W R Berkley Corp (WRB) 2015 Q2 法說會逐字稿

Good day and welcome to the WR Berkley Corporation second-quarter 2015 earnings conference call. Today's conference is being recorded.

The speakers' remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words including, without limitation, believes, expects, or estimates. We caution you that such forward-looking statements should not be regarded as a representation by us that the future plans, estimates, or expectations contemplated by us will in fact be achieved.

Please refer to our annual report on Form 10-K for the year ended December 31, 2014, 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. WR 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, it was an interesting quarter, exciting in many ways, challenging in many ways. We're pleased with our results. Why don't I start by turning this over to Rob?

Okay. Thank you. Good afternoon, everyone.

The second quarter, as a suggested a moment ago, has been a period of significant change for the industry, but much of that change has stemmed from the level of M&A activity that persisted through the quarter. Having said that, while it has given people something to talk about, the reality is that the underlying market conditions have been reasonably consistent, though in some cases, perhaps incrementally more competitive.

Of the markets that we participate in, the domestic insurance market remains a bright spot. Workers comp, GL, as well as select parts of the professional market remain particularly attractive.

Having said that, unfortunately, commercial auto, aviation and marine remain challenging and, more recently, offshore energy has become notably competitive. As it relates to the international insurance environment that we operate in, it remains also quite competitive, with the UK and Europe standing out as particularly challenging.

And finally, the global reinsurance market remains painfully competitive as well. Having said that, the pace of the erosion seems to be slowing, which is giving reason for perhaps guarded optimism that we are approaching the bottom.

Turning to the Company's performance during the period, net written premium came in at $1.54 billion. That is up about 3.5% when compared with the corresponding period last year. The domestic segment led the growth, coming in up 7%. The growth was primarily driven within the domestic segment by our workers compensation activities, as well as parts for professional liability activities.

It's worth commenting that of the seven points of growth, just shy of two points were associated with rate and the renewal retention ratio remained at approaching 80%. Partially offsetting this growth was the international segment, which was down 11%. Gene is going to give you a bit more detail on that, as well as the reinsurance segment, which was approximately flat.

With regards to the loss ratio, came in at 60.7%, which is an improvement of approximately half a point. This is primarily driven by improvement in the reinsurance segment, as well as a bit of improvement from the international segment. It's also worth noting that our paid loss ratio is came in at an attractive 53%.

With regard to the expense ratio, this was a little bit of a bittersweet situation. The expense ratio did tick up to 33.5%. We are pleased with the continued improvement in the domestic segment.

Having said that, this was offset by some activities in the international segment, as well as the reinsurance segment. Gene is also going to be giving you some numbers in this area.

Having said that, a couple of quick comments from me. As far as international goes, as I've mentioned in the past, we're going to need to, on occasion, take one step back in order to take two steps forward. Some of the expenses spike that we saw in the second quarter in the international segment, we believe, is a short-term phenomenon, which will spill over into the third quarter, we would anticipate, and may, in fact, affect the fourth quarter, but by the time we get to next year we believe this will be behind us. And as it relates to the reinsurance segment, our internal costs actually are in a pretty good place and Gene is going to give you some color as to, again, what's driving that.

When you put it all together, the Company achieved a 94.2% for the quarter, which included $22 million of net positive development. This is the 34th quarter in a row of net positive development.

In spite of the challenges that exist in the international insurance market, as well as the global reinsurance market, we believe that the domestic market still has a meaningful amount of gas in the tank. And quite frankly, the level of M&A activity is likely to create further opportunity. For example, we've already announced a few new activities in the third quarter.

So all things being equal, we are quite optimistic, as were the domestic businesses. We think things will, over time, be improving for the reinsurance segment. And we think we're well on our way to making meaningful progress with our international business.

Thank you.

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

Okay. Thanks, Bill.

As Rob said, for the second quarter, we reported operating income of $105 million, or $0.81 per share, which is almost unchanged from $109 million, or $0.82 per share, a year ago. The slight decline in earnings was a result of higher underwriting profits that were offset by a modest decline in investment income. I'll go over the details -- some of those details, starting with underwriting.

Again, as Rob said, net premiums written were up 3.5%. That was led by the domestic segment, which was up 7%, with increases in all major business lines. Our largest line, workers comp, was up 15% and professional liability was up 29%.

