, we'll convert some of those to real value when it gets attractively priced. And as we convert those to real value, we'll have more revenue than we anticipated. So we have the capacity to buy it back while keeping in mind the rating agencies want us to maintain our level of capital.

Got it, that's helpful. That's somewhat similar to what you had said in Q4, so I think I get the point.

The second question I have is on the discussion on re-insurance global. I know that you talked about the non-notable losses. The loss ratio for re-insurance global was elevated at 64.6% versus 55% in Q1 2013. Were there any one-timers in that number, too?

Gene, I believe we had some positive development coming through a year ago. Is that correct?

Yes, we did. And (multiple speakers) your basis --

That was the big difference.

So if you strip the [noise] or the development out, what's a good underlying run rate number to think about?

In terms of a loss ratio?

Yes, loss ratio.

So we're like in the low 60s now.

Low 60s. Okay. That's that quite helpful. The final question I have is for Bill.

Recently, we have seen a return of consolidation discussions Bermuda. And I know this does not somewhat directly relate to you, but could you refresh us what your view is on consolidation at this juncture of the cycle for W. R. Berkley and even some of the properties which might be first sale?

We manage our business for what's in the best interest of our shareholders, all shareholders. Unlike some companies, every single senior person here has their maximum economic gain by having the stock do well. We, therefore, will always look at buying selling, or doing whatever is in the best interest.

At this point in time, we're always hearing about opportunities, but the opportunities have to create value for our shareholders. And we think there'll be a lot of consolidation, especially of what I call the billion-dollar club, the people in the reinsurance business to have $1 billion plus or minus of capital and don't fit in the marketplace where we have so much mobile capital. People can step in and offer tax protection and so forth.

So we think that, unless you're a specialized re-insurer in the billion-dollar class, a lot of those people are going to disappear. I think, in addition to that, it's going to be hard for mid-sized players in that same size category to continue to generate value unless they have a real special niche. So I think there'll be substantial consolidation in both the insurance company and broker side.

But haven't we been talking about this for some time, and yet, the consolidation really hasn't happened? What you think has been the factor which has restricted more consolidation in the space?

Well, you heard my starting point, which was that in this Company, the Senior Management of the Company have more vested in the value of the shares of the stock than they do in anything else, which gives them the same interest as the shareholders. I think in many companies, the senior management is more interested in their jobs and their pay than they are in what's best interest of the shareholders. And it's very hard to differentiate that at all times.

I think there's a lot of people convinced their boards or otherwise to do what's not the right thing. And the right thing isn't always to sell at the highest price. The right thing is to create value for your shareholders over the long run, and that's not so easy.

Okay. Thanks. It's for that insight.

Ronnie Bobman, Capital Returns.

Good morning. Rob, in your prepared remarks, and then even, I think,, in the Q&A you mentioned work comp, and again, not broadly. You caveated that to a degree. And I was wondering, I had two questions in the work comp area.

One is, does California, your California work comp book fall into that attractive categorization or one of the caveats? And then I think you also mentioned 16% growth in workers comp. And I was wondering if California or other states was a particular driver or not a driver of that? Thanks.

As far as comp goes, you're right. We did suggest that it varies greatly by classes within the comp space, and it also varies greatly depending on the territory. We think that whether it be workers' comp or any line of business, the places where it typically gets ugliest is where becomes most attractive because the pendulum tends to swing in the broadest manner.

As far as workers' compensation goes in California, certainly, historically, California has been one of those markets where the pendulum has swung very broadly. There are opportunities in California that we think are attractive currently, and there are some opportunities in California that we would not touch with a 10-foot pole. The growth that we have had in workers' compensation, there has been a meaningful amount of growth coming out of California, but it would be wrong to reach the conclusion that is being solely driven by the growth that we are experiencing in California.

That sounds like a very delicately and selective response, but I suspect that's (multiple speakers) --

Given who I'm surrounded by in this room, you would understand if you could see them all.

He has two lawyers. He has all these people, and he has me, and all being careful that we're not -- we're happy to inform people, but we're not happy to inform our competitors.

