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W.R. Berkley Corporation (NYSE:WRB)

Q1 2014 Earnings Conference Call

April 23, 2014, 08:30 AM ET

Executives

William R. Berkley - Chairman and Chief Executive Officer

W. Robert Berkley - President and Chief Operating Officer

Eugene Ballard - Senior Vice President and Chief Financial Officer

Analysts

Michael Nannizzi - Goldman Sachs

Amit Kumar - Macquarie

Ronnie Bobman - Capital Returns

Vinay Misquith - Evercore

Mark Dwelle - RBC Capital Markets

Bob Farnam - KBW

Jay Cohen - Bank of America

Patty Penn - Morgan Stanley

Ian Gutterman - Balyasny

Josh Shanker - Deutsche Bank

Operator

Good day, and welcome to the W.R. Berkley Corporation's first quarter 2014 earnings conference call. Today's 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 are contemplated by us will, in fact, be achieved.

Please refer to our Annual Report on Form 10-K for the year ended December 31, 2012, 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.

William R. Berkley

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, I think we'll be able to demonstrate many of the things that we think differentiate our company from many of our competitors. So we'll start with Rob, talking about our operations.

W. Robert Berkley

Thank you. Good morning. Trends in the commercialized property and casualty insurance market and reinsurance market remain reasonably consistent with what we've seen over the past few quarters. The two markets, while they are intertwined with one and 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, it can vary by class. Non-cat exposed property is also generally speaking threading water, while cat-exposed property continues to be under mounting pressure.

Commercial transportation continues to be the very puzzle to us. We talked about this a few quarters ago, how it is right for change and has been right 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 in workers compensation a few years ago.

The insurance market outside of the U.S. 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 planning for change.

On the other hand, the reinsurance market remains painfully competitive. The combination of an ongoing change and the approach that seating companies are taking combined with the increasing participation from non-traditional capacity coming into the 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 U.S. 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 60.3%, which includes 1.8 points of positive development and 1 point of cat losses associated with main storm. As Gene has defined for you in the past, we define cat losses based on PCS or main 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 we had this, 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 operation 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 believed that we have identified the issue and have taken the action, and are in the process of fully addressing what has been 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 33.6%, which is an improvement of more than 1.5 point when compared with the same period in '13.

The expense ratio continues to be a priority for us as an organization and we expect this improvement trend to continue, although it may not be a smooth curve. When we put all the pieces together that company achieved a combined of a 93.9%, and on the 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'll leave the discussion around that to others. However, I would make the comment that the first quarter of '14 represents the 29 quarter in a row of net positive reserve development and more specifically in the quarter we had net positive development of approximately $45 million.

When we look at our policy in numbers in combination with the fact that we are still able to get a rate above loss cost trend, 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.

William R. Berkley

Thank you, Rob. Eugene, you want to take us through the numbers.

Eugene Ballard

Thank you. Well, as Rob said, we had another solid quarter with strong premium growth, continued improvement in our overall combined ratios, both on an accident year and a 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 U.S. dollars and our reinsurance premium decreased by 6% as a decline in our Asia-Pacific reinsurance more than offset growth in our U.S. and U.K. reinsurance companies.

Our underwriting profits increased 28% to $83 million. The accident year loss ratio before cat losses improved by, eight-tenth-of-a-point to 61.1, due primarily to higher prices. In addition, our overall expense ratio improved by, seventh-tenth-of-a-point, due to premium growth as well as the benefit of various initiatives underway to reduce administrative cost.

That gives us an accident year combined ratio of 94.7%, down 1.5 points from a year ago. The pre-tax accident year combined ratio for our domestic segment, which represents 74% of our Q1 premiums was 93.7%, and for the international and reinsurance segment 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 at 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%, is actually the lowest it's been since the first quarter of 2008. Our investment income was up 24% to $169 million due to significant increase in income from investment funds, specifically funds that are invested in real estate, energy, aviation and rail car businesses. And the annualized yield on our overall portfolio was 4.5% of eight-tenth-of-a-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-.

You'll see our effective income tax rate increased to 30.5% in the first quarter from 26% a year ago. That's due 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 $193 million. And 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 at an annualized return on equity of 15.7%.