In the international segment, premiums declined 11% to $198 million. Most of that decline was due to changes in foreign exchange rates. In original currency terms, international premiums were down 3% as growth in South America and Canada was offset by lower premiums in the UK and Continental Europe. Reinsurance premiums were essentially unchanged at $143 million, as growth in the US was offset by lower premiums in Asia and Europe.

Our overall pretax underwriting profits were up 9% to $87 million. The accident year loss ratio before catastrophe losses was a 60.5%, up slightly from 60.1% in the second quarter of 2014, and below the accident year loss ratios for each of the immediately preceding three quarters. Cat losses were relatively benign for a second quarter, with only one cat event with a net loss greater than $5 million. Overall, our cat losses were $25 million, or 1.6 loss ratio point, in the quarter and that's down from $40 million, or 2.8 loss ratio points, a year ago.

We reported favorable reserve development of $22 million this year, compared to $24 million a year ago. Almost all of that favorable development was from the domestic segment, but all three segments did have positive development. That gives us a reported loss ratio after cats and reserve releases of 60.7%, down a half a point from last year.

The overall expense ratio for the second quarter was 33.5%, up 0.3 points from the second quarter. The domestic segment, improved -- expense ratio improved by 0.8 points to 31.5%. That's right in line with our expectations.

On the other hand, the reinsurance expense ratio increased seven points. However, five of those points was due to what we call structured transaction, which are transactions that have much higher profit commissions that's more than offset by lower loss ratios. In fact, the internal expenses for the reinsurance segment other than commissions was actually down 0.8 points from the second quarter of 2014.

The international expense ratio increased almost three points to 41.6% for two main reasons. One is the decline in premium I mentioned, and the other is slightly elevated costs in Europe that are related to the integration of our UK companies, as well as the setting up a new European platform and to some ongoing solvency two costs. We expect those costs to subside in early 2016.

That gives us an overall combined ratio of 94.2%, down 0.2 points from the second quarter of 2014. As Rob said, the paid loss ratio was 53%, down from 56% in the second quarter of 2014. And our loss reserves increased $250 million from the beginning of the year to just over $10.6 billion.

Investment income was $128 million. That's down $11 million from a year ago. The decline was primarily related to lower earnings from our merger arbitrage account, which broke even in the quarter, compared with income of $7 million in last year's second quarter.

Earnings from fixed income securities were down $2 million to $107 million. And earnings from investment funds were unchanged at $22 million. The overall portfolio yield was 3.2%, compared to 3.6% in the second quarter of 2014. In addition, we had realized gains of $28 million in the quarter. That's primarily from the sale of interest investment funds and that compares with realized gains of $109 million in 2014, which included a large gain from the sale of a real estate investment in the UK.

At June 30, 2015, our average rating and duration of fixed income portfolio were AA minus and 3.3 years. And our aggregate unrealized investment gains before taxes were $343 million.

The duration of the portfolio of 3.3 years is a full year less than the duration of our loss reserves. Interest expense for the quarter was up $3 million. That's due to interest on $350 million of debentures that we issued in the third quarter of last year, which was partially offset by a reduction in interest from $252 million of senior notes that we repaid in May of this year. The overall effective tax rate was 30.4%, down from 31.5% in the second quarter of 2014. The decline was mainly due to lower investment gains that are generally taxed at the full 35% tax rate.

In the first quarter of 2015, we repurchased 4.4 million shares of our stock at an aggregate cost of $218 million. Our cash flow more than doubled to $272 million in the quarter, due in part to lower tax payments. In summary, for the quarter, that gave us a pretax ROE of 15.5% and after-tax ROE of 10.7% and an ending book value per share of $36.76.

Thank you, Gene.

I thought I'd talk a little more about our strategies and some of the things that I think reflect upon our longer-term view and what we're looking at, and then open it up for questions. First of all, we think management of capital is really a cornerstone issue. We've bought a lot of stock back.

When we look at our book value in the sense of what we assess as our real book value. So for instance, as we mentioned in the footnote, we have a $400 million gain that's not reflected on our balance sheet and health equity. That's a couple of dollars after-tax per share not reflected.

There are a number of other assets that we think, more judgmentally, but are undervalued on our balance sheet, some of our real estate to some of our other key investments. So we think that our real book value is probably, because of things like that, not reflective of our balance sheet stated book value because we follow accounting rules. That's the way it is.

