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Executives

William R. Berkley – Chairman and CEO

W. Robert Berkley, Jr. – President and COO

Eugene G. Ballard – SVP, CFO

Analysts

Amit Kumar – Macquarie Research Equities

Gregory W. Locraft – Morgan Stanley

Vinay Misquith – Evercore Partners, Inc.

Michael Nannizzi – Goldman Sachs Group Inc.

Robert Farnam – Keefe, Bruyette & Woods

Meyer Shields – Stifel Nicolaus & Company, Inc.

Jeffrey Cohen – Bank of America/Merrill Lynch

W.R. Berkley Corporation (WRB) Q2 2012 Earnings Call July 25, 2012 10:00 AM ET

Operator

Good day and welcome to W.R. Berkley Corporation’s Second Quarter 2012 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 contemplated by us will in fact be achieved. Please refer to our annual report on form 10-K for the year ended December 31st, 2011 and other fillings 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 obligations 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.

William Berkley

Thank you. Good morning. First, everyone should understand we do not [inaudible] insurance business. We got out of that business in 1986, and haven’t seen it since. Number two, I must be the only person that was happy with our quarterly earnings based on the stock price. We’re pretty pleased with how things are going, we’re pretty pleased with where the business is and the direction we see things. I’ll talk more about the general industry and our position. First, Rob is going to talk about the operating segments and then Gene will talk about the numbers and then I’ll try to pull it all together and take questions. Rob?

W. Robert Berkley, Jr.

Okay. Good morning. Market conditions in the second quarter were a continuation of the trends we observed in Q1. Carriers seem to be increasingly aware of the realities that stem from a weak investment environment, combined with less robust prior year reserve development. Additionally, it is becoming more apparent that the benign loss trends experienced over the past several years may not be a proxy for what we should expect going forward. The reality of these ongoing circumstances continue to apply pressure to the situation, and it consequently is requiring market participants to refocus on achieving and underwriting profit.

However, while the need for a change in behavior may be clear, it is equally apparent there is significant tension between the desire to increase underwriting discipline versus the impact these actions may have on production. Having said this, by and large companies seem to be accepting the realities of the industry’s challenges, and are consistently looking for additional rate while simultaneously continuing to show early signs of an introspective examination of their risk appetite. In particular, it is encouraging to see national carriers taking this path, given the meaningful tone they play in setting the stage for the overall market.

Generally speaking, the excess market continues to be one of the areas that is the most resistant to change. It would appear as though there is a misperception held by some that the loss activity that is occurring in the primary layers won’t climb up the coverage tower over time. A prime example of this would be excess comp. It is our view that some of the loss activity that the primary comp carriers have been experiencing with time will begin to impact the excess comp market as well.

Having said this, perhaps the silver lining is that history would suggest that areas that get the softest for an extended period of time tend to be the ones that offer the best opportunity in a hard market.

Net written premium in the second quarter was $1.19 billion. This represents an increase of 12.6% compared to the corresponding period in 2011. All five business segments contributed to the growth, although to varying degrees. The expansion of the specialty and international segments continues to be a result of our market positioning, breadth of product offering and relationships, as we have discussed in the past.

The strength in the alternative markets was driven by improving market conditions, specifically in primary Worker’s Compensation. The growth in the reinsurance segment, primarily in the treaty division, we believe is generally a result of [inaudible] becoming increasingly sensitive to financial strength, as well as their confidence in the value our team brings beyond financial capacity.

Our regional segment experienced less growth than other segments, which is a reflection of the level of competition in their part of the market, and their unwavering commitment to underwriting discipline.

The growth in the quarter not only varied by segment, but also by operating unit. Of the 44 units writing business during the period, 31 of them grew a total of 23%, while 13 declined a total of 14%. As we have suggested in the past, our model allows us to focus on growth when opportunities present themselves, and the ability to shrink when necessary.