All right. Fair enough, gentlemen. Good luck, and hope it continues.

Thank you.

Vinay Misquith, Evercore.

Good morning. Just looking at the pace of rate increases, I think you mentioned it was 4.6% for the Company this quarter. I think last quarter was 5.7%. Curious whether that's a function of the markets, which I thought he said was stable, or you being -- trying to gain more market share because you think that you are adequately priced?

It's a combination of both, and it's specifically the domestic business where we are getting a bit over 5%. There is a place where we are seeing opportunities to lighten up our foot on the rate accelerator a little bit because we are quite pleased.

So to make a long story short, it's really a combination of both. I can assure you though, that if we are not going to be writing business where we can't get an adequate rate in order to justify the utilization of the capital.

Okay. Secondly, your retentions in the primary insurance -- in the domestic insurance went up. Just curious if there was just business mix, or are you choosing to keep more net on your books?

The retention as far as how much we see versus what we keep net?

Yes, correct. It was up modestly this quarter. Last year --

I think it's up modestly. I don't think that there's a lot to it. Having said that, I would tell you that we continue to, like others, examine our re-insurance purchasing and are considering whether the way we've been buying the insurance historically will be the same approach that we take going forward or whether there are opportunities to try and optimize that.

So it is certainly possible that you will see us retaining a bit more going forward, but we are going to be examining that. But as far as what you are referring to right now, I don't think it's particularly material and would not suggest that you read too much into that at this stage.

Okay, that's a plan. And just one last follow-up. On the non-cat weather, you said -- was that about a point on the combined ratio you would think?

It becomes a little bit of a slippery slope -- no pun intended -- because how do you define that? We've tried to come up with what we would suggest is a very black-and-white definition in using PCS. But the reality is, after the winter storm season that we've had, clearly PCS does not fully encapsulate all of the weather-related losses that are atypical or not the norm.

So whether it be roofs -- a roof collapsing or pipes breaking or slip and fall, Gene and I and others, we hear about this in our dialogue with our colleagues, but it doesn't get incorporated in. How one wants to calculate that, again, turns into the shades of gray. But when Gene and I did our back of the envelope with the assistance of some colleagues, we were getting to something that is comfortably a point and arguably well north of that.

Okay, that's helpful. Thank you.

Mark Dwelle, RBC Capital Markets

Good morning. A couple questions. Can you just remind me, on your re-insurance business, that business is still predominantly casualty oriented business, right? What percentage is property?

Well, let me -- yes, I would say maybe 20%, if that, is property. Having said that, I would tell you that the vast majority of the property business is risk as opposed to cat, so the cat component is quite modest.

Okay. And so to the extent that you're feeling competition pressure, price pressure in that business, it's really more a derivative of just a lot of capital sloshing around as compared to direct alternative vehicles or anything directly attacking your core markets.

At this stage, I think that's right. And you've gotten somewhat of a ripple or a domino effect where you've seen some of this alternative capital come in and trying to play the property or property-related game. And that, in turn, is driving some of the traditional players to be feeling the pressure in the property space and to be looking to participate in a broader manner in the casualty space.

I would suggest to you so far because of the, quite frankly, the skill of our colleagues, the balance sheet that they operate from, and the service that they provide in intellectual capital. We have been reasonably insulated compared to many others that are front and center in some of the parts of the re-insurance marketplace that are very much in the crosshairs of some of this alternative capital.

Okay. Thanks for that. Changing gears.

On the domestic business, you commented on the overall rate environment in terms of your own experience. Are you seeing much differentiation in rate gains between, say, your ENS book and your more standard lines book?

The answer is that we're seeing more differentiation, honestly, today than we saw last year this time, but it's not an overwhelming amount.

Which one is better?

What product line do you want to talk about?

Well, broadly differentiate, if you're saying it's more differentiated now than before, that would imply one is better than the other. So you could answer it how you'd like.