We're also optimistic that our business continues to generate an outstanding pretax return. We are cursed with being a domestic insurance company. So you might look at other people who report return on capital, return on equity of 12%, 13%,14%; it's a non-tax return.

So we're, this quarter and from now on, we're going to put in our pretax return so you can measure our results based on Management's performance, because we think that's what that shows. We're going to have to, over the long run, find a way to deal with this issue. Some of our competitors are electing to find ways that don't suit us, but there will be a way to find a solution.

We also think capital management reflects a different view that we have than many of our competitors, where they think getting bigger and having more permanent capital is a good solution. We think, if anything, capital markets are more opportunistic, more flexible, and there are things to do to have capital that's available to you, and therefore maintaining ever-increasing permanent capital can be more like an anchor than a sail in the wind that helps you move ahead.

So we're trying to maintain our level of capital, being sure we have enough always so we're not rushing to shrink our capital base. But not build capital when we don't need it, when we can find other places to get it if we want it for short or long duration and leverage the returns that we can deliver to our common shareholders.

We're really optimistic about where we see the business going. In the short term, there may be a bump or two. The global economy has never been as uncertain in my recollection. Not that there's a huge crisis here, but there's lots of uncertainty.

The spread between the duration of our bond portfolio and the duration of our liabilities is as great as it's ever been, being a year, because we're worried about inflation. We don't know what's around the corner, but we know it's out there, given economic activities and economic policies.

We have the same view of our loss reserves. You have to at least recognize what can happen.

So while we're aggressive in seeking out opportunities, finding great teams of people, we being willing to jump into something where we see an opportunity, we're cautious when we look at what can go wrong in the insurance business. We want great returns but we don't want to take them at any price. We continue to feel that we'll be able to deliver on that high 15%-plus after-tax return over the long run, while it may be bumpier in the short run to get there.

Okay. We're happy to take any questions.

(Operator Instructions)

Kai Pan, Morgan Stanley.

Bill, the first question on your -- you give a lot of detail your thoughts about capital. Two issues there. One is for the tax issue. You've been a vocal critic of the offshore tax treatments. And is an indication that you just think the law will now change and you have to find a way to reduce the tax rate for W.R. Berkley shareholders?

Well, I think that return on capital serves two purposes. One, it tells you what your shareholders are getting to keep but it also is a measure that people have evolved to use to tell how well a company is managed. So I thought it was important, and we discussed it here at great length, that we put the number up there so you can look at us compared to so many companies who pay no tax, so when you look at us you don't say, hey, they earned 10.5% return on equity and this other company earned 13%, 14%, 15%. To measure management, you have to look at it on a consistent way, so we're putting the number up there first through first of also you can measure how we do compared to everyone else. I don't think they're going to pretend they pay taxes, so we have to pretend we don't.

Number two, I think that ultimately, the system of taxation in our country only can work when business done in the United States pays tax on a universal basis. Otherwise, everyone will find ways to do business here and move their incomes offshore. That is not how it works in the insurance business at the present time. So that being said, I think there will be someone, something done to address the tax issues. But I have been an optimistic for five years and I have been wrong. Actually, it was more than five years. Probably seven years.

But the fact is, I've been wrong. And we're constantly looking at alternatives and how and what and how the world works. And I'm an optimist. I always think I will find a solution or the government will find a solution that makes the country work better. So no, I don't have an answer, but I'm working on it.

Okay. Then on your second point on the capital optimization, looks like you're probably pursing a more capital-light business model because the capital available in the marketplace on demand, that you don't need to maintain a big buffer in terms of capped balance sheet. Does it mean that you will be very active in buyback? You own shares that you probably will not grow your shareholders outwardly unless there's business needs?

I think what it means is just as now for a number -- for couple years we've tried to maintain our capital levels at roughly the same level, because external capital is available at very low costs, much lower costs than our average cost of capital. So we're not going to reduce our capital. But we also don't see that we're going be up to grow our business a huge amount, so we grow our business 5% or 7%, there's external capital that we can find ways of obtaining for that amount of growth. If we can start to grow our business more, we're going to grow our internal capital more or get more permanently provided external capital. We have many people who talk to us about being our partners and doing things all the time.

Okay. Lastly on industry consolidation, Bill, you been running the Company for almost five decades here. We've seen this play out before. What do you think about the current wave of consolidation? What do think it will do for the industry and particularly, what did you want to do W.R. Berkley. Do you think yourself more as buyers or sellers?

