W. R. Berkley's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: W.R. Berkley (WRB)

W. R. Berkley Corporation (NYSE:WRB)

Q3 2012 Earnings Conference Call

October 23, 2012, 08:30 a.m. ET

Executives

William Berkley - Chairman and CEO

W. Robert Berkley, Jr. - President and COO

Eugene Ballard - SVP and CFO

Analysts

Amit Kumar - Macquarie Capital

Vinay Misquity - Evercore Partners

Greg Locraft - Morgan Stanley

Josh Shanker - Deutsche Bank

Michael Nannizzi - Goldman Sachs

Meyer Shields - Stifel Nicolaus

Jay Cohen - Bank of America/Merrill Lynch

Kenneth Billingsley - BGB Securities

Larry Greenberg - Langen McAlenney

Howard Flinker - Flinker & Company

Operator

Good day, and welcome to W. R. Berkley Corporation’s Third Quarter 2012 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, 2011 and our other filings made with the SEC for a description of the business environment in which we operate and the important factors that may materially affect our results. W. R. Berkley Corporation is not under any obligation and expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

I would now like to turn the call over to Mr. William R. Berkley. Please go ahead, sir.

William Berkley

Good morning. We were very pleased with our quarter more than just the quarter all of the trends we see continue to cause us that the optimistic about the balance of the year and next year. The world is not perfect, there are all kinds of things that are beyond our control, but we see nothing on the horizon that will prevent us from achieving improving rates and continued higher returns.

That said we would hope that we can achieve the kinds of returns we have targeted as we move into the next several years. With that I’ll turn this over to Rob to talk about our operations.

W. Robert Berkley, Jr.

Thank you very much. Good morning everyone. The third quarter offered further evidence that the property and casualty commercial lines market is going through a time of positive transition. Efforts among many carriers to obtain rate adequacy are becoming more wide spread with every packaging date.

While this change in behavior is not occurring in all lines of business in perfect (inaudible) there is a clear prevailing wins driving rates up. As we have discussed in the past and it remains our belief today, the catalyst driving this change continues to be carriers increasing sensitivity over how prior years will develop. This concern is a consequence of an industry wide under estimation of loss trends as well as loosening of terms and conditions combined with aggressive pricing.

Worker’s compensation continues to be one of the lines of business as experiencing the greatest change in behavior. In addition to rate increases the accelerating growth in several state assigned risk plans is also an important data point. The casualty market and especially the excess casualty lines are offering encouraging signs as well. Having said this, given how much underwriting discipline has eroded over the past several years the markets still has a long way to go. On the other hand much of the professional lines market continues to be exceptionally competitive but it is showing early signs that things have bottomed out. The marine and the aviation markets have also remained surprisingly competitive given the level of loss activity that has occurred over the past several quarters.

The group’s rate monitoring for the third quarter indicated an improvement of 7% over the third quarter and 2011. While pricing does not move at the same pace across all segments or for that matter across all operations, our primary insurance rate improvement stood out at 7.5%.

The renewal retention ratio continues to remain at approximately 80% providing us confidence in our pricing levers as well as comfort that we are not experiencing adverse collection. This represents the seventh quarter in a row where the group achieved rate increases and the third quarter in a row where we also came late on rate.

Net written premium in the third quarter was 1.276 billion this is an increase of 13.3% over the third quarter of 2011. 39 of our 45 underwriting operations grew which allowed all five business segments to continue to the group’s overall [gains].

The growth was driven primarily by rate at 7%, 5% of exposure and 1% audit premium. The group’s loss ratio for the third quarter was 62.1 which is an improvement of 2.7 points over the third quarter last year. In addition the expense ratio improved by eight-tenth of a point, this gives us the combined ratio of 95.8 or a total improvement of three and one half points over the corresponding period.

The company’s progress is primarily a result of higher earned premiums stemming from rate increases and our (inaudible) operations as well as lower cat activity. Gene will be going into more detail on these topics shortly.

The group’s balance sheet remains robust; our reserves remain strong as demonstrated by 23 consecutive quarters with net positive reserves development. Additionally, our investment portfolio remains strong with an average rating of AA minus.

The market is turning at an increasing pace. Much of the change in behavior we are seeing today is a reaction to development stemming from underwriting decisions made by some in the past. We expect more companies to report additional negative developments over the next few quarters. Further while the impact that the low interest rate environment has on the industry’s economic model is widely discussed, we believe few have begun to appropriately factor this into their pricing.

