W R Berkley Corp (WRB) 2014 Q3 法說會逐字稿

Good day, and welcome to W. R. Berkley Corporation's third-quarter 2014 earnings conference call. Today's conference is being recorded.

The speakers' remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words -- including, without limitation, believes, expects, or estimates. We caution you that such forward-looking statements should not a 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. William R. Berkley. Please go ahead, sir.

Thank you very much. Well, we were very pleased with our quarter. We think it demonstrates our earnings capacity. And we think that in looking ahead, while there are bumps in the road, we are quite optimistic that we will continue to be able to deliver outstanding returns.

I'm going to let Gene start out by talking about our financial results. Excuse me -- I will let Rob Berkley start by talking about our operating results and followed by Gene. Go ahead, Rob.

Thank you. What a relief. I thought Gene was going to take all my material. (laughter)

Well, good morning, everybody. Market conditions during the third quarter by and large followed the trends that we've seen over the past few quarters. The domestic insurance market continued to offer the greatest promise, from our perspective. Casualty and Workers' Comp continued to stand out as particularly attractive.

Non-cat-exposed property also offer some opportunity, and we are seeing the ability to get additional rate there. Having said that, cat-exposed property is a bit of a different story.

As it relates to professional liability, it is very much a mixed bag, or it continues to be, as we have suggested in the past. By example, D&O is very split between what we would define as the Fortune 1000, where that excess market is particularly competitive. Having said that, the smaller-cap part of that marketplace -- there is opportunity for meaningful rate increase in both the primary as well as the excess.

Commercial auto continues to be a bit of a challenge. Rate increases are being achieved in the marketplace, and we expect that this is going to need to continue for an extended period of time. Adequate returns for this product line at times feel as though it's a carrot tied to the far end of a long stick. But I think we are getting there, gradually.

On the international front, it depends on the corner of the globe that you are talking about. But I would make a comment that both the UK and select parts of Continental Europe remain exceptionally challenging.

The big question mark or concern from our perspective continues to be the global reinsurance market. We've talked about this over the past several quarters, and it continues to be front and center on our radar screen. The fact of the matter is the cold that the property cat market caught some time ago seems to be continuing to spread to other parts of the reinsurance marketplace, and it would seem as though no bottom has been found yet. While the non-cat season can mask some of these issues, there should be no misunderstanding that the underlying challenges persist.

Turning to our organization and how we did over the third quarter, net written premium came in at approximately $1.525 billion. This is an increase of 7% when compared with the corresponding period last year.

The growth was driven by -- well, primarily driven by our domestic insurance business, which grew at approximately 12% and was partially offset by our reinsurance segment, which was off by approximately 16%. This very much fits with our expectations, given the market conditions in the reinsurance space that I mentioned earlier as well as in prior calls. Let there will be no misunderstanding: we applaud our reinsurance colleagues for their underwriting discipline.

Rate increase for our insurance operations was approximately 3%, and the domestic insurance was a bit above that. And our renewal retention ratio remains at about 80%.

Loss ratio for the quarter was at 60.7, which includes approximately 1 point associated with cat. It's worth noting -- and Gene is going to get into this a bit more detail -- that in our cat number, there are two aviation hull war losses in the coming out of our international segment.

Expense ratio showed improvement, and we thought it was encouraging, particularly what came out of the domestic insurance segment. This is another area that we are very focused on. And we expect that we will be able to continue to improve what's going on with our expense ratio over the quarters to come. However, I would caution you that on occasion we will need to take one step back in order to take two steps forward.

As it relates to the combined, it was 93.5 on a calendar-year basis. And when you adjust for reserve development as well as cat, we came in at a 93.4 on an accident-year basis. I would remind you that this is approximately a 2-point improvement from the third quarter last year.

On the topic of loss reserves, we had net $13 million of positive reserve development. And I would remind you also that this is the 31st quarter in a row of net positive reserve development. As we look forward to 2015, we remain encouraged as we continue to see our rate increases in excess of loss cost trends continue to earn through.