William R. Berkley

Thank you, Gene. We're very enthusiastic, although many of you might say, I'm always enthusiastic, which would be absolutely correct, but who would want a company run by pessimist. The fact is we have had over seven years of positive development, which I might point out as 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're short of reserves to continue that process, if that was the case, but there are people who write fairly tails 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 always have a problem some place. But overall, we see continued improvement in our underwriting results and a continued decline in our expense ratio. So we're 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, Gene, 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 and what would be considered as hedge funds, 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 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 rule 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 the 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 good, 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 we deliver through both claims and underwriting expertise.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Michael Nannizzi of Goldman Sachs.

Michael Nannizzi - Goldman Sachs

I think as though and kind of looking out from here, where do you see the environment shaking out for the rest of '14 and into '15 in terms of rate versus loss trends in your domestic book?

William R. Berkley

Well, let Rob talk and I'll add. Go ahead, Rob.

W. Robert Berkley

I think our expectation is that we should be able to continue to certainly keep up with an all likelihood exceed loss trends for the balance of the year. The only reason of caveat I would throw out there is, there are parts of our book and we mentioned this on the fourth quarter call, I probably should have been more specific about it today, where we feel on a policy or 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 becoming more focused on adding two policy account 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 to be able to keep up our outpace loss cost, and to the extent that you see us really just keeping up or below loss cost because we are so pleased with the policy returns we're able to achieve.

Michael Nannizzi - Goldman Sachs

And will you talk about those high-teens ROEs? I mean is that mostly on the comp side or are there other long-tailed areas, where you're seeing those sort of returns?

W. Robert Berkley

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 brush, because it can vary by territory, it can vary by class.

William R. Berkley

One other thing 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 there.

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

Michael Nannizzi - Goldman Sachs

And I guess maybe, Bill, you mentioned your sort of 15% ROE goal?

William R. Berkley

Not 50%, 15%.

Michael Nannizzi - Goldman Sachs

So if we look at the first quarter we normalize investments, it looks like you're closer to that sort of 10% range. How do you get there? I mean is it, given the environment you see?

William R. Berkley

I don't think 10% is normalized. I think 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 market-to-market the value of the railcars, as we got into that business early.

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 sort of $25 million. So I would say with no improvement in expenses or underwriting, we're probably today at 13.5%.

And I think we will have improvements 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 I think the answer to that also is we brought back a lot of stock in the first quarter. So that helps us a little bit also.

Michael Nannizzi - Goldman Sachs

And then just last quick one, if I could. Rob, on Europe, and you mentioned, I guess the non-Lloyd's Europe in terms of operations, where you were making some changes or some re-underwriting things or re-underwriting actions. Can you talk about, where you've seen the growth in that international book recently? And what's the overlap with the area that you were talking about?

W. Robert Berkley

So let me first talk to you a little bit about where we've taken the action and what those areas are. One is within the U.K., a part of the professional liability phase, a particularly class in that. Also, there was a sub-class in Spain within the professional liability space, as it relates to healthcare. And in that sub-class 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.

Michael Nannizzi - Goldman Sachs

So not within that area?

W. Robert Berkley

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're having some growth in the Scandinavian territory. Not in some of the professional line within Europe and U.K.

Operator

Our next question comes from Amit Kumar of Macquarie.

Amit Kumar - Macquarie

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

William R. Berkley

No. What it suggests is we think we'll have a lot of capital gains, so we'll generate more capital than our planning anticipated, so we have more resources to buyback 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 carry across, because of the nature of the accounting rules that we think we value, and therefore we think the stock is attractively priced.

And given that we'll convert some of those to real value. I think it's attractively priced and as we convert those to real value, we'll have more revenue than we anticipated. So we have the capacity to buyback, while keeping in mind the rating agencies want us to maintain our level of capital.

Amit Kumar - Macquarie

That's somewhat similar to what you have said in Q4. So I think I get the point. The second question I have is on the discussion on reinsurance global. I know that you talked about the non-notable losses. The loss ratio for reinsurance global was elevated at 64.6% versus 55% in Q1 2013, were there any one-timers in that number too?

