William Berkley - Chairman and CEO Robert Berkley - President and COO Eugene Ballard - EVP, CFO.

Kai Pan - Morgan Stanley Amit Kumar - Macquarie Michael Nannizzi - Goldman Sachs Josh Shanker - Deutsche Bank Ryan Tunis - Credit Suisse Jay Cohen - Bank of America Merrill Lynch Ian Gutterman - Balyasny Asset Management Mark Dwelle - RBC Capital Markets.

Good day and welcome to the W.R. Berkley Corporation's Second Quarter 2015 Earnings Conference Call. Today's conference is being recorded. The speakers' remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words including, without limitation, beliefs, 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, 2014 and our other filings made with the SEC for description of the business environment in which we operate and the important factors that may materially affect our results. W.R.

Berkley Corporation is not under any obligation and expressly disclaims any such obligation to update or alter its forward-looking statements whether as a result of new information, future events or otherwise. I would now like to turn the call over to Mr. William R. Berkley. Please go ahead, sir..

Thank you very much. Well, it was an interesting quarter, exciting in many ways, challenging in many ways. We're pleased with our results, and why don't I start by turning this over to Rob..

Okay. Thank you. Good afternoon everyone. The second quarter, as suggested a moment ago, has been a period of significant change for the industry, but much of that change is stemmed from the level of M&A activity that persisted through the quarter.

Having said that, while it has given people something to talk about, the reality is that the underlying market conditions have been reasonably consistent, though in some cases perhaps incrementally more competitive.

Other markets that we participate in, the domestic insurance market remains the bright spot, workers' comps, GL, as well as select parts of the professional market remain particularly attractive. Having said that, unfortunately commercial auto, aviation, and marine remain challenging, and more recently, offshore energy has become notably competitive.

As it relates to the international insurance environment that we operate in, it remains also quite competitive with the U.K. and Europe standing out as particularly challenging. And finally, the global reinsurance market remains painfully competitive as well.

Having said that, the pace of erosion seems to be slowing, which is giving reason for perhaps guarded optimism that we are approaching the bottom. Turning to the Company's performance during the period, net written premium came in at $1.54 billion, and it is up about 3.5% when compared with the corresponding period last year.

The domestic segment led the growth coming in up 7%. The growth was primarily driven within the domestic segment by our workers' compensation activities as well as parts of our professional liability activities.

It's worth commenting that, of the 7 points of growth, just shy of 2 points were associated with rates, and the renewal retention ratio remains at approaching 80%.

Partially offsetting this growth was the international segment which was down 11%, Gene is going to be giving you a bit more detail on that as well as the reinsurance segment which was approximately flat. With regard to the loss ratio, it came in at 60.7, which is an improvement of approximately half-a-point.

And this was primarily driven by improvements in the reinsurance segment as well as a bit of improvement from the international segment. It's also worth noting that our pay loss ratios came in at an attractive 63%. With regard to the expense ratio, this was a little bit of a bittersweet situation. The expense ratio did tick up to 33.5.

We are pleased with the continued improvement in the domestic segment. Having said that, this was offset by some activities in the international segment as well as the reinsurance segment. Gene is going to also be giving you some numbers on -- in this area. Having said that, a couple of quick comments from me.

First, international goes, as I've mentioned in the past, we're going to need to, on occasion, take one step back in order to take two steps forward.

Some of the expenses spike that we saw in the second quarter in the international segment we believe is a short-term phenomenon, which will spill over into the third quarter, we would anticipate, and may in fact affect the fourth quarter. But by the time we get to next year, we believe this will be behind us.

And as it relates to the reinsurance segment, our internal costs actually are in a pretty good place, and Gene's going to give you some color as to again what's driving that. When you put it all together, the Company achieved 94.2 for the quarter, which included $23 million of net positive development.