Thanks, Rob. Gene, do you want to pick it up?

Okay. Thank you, Bill. Well, as you can see, we did have an outstanding quarter, with a 46% increase in net income and an annualized return on equity of 17.4%.

I'll start with just a few more details on the underwriting results that Rob covered. As he said, overall premiums were up 7%. The domestic growth at 12% was led by Workers' Compensation, professional liability, and selected short-tail lines. The international premiums, up 3%, was a result of lower growth in Europe and a modest decline in South America. And in the reinsurance segment, the decline of 16% was a result of less treaty business written in both Asia in the United States.

With respect to underwriting results, underwriting profits were up 17% to $95 million, with a combined ratio of 93.5. Just recapping again the major components of underwriting, accident-year loss ratio before cat, down 1 point to 60.6, as rate changes more than offset our loss cost assumptions.

Cat losses were $15 million, 1 lost ratio point; and that included $9 million from storms in the US and another $6 million that Rob referred to from the aviation events in the Ukraine and Tripoli. Favorable reserve development was $13 million, primarily in the domestic segment; and overall expense ratio down 1 percentage point to 32.8%, with the domestic expense ratio down a full 2 points, as many of the expense initiatives underway are beginning to have a stronger impact across more of our Companies.

If you look at those combined ratios by segment, domestic improved by 1.6 points due to improvement in both the accident-year loss ratio and expense ratio, partially offset by slightly lower reserve releases. The international segment combined ratio increased 6 points due to the aviation-related cat losses that I mentioned before, as well as modest unfavorable reserve development. And the Reinsurance segment combined increased by 1 point to 98.7 due to lower earned premiums and slightly lower -- but still positive -- reserve development in the quarter.

Turning to investments, our overall investment income increased 43% to $179 million. Most of the increase was related to investment funds, which earned $59 million, up from $12 million a year ago. The increase in the investment fund earnings in the quarter was primarily related to strong returns for funds in the aircraft leasing, real estate, and energy sectors. The overall yield on the portfolio, excluding gains, was 4.6 in the quarter, up from 3.4 a year ago.

In addition, we reported realized gains of $72 million, up 65%. The largest gain in the quarter was a $39 million gain that resulted from an IPO by one of our private equity investments. We report that investment under the equity method of accounting, and under that method our share of the increase in the Company's stockholders' equity as a result of the IPO, which was $39 million, is reported in realized gains.

However, the full market value of the stock at its current price is not recognized until -- and if and until the stock is sold. So at the current price the market value of our stock exceeds the carrying value by $260 million, and that's not in the earnings or on the balance sheet.

For our overall portfolio, aggregate pretaxed unrealized gains were $561 million, and the average duration and credit rating were unchanged at 3.1 years and AA-minus. In August we issued $350 million of 4 3/4% senior notes that mature in 2044. A portion of the proceeds from that offering will be used to repay $200 million of 5.6% senior notes that are due in May of 2015.

Our effective income tax rate increased to 31% in the quarter from 29% a year ago. As I talked about on our last call, as we earn more from underwriting and from investments other than investment income, our effective tax rate has moved closer to 35%. We repurchased 738,000 shares in the quarter and 5.6 million shares so far this year. With that, we finished the quarter with a book value per share of $37.10, up 13.1% from the beginning of the year.

Thanks, Gene. I'd like to talk about a couple things about our investment results, complain about the accountants, and try to give you a little bit better picture of where we expect to go.

As hopefully most of you remember, I told you certainly for the past few quarters that we would anticipate on average $25 million or more per quarter of investment returns. That's going to be a little lumpy. It may be more one quarter; it may -- we may miss a quarter.

But the fact is, achieving the kinds of investments, goals, that we've set forward and the returns we want for our Company preclude us from having high-quality fixed-income securities for all of our portfolio. We still have the vast majority of our portfolio in those high-quality fixed-income securities -- more than enough to meet all our liabilities.