I'm going to try and answer in what will be somewhat of a sanitized way, but I think it will be hopefully helpful to you. I think what you're seeing in the standard market, and particularly national carriers that by and large are the ones that set the tone for the overall market because as their appetite ebbs and flows, that determines how much falls off or spills over into the specialty, and more specifically, the ENS market.

What we've seen in the first quarter as far as national carriers, and I am generalizing now, is they are taking their foot slightly of the rate petal and looking for ways to try and not shrink their business as far as count goes. Because they have been grappling with this balance between rate and growth for some period of time.

National carriers in general, what we saw particularly in the quarter, when it's a line of business that they think that they have their head around and they're happy with the margin, they are becoming a bit more aggressive, not significantly more aggressive, but marginally more aggressive. Having said that, simultaneously, we are seeing them become increasingly selective in the marketplace and where they are choosing to participate. So there are a growing number of examples of where they are kicking business out of the standard market and it is going to the specialty and ENS market.

That's helpful.

One other comment I would suggest to you that there seems to be an increased focus on large accounts among some of the national carriers. I don't know if it's pressure on field underwriters that they feel like they need to make a budget and it's easy to write large accounts to get there, but that would be another nugget of something we're seeing out there.

Would you characterize these subtle shifts as maybe the opening shots of the ultimate turn in the market that we may eventually see? Or would you just see these as the ebb and flow of emphasis within a portfolio of risks?

I think I could probably argue either side, to tell you the truth. And having said that, I'd like to think that this is the further indicator that at some point, there will be further tightening. But honestly, I do not participate into the eternal meetings of some of these national carriers to understand how they are thinking about the business.

This is Bill. I think one of the things you need to recognize is the unforeseen event is what changes the pattern of behavior. And the advent of big data and all kinds of analytics and people's belief in the certainty of such is taking us down a particular path.

And even the best actuary who's old enough to be experienced knows that it is that unforeseen event that gets you. And I think that what's going to surprise people is that unforeseen event when it comes. And a lot of people have that big amounts on the certainty of the actuarial science and the mathematics of big data.

So it's hard to predict one way or the other, but you know it's sitting out there, and you know the history of this business always surprises you by that unforeseen event. The best example is all the mathematical models said Katrina was a $15-billion storm.

I appreciate your insights. Thanks very much.

Bob Farnam, KBW

Thanks. Good morning. A couple quick questions on the different segments.

On the global re-insurance segment, gross rate and premium was down for the quarter. Given the competitive pressures in that space, are you expecting, and would it be hard for us to imagine a case where you're going to have much growth in that line, in that segment, for the year?

As far as the reinsurance goes, as Gene referenced, a fair amount of the reduction that you saw there had to do with also a change in our appetite for property exposure in Asia. We certainly remain a participant in the property re-insurance markets in Asia, but we made a strategic decision to dial that down a bit and to be a bit more selective perhaps than we had been So I think that was probably the biggest contributer to that.

So the decline in the property in Asia, that would likely impact in the next few quarters as well. Is that --

I think that you should assume that you, while I don't have the numbers in front of me, Bob, so I can't be very granular about it, I think you will see that we are going to continue to reduce our participation in the property re-insurance market in Asia. Consequently, it is very possible that will be impacting our top line.

Okay.

As it relates to the other markets, I think that there's probably some level of opportunity, but not as strong as you'll see in some of the other segments.

Right. Okay.

We always had a saying, volume is vanity; profit is sanity. We're not interested in being a big re-insurance company and losing money.

Good thing. And the international insurance segment, the expense ratio is around 40%. Just curious if you have a target expense ratio, you're looking for that spaces as you guys try to gain scale there.

I think there are a couple of things there. One has to do with commissions, quite frankly, and the commissions that you have to pay in different parts of the world are higher than what we would like.

And I think the second piece is that we have some operations that we started up in certain territories where they don't have the critical mass as of yet from an earned premium perspective. So we haven't been able to get the full scale to leverage the fixed expenses.

We expect as far as the expense ratio and our internal expenses, we expect that we will be able to continue to try and leverage that, and we are focused on trying to bring that in line. Certainly, scale will help, but we are looking at how we are spending money and how efficient we are. And then as far as commissions go, to a certain extent, they are what they are, but obviously, we examine that as well because it is a material cost of doing business.