First of all, on October 31, I will step down as Chief Executive and Rob is going to take over. So it will be not five decades, but I'll be out on this box at this point and he'll take care of it and then I'll be Chairman. And then I get to harass everybody else.

But the fact is, I think consolidation serves a purpose. In the case of our business, regulators and regulatory pressures makes it important not to stay small. We're big enough that we can deal with it. We've always had the same view. We're here to do what's right for our shareholders. We'll always do what's right for our shareholders.

But that being said, we can continue to generate great returns over the long run for our shareholders and if somebody comes up and says, hey, we'd like to talk to you about something, we're always willing to talk. If it's good for our shareholders, it's good for us. In the meantime, we're big enough that we think there's not much that we can't do, and if we can't do it ourselves, we have lots, as I said, lots of people who come to us with billions of dollars in capital and offer to be our partners to do some other things. So, I think that the consolidation that's happening now is frequently about management ego or management rewards and less about -- less than it is about what you need to run your business.

Now, there are exceptions, because to be a global Company and to do business globally, scale is certainly of value. But that's a small part in dollars of the marketplace. So there are a few companies that need to be global to serve customers. Our global ambitions have to do with doing business with great customers, wherever they're located.

Thank you very much for sharing your thoughts.

Amit Kumar, Macquarie.

Two quick follow-up questions, I guess, to the previous discussion. First of all, going back on the discussion on capital management, in the past, we have talked about a special dividend too. Is that still on the table down the road, or is that off the table?

Amit, I've talked to you for many years and I've always said exactly the same thing. My view about our Company is that we do what we think is best for our shareholders no matter what. Someone comes in at a high price and wants to buy the Company, we'll talk to them. If some -- if we think is the most attractive for our shareholders to buy back stock, we'll buy back stock. If we think we have more capital than we need and there are alternatives to it, we'll pay a special dividend. We paid a special dividend a couple of times. We bought back stock opportunistically.

And each period of time on a consistent curve, we look at our capital account, we look at what alternatives we have, we look at what we see the future to be and we try to make those decisions. But the only benefit we have with our size is we can be nimble. All the decision-makers fit in one room and we talk and try and figure out the right thing to do. So nothing is ever off the table. We do what we think is best for our shareholders at any point in time.

Got it.

The answer is, not the table.

Got it. And then maybe this might be for Gene. Were all the buybacks working in the open market or was a piece of it under a 10b5-1?

All open market.

Got it. Okay. That's all I have for now. Thanks so much.

Michael [minute see], Goldman Sachs.

I had a couple questions if I could. One is, on the temporary capital point, what might a structure look like that you kind of alluded to? Are there any that you have that you're putting together on a small scale today that might come to fruition or is there -- where are we in this process of W.R. Berkley being able to leverage external capital? Is it a first-in conversation?

Michael, you have the most advanced firm and structuring alternative capital in the insurance business. When I was the annuity business, your firm structured alternative capital for me.

Yes, but those are the smart guys on the other side of the wall. They don't talk to us.

The answer is that there are people out there who come and talk to us all the time about wanting to find ways to put capital at risk in the insurance business. And we talk about various alternatives and things that we consider. We don't have a plan now, but between their discussions with Rob and Gene and me, we're very confident, if we wanted to do any one of a number of things, we could easily do it. We haven't chosen a plan, but we're pretty comfortable being financially versatile, that we could come up with something no matter what the option was, that could help us get by without raising new common stock.

Which really was, our historic view was, you raise common stock, you raise preferred, you raise debt. That's what it was and I don't think that's the alternative mix that is what a Company in 2015 needs to look at in our business. I think there are a lot of other alternatives. We see many of them in the marketplace now and there are also variance that aren't in the marketplace but offer attractive options.

Okay. I guess the question is, is this something that you expect, that you think you could put together in the next year, two years, five years, or is it if we look over time, is the ability for Berkley to either leverage external capital to grow, or utilize external capital and shrink its own capital base?

We think we can always find capital, which we will do on an opportunistic basis when we see reason or need. And we're not -- if I was talking about three, five, seven years, I wouldn't be talking about it. This is something we see in the next year or two or three where we think there'll be an opportunity to do something. Do we have it now? It's not two or three months from now, but it is within a timeframe, we think that one can see. But tell me what pricing is going to do, tell me how opportunities are going to arise. We think they're there.