So we are talking about relatively modest amounts, $2 billion or $3 billion of our roughly $16.5 billion or $17 billion investment portfolio. Where we invest in these nontraditional kinds of things, we have been very successful in doing it. Part of the issue that we face is the accounting rules, which tell us where we book things, how we book things, which are not relevant from the point of view of building book value.

But it seems to impact analysts more substantially than reality, and that is -- if it's in operating income, people think that's good; if it's in capital gains, it doesn't count. Oftentimes these things are the same.

So we continue to build our investment portfolio in alternative kinds of things -- our private equity portfolio, which is where we own large percentages of companies. A good example would be health equity, which is the company Gene was speaking about, where we booked a substantial income gain. And we have an unrealized gain in the portfolio -- which is not reflected anyplace -- of $260 million, or as of probably yesterday, $285 million.

But, in fact, those are the accounting rules. We carry it at our equity. And if it was in our regular, ordinary portfolio, our book value would increase. There are other things that are similar to that.

In our real estate portfolio we have substantial gains that aren't recognized. But, again, carried at cost. It's not that these realized gains are new, and they went from yesterday's value to today's value; they are reflected because of accounting rules at cost, at equity, or whatever. And when, in fact, something happens to allow us to move the unrealized, unrecognized gains, it suddenly becomes visible.

We think that's a very significant number. Hard to get a definitive number on it, but certainly you'd measure in $5 a share or more. So we are pleased with our real investment results, but I have to recognize we elected to take a course that gives returns that are less subject to building a model around them.

We continue to be optimistic that there will be opportunities to find such returns. We at this point have been able to continue to do that. And we are very pleased at where we are this quarter, and are optimistic about the balance of the year, and continue to see opportunities that we can invest in.

So with that, Van, I'm happy to take questions.

(Operator Instructions) Amit Kumar of Macquarie.

Congrats on the quarter. Just very quickly -- and that color was very helpful -- some of the questions you were getting last night related to the discussion on the energy-related exposure in your investment funds, and especially as it relates to the drop-in, I guess, crude and energy pricing of 22% in Q3. How should we think about that piece and its impact in the Q4 numbers?

Well, current gave us a $5 million, $6 million positive in the third quarter, and my guess is it will be breakeven to a loss in the fourth quarter. Again, it's a bumpy process, the energy market. But they are not highly leveraged from that point of view. And our exposure to current has been constantly diminishing as they liquidate their assets. So it's a smaller number at the moment. But I would think that would be a negative swing next quarter.

Got it. The other question I had was -- I think when Rob was talking about the expense ratio in domestic; and obviously, you pointed out improvement, and yet there was some cautionary language around that. Is this -- should we think about, I guess, the 31% as the number we should think about for the next few quarters? Or is there more room for improvement in that?

I will let Rob answer the question.

I think as far as the domestic goes, I would encourage you cannot to get fixated on the 31.1. It can move up and down some number of basis points. Having said that, I think over a longer period, the trend is going to be downward. A lot of it is, quite frankly, going to be driven by mix of business and market conditions.

I think what you really have seen in the domestic business is that our earned premium continues to grow, and we have gotten to the point where we are able to further leverage our platform. So, again, I would suggest that you recognize that it could go up or down a little bit. But I think overall, there's probably more likely over time room for a bit more improvement than not.

Got it; that's helpful. And just a quick numbers question for Gene. Do you have the paid losses number?

Paid losses or the paid loss ratio?

Paid loss number. I'll take anything.

(laughter) He doesn't give much, I'll tell you, not even to me.

The paid loss ratio in the quarter was 53.4.

Okay. That's all I have. Thanks for the answers, and good luck for the future.

Michael Nannizzi of Goldman Sachs.

Just a couple questions in the domestic business. So it looks like the short-tail lines grew a bit, and comp also grew a bit. We saw some other players look like they were pulling back a little bit there. In comp, is that excess or primary? And can you give a little bit of color on the short-tail lines, please?

Sure. The growth is primarily driven by the primary comp as opposed to the excess comp. I think we had a little bit of growth in the excess comp, but again, it was mainly primary.

And that's just because, again, as we've suggested in the past, Mike, we don't think that everything is rosy for comp nationwide. But we think that there are certain markets, certain classes within the comp space that are particularly attractive. And we like the returns.

So we recognize that the name of the game is to -- it's a cyclical business. The name of the game is to build up the iceberg as big as you can, because over time market conditions will become less attractive. So that's what we're doing in the comp space -- adding to the exposure, adding to count, again, because we like the returns.

Got it, thanks. And then just on international, how should we be thinking about that? It looks like the combined is sticking up in the 98-ish range recently. You've had some growth kind of pull back a little bit this quarter. How should we be thinking about the trajectory for that business? Is that an area where you expect to continue to grow? And do you want to see that -- or do you expect to see, maybe, the expense ratio follow the same sort of pattern that we've seen on the domestic side recently?

I think in the short run, you are going to see the growth rate slow a bit from what you have seen in past quarters. I think on the expense ratio side, clearly, we have some work to do, and we are focused on that. And as far as the loss ratio, there's just some work to be done there.

Some of the businesses that make up that segment are performing particularly well. The syndicate is doing reasonably well, putting aside the two aviation hull war losses. Our European/UK insurance business, aside from our Lloyds operation -- we have some work to do there, as I think I mentioned a quarter or two ago. And we have already taken some action to get that to a better place. And we think the results of those actions will be coming through in 2015.

Got it. And Gene, could I ask a numbers question? On other expenses, it looks like that number ticked up in the quarter. Obviously, that doesn't run through the combined ratio. But just trying to think about just overall operating income, looks like it ticked up from about $33 million to about $42 million in the third quarter. Is that just some seasonality trend, or is that something that flipped up this quarter and last quarter? Or is that a level that we should be thinking about?

Yes, so that's the parent Company expenses, and then any expenses that we don't allocate back to the subsidiaries. And one of those is -- a big portion of our incentive comp program is kept here at the parent level. So as we make more money, we accrue a little bit more for that. And that comes through in the quarter when our returns are higher. But it's unallocated expenses that we choose to pay here at the parent level.

Got it. And --

Mike, let me just be a little more explicit. As our return for the year is going to move over 15, we start to have to accrue on a different level for an incentive plan which is not at all -- which is all paid for at the parent Company expense level and not allocated. So as it has become much more likely that we will exceed that 15% return for the year, one of our long-term incentive plans required a greater accrual.

I understand. Okay. So as time goes on, and you are accruing past that threshold on a net basis, then you start accruing more incentive comp?

Yes, except this was a catch-up for the first three quarters -- not quite -- but we weren't there. So when I say a catch-up, you make it for the year. So as soon as you are confident you are going to make it for the year, you make it. So, for example, God forbid we would have a terrible fourth quarter, we would find that would be an over-accrual.

Got it. So then if I were to take that accrual piece out and look at whatever the corpus of the expenses were, other than that, is it fair to say: whatever that was, that didn't change much year over year?

There would be some modest growth, but nothing -- not significant.

Great. Okay. Thank you very much.

Josh Shanker of Deutsche Bank.

I wanted to talk to you guys about the traditional investment portfolio as opposed to to the alt investment portfolio. I noticed that your investment yield seems to have gone up by about 20 bps compared to a year ago or the second quarter. Have you changed strategy on investing, or what might be causing that?

The answer is no. I mean, our duration is unchanged. Our quality of the portfolio is unchanged. For a period of time we were able to invest our short-term cash and bring it down, because cash flow was up. So our mix of short-term cash changed a little bit, but it was just -- it was quirky if -- you know, our returns have been on their way up.

Honestly, we did better than we had expected to do, and we were very pleased. But we don't think there's anything that's particularly different.

So if we look past the previous quarters, the run rate trend on shrinking NII in this is insuring environment is more normal, instead of the big pop that you had in the quarter?

I don't know if I'd say shrinking, but I would think that it would be more like flat to slightly up. I think this quarter probably ended up being disproportionately more cash invested in that we have -- the cash has increased again. So the return probably will move back in between where we were and where we are.

So it's not -- I don't think you should think we will get a much higher yield than we have averaged. It might be slightly higher, but this was -- I think because of how we invested our cash, I think it was slightly better.

And do you have a breakdown for prior development by operating segment?

As you know, we do not have it on this call. It will be available afterwards.

Thank you very much.

Kai Pan of Morgan Stanley.

So first question is on the investment side. Thank you for the disclosure about the substantial gain that's not on the book. I just wonder if you can quantify what's -- if you were to mark-to-market all your holdings which occurred and not on the book, like, do you have estimates on how much would that be as a percentage of current shareholders' equity?

I said it would certainly be more than $5 a share.

$5 share. Thank you so much.

And also, just trying to understand a little bit about that investment process, basically for the nontraditional investments. So could you give a little bit more colors on, like, what's the approach there; and how do you come up with these deals? But the question is really to say: what is the consistency of the return going forward?

Consistency -- in the short run, there is none. Consistency will run when we continue to be opportunistic, searching for what we believe are good risk-adjusted returns where we aren't required to have liquidity. So we bought an office building in West Palm Beach, Florida, because someone needed to close, and it needed to be a cash closing in a very short period of time. And it was the very best office building. And to get approval to do that again at this point in time would take years. That would be an example.

So this deal just come to you, or do you have a regular sort of process, like a -- basically investment process, and you have had it all sort of as that opportunity arise?

Both. We have a regular process as far as private equity things, where we have our own private equity team where things come in. We have our own real estate team that looks at these. And some things, such as the real estate transaction in West Palm Beach, they come to us because someone here knows someone. So we are just out there looking.

Great. The second question is on the reinsurance side. Given all the alternative capital, as well as now there is some curious talk -- primary company -- talking about creating internal reinsurers that potentially pull the demand from the open market. I just wonder your thoughts on both as a buyer and seller of reinsurance in this changing marketplace.

I think, stating the obvious, it's a better moment to be a buyer than a seller. I think as far as long-term goes, it's still a bit unclear as to the permanence of this alternative capital. It hasn't fundamentally been tested from a loss perspective, where a lot of the decisions and judgments which are based on models prove to be wrong as a result of some type of unforeseen or unfortunate event.

I think, in addition to that, while parts of the casualty reinsurance market have become a bit more competitive, much of the alternative capital has not necessarily found a way to effectively penetrate that market. To make a long story short, our expectation is that the reinsurance market, particularly the traditional one, is not going to go away overnight. This is a challenging moment, and there remain opportunities to participate in the reinsurance market that are reasonably attractive. But there is no doubt it is a competitive time.

I think that this is an ever-so-alluring business: appearing so predictable, but proving to be particularly unpredictable when the unforeseen event arises. Many companies after Katrina -- and several other events -- would have proved to be insolvent if, in fact, anyone had said, okay, you have to pay your claims now.

And they went out and rushed to raise capital very quickly on financial statements that at best were questionable. I think when Rob said they have been untested, it's a very quick period of time when these companies could be tested. The capital accounts could be gone; and not only will they be tested, but the people who purchased reinsurance from some of them will be tested.

The moral commitment of participants in this business is a really important factor. And many of the people who are now playing in the industrial game don't have substantial moral commitment to our industry.

Okay. Thank you so much for this stuff. Lastly, on capital management -- and it seems like you have a very strong earnings year to date, and buybacks slowing down a bit. So just wondered your thoughts on buybacks going forward or any thoughts on a special dividend.

One of the things we face is the opportunity to buy back stock when we are blacked out, because our lawyers say we are taking a risk. When there's opportunities, we are trying to constantly measure our capital, our alternatives of regular dividends, special dividends, and buying back stock.