The company’s rate monitoring report indicated an improvement of approximately 6% compared to the second quarter of 2011. This represents the sixth quarter in a row that rates have improved, and the second quarter in which we have achieved rate increase over rate increase for corresponding periods. Additionally, this is the third quarter in a row where we believe our rate increases have more than outpaced loss trend.

Our rate monitoring for new business showed that we are achieving 4.6% more rate on new versus renewal business. Finally, our renewal retention ratio remains at approximately 80%, suggesting, as it has in past quarters, that the quality of the book is not being sacrificed as we achieve these improved rates.

The group’s loss ratio for the quarter was 63.7. This result included 2.3 points of storms, which primarily impacted our regional segment. The company’s expense ratio in the second quarter was a 34.5. This is an improvement of almost half a point compared to the second quarter last year. This modest progress is a result of the group’s increased earned premium, however it is partially offset by costs associated with some of our younger operations, as well as some changes in our reinsurance program. As we have suggested in the past, we anticipate a continued gradual improvement in this area as our earned premium builds. Gene will be going into more detail on this shortly.

When one puts all the pieces together, the group delivered a combined ratio of a 98.2 for the quarter. However, when one looks at the business on an accident year basis, we believe this reported number is a reasonable indicator.

The company’s balance sheet continues to be in good shape; in spite of the challenges in finding investment yield, the average rating of the investment portfolio remains AA-. Additionally, on the other side of the balance sheet, we remain more than comfortable with our aggregate MOSS reserves. On balance, the group is performing in line with our expectations, given where we are in the cycle. Rate increases are outpacing loss trends, and as a result we expect our underwriting margin to improve as higher earned premium flows through. While a turn in the market always seems to take longer than one would expect, it continues to be comforting that with the many signs that would suggest we are well on our way.

William Berkley

Gene, you want to pick up?

Eugene Ballard

Okay, thanks. It was another solid quarter for us, with significant improvement over the prior year for both underwriting profits and investment income. I’ll start by going through the premiums, but I really only have a couple points to add to what Rob already said. First, for the international segment, premiums were up 22.5% to 208 million, with strong growth from both our insurance business and our new reinsurance business in Europe. And also if you adjust for the impact of foreign exchange, international premiums were actually up 30% in constant dollars for the quarter.

Our alternative market premiums were up 21% to 148 million, with strong increases for primary Worker’s Compensation business. Our reinsurance premiums were up 14% to 113 million. Specialty premiums were up 12% to 454 million, but if you look at our 20 specialty companies the way Rob looked at the overall business, you’ll see the same focus on growing the profitable business. We had 14 specialty companies that grew by 31% and 6 companies that declined by 17% total. And the regional business was up 3% to 268 million.

The overall loss ratio was 63.7% in the quarter, which is a decrease of 2.6 points from a year ago. Catastrophe losses were down significantly to 26 million, from 63 million a year ago. That’s an improvement of 3.9 loss ratio points, as we had fewer cat events in the quarter compared to last year, and a significant decline in the average loss per event.

We had favorable reserve development of 30 million in the quarter. That’s 2.6 loss ratio points, and it’s up from 25 million in the first quarter of this year. Most of the favorable reserve development in the quarter was related to the specialty and reinsurance segments, and was primarily for accident years 2005 through 2010.

The accident year loss ratio before catastrophes was 64%, unchanged from a year ago. On an accident year basis, there’s only about four points of rate increase in the earned premiums so far, and that’s offset by our loss cost assumptions, which continue to be conservative. On a policy year basis, there’s at least an additional two points of rate increases that will convert to earned premium and underwriting margin that will become more visible in the second half of the year.

The overall expense ratio declined .4 of a point from a year ago, to 34.5%, with declines of one point each for alternative markets and reinsurance segments, and 2.5 points for the reinsurance segment. The specialty and regional expense ratios were up slightly, and that’s due primarily to changes in our reinsurance programs. These changes include a shift in some programs from quote share reinsurance treaties that had seeded commission to excess of loss structures with no seeded commission.