Got it. So you would be comfortable moving in that capacity towards at least part of your business more of a fee-based model if that were to present itself in a way that was somewhat sustainable?

Those are your words, not mine.

Okay. All right. Thanks. And then on the tax rate, if nothing comes to fruition from the government side, would reallocating your portfolio back towards munies, is that something you would consider doing to reduce the tax rate or --

The answer is yes. We could shift back towards the muni market, but the muni market is a much better longer-term market, longer duration market than a shorter term duration market. You don't get the real benefits in the shorter term so you need some changes in the investment marketplace for us to do that as well as higher yields for us to be willing to go out 10, 12, 15 years.

Okay. Got it. So tax strategies may be on the investment side, maybe other strategies, but with the goal to try and reduce the tax rate at some point if government rules don't change?

Although, there are lots of things in the hopper now because the government is taking note of more and more US companies going overseas.

Got it. Last question if I could maybe in the domestic business. The expense ratio, Gene, you mentioned it came down year-over-year but it was higher than we had and I think we talked over the last few quarterly calls that the expense ratio should continue to come down to reflect the growth that you guys have had over the last couple years. Are we at a point now where this is where you expect the expense ratio to be, or is there still leverage on the expense side as you continue to earn through that growth?

Mike, there's still leverage that and we expect it to continue to improve. When you look quarter to quarter, some of it is sort of volume dependent with the new DAC rules. When your volume drops, you take a little bit more of a hit on your expense ratio than you used to, so it's hard to look at quarter by quarter. But yes, we definitely expect it to continue to improve.

Got it. Great. Thank you.

Josh Shanker, Deutsche Bank.

I'm going to continue along the same line of questions and I don't -- I hope you'll bear with me. In terms of the current view of, hey, you're going to report both the pretax and an after-tax ROE and you are reiterating your long-term goal of 15% ROE or better. Is that the optimism talking up that you believe that the taxation situation will change in a way that allows you to do that or do you expect to be able to hit that 15% ROE over the long run without any improvement from the tax situation?

I do.

You do? Okay. Thank you very much. And in terms of thinking about -- Rob talked about two steps forward one step back for international work. Can you talk about a little bit of how you're looking at the situation from this quarter and is this a one-quarter issue? What should we expect going forward?

Josh, it's Rob. On the international front, first off, there are some expenses, as Gene referenced, associated with solvency, too, which we will be working our way through as we make our way to the end of the year. We would expect that those expenses will begin to diminish at a material rate as we make our way to 2016. And then we have some other plans as it relates to some reorganizations that we're doing within the segment. Some of which was accomplished in the second quarter, some of it will occur in the third quarter and we would expect that, that component would be quieting down in the fourth quarter.

So I think the way that people should be looking at it is that the third quarter, you may see it tick up a little bit more from where it is now. The fourth-quarter you should see somewhat of an improvement, we would hope, from the third quarter. And by the time we're in 2016 we should be certainly in or on our way to a materially better place.

Perfect. And in terms of thinking about the opportunity set of hiring new talent, how does the international market look compared to the domestic market?

I think the answer is that we see opportunity on both fronts. Obviously, we look at each opportunity individually and it needs to stand on its own two feet.

[Is] that true -- anything about a greenfield business that you guys are willing to develop yourself? The opportunity exists for you to create a new idea for a business, maybe internationally whereas US market is somewhat more developed. Do you see an opportunity there or would are you more interested in proven track record from an international idea that's already underway?

Josh, again, it depends on how you define greenfield. But if you look at most of our activities, most of the business that we have started, it's been a situation where we have an individual or a team of people to come together that have a significant amount of expertise that they've developed over the years within a particular niche. And we don't expect that we would deviate from that approach.

Okay. Thank you. Good luck.

Ray Tunis, Credit Suisse.

My first question is on the expense ratio, I guess bigger picture in international. It's been elevated for some time and it looks like premium growth is slowing somewhat. Just curious how much longer term improvement there is contingent on revenue growth relative to managing down costs?

I'll make a comment. It's definitely a combination of both. There's a number of initiatives underway that we know are going to improve things from the expense side. Rob could comment more on the premium side, but I think it's going to take a combination of both to get it where we'd like it to be.