But as you and everyone knows, when we talk about myself and other senior management of the Company, everyone is concerned about capital usage. And we'll be very conscious of all those things. And we are examining all those options.

Thank you so much for the answers.

Vinay Misquith of Evercore.

Several small questions. First, thanks for the $5 number of unrealized gains. So is that an after-tax number, Bill?

It was an estimated number to give people a magnitude picture of what it could be. I'm really trying to give people an idea. I would tell you that it probably is. But it's an estimate.

Sure, sure.

Don't, don't, don't, don't, don't, don't value -- and as I said, it shouldn't be modeled in. It can't be modeled in.

No, no, no --.

It's a number to give people a sense of what's out there.

No, no. That's fair enough, but I think that's really helpful. Second question was on pricing was as loss trend. And I believe Rob said that you have some ways to go on the international side, where you can actually reduce the combined ratio.

So, given that pricing and loss trends are now roughly flattish and maybe going the other way, but that may be offset by some margin improvement in the international. Do you still think that you can keep margins flat? Or do you think that the combined ratio is going to tick up next year?

So I think, obviously, we are in the throes of our planning process. But when we look at the front windshield, our expectation is that for 2015 we should be able to certainly keep up with trend, if not exceed it, in general, in addition to that. We think that there will be some further benefit coming through in the expense ratio, particularly on the international front.

So all things being equal, I think the reported numbers, barring unforeseen events, should probably hang in there or improve next year. And on a policy-year basis, I think there's certainly room for us to do as well if not better.

I am more optimistic. I think that, in fact, we are going to -- as premiums get earned, we will see continued improvement from the past 12 months' rate increases.

Okay, that's helpful. And I just wanted to have a clarification on the yield on the fixed income. I thought that the dollars of fixed income for earnings this quarter was about $120 million. That was about $107 million, $108 million in prior quarters. There seems to be a jump this quarter. So what is the one-time items in there?

Well, there are various things. But you've got to remember, our cash flow was almost $400 million also. So there was a big amount of cash flow also that accounted for part of it.

But the fact is that I think that there were a whole -- every quarter there are various changes, things that happened in -- we have 52 operating units. We have lots of bundles of securities. The general view I would have is our core portfolio will have a slightly better trend than it had in the prior quarters, but you shouldn't think we will do a lot better than we did before.

If I can just give another reference to that -- our yield on the fixed income portfolio for all of last year was 3.6, and it's 3.6 in the third quarter of this year. It was slightly lower in the first two quarters, but it's back around where it has been for the last four quarters.

Okay. So I just want to be sure that there was nothing untoward this quarter. And this quarter is maybe the base for the run rate for the future? Okay.

I think this one had a couple of quirks in it to make it slightly better, but not an overwhelming number.

And the last thing, if I may, the pace of reserve releases has slowed a little bit this quarter. Just curious as to what's happening there.

The answer is -- over time, as pricing in reserve releases get more modest, they should get more modest. And the fact is, as you saw, we've already had three or four companies have adverse reserve releases. So we are pretty pleased. Our reserve position is very comfortable. And I think that everyone has been spoiled by a few of our very large competitors with huge reserve releases. It's never been an issue with us.

Thank you.

Brett Horn, MorningStar.

I wanted to ask a follow-up question on the previous question on the expense ratio in the domestic lines. I appreciate your comment that it could potentially tick up here in the very near term, but it sounds like you are positive about the longer-term direction. You obviously have got more active in those lines and presumably are scaling your costs there.

I guess my question is: to see a positive longer-term trend, do you need to see the pricing picture get even better? Or is it -- would just a status quo situation allow you to continue to leverage that cost?

I'm pausing because I'm trying to figure out how to answer that question without getting myself in a corner or splitting hairs. So I think the answer to the question is, for the domestic insurance business, we think give or take a certain number of basis points we can do a little bit better over time as our earned premium continues to grow, reflecting the written growth that we talked about earlier.

I think that that is not necessarily perfectly smooth or perfectly predictable, and it can ebb and flow by quarter. What I can tell you is that all of my colleagues, both domestically as well as outside of the United States, are focused on our expense ratio overall as a group and are determined to make sure that we are spending what we need to spend and not spending more than we need to spend.

So will the 31.1 come down X number of basis points? Yes, I think it's possible that it could get a little bit better from here over time. A lot of that's going to be driven, quite frankly, by mix of business as well, and to a certain extent, the type of reinsurance we are buying. But I think the areas of lower-hanging fruit are probably in the international segment over the next 6 to 12 months.

Okay, great. Thank you.

Jay Cohen of Bank of America.

Thank you. A couple of questions. First, on the reinsurance side, one thing we do notice is that you have retained the bulk of your reinsurance premiums. Your net to gross really hasn't changed. In fact, it has gone up a little bit. Given the softness in the reinsurance industry, have you explored and could there be an opportunity to buy some retro from people that want to sell it too cheaply, potentially?

J, I think probably the best way for us to answer that is we are cognizant of the market; we are cognizant of the various types of pools of capital that are out there that seem to have an unquenchable thirst to participate this marketplace. And we have in the past and continue to explore and consider whether there are alternatives to using choosing our shareholders' capital that would make more sense.

Got it, got it.

How was that for a non-answer answer?

Yes, it's a reasonable non-answer, though, so that's okay. The other question was on health equity. You obviously gave us the number as far as market value in excess of cost. When we think about the contribution --

By the way, that's in excess of our book cost. We have a real cost of zero at this point.

Got it. So carrying value, let's say. When we think about the economic value, forgetting accounting, is that something we should tax-adjust anyway, or is that our after-tax number?

No, that's a pretax number. We think -- we elected not to sell any of the stock, because we think it's an outstanding Company. But I think that we have not tax adjusted it.

But eventually, when you do sell it, obviously there would be a tax bill?

Yes, unless it was -- yes, answer is yes.

Okay. That's all I got. My other questions were asked and answered. Thanks.

Larry Greenberg, Janney Capital.

Just one quick one related to health equity. So they declared a dividend, I think, the day before the IPO. And you guys got $17.5 million. Is that included in the gain that you reported? Or is that something that you might report on a lagged basis?

No, that's taken into account.

That reduced our cost basis, and then the increase in book value took it up. So it's my frustration with the accounting treatment, Larry. I've finally gotten old enough that I can tell that acccountants they are wrong, but I won't convince them they are wrong. It all appears as -- in the gain.

Okay. Thank you.

Amit Kumar of Macquarie.

Just one quick follow-up on the investment funds. I guess the other question we were getting was the discussion on the merger arb these of your investment portfolio. There has been a lot of chatter in the news regarding the unwinding of some deals and apart from the tax discussion.

Do you get the sense that you will see some impact from all that is going on in the merger arb space in your Q4 numbers? Or is that somewhat unaffected?

So you are asking me to tell you what already has happened. Right?

Yes.

And the answer is no, we did not get particularly adversely affected. That goes under the forecasting what already happened exception under our --

Safe Harbor.

Go ahead.

Ian Gutterman, Balyasny.

Bill or Rob, I was hoping one of you could expand a little bit more, just about market competition and how it might affect your future growth plans. I guess I'm thinking specifically -- well, you mentioned international. Maybe you could expand what you are seeing there in London and so forth.

But, also, are we seeing competitors that maybe six months or a year ago would have then focused more on improving their own books, trying to be more aggressive for new business? Or are we seeing more E&S business return to standard markets, things like that?

I think it would be fair to characterize -- maybe to bifurcate between the domestic, and then we can talk about any markets outside of the United States that we participate in that you wish to. But on the domestic front, I think it is fair to say that the market is a bit more competitive now than it was 12, 18, 24 months ago.

Having said that, we do believe that we are still able to achieve rate that's a bit above what we believe loss cost trend to be. Having said that, it's an interesting moment because the level of competition seems to ebb and flow by the month.

So, for example, we found July to be particularly competitive. August was a bit competitive. September was a little bit less competitive. And, actually, October was very encouraging for many of our Companies in the Group. And, again, this is domestically.

So it's up and down. Clearly, some of it is driven by competitors perhaps trying to make their budgets at certain times of the year. But I think we are pretty comfortable that, by and large, the market conditions that we have seen in the third quarter will certainly continue into the first half of 2015, if not beyond.

As it relates to the UK market I think you had referenced also, it's an exceptionally competitive price. You have got a lot of very skilled people managing a lot of capital within a couple of blocks of one another. And as a result of that, you get a very competitive marketplace.

In addition to that, much of the business they write is cat-prone and short-tail. So when things don't go the wrong way, people end up feeling pretty good about themselves. And sometimes that euphoria from the shorter-tail lines of business can appropriately or inappropriately spill over into the longer-tail lines of business. And as result of that, you get a very competitive market. That's been the case for some period of time. And it is our expectation at some point you are going to have to see that change, particularly for some of the casualty lines.

Got it. So international, obviously more difficult. In the US, as common -- it doesn't sound like it's -- again, I assume it always does in some accounts. But as an overall theme, it's not impacting your ability to grow in the areas you want to grow in, then?

We are comfortable with the US insurance market. We think, again, a bit more challenged than it was 12, 24 months ago. But we still think it is a good opportunity as opposed to the reinsurance market, which is facing more of a headwind on a global basis; and the international insurance market -- obviously, it varies by territory. But as we suggested, UK/parts of Europe are also facing a bit of a headwind.

Great. Thanks for the answers.

(Operator Instructions) Josh Shanker of Deutsche Bank.

Sorry to belabor things on this cash in the quarter. Trying to understand a little better. If you receive a lot of cash in the quarter and reinvestment at the current market, doesn't that depress the overall yield of the portfolio? I guess I need just a little education on how that works.

I'm sure you can talk to Gene after the call.

Okay, then, next question. So I was trying to answer it for myself, and I noticed over time that there has been a concerted effort to decline the percent of the portfolio invested in municipal bonds, which -- municipal bonds, of course, have a lower yield than traditional fixed-income corporates.

Is that going on? And why, if maybe we think that tax rates are at risk to rise -- or maybe are not at risk to rise -- why is the strategy of the Company trying to own less munis over time?

In the area that we invest, the relative yields on municipals are not as attractive. And the reason our tax rate is going up is because we are having substantial realized gains, which are fully taxable. So the investment income is a smaller percentage of our overall income. But if you look at the relative yields on after-tax basis, municipals are particularly rich in the five years or under.

Okay, thank you.

Jay Cohen of Bank of America.

I'm looking at the international segment. And if I build in a little bit of adverse development -- low single-digit numbers, millions of dollars -- it looks like the accident-year loss ratio in that segment ex-cats jumped up quite a bit from a year ago, and even quite a bit from the first half. I'm wondering, are there any other non-cat large losses in that segment? And/or what drove the presumed increase?

No, there's nothing else in there. But we did raise our loss pick as we saw some of that unfavorable development come through. So we raised our loss pick, and there was a bit of a catch-up because we came through in the quarter. And the expense ratio is slightly higher, as well.

I was just focused on the loss ratio. So on that loss ratio, then, Gene, for a reasonable run rate number, should I look at maybe the first nine months of the year as what you suspect that business is producing?

I think that would be pretty accurate.

Great, thank you.

I am showing no further questions. I'd like to turn the conference back over to management for any closing remarks.

Okay. Well, thank you all very much. We are really quite pleased with the quarter and quite optimistic with the balance of the year. I wish you all a very happy Halloween.

Ladies and gentlemen, thank you for your attendance to today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.