William R. Berkley

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

Eugene Ballard

Yes. We did.

William R. Berkley

That was the big difference.

Amit Kumar - Macquarie

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

Eugene Ballard

In terms of loss ratio?

Amit Kumar - Macquarie

Yes. Loss ratio?

Eugene Ballard

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

Amit Kumar - Macquarie

The final question I have is for Bill. Recently, we have seen I guess return of consolidation discussions in Bermuda. And I know this does not somewhat directly relate to you, but could you sort of refresh us what's your view is on consolidation at this juncture of the cycle for W. R. Berkley and some of the properties which might be for sale?

William R. Berkley

We mange our business, but what's in the best interest of our all shareholders. Unlike some companies, every single senior person here has their maximum economic gain by having the stock to 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 will be a lot of consolidation, especially of what I call the billion-dollar club. The people in the reinsurance business who 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 reinsurer in that 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 and then same-sized category, to continue to generate value unless they have a real special mix. So I think there will be substantial consolidation in both the insurance company and broker side.

Amit Kumar - Macquarie

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

William R. Berkley

Well, you heard my starting point, which was that in this company, the senior management of the company has 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 there job and their pay than they are in what's best interest to the shareholders, and it's very hard to differentiate that at all clients.

So I think there is a lot of people convince 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.

Operator

Our next question comes from the line of Ronnie Bobman of Capital Returns.

Ronnie Bobman - Capital Returns

Rob, in your prepared remarks and then even I think in the Q&A you mentioned work comp, and again not broadly, you sort of caveated that to a degree. And I was wondering -- all right, two questions in there work comp area. One is, there is California, your California work comp book fall into that sort of 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?

W. Robert Berkley

As far as comp goes, you're right. We did suggest that it varies greatly by classes within the comp space, but then also varies greatly depending on the territory. We think that whether it be workers comp for any line of business, the places where it typically gets ugliest is where it 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.

Ronnie Bobman - Capital Returns

That sounds like a very delicately and selective response?

W. Robert Berkley

Given I'm surrounded by and it's real [ph] mute, understand and you could see them all.

William R. Berkley

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

Operator

Our next question comes from the line of Vinay Misquith of Evercore.

Vinay Misquith - Evercore

Just looking at the pace of rate increases, I think you mentioned it was 4.6% overall for the company this quarter. I think last quarter was 5.7%. Curious whether that's a function of the market or which I thought you said was kind of stable or you being instead of trying to gain more market share, because you think that you're adequately priced?

W. Robert Berkley

It's a combination of both. I mean, specifically, the domestic business, where we are getting bit over a 5%, there is a place where we are seeing opportunities to lighten up our foot on the rate, accelerate it 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 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.

Vinay Misquith - Evercore

Secondly, your attentions in the primary insurance and the domestic insurance went up, just curious if there was just business mix of are you choosing to keep more net on your books?

William R. Berkley

Retention as far as how much we see versus what we keep net?

Vinay Misquith - Evercore

Yes, correct. I mean that was up modestly this quarter last year?

W. Robert Berkley

I think it's up modestly. I don't think that there is a lot to it. Having said that, I would tell you that we continue to like others examine our reinsurance purchasing, and are considering whether the way we've been buying reinsurance 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 examine that. But as far as what you're 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.

Vinay Misquith - Evercore

Just one last follow-up. On the non-cat where you said, so was it about 1 point on the combined ratio you would think?

William R. Berkley

It becomes a little bit of a slippery slope, no pun intended, because how do you define that. We have 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 the roof's 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.

Operator

Our next question comes from the line of Mark Dwelle of RBC Capital Markets.

Mark Dwelle - RBC Capital Markets

A couple questions. Can you just remind me on your reinsurance business? That business is still predominantly casualty-oriented business, right? What percentage is property?

William R. Berkley

I would say, maybe 20% of 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.

Mark Dwelle - RBC Capital Markets

And so to the extend 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?

William R. Berkley

At this stage, I think that's right. And you've gotten somewhat of a ripple or a domino effect where you're seeing some of this alternative capital coming in and then 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 on the property space and to be looking to participate in a broader manner in the causality space.