So as Gene suggested, it's going to be a combination of both. Certainly top line and earned premium levels have an impact, certainly. Currency, to a certain extent, has an impact as well in some cases. But fundamentally, much of the action that Gene was alluding to earlier that I touched on as well, has to do with quite frankly just trying to find ways to make the biggest better, to make it more productive, to make it more efficient and we think that we are getting some traction and doing so. Really not because of what we're doing here, at the holding Company, as much as really a lot of the good things that our colleagues that run these businesses are doing.

Long story short, would more earned premium in the backing be helpful? Absolutely. But I think the way we're going to get to a better place is because of some of these deliberate activities that we referenced earlier.

Thanks. That's helpful.

I think the bottom line is, we would expect that, that expense ratio is going to come down and putting aside currency issues, we will, in fact, have somewhat improvement in the volume. So I think that while in the short run, i.e. a quarter, you may not see much dramatic improvement, I think if you look at these numbers a year from now, it will be substantially better.

Okay. And then along the consolidation line, curious if you could opine a little bit on how the consolidation might potentially give you guys some near-term advantages? If we should be thinking about this as something that over the next year or two could actually create revenue opportunities?

Why don't I let Rob talk about some of the opportunities he sees now from an operating point of view, and then I'll talk about it from a broader perspective.

Just to make sure we're clear, we're talking about the consolidation that we see going on in the marketplace, correct?

Correct.

Okay. I think that it creates opportunity on multiple levels. I think the fact of the matter is that whenever you have this type of activity going on, it creates a distraction within organizations that are directly involved in the activity; because they are somewhat inwardly focused on what they are trying to do and when they are distracted in such a manner, it makes it more challenging to remain focused on the distribution system as well as, ultimately, the insured or whoever the customer may be.

In addition to that, our experience is that oftentimes, back to the point around distribution, that when there are large mergers, it creates questions within the minds of some of the distribution, how many eggs they want to have in one basket. And then finally, you have the other component, which oftentimes also can create opportunity for us or any other market participant where there are talented people that, for whatever the reason may be, become disenchanted with their future and are looking for another alternative.

Okay. And then I had one more nittier, one just on NII. What was the impact this quarter from the energy portfolio and is there any visibility on to what you think the impact might be next quarter?

The investment for the energy investments, yes. They're profitable this quarter and we expect them to be profitable next quarter.

Thanks a lot, guys.

Jay Cohen, Bank of America Merrill Lynch.

On the tax rate issue, Bill, at some point would you be willing to essentially re-domicile offshore, whether it's on your own or through some sort of M&A?

The answer is, we're always willing to do what we think is in the best interest of our shareholders. We think we have some level of obligation to this country, we just think at the moment the way the tax laws are, we won't be able to compete in the long run when we're paying taxes at 30%-plus and we have many competitors who are paying very low tax rates. And they do it, forget about what they show on their statements, they do it in many ways, through loss portfolio transfers, because then they don't pay tax on the discounted value of their reserves, through all kinds of vehicles, some of which they feel are justified and some of which they don't.

But the bottom line is, how much cash taxes do you pay? And it's a competitive disadvantage that in the long run, you can't continue with. We look at it all the time. We've worked on Congress. I have no idea how come it has been so difficult to persuade Congress. And I have no idea how some insurance commissioners think, for some reason or another, it's a good thing for people not to pay taxes in the country.

But Jay, we work at it every day. We make that decision and we look at it all the time. And at some point, we'll have to come to the conclusion, we can't continue in the current posture. But each time they do something to make the differential less, it makes it less certain. But we would look at every alternative, and we do every day. We talk to people about it.

Got it. Maybe a question for Gene. Looks like your debt-to-capital is a little over 32%. Would that act as any sort of constraint when you think about buybacks at this point?

No. I don't think so. The fact is, our net -- you have to remember, first of all, we have $400 million of statutory capital because we carry health equity at fair market value, so our statutory capital and our GAAP capital aren't the same, so we've had an increase in the statutory capital that you don't see of $400 million from just health equity. And there are other things that we've had increases in statutory capital because there, it's not a GAAP number so statutory capital has gone up, whereas GAAP capital has not.

We haven't bought more stock than our net earnings have, so if you look at our aggregate earnings, the amount of stock we bought basically matches our earnings. So we don't think it's a problem.

Bill, going forward is that a reasonable assumption for us to use, that your buybacks and dividends would be roughly equal to your earnings?