Great. I understand that the expense ratio in that segment is going to be higher than the others. But was just curious thinking on a combined ratio basis maybe, just what kind of combined ratio are you looking at in that segment to achieve acceptable returns?

We need to get into the low 90s.

Okay. Very good. Thanks.

Jay Cohen, Bank of America

Yes. Thank you. Eugene briefly mentioned earlier about some of the alternative capital that you see in the property re=insurance space, but you've had at least one competitor now start up a fund attacking casualty re-insurance, which is where you guys play.

And my question is, two questions maybe. Do you see that as a trend? And secondly, is there an opportunity for you to do something in that space?

I think that there's two things. You're talking about Wexford and Arch, and we think it's a good opportunity. It's different than we would do it.

We think that it's a thoughtful approach, but it's different than we would do it. We think there are opportunities to manage alternative capital, but it's got it to be a very long-term alternative capital from our point of view because we view this business a little differently than most people, and we think it's at a long-term business. And we think it's probably not best designed for hedge fund investors who for the most part don't have a long-term view.

So we're just trying to think about it and mull over it how we think we want to do it and where we want to do it. But clearly, more and more people are looking at the industry.

The problem with most people's views is they look at the industry as lower risk than it is. Over the very long run, it's a very low-risk business. Over any three- to five-year period, it can have much more volatility than people think.

And many of these investors are investing in risk-year kinds of securities. So the composite of those packages result in higher-risk insurance enterprises.

So it's an interesting thing. It's going to continue. It's going to represent opportunities. We've been looking at it for an extended period of time.

I would hate to tell you, in fact, since [Max Reid], which was the first one down the line, we've been looking at it. So that's tells you slow we are. But we're slow because we think the risks are hidden and unforeseen, and every time we think we've figured it out, we find out there's some things we haven't thought about. But I wouldn't be surprised if we didn't find some way we thought appropriate.

Great. Thanks for your thoughts, Bill.

Kai Pan, Morgan Stanley

Good morning. And the first question is about the insurance segment, domestic, the year-over-year improvements on the loss ratio, actually the loss ratio ex cat.

Remember about a year ago when some of your like peers showing big improvement because of pricing increase last two years. You were a little bit like below peers. At that time, you mentioned that you had some pushback from your actuaries and they wanted more conservative, taking accident initial pick.

So I just wondering going forward, as the rate actually increase as starting to slow down a bit, so the gap between the pricing and the loss cost are narrow, are we going to see a slower year-over-year, basically, loss ratio improvement? Or you are actually now becoming more confident because the past, your development, that will be able to sustain the level of year-over-year loss ratio improvements?

Thank you for the question. From our perspective, as we suggested, we tend to, for better or for worse, take a cautious approach to coming up with our initial loss pick. And then as more information becomes available and they become more seasoned, then we will tighten those picks up.

Certainly, we did not want to declare victory prematurely. There's not just rate increases that we've achieved, but some of the adjustments we've made in our underwriting appetite as well, so if you will, rates plus selection and terms and conditions. I think it is fair to say that generally speaking, we as a group have not taken full credit for all the benefit that we believe is likely to appear over time. Having said that, as I suggested earlier, we are not an organization to declare victory prematurely, and to your point, I think it is very possible you will see our reported results improved from here.

So I would now add, now the lawyer is looking at me with evil eyes. What I would suggest is this spread between the incurred and the paid loss ratio of 10 points is much more than one would normally expect, and especially given the growth rate. I think what's that probably implying is that we're booking somewhat too high an incurred loss ratio at the moment. And as we move along in the quarter, we hope to persuade the actuaries that they're being a bit too cautious.

Thank you for that. The second question is regarding to your International segments. Your loss ratio ex cat actually deteriorate a bit the last two quarters. I just wonder if that related to the issues that Rob mentioned earlier or some business mix shift change.

No, it's related to the issues Rob spoke about. We're managing through them at the present.

Okay. My last question on the investment portfolio, and we saw a -- interest rates have been going down for years, and last year we see some hope of higher interest rates, and now this year, that expectation had been tempered down. I just wonder what is your outlook for interest rates, and how do you position your portfolio accordingly?

It was very diplomatic to say it was tempered. I would say our hopes for interest rates going up were dashed.

I think that we're searching for asset-focused investments that give us a yield or a more predictable gain, that the return is in the 5%, 6%, 7% area. That whether it accumulates and is realized at the end of a period of time or comes ratably doesn't matter to us, but it does give lumpier results.

It's hard to find things, especially where we historically have invested, because there is so much liquidity in the system. And liquidity in the system that's brought about both by the policies of the various central banks, but no one should forget that the number of older people who are saving money for retirement is increasing also. So the aggregate savings are increasing on their own independently of this.

So from our point of view, we don't see interest rates moving up, certainly, for 18 months or more. And it's hard to search for things that are going to give us a good return, and we don't want to take the risk for when it happens and extend the duration of our portfolio because then you're in a position at exactly at the wrong moment to have a longer duration. So we intend to keep the duration of our portfolio between 3 years and 3.5 years, which is less than the duration of our liabilities, and search for other opportunities that give us what we would think are a good, attractive, long-term yield.

But we don't see interest rates going up for, certainly, more than a year, probably 18 months, and even then, we don't see them going up very dramatically. We don't even think global interest rates reflect the softening economy in China, and there's very little differentiation for quality. You buy a five-year Spanish Government bond, it yields the same as a US Treasury. Or maybe that does show quality. Okay.

Thank you so much for the answers.

Thank you.

Ian Gutterman, [Vivani].

I think most of mine have been answered. If I can ask Gene just one last question.

Do you have any color on the preserve releases within the US segment, either by line of business or by accident year? I was just trying to get a little flavor for those.

No. We'll go into to little more detail on that in the queue, but I don't have anything more to add to it right now.

Okay. Anything that would seem just different from what we would have seen last year?

No.

Or pretty similar? Okay, pretty similar.

That's what I was trying to get at. Okay. Thank you.

Josh Shanker, Deutsche Bank

Thank you for taking my question. First of all, I just want to point out the egg on my face with the new disclosures on workers' comp. Congratulations on that. They were excellent. And thank you.

The second issue, two things that Rob mentioned. One is the possibility of retaining more risk in terms of reinsurance purchasing --

I don't think that's what he said.

Oh, that's not what he said. Okay, but it confused me. I thought that he said he might consider retaining more, and if he didn't, I was trying to understand the math behind it, so that might --

He just didn't say retain more risk. He said changing our re-insurance retention.

I think he did say retain more, but maybe I'm wrong. So then skip that if that's what he said as I didn't understand that. That would be the question.

Josh, I think that the point is that right now, we see somewhere in the neighborhood of $750 million-ish of premium into the traditional reinsurance market so to speak. And we, like others, are looking at that, and we continue to look at that to make sure that what we're doing makes sense.

So the reason I think you said retain more risk, and I was trying to be explicit, we're trying to examine the premium we see and understand, are there ways to change our re=insurance program that may or may not mean changing the risk profile (multiple speakers) --

So we're seeing more premium without retaining more risk.

I didn't say that, either, Josh. I think the answer to your question is, we buy a fair amount of re-insurance now, and we continue to examine that and think about whether what we are doing makes sense prospectively.

Okay. Okay. Fair enough.

And the other question relates to the 100 or more basis points of winter weather non-cat losses. Would that be compared to 1Q 2013 or a typical winter? I think 1Q 2013 was particularly benign in terms of winter weather.

I think the answer would be both.

Both. Okay. I'm not sure how to do that, but I'll work on that answer.

I don't think it really matters. You'll do it however you want to do it. So could we go on to the next person, please, Nicole?

(Operator Instructions)

I'm showing no further questions at this time.

Okay. Thank you all very much. We appreciate it, and as I said, we're very pleased with the quarter, and we expect the year to continue to show better returns. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.