As I mentioned last quarter following the change in accounting for DAQ, we’ve begun to place more focus on the gross written expense ratio, which is gross expenses before DAQ divided by gross written premiums. On that basis, which we think is a better measure of our current operating costs, the specialty expense ratio and the overall expense ratio declined by 1.2 percentage points from a year ago, and we expect that trend to continue. The overall combined ratio was down three points from a year ago, to 98.2 in the quarter, and the accident year combined ratio before cats was about a 98.5.

Net investment income was 161 million, up 8% from last year. Income from the core portfolio, which includes fixed income, equity and over $1 billion in cash, was 126 million, compared with 128 million a year ago. We’ve added over 900 million to the core portfolio at new money rates in the past 12 months, as a result of strong cash flow as well as the proceeds from a $350 million debt offering in the first quarter of this year. The annualized yield on the core portfolio was 3.7%, and the duration was 3.4 years for the fixed income with bonds.

Income from investment funds was 36 million for the quarter, up from 16 million a year ago. That’s a return of 22% in the current quarter on an average invested balance of approximately 650 million. Most of the income in the quarter was from funds that invest in energy-related businesses. Those funds, as well as the rest of our investment funds, are reported on a one-quarter lag, and we expect the returns for the energy funds to be lower in the third quarter.

The merger arbitrage rating account made a modest profit in the second quarter, and had an annualized return of 4.2% for the first six months of this year on average invested assets of approximately 315 million.

Real-life gains, primarily from the sale of equity securities, were 24 million in the quarter and 68 million for the first six months. In addition to that, we had unrealized gains before taxes of almost 100 million since the beginning of the year, and have unrealized gains of 750 million at June 30th, 2012.

Finally, I’ll mention just a few other key numbers for the quarter that are in the release. Cash flow, which was 239 million, up 48% from a year ago. Share repurchases, we repurchased 1.3 million shares for a total cost of 48 million. Our ROE, which was 11% in the quarter and 12.4% for the first six months. And book value per share, which was up $1.93 or nearly 7% from the beginning of the year.

William Berkley

Thank you, Gene. We were really pretty pleased with the quarter, in spite of what seemingly others weren’t. We run the business, as we said, as owners. That means we count catastrophes. That means we count all kinds of other things. We look at how we’re doing as far as increasing book value per share. We think that’s the real measure. We meet lots of people who say without catastrophe losses? Well, it’s great to say, but that, when you don’t have catastrophe losses, you count the high returns that come from that chicken today, feathers tomorrow business. We also think that people who don’t show realized gains and losses over an extended period of time tend now to show the risks inherent in their portfolio, and you can take greater risk and never be held accountable for it. That aside, I might mention that we do have substantial unrealized gains in our private equity portfolio, which was not in gene’s number of our unrealized gains, which as I mentioned before, we expect some significant portion will be realized before the end of the year.

I think the biggest news is we’re not worried about the cyclical change in the market. People that are parsing over 6%, or 6.5%, or 7 instead of 7.5 are really focusing on the wrong thing. The cycle is changing. Clearly the economic activity may well have slowed the pace of rate increases somewhat, but the cyclical change is taking place and rate increases continue to move up a pace. Whether it moves up at 6 or 6.5 is sort of irrelevant. As it continues, though, our view still is really unchanged that by the end of the year we’ll be looking at 8 to 9% rate increases, and nothing has changed that. I was really trying to get across a message that this is clearly, in any short period of time, people’s psychology is impacted, and therefor price increases may have a blip for a month, but there’s nothing that’s here. The cycle has changed. It’s no longer the issue.