I think that over any period of time, that would be a general thing. Gene needs to make a comment about, he pulled up the numbers on his partnership things.

I misspoke on the energy fund. I get a quarter ahead of myself with the one-quarter lag, but they actually in the quarter we just reported, they had a small loss, but we don't expect that to go forward. I just wanted to correct that.

But at this point, I think they don't have a lot of our attention because the velocity of change now is much less. Okay, Jay?

Thanks for the answers.

Ian Gutterman, Balyasny Asset Management.

Bill, I was hoping first you could talk about your outlook in the Latin America part of your international business. Forgetting about the currency for a moment, but just seems like there's those economies are getting a little tougher. Does that impact your ability to grow or are the lines your participating in not seeing pressure from the economies there?

I think in the broadest sense, Latin America is a growing marketplace. It has more volatility as every developing market does. We have been successful in Argentina because we have great managers in Argentina and they've done a great job. We have the same in Brazil and we're expanding in Columbia now. The cornerstone of this business is great managers and great people. And we think that we've been able to get those kinds of people to work for us. Now, that said, it's a lot bumpier ride at the moment than it was 18 months ago.

Okay.

But I think that we're pretty happy with our participation and if anything, we would like to use an opportunity of uncertainty for us to expand further.

Got it. Great. And then just on the taxes, the one advantage, I think you'd agree, the one advantage of being in the US is access to business, right? The offshore companies, frankly, can't get at the great specialties you have because they don't have that -- that kind of business doesn't make it offshore, right?

No. The way they do it is they set up domestic subsidiaries.

Right. But then can only quota share a part of it. They can't get 100% offshore.

First of all, they can do loss portfolio transfers so they moved their reserves offshore, so they don't pay discount on the loss reserves. And then they quota share a large percentage of what's left. So they bring their tax rate down from 35% or 39% down to less than 10%. So when you can do that, it's a pretty big competitive advantage.

Understood. I guess what I was getting at is the opposite side. Would any potential solution to improve your tax rate in any way affect your ability to control the type of business you want to control? You know what I mean? The companies offshore, even though some of them have bought US businesses, haven't seemed to have the success accessing business in the same way because they seem to be perceived differently by being offshore.

I don't think it's the perception of being offshore. I think they have all have great people. But I think some of them have great people and do really well and others don't. But I think being here, doing this now for almost 50 years, we have a competitive advantage, because we have people who are old and gray and have been doing it for a while and most of the others are young and spry. So we're hopefully replacing the old and gray people with the young and spry people and we'll have accommodations that will be okay.

All right. Fair enough. Thanks, Bill.

Mark Dwelle, RBC Capital Markets.

Just one quick question. Back at the top of the discussion, I think Rob had mentioned weakening in the commercial auto line. I was wondering if you could expand on that. I guess I had been under the impression that was a line of business that, relative to many, was actually holding up somewhat better.

Maybe I miscommunicated, but from our perspective, commercial auto is very challenged. While it would seem by and large there's opportunity for additional rate, I still think the economic result that will deliver is not particularly rewarding at this stage. So while it may not be rapidly deteriorating, or deteriorating at all from a rate perspective, I think even with the rate increases that many in the industry are getting, it's not where it needs to be.

I see. So the comment was directed more towards the relative profitability weakening rather than --

(Multiple speakers) correct. I'm sorry if I misspoke.

No worries. That was the only clarification. Thanks very much.

Thank you.

(Operator Instructions)

Howard Flinker, Flinker and Company.

Howie Flinker. I'll take your side on the question of capital. Your writing at about [0.9 to 1] if you include total capital. If you want to include equity, it's [1.3]. You could write as much business as you want. You don't need capital. As you've learned since you went into business, you learned two things. One, the best form of capital is retained earnings. And the second, when you were very young, when your business was very young, you saw what happened to insurance companies like St. Paul and Geico and Safeco when they used too much leverage. The bill comes at the wrong time and it's a large bill. So I'm on your side on this one.

Thank you.

You're welcome. That's it.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to William R. Berkley for closing remarks.

Thank you all very much. We are optimistic that this is the time that will give us great opportunities in many fronts. The ability to be nimble and select the opportunities that reward our shareholders best is something we've always prided ourselves on. You can only be sure of one thing. We will always do we think is right for our shareholders and you can count on that in this Company no matter what. Have a great day. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect.