Operator: Good day, and welcome to W. R. Berkley Corporation's Second Quarter 2013 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 representation by us that the future plans, estimates or expectations contemplated by us will be in fact be achieved. Please refer to our annual report on Form 10-K for the year ended December 31, 2012, and our other filings made with the SEC for 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 R. Berkley - Chairman and CEO: Thank you very much. So, we were pleased with our quarter. We think it demonstrates our lack of volatility and our ability to continue forward in this environment and we would expect our underwriting results to continue to leave the process. I'll make a lot more comments after Rob and Eugene. Why don't we start with Rob talking about our results. Go ahead, Rob.
W. Robert Berkley, Jr. - President and COO: Thank you very much. Good afternoon. The second quarter by-and-large was a continuation of the trends that we saw in Q1. Primary comp rates continue to move up with a healthy pace and we are pleased to see that it would appear as though the excess comp market has touched bottom and is showing early signs of improvement. The GL market both from a primary and excess perspective is getting some rate and it would appear as though the momentum is building and the umbrella market is right there along with it.
On the other hand, the professional market is a bit more of a mixed bag depending on the class, also depending on where you are in the tower. Primary public D&O rates continue to move up with a healthy pace. Having said that, if you are farther up in the tower in the excess space it would seem that those things are more flat to up to plus low-single digits.
Private and not-for-profit D&O are also getting some rate as EPLI, but then again on the other hand the medical space has remained very competitive and perhaps increasingly competitive as is the miscellaneous D&O.
The property market, while rate is still available, best as we can tell it would seem as though the market is losing a bit of momentum. It's a bit surprising quite frankly that this would be the case. On the heals of Sandy, as well as an active Tornado season in the Midwest, and of course, the floods in Europe and Canada, well quite frankly, doesn't seem like it's given the marketplace much reason to pause.
The property market is always been one that's made us scratch our heads from time to time. When the earth shakes or the wind blows, it seems as though people choose to back that out of the results and when the Mother Nature is kind to us, it seems as though people call it brilliance. The (indiscernible) presumably at some point is going to begin to get a little bit old.
Now if I can turn your attention more specific to our results during the quarter. Rate adequacy and underwriting margins remain at paramount focus for us. We are pleased with the rate increases that we got in our insurance operations during the quarter coming in at 6.5%. This is reasonably consistent with what we've seen over the past several quarters. More specifically 43 of our 47 underwriting units achieved additional rates. We were comforted by the fact that our renewal retention ratio remains at approximately 80%, this gives us a piece of mind that while we are achieving this additional rate, we are not undermining the quality of the books.
Our new business relatively metric came in at 3.6%. This is a metric that we talked about with some of you in the past. It's our effort to try and compare the rates that we're getting on new business with our renewal book. We think that this is an important metric because obviously you want to make sure the new business that you're adding to the portfolio in no way is under mining or diluting the margin in your book. In addition to that obviously new business as opposed to renewal business you know less about, so consequently some type of surcharge would be logical and appropriate.
New business relativity metric is something that quite frankly we don't understand why more market participants don't focus on. There is no doubt it is not a perfect formula, but it is a meaningful data point. Our conclusion is that others must do it they just may choose not to discuss it.
During the quarter gross written premium was $1.617 billion, up 13% over the second quarter in 2012 as I mentioned earlier, part of that was driven by the 6.5 points of additional rate, a little bit over 6 points due to exposure and the balance is due to audit. All three segments contributed in a meaningful way and more specifically 39 of our 47 underwriting operations contributed to this growth.
The loss ratio on a calendar year basis for the quarter came in at 62.8% versus 63.7% for the corresponding period last year. We are pleased with these results, given the fact that we had $8 million associated with the cat losses during the second quarter of this year.
On the topic of tax we had a total of $34 million of losses during the quarter. The lion share of the loss is stemmed from severe conductive storm activity in the mid-West. Eugene is going to spend a bit on time on the loss ratio, as well as on an accident year basis, but I thought I would tuck-in the comments that on an accident year basis came in a 64.2% compared to a 66.3% for the same period last year.
Lastly, on the topic of losses I wanted to mention that the paid loss ratio for the quarter ran at 55.1%, which again is not a perfect indication, but perhaps an encouraging sign as to what the portfolio is running at.
With regards to the expense ratio, we are pleased with the improvement coming in at 33.8%. This is an improvement of 0.008%. The main driver is the improvement in the expense ratio is due to the building of our earned premium. As we've discussed over time, this will be happening. We expect this to continue to improve over time as we are able to further leverage the platform that we are heavily invested in over the past several years.
When you put all the pieces together, we ended up with a combined of 96.6% compared to 98.2% for the second quarter last year. On an accident year basis the improvement is similar, approximately 2%. Two points rather, excuse me.
With regards to the balance sheet, I believe our Chairman is going to be spending a bit of time talking about this, but I did want to tuck-in one quick comment, and that is related to our loss reserves. We are very comfortable as an organization with our loss reserves and the aggregate. We have a large number of people that work very diligently every day to make sure that the loss reserves are approximately managed than what they should be. Obviously, there's no substitute for time and with the passage time it will be become apparent how successful we have been in managing this.
Having said that, the second quarter of this year represents the 26th quarter in a row of positive reserve development for the Group. But perhaps I give a bit of comfort.
Another subject that has come up more recently would have to do with the marketplace overall. Whether the rate increases that have been achieved over the past several quarters are sustainable, whether the momentum will build, whether it will maintain or whether it will erode. When we look at the marketplace we are convinced that at a minimum rate increases will remain or increase from here. When you look at the continued growth in the assigned risk plans as insurers are forced to accept the market of last resort. When you look at the commercial line space overall and the number of accounts that are leading the standard market, making their way into the specialty market and the E&S market as the standard market narrows its appetite. It also provides further evidence that there is more tightening going on. So, putting those data points aside there is the fundamental reality of the economic model of the industry. The lower interest rates and the impact that it is having on industry investment return is here and coming into focus very quickly. And undoubtedly that is putting further pressure on the marketplace to look for ways to increase underwriting margin.
We as a group feel very comfortable with the position of our organization. We believe we are quite well poised to take advantage of not just the markets here in front of us today, but where we see it going tomorrow. That's about it from me.
William R. Berkley - Chairman and CEO: Okay. Thank you, Rob. Eugene, you want to talk about the numbers a bit?
Eugene G. Ballard - SVP and CFO: Yeah, I will. Rob covered a lot of underwritings, so I'll just add a few brief comments on that and then cover investment income. It was a good quarter for us. Again, especially in terms of our underwriting results, underwriting profits more than doubled from year ago and that's due to the 12% increase in earned premiums as well as the declines in both our loss ratio and expenses ratio that Rob mentioned. The increase in gross premiums, 13% that is made up of domestic insurance business increase by 13% as well, global reinsurance by 17%, and the international insurance segment by 15% in local currency terms and 11% in U.S. dollars.
Our reinsurance costs were in line with last year with ceded premiums excluding, assigned risk business running at about 13% of gross premiums in both years. So, that leaves us with net premiums of $1.3 billion for the quarter, and $2.7 billion year-to-date both periods up 13%.
Overall combined ratio improved by 1.6 percentage points to 96.6. On an accident year basis, before cat losses, our loss ratio declined by 2.5 points and our GAAP expense ratio by eight tenths of a point with all three business segments reporting declines in both ratios. The cat losses Bob mentioned of $34 million includes $27 million from storms in the U.S. mostly in Midwest and Southwest regions, as well as $7 million from the European floods and other non-U.S. events.
That gives us an accident year combined ratio, including cats of 98.0, in the quarter, down 3 points from a 100.8 a year ago. Finally, with respect to underwriting the prior year reserve, which developed favorably by $18.5 million that compares to $30 million in the second quarter of 2012 and its favorable reserve development in '13 was concentrated in our domestic insurance segment.
Turning to investment income, our investment income was $144 million in the quarter that's down 11% from the prior year period. The decline was related primarily to investment funds. Although our investment funds had a good second quarter in 2013 with an annualized return of over 11%, our fund income was still down from an usually high return of 22% in the second quarter of 2012.
Income from the rest of the portfolio was down $4 million as lower fixed income returns were partially offset by higher returns for the merger arbitrage business. The overall annualized portfolio yield was 3.9% in the second quarter compared with 4.4% a year ago.
Realized investment gains were up $9 million in the quarter with most of the gains coming from sales of equity securities and investment fund positions.