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

Mark Dwelle - RBC Capital Markets

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 E&S book and your more standard lines book?

William R. Berkley

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.

Mark Dwelle - RBC Capital Markets

Which one is better?

William R. Berkley

What product line do you want to talk about?

Mark Dwelle - RBC Capital Markets

Well, I guess, broadly differentiating, if you're saying its more differentiated now than before, that would imply one is better than the other. So I guess, you can answer it.

William R. Berkley

Let me try and answer it 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, in particularly national carriers, that by and large are the ones that tone for the overall market because as their appetites ebbs and flows, that determines how much falls off or spills over into the specialty, and more specifically the E&S 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 off the rate pedal and looking for ways to try and not shrink their business as far as count goes, because they have 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 is going for the specialty and E&S market.

W. Robert Berkley

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

Mark Dwelle - RBC Capital Markets

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 just the ebb and flow of emphasis within portfolio of risks?

W. Robert Berkley

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 internal meetings with some of these national carriers to understand how they're thinking about the business.

William R. Berkley

This is Bill. I think one of the thing is you need to recognize is the unforeseen event is what changes the pattern of behavior and with the advent of big data and all kinds of analytics and people's belief in the certainty of such, has taken us down a particular path. And even the best actuary, who's old enough to be experienced, know 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 bet 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 was all the mathematical models, saying Katrina was a $15 billion storm.

Operator

And our next question comes from the line of Bob Farnam with KBW.

Bob Farnam - KBW

A couple of quick questions on the different segments. So on the global reinsurance segment, gross written premium was down for the quarter. Given the competitive pressures in that space, are you expecting, 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?

W. Robert Berkley

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 and reinsurance market 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 contributor to that.

Bob Farnam - KBW

So the decline in the property nature that would likely impact the next few quarters as well?

W. Robert Berkley

I think that you should assume that you -- well, 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 reinsurance market in Asia consequently and it's very possible that will be impacting our topline. As it relates to the other markets, I think that there is probably some level of opportunity, but not as strong as you will see in some of the other segments.

William R. Berkley

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

Bob Farnam - KBW

In the international insurance segment, the expense ratio is around 40%. Just kind of curious, if you have a target expense ratio, you're looking for that in space as you guys try to gain scale there?

Eugene Ballard

I think there are 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 we would like. And I think the second piece is 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're looking at how we're 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.

Bob Farnam - KBW

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

Eugene Ballard

We need to get into the low-90s.

Operator

And our next question comes from the Jay Cohen of Bank of America

Jay Cohen - Bank of America

As you briefly mentioned early about some of the alternative capital that you see in the property and reinsurance space, but you've had at least one competitor now, startup a fund attacking casualty reinsurance, 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 opportunities for you to do something in that space?

William R. Berkley

I think that there is 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 to be 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 a long-term business.

And we think it's probably not best design for hedge fund kind of investors. But for the most part, we don't have a long-term view. So we're just trying to think about it moreover 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 as the industry has lower risk than it is.

Over the very long run, it's a very long risk business. Over any three to five year period, it can have much volatility than people think. And many of these investors are investing in riskier kinds of securities. So the composite of those packages result in entire 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 Re, which was the first one down the line we've been looking at it. So that tells you how slow we are. But we're slow because we think the risks are hidden and unforeseen and every time we think we figured it out, we find out there is some things we haven't thought about. But I wouldn't be surprise if we didn't find some way we thought appropriate.

Operator

Our next question comes from line of Patty Penn of Morgan Stanley.

Patty Penn - Morgan Stanley

The first question is about the insurance segment, domestic, the year-over-year improvements on the loss ratio, accident loss ratio x cat. Remember about a year ago, when some of your like peers showing big improvement because of pricing increase last two years, you were able to, like no peers. At that time you mentioned you had some push back from your actuaries, and they wanted more conservative, taking accident initial pick.

So I just wondering going forward, as the rate actually increase, as it starting to sort of slow down a bit, so the gap between the pricing and the loss cost turn narrow, are we going to see sort of like a slower year-over-year basic loss ratio improvements or you're actuary actually is now becoming more confident, because of the past year development that it will be able to sustain the level of year-over-year loss ratio improvements?