Having said this, while it is unclear how hard the market will get and how quickly it will get there, it is quite apparent that we have a great deal of runway in front of us when it comes to pushing rates.

William Berkley

Thank you, Rob. Gene is now going Thank you and go through financials and then I will pick up after that.

Eugene Ballard

Thank you, Bill. As Rob said we had another strong quarter in terms of both revenues and underwriting profits and we also managed to deliver a modest growth and investment income in spite of the anticipated decline in earnings from investment funds.

Our net premiums written were almost 1.3 billion in a quarter up 150 million or 13.3% from a year ago, the growth was led by our specialty and alternative market segments which were up 18% and 17%, respectively.

Business units that we started since 2006 grew by 34% in the quarter and now represent approximately 25% of our overall premium volume. Changes in foreign exchange rates compared to the third quarter of last year added about 0.5 percentage point to the overall growth rate expressed in U.S. dollars.

Underwriting profits were 50 million in the quarter that’s up from 8 million a year ago and an overall combined ratio that decreased 3.5 point. Three main reasons for that; first, the underlying accident year loss ratio before cat improved by 1.6 percentage points to 63.7. As price increases over the past seven quarters are beginning to have a meaningful impact on both earned premiums and underwriting income.

In addition, the regional segments benefited from very benign loss activity in the third period compared with a year ago. Second, catastrophe losses were just 9 million in the quarter, that’s down from 51 million a year ago which is a further improvement of 4.1 loss ratio points. And third, the expense ratio improved by eight-tenth of a point to 33.7 also largely due to the impact of rate increases. Four of our five business segments reported lower expense ratios on both in earned and written basis; the regional segment expense ratio was flat on earned basis but down a 0.5 point on a written basis (inaudible).

That adds up to an accident year combined ratio before cats of 97.4 down 2.5 points from a year ago. In addition, we reported favorable prior year reserve development of 28 million or 2.3 percentage point loss ratio points. That down from 5.3 loss ratio points a year ago for the right in line with the reserve releases of 25 million and 30 million in the first two quarters of this year. Prior year reserves develop favorably for all five of our business segments.

The calendar year combined ratio was reported at 95.8 down from 99.3 a year ago with all five business segment reporting combined ratios under a 100. Although the specialty segments reported combined ratio was up from a year ago due to lower reserve releases the accident year combined for specialty also improved by 2.5 point.

Investment income was 116 million up 2 million from the third quarter of 2011. Income from our core portfolio which includes fixed income, equities and real estate was up 2 million to 127 million with an annualized pretax yield of 3.7%. Income from merger arbitrage was up slightly to 2.5 million and income from an investment fronts reported a loss of 13 million which includes energy related losses of 21 million that we had already announced in our second quarter 10-Q.

The year-to-date annualized yield on the overall portfolio was 4.0% unchanged from the year-to-date period in 2011, and on a tax equivalent basis adjusted for tax benefits of the municipal portfolio, the annualized return on investments was 4.6% year-to-date. We reported realized gains of 22 million in the quarter and had unrealized gains pretax of 856 million at September 30, 2012.

At the end of our quarter, 85% of the portfolio was invested in cash and fixed incomes with an average duration of 3.3 years and an average credit rating of AA minus. We repurchased 2 million shares of our own stock in the quarter which brings us to 3.3 million share repurchases year-to-date at an aggregate cost of $121 million.

Our net income was 101 million in the quarter which is an annualized return on equity of 10.2% and we finished the quarter with book value per share of $31.81 which is an increase of $3.06 for the year-to-date period and an annualized increase of 15%.

William Berkley

Thanks Gene. We are pleased with the quarter. On the investment our duration was reduced from 3.4 to 3.3 years in a quarter primarily as a result of the duration of our mortgages and prepayment rates and our mortgage portfolio declining in the ordinary attritional impact of time passing by. We have chosen not to be aggressive in extending our long-term side of the investment portfolio because we are concerned that inflation is out there although clearly the short-term time horizon appears to be benign, that’s a balancing affect that we are concerned about. And the way that push that duration out is to go out at least at a portion portfolio substantially more than 10 years and this is not something we want to do.

The investment side also is benefited from our continuing ability to find niche opportunities but unfortunately they keep disappearing. A good example of those would be, we were able to invest roughly $200 million in mezzanine mortgage obligations where the collateral protection was still less than 50% loan to value and with a return of 6%, but that as we approached the end of the third quarter, the yields on those securities declined sharply and current returns in more like 5% and another niche one way as we search for more opportunities that fulfill our security and quality requirements in spite of how they may appear because of the category.

We think we can still come close to holding our existing rates to right around 4% pretax, (inaudible) will probably decline a little but we are optimistic at least through the end of the year. Our cash flows if they accelerate dramatically would cause us to question that.

Overall, you are seeing a number of our competitors especially the midsized competitors having to face up to the reality, help deficiencies in prior years and they are coming out. We think that this is like a slow ball going downhill. Number of these companies are going to have to make up for the deficiencies then going to face issues as to their ratings and their abilities to continue on their own will diminish.

So, we are very optimistic, we see more and more opportunities. We think we are being rewarded for the five years plus of the investments we have made in setting up new enterprises and we expect that will allow us to grow and the time when others are just trying to hold their own.

So, with that I would be happy to turn this over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Amit Kumar of Macquarie Capital. Please go ahead.

Amit Kumar - Macquarie Capital

My first question relates to capital management, with then pending fiscal cliff versus (inaudible) ownership. Can you talk about how do you view a special dividend before the year end?

William Berkley

It's certainly something that we are thinking about. We are considering we will probably take a decision as we head to the election. But I think that will certainly have an impact on what we do, but if in fact we think rates are going to change dramatically, it would on a serious issue what we consider.

Amit Kumar - Macquarie Capital

And the only other question I have is on pricing. You are talking about pricing going up, and I’m curious I think maybe this is a bit too early, if you sort of fast forward to year-end 2013, all as being equal, do you expect the rates to be up double-digit at that time or do they sort of trend up in the next few quarters. And then in the absence of any industry event, do they start trending down?

William Berkley

I think that what we are trying to get across the message to people that with interest rates where they are, if rates were up 10% next year, you are still going to barely have adequate returns. It takes a lot of increase in rate to offset the decline in the investment income. So, as people’s portfolio run off and the duration of portfolios are probably came two and four year's you are going to start to see people (inaudible) mid single-digit returns at the current time. So, I think that our view is it's not double-digits, certainly very high single-digit returns by the end of next year and we don't see them falling off.

Operator

Our next question comes from Vinay Misquity of Evercore Partners. Please go ahead.

Vinay Misquity - Evercore Partners

The first question is on rate increases, now we have seen some from your company as well as some admitted carriers out there, have rates have accelerated third quarter versus second quarter, just curious from your perspective, what do you think are the drivers. I mean large (inaudible) disciplined or do you see the smaller players also be more disciplined. And I see that within your regional business your top line kicked up so just curious about that too?

W. Robert Berkley, Jr.

As far as the regional growth goes that was primarily from rate, really not so much exposure count but putting that aside, I think there are large companies and there are small companies out there that are disciplined and some that aren’t disciplined. Clearly some of the larger national carriers tend to set or have a lot to say as to what the (inaudible) of the marketplace. I think ultimately what is driving the change in behavior as was suggested earlier in the discussion is that people are seeing things develop out from as far as prior year goes and they are concerned as to how things look as they come into focus. And they are taking actions as it relates to that. So, the rate activity that you have seen so far again in our opinion is because people are observing and extrapolating how prior year is going to develop. And also as we suggested the level of anxiety as it relates to what was also discussed a few moments ago around the impact of investment income I think I son people’s mind and that’s probably the second shoe to drop and what will be the catalyst for further rate increases as also suggested a few minutes ago.

Vinay Misquity - Evercore Partners

The second question was on loss cost trends, your pricing is riding 6 to 7% margins and include about 160 basis points, curious as to what you are booking as loss cost trends right now?

W. Robert Berkley, Jr.

Quite honestly as you would expect it varies by line of business, I’d suggest in the aggregate for the group its north of 2 probably certainly not above 3 and having said that we are actively extrapolating a bit given the rate increases that we are achieving at this stage. We have a reasonably strong degree of confidence that we are adding to underwriting margin at this stage.

Vinay Misquity - Evercore Partners

And then just one last question if I may, your expense ratio actually declined this quarter year-over-year which is good, do you think that you are at a point where more premiums would now add more to your leverage on the expense ratio versus a past?

W. Robert Berkley, Jr.

Absolutely, this has been something that we have at least been trying to highlight for folks over the past couple of years. What’s happened is the written has grown and finally the earned is coming through and many of the businesses that are different points in their life cycle at the startup that are transitioning out of their infancy if you will. They are getting the critical mass, the earned premium is coming through and you are going to be able to observe the operation being able to leverage those expenses more and more over the next many quarters.

Operator

Our next question comes from Greg Locraft of Morgan Stanley. Please go ahead.

Greg Locraft - Morgan Stanley

Just had a follow-up on the last one, so Rob if I was to understand you correctly, pricing up 7 and loss trend up call it 3. So, should we be seeing the core margins increasing by 300 plus basis points in future period’s year-over-year?

W. Robert Berkley, Jr.

Couple of comments, first of all, I think the typical math would suggest that it's going to improve by 4, but obviously it takes time as you know Greg, for that earned premium to come through. And in addition to that something to keep in mind obviously we are historically and expect we will continue to air on the side of caution as we adjust those deign loss picks down, but certainly the back of the envelope math I’d suggest trend three rate achieved 7 and that gives you 4 but that will take time to come through.

William Berkley

I think you also have to recognize that passed redundancies mean our loss ratio picked for prior periods has dropped, May has been more than adequate so we will have to examine the (inaudible) since the pick is made on the waterfall basis looking backwards. So, that also could have some benefit.

Greg Locraft - Morgan Stanley

And then back to the special dividend which was sort of an interesting question. Would you all consider adding debt to fund that or would it be contained within earnings and obviously that’s pending the election as you has mentioned?

William Berkley

We wouldn’t have any need to add that, we have lots of cash the holding company and we have lots of dividend this past year or operating it, so it wouldn’t be our plan to add that.

Greg Locraft - Morgan Stanley

Okay and then shifting gears to the private equity portfolio, I think it was the last call you had mentioned possible monetization of 100 million or so in gains. How is that trending and what is the use of proceeds?

William Berkley

I think what I said in the press releases we would expect at least $75 million of gains in the fourth quarter. That really met the trident, be little more specific that issue and that one I was thinking about all our capital management, the repurchase of stock to special dividend. But we also have additional realized gains that we expect next year.

Greg Locraft - Morgan Stanley

On the pricing side for the long tail lines, this is more I guess for you guys just how it really works. Do you take the embedded 4% in the portfolio, do you take the risk free rate, how do you think about the investment yield assumption in your models as you go out 2, 3, 4, 5 years in your pricing model. So, how does it work for Berkley Corporation and then how does the competition view it from a pricing perspective?

W. Robert Berkley, Jr.

As far as pricing new business it's a little bit of a complicated answer, but the I guess simplified version is we are very cognizant of what our money rates are at the time, obviously we take into account a duration so on and so forth, but as it relates to new business that we are writing we are focused on the new money rates and the premium that comes into the reserves that we set for our design picks that are associated with that business. We are focused on what type of return that money can achieve when we put it to work today.

William Berkley

I think a good example of that would be what happens in our excess comp business where we effectively lost a third of our business maybe even a bit more, because there is a place where our pricing has literally discount rate built in because those reserves specifically our discount. And the discount we use reflected the current rate on long-term securities and a number of our competitors use their average portfolio return as the discount rate we used the current available rate for new money. So, it resulted that with the 17 year duration of those loss reserves that our prices were substantially higher than those competitors when we lost lot of business to those people. But the fact is when that money float in they had to invest it in the same way we did whatever the current new money rate is. So, in some areas specialty excess comp it's a very specific impact. Other areas it's talking to the underwriters about the profitability of the business and being cognizant of the loss ratio picks that you can have given lower rates of return.

Greg Locraft - Morgan Stanley

Some of your competition has said exactly that which is that they are using sort of a blended interest rate assumption or return assumption as appose exactly as you said which is that you guys use new money yields. So, in a way they are seducing themselves they think their pricing is adequate and overtime the returns just won’t be there?

William Berkley

It only work when we are going to sell the company.

Operator

Our next question comes from Josh Shanker, Deutsche Bank. Please go ahead.

Josh Shanker - Deutsche Bank

Two question for you. The first one, I want to talk a little bit about the acceleration of rate and the deceleration of net written premium and what’s going on there?

William Berkley

Deceleration of net written premium?

Josh Shanker - Deutsche Bank

Yes, you guys were doing mid-teens, I mean it's 14 in 3Q, 11.13 in 3Q ’12, I read that small but given that you had a significant rate bumps at that time, you would think that net written premium growth to be accelerating at this point? Maybe the startups were writing more business, I’m sure there is a reasonable explanation for that?

William Berkley

Candidly, we don't, startup is very new business, quarter-to-quarter varies we don't view those changes at particularly materially.

Josh Shanker - Deutsche Bank

And the second question involves, when can we really expect expense ratio to start coming down given the higher volumes?

William Berkley

It will come down quarter-by-quarter. You have to understand that we kind of [converted] the year-end premium at least five quarters. The other thing I have to remember is the whole change in that calculation doesn’t give you the benefit of growth and so it converts to earned premium. So, this whole new accounting change in that effectively panelizes you for growth. So, it's going to come down slower for us then it will be for companies that might not be growing as quickly.

W. Robert Berkley, Jr.

On a written basis on of the thing we have talked about when this announcement first came out as we also look at the decline expense ratio on a written basis for us quarter-to-quarter or last year this year is down 1.4% point and down 0.8 points on earned basis, so that gap will close and in addition as we continue to grow, it will be that much better.

William Berkley

The earned premium, they are still seeing growth in earned premium that going to make that continue to decline. We would expect there will substantial declines in that over the next certainly at least five quarters that they have been already.

Operator

Our next question comes from Michael Nannizzi of Goldman Sachs. Please go ahead.

Michael Nannizzi - Goldman Sachs

One question I had was on the 75 million in gains was that specifically related to the private equity portfolio or is that relate to the more traditional fixed income book?

William Berkley

We are just viewing it as generally people know that we are going to have and we are. The answer is we have, we expect it to be probably private equity but there is a lot of places that there are gains in the portfolio that will be realized.

Michael Nannizzi - Goldman Sachs

So, the question is, if you are selling fixed income?

William Berkley

It's that fixed income.

Michael Nannizzi - Goldman Sachs

Okay. So, it's not fixed. So, we shouldn’t interpret the press release commentary to imply that Europe kind of harvesting some gains on a fixed income side. And then you talked in the past about this notion of fear, or greed turning to fear when the inflection, pricing inflection points happen. How would you fit that to the environment that you are seeing right now?

William Berkley

I think it really happens company-by-company when people stop seeing redundancies in reserves and start to see deficiencies when people stop seeing those cushions that they had now many quarters. I think that you have seen it happen in a number of companies and I think there were over 30 companies have deficiencies last year. I think the fact is that as people who think they have fixed their problem of deficiencies by putting up money to find out, another quarter and we look at our reserves and other deficiency, people start to get afraid. And when they start to get afraid they push on price, they get more disciplined on terms and conditions. I think you are going to see that and lot of people who were aggressive in writing worker’s compensation, especially like California places where people didn’t know what they were doing and though this was such an easy thing. And I think there is a lot of lines of business that are like that, but I think you will see a number of people and that was a line of business that was so easy and they have managed to make a mess of it do not maybe a very long tail lines of it finding out which way. So, I think that’s what happens from fear. You pick your problems, you said it's behind us, we fixed the deficiency and then the deficiency comes up again.

Michael Nannizzi - Goldman Sachs

You made the comment about rate and exposures and translating that to a top line. If we were to look at the regional segment, I’m just curious like if rates were all up 7 or 7.5%, where does regional segment fall in that spectrum. And what is the rate versus exposure on the regional business?

W. Robert Berkley, Jr.

Mike just want to make sure as it relate to the question, so as far as the regional piece goes, you would like to understand what the relationship is between rate versus exposure versus other premium so on and so forth.

Michael Nannizzi - Goldman Sachs

Yes.

W. Robert Berkley, Jr.

Yes, typically we don't break that out by segment, having said that what I can tell you the simple math is that it is again really it is all rate and plus a little bit and exposure is flat quite frankly.

Michael Nannizzi - Goldman Sachs

So, it's mostly rate and exposures. And on relative attractiveness in terms of the rate gains you are seeing, merger loss trend or just in absolute terms. In the regional segment versus the other areas or the other segments and I realize it's a broad question because there is lot of businesses that roll up into each of them. But are you seeing more or less opportunity for rate in the regional segment versus the others?

W. Robert Berkley, Jr.

Certainly from our perspective we are quite pleased with the rate that we are achieving in the regional group. So, we don't have any reservations about the rate that we are achieving in the regional group I guess to make a long story short. Are they outperforming other segments so to speak, they are doing a little bit better than some and are not doing quite as well as couple of others, but the rates are there getting there without a doubt clearly they are adding to underwriting margin we are very comfortable with both the taste that they are moving as far as achieving more rate.

Operator

Our next question comes from Meyer Shields of Stifel Nicolaus. Please go ahead.

Meyer Shields - Stifel Nicolaus

Rob in your introductory comment you said you think that current rate changes stem more from reserve problems and from interest rate recognition. And I’m wondering what is it that you are seeing that makes you think that, that is the reserve issue and not the yields impacting current behavior?

W. Robert Berkley, Jr.

Quite frankly it's more anecdotal, but my sense is from reasoning with people in the marketplace and you hear what their focus is and what is really in the immediate term on their mind and what they are trying to address is pretty apparent that they are focused on how they see prior years developing. There is a lot of discussions around quite frankly the impact and that’s income we are going to have, but quite frankly in our opinion if they are really focused on investment income as well, there would be more extensive urgency in getting even more rate than they are.

William Berkley

I think we talk to people in every place from ages, Presidents of companies and the thinking and the concentrations is inadequate underwriting margins and no one talks about the impact of lower investment income, it's just not a topic but in the front people ‘s dialogue or in the front their mind.

Meyer Shields - Stifel Nicolaus

Are you seeing of the same trends in terms of reserve problems by rate increases on the international front?

William Berkley

I think that we would suggest that it's not as easy at this for us to see those trends internationally the same information and same format is not available for us to look at. I think that there is certainly are a number of global companies that have similar problems. So, I’d suggest that a number of the larger global companies have reserve problems, but in some of those cases bigger problem for some of those companies would be balance sheet problems related to asset. So, we think the issues exist on a global basis, some of them because of reserve shortfalls and some of them because their carrying values of investment assets which are probably not reflective of the real market.

Meyer Shields - Stifel Nicolaus

Gene, can you give us a sense as the overall percentage exposure to property. I don't (inaudible) but it has in the recent past, can you give us a sense about what the cat load is with pricing that do you think?

W. Robert Berkley, Jr.

Before Gene tackles the question, one piece I’d add is, I think it's it would be a mischaracterization to suggest that we have dramatically increased our property cat exposure, and in fact what we have done is increased some of our exporters here to some of the shorter tail line of business, but property cat is not something that we have include our focus.

Eugene Ballard

I don't really have a number I can give you, it depends on what part of the business you are talking about and it's a pretty complicated exercise that what cat load goes into each line of business. So, we don't have like an overall get cat loads off the book.

William Berkley

The fact is what we do is we examine our book of business; we examine total insured value, assess the cat value by area, by storm, by line of business and then protect ourselves accordingly. But we are even though we are now writing as Rob said more short-term business, even the property business that we are writing is not cat exposed particularly.

Operator

Our next question comes from Jay Cohen of Bank of America/Merrill Lynch. Please go ahead.

Jay Cohen - Bank of America/Merrill Lynch

Gene, can you give us more precise breakdown on the investment income, other ways you typically break it out in the Q with real estate and equity securities?

Eugene Ballard

In terms of their yields or their returns not changed so much from where they have been and those lines of business.

Jay Cohen - Bank of America/Merrill Lynch

The numbers for the quarter.

Eugene Ballard

I mean the core portfolio was up which are those three pieces up a couple million dollars and there is no movement within any of those category you mentioned, significantly one way or the other.

Jay Cohen - Bank of America/Merrill Lynch

It looks like then that the fixed income portion was up from the first half into the third quarter?

Eugene Ballard

The fixed income was up from when?

Jay Cohen - Bank of America/Merrill Lynch

From the first half run rate, it look like it improved in the third quarter?

Eugene Ballard

I think it's very, very stable. We had some cash flow, our investment portfolio has grow so we are seeing little bit more investment income come through, but the yield has been pretty flat.

Jay Cohen - Bank of America/Merrill Lynch

Second question, I guess when you are looking at price increases versus claims inflation obviously driving margin improvement. I assume that’s on the renewal book of business that 7% price increase. But if your renewal is retention is 80% and clearly obviously lot of this premium this new business is well.

Eugene Ballard

That is accurate but our renewal business accurately as we said is about 10%. We do a new to renewal pricing relativity which we are actually getting a bit more on our new business then our renewal business if you will. I think we are getting about 3.5 more on new versus renewal.

Jay Cohen - Bank of America/Merrill Lynch

So, I guess your new business stem would not necessarily detract from the margin improvement that you set on renewal book?

Eugene Ballard

No, it's a bit of a process to make sure that we are getting apples-to-apples new versus renewal but our best estimate is in fact we are getting higher rates on our new business than our renewal business. And quite frankly when you take a step back and you think about it, it's kind of logical. You know more about your renewal book on your new business so you should want to surcharge the new business. I know that we are bit of an outlier based on what we see many of our competitors doing in the marketplace. But that is our philosophy and that is coming through on our results.

Jay Cohen - Bank of America/Merrill Lynch

And then the last question is, with the reserve development for the industry, you certainly see these isolated incidents, (inaudible) they seem to be different companies every quarter practically. And if you look at some of the larger companies public companies anyway that favorable development has continued to be an important source of earnings including you guys. Do you need to see bigger companies essentially face more pressure on reserves to get it more dramatic turn in pricing?

William Berkley

Jay, I think what really happens is big companies are able to hide the problem for a longer period of time. We are trying to think is this happening and then I think what really occurs is some individual big company reaches the dam if you will and then everyone else says, okay, let’s just get it moved away. I think that there are lot of companies and I don't think companies are short, monumental amounts where they are in jeopardy as survival, but I think what it does is it point out that their pricing is inadequate. And I think that the hiding of shortfalls is reflection or the operating statements that the pricing is inadequate not they are in danger of insolvency. I think the middle size and smaller companies have insolvency issues. The bigger company’s shortfalls are just if they are not facing the issues or getting their prices to be adequate. So, I think the moment the first one of those free companies that bites that bullet, I think you are going to start to see a bunch of others follows too.

Operator

Our next question comes from Kenneth Billingsley of BGB Securities. Please go ahead.

Kenneth Billingsley - BGB Securities

Just a couple of questions, one for Gene, could you give us year-to-date reserve release numbers again by quarter?

Eugene Ballard

The year-to-date by quarter, so we had 25 million in the first quarter, 30 million in the second quarter and 28 million in the third quarter. Total 83 million year-to-date.

Kenneth Billingsley - BGB Securities

And I realize that you talked extensively about reserve releases and the way it compares the market, just to add to that. It seems like a lot of the increases that we are seeing outside if you would, a lot of is 2009 to 2011 accident year's. And I know your mix of business may not overlay exactly with where some of the people are taking some of these increases, but could you just talk about what different in your observations that your reserve estimates obviously were settled all the different.

William Berkley

I think by and large we don't expect problems in our current accident year's in essence because of how we established reserve that if you look at ’09, ’10, ’11 they prove, if you look at then they prove to be more than adequate and we expect that will continue. I think the people who have found themselves efficient ended up being aggressive in lines of business that were most competitive and they generally follows the old saying that, the grass is always greener, and they grew or expanded dramatically in lines of business where they had no experience, no knowledge and no base of data. And I think that sure things do I say find a company without any experienced personnel and that’s the kind of thing where they are looking for trouble. We think that the nature of how we chosen to grow which is don't chose a line of business you will get into, find a great team of people as for exactly that reason. We are not interested in getting into a great line of business we are interested in having great people allow us to get into a line of business.

Kenneth Billingsley - BGB Securities

It seem that some of the industry was releasing reserves from more recent year's a lot sooner than they had in prior decades and years of much more fact, corporate release reserves that were only 1.5 to 2 year's developed. Are you seeing in that as maybe in some of the issue as well is not only where they are aggressive but they still did well?

William Berkley

They are in a more recent years, I’d say ‘08, ‘09 some ’10, ’11 is really green, but remember we are only talking about $28 million in the aggregate, so it's not any one year where you are waiting to see anything that meaningful. It's a very small percentage of our reserves especially relative a number of our competitors.

Kenneth Billingsley - BGB Securities

Were you shocked to see some of the competitors were releasing more sizeable announced in comparison to their total reserves from these later years?

William Berkley

I think fundamentally as we have referenced for a couple of years now on several of these calls, we observed what others do but we can’t crawl inside of their minds and don't know what’s going on specifically in their organization. So, we can’t tell you that we feel is though it is appropriate, prudent to take a cautious approach to both pricing, setting reserves and then to the extent that there is reserve development in a positive direction recognizing that and a stop flow and controlled in a sense of making sure that you have a clear understanding as to what the outcome is going to be.

We lost 35% of our business because we priced using the discount rate of marginal return versus average portfolio return. They look like they were brilliant, they grew a lot and as that develops over the years and they had to reinvest the money at lower marginal returns, they will pay for that mispricing over a number of years. It all goes to the pricing set.

Operator

Our next question comes from Larry Greenberg of Langen McAlenney. Please go ahead.

Larry Greenberg - Langen McAlenney

Just being on the topic of reserves, I’m just wondering if you could give us any color on how your workers’ comp business is developing and more interested on the primary side but maybe some differentiation between primary and excess.

W. Robert Berkley, Jr.

As far as the development goes, we typically on these calls we don't get into a lot of granularity by line of business or by operations so to speak, having said that there is nothing that we see as it relates to our workers’ comp reserve either on an excess basis or primary basis could give us any reason to pause. We have been pushing very hard for rate for an extended period of time. We have a great sensitivity to trend, particularly medial trend and we certainly are not blind or naïve to local state comps benefits rate and what’s going on there we pay a lot of attention to that. So, many of our comp related businesses or comp focused businesses if you will have been shrinking over the past several years. But to your specific question as it relates to our reserves and primary and excess comps we feel that we are on firm ground.

Operator

(Operator Instructions) Our next question is a follow-up from Michael Nannizzi of Goldman Sachs. Please go ahead.

Michael Nannizzi - Goldman Sachs

Any alternative segments I just wanted to understand what drove the increase in premiums, I know in prior quarters there were some I believe I may be mistaken there is some reclassification of some premiums out of alternatives or something, but I’m just trying to understand, what is driving that is it primary.

William Berkley

On gross basis or net basis?

Michael Nannizzi - Goldman Sachs

I think it's kind of both. So net you are up about 18%, gross it looks like maybe it's about the same maybe a little bit less.

Eugene Ballard

You are talking about the quarter or year-to-date period?

Michael Nannizzi - Goldman Sachs

Just the quarter, I mean you have 20% in the second quarter year-over-year and then 17% net year-over-year in the third quarter.

W. Robert Berkley, Jr.

The main reason there is we have got one couple of startups that have done particularly well. One in the accident and health business and one in the workers’ comp business.

Michael Nannizzi - Goldman Sachs

And so is that kind of where you expect the third quarter is kind of indicative of where you target, there is no kind of one offs you have got.

W. Robert Berkley, Jr.

There is nothing unusual there.

Operator

Our next question comes from Meyer Shields of Stifel Nicolaus. Please go ahead.

Meyer Shields - Stifel Nicolaus

[Question Inaudible].

W. Robert Berkley, Jr.

I think it certainly a lot of it has to do with some of the startup operations having I’d say plateau but the growth rate is not what it had been in the past. And so that’s really probably the biggest piece of it if you will. Having said that there is some little bit of seasonality to it, so do I think that you are going to see a slowdown so to speak further beyond what we have seen, not necessarily but I don't think that you are necessarily going to see the pace of growth that you are seeing over the past several quarters. At some point that curve may not flatten out, but it's not going to be quite as steep as it has been as we have also suggested in past discussions.

Operator

Our next question comes from Howard Flinker from Flinker & Company. Please go ahead.

Howard Flinker - Flinker & Company

What is your pay for the 2 million shares you bought in the quarter?

William Berkley

Round number is $37.

Operator

And I’m showing no further questions at this time and I’d like to turn the conference back over to Mr. William Berkley for any closing remarks.

William Berkley

Thank you very much. We are very enthusiastic, we think that as we tried to signal people, the quarters are moving as we expected. We would expect our expense ratio to continue moving downward. We would expect our loss ratio to move downward also as increased pricing moves through our earned premium at increasing levels. So, we are very optimistic about our fourth quarter. The one issue nobody raised that I want to point out is as we invest our money in other things other than fixed income securities we are not going to see that income through come through what everyone calls operating income. It's going to be lumpier. We think it's just as good for our shareholders as having income from bond and we think in this bond market where fixed income returns are definitively less than even our March depression levels, that’s a better thing to do for our shareholders. So, thank you all very much, we look forward to our year-end call and having great results. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s conference; you may all disconnect and have a wonderful day.

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