This is the 34th quarter in a row of net positive development. In spite of the challenges that exist in the international insurance market as well as the global reinsurance market, we believe that the domestic market still has a meaningful amount of gas in the tank. And quite frankly, the level of M&A activity is likely to create further opportunity.

For example, as we've already announced, a few new activities in the third quarter. So all things being equal, we are quite optimistic as to where the domestic business is. We think things will over time be improving for the reinsurance segment, and we think we're well on our way to making meaningful progress with our international business.

Thank you..

Thanks, Rob.

Gene, you want to pick it up?.

Okay. Thanks, Bill. Well, as Rob said, for the second quarter, we reported operating income of $105 million or $0.81 per share, which is almost unchanged from $109 million or $0.82 per share a year ago. The slight decline in earnings was a result of higher underwriting profits that were offset by a modest decline in investment income.

I'll go over the details -- some of those details starting with underwriting. Again, as Rob said, net premiums written were up 3.5%. That was led by the domestic segment which was up 7%, with increases in all major business lines. Our largest line, workers' comp, was up 15%, and professional liability was up 29%.

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

And reinsurance premiums were essentially unchanged at $143 million as growth in the U.S. was offset by lower premiums in Asia and Europe. Our overall free tax underwriting profits were up 9% to $87 million.

The accident year loss ratio before catastrophe losses was at 60.5, up slightly from 60.1 in the second quarter of 2014, and below the accident year loss ratios for each of the immediately preceding three quarters. Cat losses were relatively benign for the second quarter with only one cat event, with a net loss greater than $5 million.

Overall our cat losses were $25 million or 1.6 loss ratio points in the quarter, and that's down from $40 million or 2.8 loss ratio points a year ago. We reported favorable reserve development of $22 million this year compared to $24 million a year ago.

Almost all of that favorable development was from the domestic segment, but all three segments did have positive development. That gives us a reported loss ratio after cats and reserve releases of 60.7, down a half-a-point from last year. The overall expense ratio for the second quarter was 33.5, up 0.3 points from the second quarter.

The domestic segment improved -- the expense ratio improved by 0.8 points to 31.5. That's right in line with our expectations. On the other hand, the reinsurance expense ratio increased 7 points.

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

The international expense ratio increased almost 3 points to 41.6, for two main reasons. One is the decline of premium I mentioned. And the other is slightly elevated costs in Europe that are related to the integration of our U.K. companies as well as the setting of a new European platform, and to some ongoing Solvency II costs.

We expect those costs to subside in early 2016. That gives us an overall combined ratio of 94.2, down 0.2 points from the second quarter of 2014. As Rob said, the paid loss ratio was 53.0, down from 56 in the second quarter of 2014. And our loss reserves increased $250 million from the beginning of the year to just over $10.6 billion.

Investment income was $128 million; that's down $11 million from a year ago. The decline was primarily related to lower earnings from our merger arbitrage account which broke even in the quarter, compared with income of $7 million in last year's second quarter. Earnings from fixed income securities were down $2 million to $107 million.

And earnings from investment funds were unchanged at $22 million. The overall portfolio yield was 3.2%, compared to 3.6% in the second quarter of 2014. In addition, we had realized gains of $28 million in the quarter. That's primarily from the sale of interest in investment funds.

And that compares with realized gains of $109 million in 2014, which include a large gain from the sale of a real estate investment in the U.K. At June 30th, 2015, our average rating and duration of fixed income portfolio were AA-minus and 3.3 years. And our aggregate unrealized investment gains before taxes were $343 million.

The duration of the portfolio of 3.3 years is a full year less than the duration of our loss reserves. Interest expense for the quarter was up $3 million.

That's due to interest on $350 million of debentures that we issued in the third quarter of last year, which was partially offset by a reduction in interest from $252 million of senior notes that we repaid in May of this year. The overall effective tax rate was 30.4%, down from 31.5% in the second quarter of 2014.

The decline was mainly due to lower investment gains that are generally taxed at the full 35% tax rate. In the first quarter of 2015 we repurchased 4.4 million shares of our stock at an aggregate cost of $218 million. Our cash flow more than doubled to $272 million in the quarter, due in part to lower tax payments.

And in summary, for the quarter, that gave us a pretax ROE of 15.5%, an after-tax ROE of 10.7%, and an ending book value per share of $36.76..

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

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

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

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

So we're, this quarter-end, from now on, we're going to put in our pretax return, so you can measure our results based on management's performance because we think that's what that shows. We're going to have to, over the long run, find a way to deal with this issue.

Some of our competitors will actually have to find ways that don't suit us, but there will be a way to find a solution. We also think capital management reflects a different view that we have than many of our competitors, where they think getting bigger and having more permanent capital is a good solution.

We think, if anything, capital markets are more opportunistic, more flexible, and there are things to do to have capital that's available to you. And therefore maintaining ever-increasing permanent capital can be more like an anchor than a sail of the winds that helps you move ahead.

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

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

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

You have to at least recognize what can happen. So while we're aggressive in seeking out opportunities, fining great teams of people, we're being willing to jump into something where we see an opportunity. We're cautious when we look at what can go wrong in the insurance business. We want great returns but we don't want to take them at any price.

We continue to feel that we'll be able to deliver on that high 15% plus after-tax return over the long run, while it may be bumpier in the short run to get there. Okay. We're happy to take any questions..

[Operator Instructions] Our first question comes from the line of Kai Pan of Morgan Stanley. Your line is open..

Good afternoon. Thank you. Bill, the first question. You gave a lot sort of detail, your thoughts about capital. Two issues there. One is for the tax issue, you've been a vocal critic of offshore tax treatments, and is the indication that you just think the law will not change and you have to find a way to reduce the tax rate for W.R.

Berkley shareholders?.

Well, I think that, you know, return on capital serves two purposes. One, it tells you what your shareholders are getting to keep, but it also is a measure that people have developed to use to tell how well a company is managed. So I thought it was important.

And we discussed it here at great length that we put the number up there so you can look at us compared to so many companies who pay no tax. So when you look at us, you don't say, hey, they earned 10.5% return on equity and this other company earned 13%, 14%, 15%. You have -- to measure management, you have to look at it in a consistent way.

So we're putting the number up there first of all so you can measure how we do compared to everyone else. I don't think they're going to pretend they pay taxes, so we have to pretend we don't. Number two, I think that ultimately the system of taxation in our country only can work when business done in the United States pays tax on a universal basis.

Otherwise, everyone will find ways to do business here and move their incomes offshore. That is not how it works in the insurance business at the present time. So that being said, I think there will be someone, something done to address the tax issues.

But I have been an optimist for five years, and I have been wrong, actually for more than five years, probably seven years. But the fact is I've been wrong. And we're constantly looking at alternatives and how and what and how the world works. And I'm an optimist.

I always think I will find a solution or the government will find the solution that makes the country work better. So, no, I don't have an answer but I'm working on it..

Okay. Then on your second point on the capital optimization, it looks like you're probably pursuing a more capital-light business model because capital available in the marketplace on demand that you don't need maintain a big buffer in terms of your capped balance sheet.

Does it mean that you'll be very active in buying back your own shares, that you probably will not grow your shareholders' equity unless there's business need?.

I think what it means is just as now for a couple of years we've tried to maintain our capital levels at roughly the same level because external capital is available at very low costs, much lower costs than our average cost of capital.

So we're not going to reduce our capital, but we also don't see that we're going to be able to grow our business a huge amount. So if we can grow our business 5% or 7%, there's external capital that we can find ways of obtaining for that amount of growth.

If we can start to grow our business more, we're going to grow our internal capital more or get more permanently provided external capital. We have many people who talk to us about being our partners and doing things all the time..

Okay. Lastly, on industry consolidation. Bill, you've been running the Company for almost five decades, you have seen this play out before. What do you think about the current wave of consolidation? What do you think it will do for the industry, and particularly, what it will do to W.R.

Berkley? Do you think yourself more as buyer or seller?.

First of all, on October 31st, I will step down as Chief Executive and Rob is going to take over. So it will be not five decades, but I'll be out of this box at that point and he'll take care of it, then I'll be Chairman. And then I get to harass everybody else. But the fact is, no, I think consolidation serves purpose.

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

But that being said, we can continue to generate great returns over the long run for our shareholders, and if somebody comes up and says, "Hey, we'd like to talk to you about something," we're always willing to talk. If it's good for our shareholders, it's good for us. In the meantime, we're big enough that we think there's not much that we can't do.

And if we can't do it ourselves, we have lots, as I said, lots of people who come to us with billions of dollars of capital and offer to be our partners to do some other things.

So I think that the consolidation that's happening now is frequently about management ego or management rewards and less amount -- less than it is about what you need to run your business.

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

Thank you very much for sharing the thoughts..

Thank you. And our next question comes from the line of Amit Kumar of Macquarie. Your line is open..

Thanks and good afternoon. Two quick follow-up questions I guess to the previous discussion. First of all, just going back on the discussion on capital management. In the past we've talked about a special dividend too.

Is that still on the table down the road or is that off the table?.

You know, Amit, I've talked to you for many years and I've always said exactly the same thing. My view about our Company is simple. We do what we think is best for our shareholders no matter what. If someone comes in at a high price and wants to buy the Company, we'll talk to them.

If something we think is the most attractive for our shareholders to buy back stocks, we'll buy back stocks. If we think we have more capital than we need and there are alternatives to it, we'll pay a special dividend. We've paid a special dividend a couple of times, we've bought back stock opportunistically.

And each period of time, on a consistent curve, we look at our capital account, we look at what alternatives we have, we look at what we see in the future to be, and we try to make those decisions. But the only benefit we have with our size is we can be nimble.

All the decision-makers fit in one room and we talk in trying to figure out the right thing to do. So, nothing is ever off the table. We do what we think is best for our shareholders at any point in time..

Got it. And --.

-- is not off the table..

Got it. And maybe this might be for Gene.

Were all the buybacks worked in the open market or was a piece of it under a 10b51?.

All open market..

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

Thank you. And our next question comes from the line of Michael Nannizzi of Goldman Sachs. Your line is open..

Thank you..

Hello, Michael Nannizzi..

Hello, sir. I had a couple of questions if I could. One is just on the temporary capital point.

What might, I mean, what might a structure look like, you know, that you kind of alluded to? And yeah, are there any that you have kind of that you're putting together on a small scale today that, you know, that might come to fruition, or is there, you know, like where are we in this process of W.R.

Berkley and being able to leverage external capital? Is it like a first thing in conversation or?.

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

Yeah. But those are the smart guys on the other side of the wall, they don't talk to us..

The answer is that there are people out there who come and talk to us all the time about wanting to find ways to put capital at risk in the insurance business. And we talk about various alternatives and things we consider. We don't have a plan now.

But between their discussions with Rob and Gene and me, we're very confident, if we wanted to do anyone of a number of things, we could easily do it.

And we haven't chosen a plan, but we're pretty comfortable being financially versatile that we can come up with something no matter what the option was, that could help us get by without raising new common stock, which really was our historic view was, you raise common stock, you raise preferred, you raise debt, that was -- that's sort of what it was.

And I don't think that's the alternative mix that is what a company in 2015 needs to look at in our business. I think there are a lot of other alternatives. And we see many of them in the marketplace now. And there are also variants that aren't in the marketplace but offer attractive options..

Okay.

So I mean, I guess the question is like, is this something that you expect, I mean, that you're -- you think you could put together in the next year, two years, five years, or is it, you know, like if we didn't look over time, you know, there's the ability for Berkley to either leverage external capital to grow or utilize external capital and sort of shrink its own capital base?.

We think we can always find capital which we will do on an opportunistic basis when we see reason or need. And we're not -- if I was talking about three, five, seven years, I wouldn't be talking about it. This is something we see in the next year or two or three, where we think there'll be an opportunity to do something.

Do we have it now? It's not two or three months from now. But it is within a timeframe we think that one can see. But tell me what pricing is going to do, tell me how opportunities are going to arise. We think they're there..

Yeah. So I mean, so that -- so you would be comfortable moving in that capacity towards at least part of your business, more of a fee-based model, if that were to present itself in a way that was somewhat sustainable or --.

Those are your words, not mine..

Okay. All right. Thanks.

And then on the tax rate, I mean if, you know, if nothing comes to fruition from the government side, I mean, you know, would reallocating your portfolio back towards munis, I mean is that something you would consider doing to reduce the tax rate or?.

Yeah. But you can also -- the answer is yes. We could shift back towards the muni market. But we're, you know, the muni market is a much better longer-term market, longer-duration market than a shorter-term duration market. So you don't get the real benefits in the shorter term.

So you need some changes in the investment marketplace for us to do that, as well as higher yields for us to be willing to go out 10, 12, 15 years..

Okay, got it. So that strategy is maybe on the investment side, maybe other strategies, but with the goal to try and reduce the tax rate at some point if government rules don't change --.

Yeah, although there are lots of things that are in the offer now because the government is taking note of more and more U.S. companies going overseas..

Got it.

And then just last question if I could, maybe in the domestic business, the expense ratio, you know, Gene, you mentioned it came down year over year, higher than we had, and I think we kind of talked over the last few quarterly calls that the expense ratio should continue to come down to reflect the growth that you guys have had over the last couple of years.

Are we at a point now where this is kind of where you expect the expense ratio to be or is there still leverage on the expense side as you continue to earn through that growth?.

Mike, there's still leverage there and we expect it to continue to improve. You know, when you look at it quarter to quarter, some of it's sort of volume-dependent with the new DAC [ph] rules, when your volume drop, should take a little bit more of a hit on your expense ratios than you're used to, but -- so it's hard to look at quarter by quarter.

But we definitely expect it to continue to improve..

Got it. Great. Thank you..

Yes, sir..

Thank you. And our next question comes from the line of Josh Shanker of Deutsche Bank. Your line is open..

Good evening everyone..

Good evening..

I'm going to continue along the same line of questions, and I don't -- I hope you'll bear with me.

In terms of the current view of, hey, you're going to report both a pretax and an after-tax ROE, an you're reiterating your long-term goals of 15% ROE or better, is that the optimism talking, you believe that the taxation situation will change in a way that allows you to do that, or do you expect to be able to hit that 15% ROE over the long run without any improvements in the tax situation?.

I do..

You do. Okay. Thank you very much. And in terms of thinking about, you know, Rob, talked about the two steps forward, one step back for international work.

Can you talk about a little bit of how you're looking at the situation from this quarter and this is a one-quarter issue? What should we expect going forward?.

Josh, it's Rob. So on the international front, first off, there are some expenses, as Gene referenced, associated with Solvency II, which we will be working our way through, as we make our way to the end of the year. We would expect those expenses will begin to diminish at a material rate as we make our way to 2016.

And then we have some other plans as it relates to some reorganizations that we're doing within the segments, some of which was accomplished in the second quarter, some of it will occur in the third quarter, and we would expect that that component will be quieting down in the fourth quarter.

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

Perfect. Perfect.

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

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

Is that true, anything about the greenfield business that you guys are willing to develop yourself, I mean, the opportunity exists for you to create a new idea for a business maybe internationally whereas the U.S.

market is somewhat more developed? Do you see an opportunity there or would you -- are you more interested in proven track record internationally that's already underway?.

Josh, I guess, again, it depends on how you define a greenfield. But if you look at most of our activities, most of the business that we've started, it's been a situation where we have an individual or a team of people that come together that have a significant amount of expertise that they've developed over the years within a particular niche.

And we don't expect that we would deviate from that approach..

Okay. Thank you. Good luck..

Thank you..

Thank you. And our next question comes from the line of Ray [ph] Tunis of Credit Suisse. Your line is open..

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

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

So, as Gene, suggested, it's going to be a combination of both. Certainly, top line and earned premium levels have an impact. Certainly, currency to a certain extent has an impact as well in some cases.

But fundamentally, much of the action that Gene was alluding to earlier that I touched on as well has to do with, quite frankly, just trying to find ways to make the business better, to make it more productive, to make it more efficient.

And we think that we are getting some traction in doing so, really not because of what we're doing here at the holding company as much as really a lot of the good things that our colleagues that run these businesses are doing. So, long story short, would more earned premium in a vacuum be helpful? Absolutely.

But I think the way we are going to get to a better place is because of some of these deliberate activities that we referenced earlier..

Thanks. That's helpful..

I think the bottom line is we would expect that expense ratio is going to come down. And putting aside currency issues, we will -- we expect to have somewhat improvement in the volume. So I think that, while in the short run, i.e.

a quarter, you may not see much dramatic improvement, I think if you look at these numbers a year from now, it would be substantially better..

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

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

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

Correct, correct..

I think that it creates opportunity on multiple levels.

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

In addition to that, our experience is that oftentimes, back to the point around distribution, that when there are large mergers, it creates a question within the minds of some of the distribution how many eggs they want to have in one basket.

And then finally, you have the other component which oftentimes also can create opportunities for us or any other market participant where there are talented people that for whatever the reason may be, become disenchanted with their future and are looking for another alternative..

Okay. And then I had one more, I guess, new one, just on NII.

What was the impact this quarter from the energy portfolio and is there any visibility on what you think the impact might be next quarter?.

For the energy investments, yeah. They're profitable this quarter and we expect them to be profitable next quarter..

Thanks a lot guys..

Thank you. Our next question comes from the line of Jay Cohen of Bank of America Merrill Lynch. Your line is open..

Thank you. Yeah, on the tax rate issue, Bill.

At some point, would you be willing to essentially re-domicile offshore, whether it's on your own or through some sort of M&A?.

The answer is we're always willing to do what we think is in the best interest of our shareholders. We think we have some level of obligation to this country.

We just think at the moment, the way the taxes are, we won't be able to compete in the long run when we're paying taxes at 30-plus percent and we have many competitors who are paying very low tax rates.

And they do it, forget about what they show on their statements, they do it in many ways, through loss portfolio, transfers, because then they don't pay tax on the discounted value of their reserves, through all kinds of vehicles, some of which they feel are justified and some of which they don't.

But the bottom line is, how much cash taxes do you pay? And it's a competitive disadvantage that in the long run you can't continue with. We look at it all the time. We've worked on Congress.

I have no idea how come it has been so difficult to persuade Congress and I have no idea how some insurance commissioners think for some reason or another it's a good thing for people not to pay taxes in the country.

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

But we would look at every alternative, and we do every day and we talk to people about it..

Got it. And then maybe a question for Gene. It looks like your debt to capital is a little over 32%.

Would that act as any sort of constraint when you think about buybacks at this point?.

No, I don't think so. I mean the fact is our -- you have to remember, first of all, we have $400 million of statutory capital because we carry health equity at fair market value. So our statutory capital and our GAAP capital aren't the same, so we've had an increase in the statutory capital that you don't see of $400 million from just health equity.

So there are -- and there are other things that we've had increases in statutory capital because there it's not the GAAP numbers, so statutory capital has gone up, whereas GAAP capital has not. And we haven't gone -- we haven't bought more stock than our net earnings have.

So if you look at our aggregate earnings, the amount of stock we bought basically matches our earnings. So we don't think it's a problem..

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

I think that in -- over any period of time that'd be a general thing. Gene needs to make a comment about the -- he pulled up the numbers on these partnership things..

I misspoke on the energy funds. I got a quarter ahead of myself with the one quarter lag. But they actually, in the quarter we just reported, they had a small loss. But we don't expect that to go forward. So I just want to correct that..

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

Okay, Jay?.

Yeah. No, thanks for the answers..

Okay..

Thank you. Our next question comes from the line of Ian Gutterman of Balyasny Asset Management. Your line is open..

Hi. Thank you. Bill, I was hoping first if you could talk a little bit about your outlook in the Latin America part of your international business. You know, forgetting about the currency for a moment, right, but just, you know, it seems like those economies are getting a little tougher.

Does that impact your ability to grow or are the lines you're participating not seeing pressure from the economies there?.

I think in the broadest sense, Latin America is a growing marketplace. It has more volatility as every developing market does. We have been successful in Argentina because we have great managers in Argentina, and they've done a great job. And we have the same in Brazil. And we're expanding in Colombia now.

The cornerstone of this business is great managers and great people. And we think that we've been able to get those kinds of people to work for us. Now that said, it's a lot bumpier ride at the moment than it was 18 months ago..

Okay..

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

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

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

Right, right. But then they quota share part of it, they can't get 100% --.

No. But they --.

-- offshore..

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

No, understood. I guess what I was getting at is sort of the opposite side, is, would any potential, you know, solution to improve your tax rate in any way affect your ability to control the type of business you want to control, right? You know what I mean? The companies offshore, even though some of them bought U.S.

businesses, haven't seem to have the success accessing business in the same way because they seem to be perceived differently by being offshore..

I don't think it's the perception of being offshore. I think they have --.

Okay..

-- have great people, but I think that some of them have great people and do really well and others don't. But I think being here, doing this now for almost 50 years, we have a competitive advantage because we have people who are old and gray and been doing it for a while and most of the others are young and spry.

We're hopefully replacing the old and gray people with the young and spry people, and we'll have a combination that'll be okay..

All right, fair enough. Thanks, Bill..

Thank you. And our next question comes from the line of Mark Dwelle of RBC Capital Markets. Your line is open..

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

Yeah. Maybe I miscommunicated, but from our perspective commercial auto is very challenged, while it would seem by and large there's opportunity for additional rate, I still think the economic result that will deliver is not particularly rewarding at this stage.

So while it may not be rapidly deteriorating or deteriorating at all from a rate perspective, I think even with the rate increases that many in the industry are getting, it's not where it needs to be..

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

Yeah. That is correct. I'm sorry if I misspoke..

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

Yup..

Thank you. [Operator Instructions] Our next question comes from the line of Howard Lineker [ph] of Lineker & Co. [ph]. Your line is open..

It's Linker [ph]. Hello everybody..

Hi..

I'll take your side on the question of capital. You're writing at about 0.91 to 1 if you include total capital. And if you want to include equity, it's 1.3. You could write as much business as you want. You don't need capital. And as you have learned since went into business, you learned two things. One, the best form of capital is retained earnings.

And second, when you were very -- when your business is very young, you saw what happened to insurance companies like St. Paul and GEICO and SEICO [ph] when they used too much leverage. The bill comes at a wrong time and it's a large bill. So I'm on your side on this one..

Thank you..

You're welcome. That's it..

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

Well, thank you all very much. We are optimistic that this is a time that'll give us great opportunities in many fronts. The ability to be nimble and select the opportunities that reward our shareholders best, something we've always prided ourselves on.

You can only be sure of one thing, we will always do what we think is right for our shareholders and you can count on that in this Company no matter what. Have a great. Thank you..

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