W. Robert Berkley

From our perspective as we have 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, with not just the rate increases that we've achieved, but some on the adjustments we've made in our underwriting appetite as well, so if you will, rates plus selection and terms and conditions.

And I think it is fair to say that generally speaking we as a group had not taken full credit for all the benefits that we believe is likely to appear overtime. 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 improve from here.

William R. Berkley

So I would now add, now the lawyer is looking at me with evil eyes, what I would suggest is the spread between incurred and paid loss ratio of 10 points is much more than one would normally expect, especially given the growth rate. I think that what that's 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.

Patty Penn - Morgan Stanley

And second quarter is regarding to your international segments, x-ing your loss ratio x cat actuary deteriorated a bit last two quarters. Just wonder if that's related to the issues that Rob mentioned earlier or some business mix shift change?

William R. Berkley

No. It's related to the issues Rob spoke about and we're managing though them at the present.

Patty Penn - Morgan Stanley

And my last question on the investment portfolio. And we saw, interest rate having going down for years and last year we see some hope of higher interest rates and now this year. Does that expectation has been tempered down. I just wonder what's your outlook for interest rate and how do you position your portfolio accordingly?

William R. Berkley

It was very diplomatic to say, it was tempered. I would say hopefully interest rates going up were dashed. I think that we're searching for asset-focused investments that give us a yield or more predictable gain that the return is in the 5%, 6%, 7% area, that whether it accumulates and is realize at the end of the period of time or comes ratably, it doesn't matter to us. But it does give us 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 has brought about both by the polices 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 exactly at the wrong moment to have a longer duration.

So we intend to keep the duration of our portfolio between three and three-and-a-half years, which is sort of less than the duration of our liabilities and search for other opportunities that give us what we would think are 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 is very little differentiation for quality, by a five-year Spanish government bond, it yields the same as U.S. Treasury or maybe they test your quality.

Operator

And our next question comes from Ian Gutterman with Balyasny.

Ian Gutterman - Balyasny

I think most of my have been answered. If I can ask Gene just one last question. Do you have any color on the reserve releases within the U.S. segment, either by a line of business or by accident years? I was just trying to get a little flavor for this?

Eugene Ballard

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

Ian Gutterman - Balyasny

And anything that would be seen as, different than what we would have seen last year?

Eugene Ballard

No.

Operator

And our next question comes from Josh Shanker with Deutsche Bank.

Josh Shanker - Deutsche Bank

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, some things that Rob mentioned, one, is the possibility of retaining more risk in terms of our reinsurance purchasing.

William R. Berkley

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

Josh Shanker - Deutsche Bank

That's not what he said, okay, that confused me. I thought basically he may consider retaining more, and if he didn't I was trying to listen the math behind it.

William R. Berkley

He just didn't say retaining more risk, he said changing our reinsurance retention.

Josh Shanker - Deutsche Bank

I think he did said retain more, but maybe I'm wrong. So then skip that if that's not what he said, because I didn't understand that.

W. Robert Berkley

Josh, I think the point is that right now we see somewhere in the neighborhood of $750-ish million 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 and make sure that what we're doing makes sense.

Josh Shanker - Deutsche Bank

So the reason I think you said retaining 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 reinsurance program that may or not mean changing the risk profile.

Josh Shanker - Deutsche Bank

We're seeing more premium without retaining more risk?

William R. Berkley

I'd say that, Josh, I think the answer to your question is that we buy a fair amount of reinsurance now and we continue to examine that, and think about whether what we're doing makes sense prospectively.

Josh Shanker - Deutsche Bank

The other question relates to the 100 or more basis points of winter weather non-cat losses, would that be compared to 1Q '13 or a typical winter. So I think 1Q '13 was particularly benign in terms of winter weather.

William R. Berkley

I think the answer would be both.

Josh Shanker - Deutsche Bank

And I'm sure I'll work on that answer.

William R. Berkley

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

Operator

(Operator Instructions) And I am showing no further questions at this time.

William R. Berkley

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

Operator

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

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