So what are the things we sit and look at? Well first of all, when we look at our reinvestment rate for our portfolio, in spite of us finding niches and whatever, we’re just not able to reinvest at as high a rate as we got before. Therefore, while our after-tax returns are probably not much different, because municipal returns are better, and we bought a fair-sized portfolio of high-quality dividend-paying common stocks, the fact is, our yield has come down by probably 40 basis points or so, and is going to probably come down by another 15 or 20 by the end of the year because cash flow’s coming in and reinvestment rates are not as attractive. The biggest thing to worry about is our biggest concern.

Second on our list of concerns, inflation or no inflation. We’re making some conservative assumptions and loss costs. Are we too conservative? Maybe. But just as important, we’re making conservative low-risk assumptions on how far out we go with our investment portfolio. We’re investing with relatively short duration. We’re still buying in the five- to seven-year area, and keeping our portfolio duration in the area of 3.5 years. That is because we believe the risk of ultimately having to face inflation is still there. We don’t want to have a big charge in our portfolio when you mark the market, and not be able to get out of our own way. Therefore, we’re being cautious on both sides, cautious in our picks for our losses and our expectation there, and cautious in keeping our portfolio shorter than we might. In the short run, that costs us money. In the long run, it’s beneficial in our risk-adjusted criteria that we put forward for our shareholders.

We are happy with where we’re going. We think our returns can continue this way for a while. But obviously, if we don’t see a turnaround in the economy where interest rates start to move up, at some point we’re going to have to look and say, “Is 15% still the right target?” The key to that target is return, it’s investment asset leverage for capital and it’s opportunities.

I think that from our point of view, we’re pleased with where we see things going at the moment. I think that there still are a few people out there doing stupid things on occasion, there’s nothing we can do about that. Most people, though, are much more responsible. It’s clear that this is a tough, competitive business. No matter how good an investor you are, you still have to have underwriting expertise.

Back a long time ago when I was getting in the business, people who were investment managers thought this was the best business to be in, including me. I found out that no matter how good you are at investing money, without underwriting expertise, this is not a good business. So, I think before I babble on, why don’t we take questions. Tyrone, why don’t we open this up for questions?

Question-and-Answer Session

Operator

(Operator instructions). We have a question from Amit Kumar from Macquarie. Your line is open.

Amit Kumar – Macquarie Research Equities

Thanks and congrats on the quarter. Just going back to the discussion on I guess new business pricing versus renewal pricing and how the new businesses above the renewal. I know that in the past you had mentioned that you know, you examined the business makes and you revisit the lost pays every 90 days. Can we just sort of revisit that discussion and maybe tell us how the new business has been, you know, when you’ve gone back and looked at it, has it been performing in line or has it been different?

W. Robert Berkley

I guess once again to confirm, yes, it’s – we do review our reserves every 90 days by operating unit and we cut it, slice it and dice it every way that you can image or certainly that we can image. So far, as far as the new business performance from the past several years when we have been having some – some increased growth, we are very comfortable with both the pricing and more specifically the margin that that business is providing us. So there are no early returns that give us reason to pause but in fact, the pricing on that new business that we have been writing over the past couple of years actually has turned out to be something different than what we have suggested.

Amit Kumar – Macquarie Research Equities

Okay, that’s helpful. I guess the only other question I have is on capital management. You bought back some stock. I’m sort of stepping back, you know, thinking about the industry, your discussion on economy. You’re expectation for I guess 8 or 9% pricing at year end. If it is softer than that, you know, should one anticipate more capital management for 2012 or is this a one-shot deal in this quarter?

William Berkley

Nothing is every one shot, everything in life is continuous. Yeah, you know, when you get married, how do they say, the ring is continuous, everything in life is the same way. I think that, you know, one of the things we pay attention to is our premiums to surplus and premium surplus continues to go down as our portfolio continues to do better. As I mentioned, we have very substantial unrealized gains in our private equity portfolio that are not reflected, that we expect to occur this year that isn’t something that was in our calculations. So I think that money, that gain is something we may well use to buy back stock or we may instead decide to examine repurchasing our preferred. You know, I think it’s a continuing process. We don’t reach the conclusion until the moment of do we want to sell the stock now, we would probably make that decision this afternoon.

But you know, the fact is that it’s opportunistic. As you know well, we try and run the business we think will get the best return to our shareholder and if we found an opportunity, we would take advantage of it. But the reality is, our capital account has grown pretty significantly and our (riding) surplus are going down. So there’s – there’s plenty of opportunity to balance all that out. So this was only $15 million, it was not a, you know, a huge amount.

Amit Kumar – Macquarie Research Equities

Got it. Thanks. And don’t buy a crop entity, thanks for answers.

William Berkley

I appreciate your advice, Amit.

Operator

Thank you. Our next question is from Gregory Locraft of Morgan Stanley. Your line is open.

Gregory W. Locraft – Morgan Stanley

Thank you. I just wanted to, again, on the private equity, I guess harvesting the gains, can you frame maybe how much it is and what is it and then actually relate it on the energy loss for the third quarter? Can you also frame that as well? It sounds like you know…

William Berkley

There was no energy loss. We said we thought it would earn less because it varies. So I don’t think we said it would be an energy loss, I think we had the earnings from the funs related to energy will be lower likely in the third quarter than the second quarter. And you know, we don’t – that would be not in the best interest of our shareholders. But you know, I think in the aggregate, there’s certainly in excess of $100 million of unrealized gains in that private equity portfolio.

Gregory W. Locraft – Morgan Stanley

Okay, so 100 million of gains that can be used, obviously, to buy back stock and the preferred by year end? That’s sort of how you think about things?

William Berkley

No, that’s not what I said. I said that that will – that the gains from the private equity portfolio weren’t in our original calculations in examining what we might do, but everything stands alone. It’s our capital account that’s going to be probably somewhere better than we anticipated and therefore we’re evaluating what and how we want to balance it, which includes whether we call – well, we wouldn’t buy it back, we would call the preferred, which would take up 250 million or whatever dollars or buy back stock. You know, it’s a constant balancing act.

Gregory W. Locraft – Morgan Stanley

Okay, great. And then the last question is just, I think back in the first quarter on the February timeframe when we did the fourth quarter call, you mentioned that the year was going to be backend loaded. And I’m just wondering are these sort of – is this the ROE we should be thinking about and expecting or how do you stand today versus that comment relative to [inaudible]?

William Berkley

Well what I was trying – the explanation you’re talking about was when I tried to explain to people how earned premium comes in. In other words, an increase in price comes in from an accounting point of view, accountants will probably argue with me, but let’s just say 12.5% in the quarter. You write the business, 25/25/25 and 12.5 in the fourth quarter and so price increases come in later on. So in fact, here’s the second quarter, we’re getting price increases from the second quarter of last year, the third quarter, the fourth quarter, the first quarter and the second quarter. So as you move out, by the fourth quarter you’ll get 100% of the pricing increases from the first, second and the third quarter. You will get 12.5% of those price increases will be earned from the first quarter and 12.5 in the fourth quarter whereas in this quarter, give or take, it’s going to be 4%. And if you said you’ll be at 8% by the fourth quarter, you’ll probably have 7% give or take in the fourth quarter of improvement in the earned premium. So it’s backend loaded assuming price increases are tending as they are.

Gregory W. Locraft – Morgan Stanley

Right, okay. And then I guess maybe perhaps just to clarify because I’m – so really, what we should be expecting is material margin improvement on an accident year ex-cap basis starting 3Q, 4Q? I mean, you’re showing it now, it’s just the year over years are going to be looking – we’re going to be getting hundreds of basis points of improvement starting now? I’m sorry, starting third quarter.

William Berkley

Well, you’re choosing hundreds, the answer is I think that we would expect – I couldn’t persuade my accounting people to give me specifics, they were so difficult to deal with then. But the answer is, if you said that you’ll get 2.5 to 3.5% improvement in dollars of our earned premium over loss cost by the fourth quarter, that would be a reasonable assumption.

Gregory W. Locraft – Morgan Stanley

That’s very helpful. Thank you.

Operator

Thank you. Our next question is from Vinay Misquith of Evercore. Your line is open.

Vinay Misquith – Evercore Partners, Inc.

Hi, good morning. Looking at the margins once again this quarter…

William Berkley

I'm sorry, it’s not clear, could you…

Vinay Misquith – Evercore Partners, Inc.

Hi, sorry. Yeah, now can you hear me? Okay, great.

William Berkley

Yeah, that’s great.

Vinay Misquith – Evercore Partners, Inc.

So this quarter, the earned rate increases are plus 4% and I remind myself that historically you’ve had a 2 to 3% loss cost trend. So just curious why margins were roughly flat this year versus the prior?

William Berkley

Because we had more pessimistic people and they were more overwhelming and I didn’t fight as hard as I should have. So you know, they were more cautious, but the answer is, you’re trying – and I understand why, we’re trying to split hairs on whether it was 3 or 4 and we look at it every quarter, where we think loss cost trends, and honestly, the economy being a little slower than we thought will end up having us review loss cost trends and me may end up saying, hey, well, we’re a little cautious so we may go from 4 to 3 or from 3.75 to 3. Okay? So it’s a continuing process. So that optimism is not just in price increase or the rate of adoption and speed of price, it’s also in expectation of loss costs.

Vinay Misquith – Evercore Partners, Inc.

[Inaudible].

William Berkley

So I, you know, I think we were a little more cautious in the second quarter than we may well be in the third, but that’s not a promise, it’s trying to give you an understanding that, you know, this is real-time stuff, we’re not talking about, you know, - I understand you have to invest day to day but we’re looking at this and we look at our numbers and look at developments and we have all these actuaries fighting amongst themselves. You know, one dies every quarter from fights and we have to replace him. So the fact is that it’s not always the one I want to die that dies. I’ve got a few of those in mind. But the fact is that it really is a continuing process and I, you know, and I think that when I say I wasn’t pushing harder, the fact is, how we all feel and how optimistic or pessimistic we are influences that short-term decision and as we get to year end, we’re trying to true it up as much, here it is, as we can and I think that we were a little more cautious in the second quarter than the economy ended up warranting.

Vinay Misquith – Evercore Partners, Inc.

Fair enough. And then on the pricing, I mean, on the related comment on pricing, so about 8 to 9% by year end. Just curious as to what your views are for next year and also given the fact that the economy’s weaker?

William Berkley

Well, I have one of those magic eight balls in front of me, coincidentally. I have – they heard your question and I turn it and it says most likely. So I guess that means it’s most likely to continue going up at the same rate. No, I think that – I think that we would expect pricing to continue increasing at sort of the same kind of pace, you know, 8 to 10% rate, 8 to 9% rate, you know, if you used 8% as a target, that would be what we think. And I think at that point, you’re starting to really move into very positive territory. But understand one thing, there’s two issues that the world has to understand; investment income is going to start to really hurt a lot of people, a lot of people. People who are in the auto business and invested short term with a 1.5 or 2-year duration are going to get, you know, virtually no investment income unless they change the duration of their portfolios. We have been good at it, it’s something we’re pretty good at. So…

Vinay Misquith – Evercore Partners, Inc.

You mentioned on the call that the investment deal is coming down, correct?

William Berkley

Yes.

Vinay Misquith – Evercore Partners, Inc.

Okay. And then one final thing on the alternative. You mentioned that [inaudible] bought 100 million of …

William Berkley

No, I said at least 100 million.

Vinay Misquith – Evercore Partners, Inc.

Sure. Do you expect that to be released or sold in the second half of this year or is that just going to remain in sort of unrealized and not appear in the income…

William Berkley

We would expect it’s going to – at least some significant part of that is going to happen this year.

Vinay Misquith – Evercore Partners, Inc.

Okay, that’s good. Thank you.

Operator

Thank you. Our next question is from Michael Nannizzi of Goldman Sachs. Your line is open.

Michael Nannizzi – Goldman Sachs Group Inc.

Thanks, so just first question I guess is trying to understand Bill, your comment in the press release about the economy and the impact on pricing. And obviously the economy and exposures, a direct relationship there, but I just want to understand just a little bit more color on that comment, more follow-up.

William Berkley

I was trying to explain to people that as the economy is under sort of more pressure, this is just not a smooth world. We're not independent of the rest of the world. Prices are still going up. Nothing has fundamentally changed.

However, we don’t really see an acceleration quite as quickly as we thought before. We still think by the end of the year, we'll be at that 89%. If you would have asked me where we would have been in the second quarter, I would have said 6.5 to 7. We were at 6, so it was just slower than I thought. The psychology just isn't as powerful as I'd like it to be. But no directional change. You know, it's one month, people get depressed and feel pessimistic. Honestly, I think we're pretty much past that at the moment. And I think you're starting to see a little bit more positive attitude.

Michael Nannizzi – Goldman Sachs Group, Inc.

All right, thank you, and just trying to understand a couple things too, and maybe this isn't right. But as I understand it probably the U.S. instead of outside particularly in casualty, and your international business has been growing I'm sure as you added folks and are writing new types of business. But just trying to understand kind of growth in international. And then on the flip side regional, which as I understand is mostly U.S. has been growing slower than the rate change that you've been talking about for the last few quarters. So just trying to understand maybe the dichotomy is not the right word, but just trying to understand maybe the tradeoff between those two. Thanks.

William Berkley

First of all, growth in new businesses in Europe has helped that, and Australia, and Asia, as well as Brazil, and Latin America. Some other parts of Europe have also grown. But it's been driven by a couple of particular things. Our syndicate employees and our re-insurance business in London is at the – I think that the regional business has been terrific with price increases. And they have not grown as much. Their price increases have been more than their growth, which obviously means we've lost some business. That's a segment of the business that is more competitive at the moment. But we're really pleased that in the places where the world is more competitive, the people are more disciplined. So that's why it's sort of not a uniform picture every place. Rob, do you want to add to that?

W. Robert Berkley Jr.

No, I think that generally speaking, you've covered it. I think there are parts outside of the United States where there are really significant opportunities as there are parts outside of the United States where it's overwhelmingly competitive. Hence the point earlier that we have some operations that are growing. We have some operations that are shrinking into paint with such a broad brush to set such as suggesting. All markets outside of the United States that are more competitive or less competitive I think is a slippery slope.

As far as the regional companies go as I had mentioned in my remarks, it has been a little bit surprising to us how that piece of the marketplace has remained a bit more competitive at the same time. As suggested a few moments ago, our underwriting discipline and focus on profitability is such that we are prepared to effectively shed policy count as it was also suggested a moment ago in order to achieve the rate that we think is required.

Michael Nannizzi – Goldman Sachs Group, Inc.

Great, thanks, and then just one last one I guess is and Bill kind of your comments before about margins through the rest of the year and earning premiums through. I mean if we were to kind of fast forward to the end of the year, what do you think is going to have a more pronounced impact on margins and earnings? Is it the reduction in the loss ratio or the bigger premium base against which you're spreading your expenses?

William Berkley

I think that the loss ratio will have a bigger impact by the fourth quarter. I think by the time you get to next year, you will start to see a real benefit from the premium.

We are also you have to remember the constant balancing of what kinds of re-insurance you buy and how that impacts back to expense ratio. It's pretty significant. So I think there's a lot of moving parts that are in there.

Michael Nannizzi – Goldman Sachs Group, Inc.

Great, thank you very much for your answers.

Operator

Thank you, next question is from Bob Farnam of KBW. Your line is open.

Robert Farnam – Keefe, Bruyette & Woods

Heading back to the European business, I'm just trying to get a feel for with your strong credit rating, is that really giving you a lot of opportunity in the European space?

William Berkley

I think it gives us a lot of opportunity. Every opportunity has its risks. And we emphasize the risk adjusted return. And I think that we see lots of opportunities to grow and enhance our business. And we're cautiously examining those opportunities. Rob spends a fair amount of time over there looking for opportunities. And he's cautiously optimistic that something will come along, but cautious is the by word. When you don’t know how something is going to come out, it's a pretty critical assumption, and there's a lot of leverage in these things.

Robert Farnam – Keefe, Bruyette & Woods

Okay, and can you just shifting topics, your liability duration relative to prior years, has your business mix changed and is that coming down or is that staying?

William Berkley

No, our liability ratio is basically unchanged. It's about four years. Our assets are about three and a half give or take.

Robert Farnam – Keefe, Bruyette & Woods

Right, okay, thank you.

Operator

(Operator Instructions). Our next question if from Meyer Shields of Stifel Nicolaus. Your line is open.

Meyer Shields – Stifel Nicolaus & Company, Inc.

Thanks, good morning everyone. Bill, just a question. If you're making a capital allocation decision deciding between a dollar profit in the investment funds and a dollar profit in underwriting, is there any difference in terms of how you would evaluate that?

William Berkley

Well, I think from my point of view, the question is investment allocations, I can look at the same decision every day. Building a better business is always a more attractive thing for me. So I would always invest in expanding my business than an investment in something else.

However, the uncertainty of an investment for instance the uncertainty of expanding the business is certainly not the same.

The long and the short of it is we always want to build our business. We always want to expand our business. And every opportunity that we see that lets us create long term value, we want to seize it.

And the tradeoff you're always making is you want to grab everyone that's really attractive. And we for instance haven't bought back our long term trust preferred even though it's a lot better return than the things we're buying because it suits our capital structure. So that would be a good example of it's always there. I can always buy it back. Don’t use my capital resources for the moment to do that. So that would be a good example.

Meyer Shields – Stifel Nicolaus & Company, Inc.

Okay, sounds great. And Gene, if I can turn to the reserves, I guess I was going to ask for the releases by segment. And also in the first quarter, you talked about how maybe the $25 million in reserve releases was not a good run rate. Is the second quarter a better approximation?

Eugene G. Ballard

First, we don’t give out the reserve releases by segment for any of these calls, but we'll do that in our queue.

Second, I don’t think it's any better run rate. I mean, that number fluctuates quite a bit as the year evolves. We get more and more insight into how the current underwriting year is performing as well as the older years and things change. So I wouldn’t assume that's necessarily a run rate either.

Meyer Shields – Stifel Nicolaus & Company, Inc.

Okay, thank you.

Operator

Thank you, your next question is from Jay Cohen of Bank of America. Your line is open.

Jeffrey Cohen – Bank of America/Merrill Lynch

Thanks, my question was answered. Thank you very much though.

Operator

Thank you, there are no further questions in the queue right now. I would like to turn the call over to Mr. Berkley for any closing remarks.

William Berkley

Okay, I think the one thing I want to remind people, which I think is so important as times are changing cycles, probably those people that followed our stock for a long time remember me talking about it in 2003, 2004, and on. And that is paid losses are the only thing no one can fool with. Paid losses are a certainty. They can vary quarter to quarter with storms and with other things. But if you look at paid losses to encourage premiums or better yet paid losses to earned premium including loss adjustment expense, that trend is a really good indicator for what our company is doing.

I would urge you to keep track of that for all the companies you follow, us included. You can't hide from paid losses. There's no except for. There's no maybes. It's a great comparator to see how companies are doing. Simple number, define number.

I thank all of you. We are really excited. We think the business is great right now. And we're very pleased.

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