Unrealized investment gains were $328 million at June 30, that's down $190 million from the beginning of the year. Most of that increase occurred in the second quarter, as benchmark rates for treasuries increased by 65 basis points and quality spreads widened.
As of the end of the quarter, the portfolio remained at 81% cash and fixed income securities with an average duration of 3.3 years and an average credit rating of AA minus. During the quarter, we repurchased 776,000 shares of our stock at an aggregate cost of $31 million. We also issued $350 million, a 40-year trust preferred security with a 5.625%coupon and we repaid $250 million of trust preferred securities, which had a coupon of 6.75%.
Our second quarter earnings include approximately $7 million of expenses related to the early debt extinguishment. The overall effective tax rate was 27%, unchanged from a year ago and that gives us net income of $116 million and an annualized return on equity of 10.8% for the quarter.
William R. Berkley - Chairman and CEO: Thanks, Eugene. So I want to try and take you through a few highlights that I think are important to focus on. First of all, be sure you understand. If you may recall, the first quarter of last year we had higher price increases than in the second quarter. It really is an aberration having to do with the nature of what price and when. We don't think pricing momentum has changed or going down. June is always softer than the rest of the quarter. It's softer than the first six months in general. We think it picks up. We don't see any changing in pricing momentum at this point in time. Lots of brokers are trying to push prices down back in their interest. It's wonderful to say and they keep talking about how much prices have gone up. But if you look at the profitability of insurance companies, insurance companies have always made their money from investment income and investment returns are down substantially.
In fact, in the world we live in today, investment income for the kinds of portfolios that cautiously managed property casualty companies have – you've got to have to see from 50 to 150 basis points decline in new portfolio as you reinvest the money, because you have your highest yielding, longest term investments maturing or being prefunded, pre-refunded and you have to invest that money. So the fact is you are facing serious changes in what's going off your portfolio and what you are able to invest in. The alternative is the bet on no inflation for an extended period of time, which is not something we're prepared to do, nor are most of our competitors.
Overall, we continue to have as the biggest single part of our portfolio being municipal bonds, although that is a smaller portion today than it has been. Corporates are now a bigger portion, not quite as large as municipals but a much bigger portion than they have been historically. It is purely based on maturity, yield and opportunity to invest. We continue to be modest players in the equity market and search out particularly unique investments that we think offer us good returns. At this moment in time, we think that we will be able to find some of those but not enough to keep or our cash flow and our maturing portfolio fully invested. So, we would expect modest continuation of decline in portfolio returns. Overall though, we are pretty pleased to how things are going. We think we will see continuing improvement in our combined ratio over the balance of the year. As our earned premium from higher rates come through, we would expect at least another point maybe more or maybe two points in combined ratio improvement inclusive of part of that coming from the expense ratio and we are pretty optimistic that it is going to end up being a good year with really good return on capital. We think that in spite of the brokers pounding the table that rates have gone up are not enough they are just now looking at the real cost of capital and what's happening to returns for their property casualty companies that they do business with.
With that said, I'd be happy to take questions.
Operator: Amit Kumar, Macquarie.
Amit Kumar - Macquarie: My first question relates to the topic of pricing. Rob said that rates, I guess, will remain the same or probably increase from here. If I go back to the comments you made previously, you have said that pricing could 8% to 10% up by year-end 2013. Do you still think you are on track for that or has that thought process changed?
W. Robert Berkley, Jr. - President and COO: It's Rob. I don't recall exactly the words, but what I was trying to suggest is that we think the level of rate increase that we are getting today or in the second quarter if you like which was 6.5% we believe that you will continue to see that and it is likely to build from here, which sort of ties into the comments later in my commentary that if you look at the economic model of an insurance company, much of the rate increases people have been seeking stem from their concerns having to do from loss activity. The impact which is even more leveraged of investment income declining is likely to force people to raise rates even beyond what they have done to-date.
William R. Berkley - Chairman and CEO: I think his comments really (indiscernible) what I was talking about which is that price increases will continue at the 6.5% or higher. So, I would expect what I said before is our view as well. We still are optimistic that seven eights percent give or take will would be the level of increases by the end of the year.
Amit Kumar - Macquarie: So we have gone down because as I said previously we were – again, I don't want to parse the word fear, but we were thinking o8% to 10%?
W. Robert Berkley, Jr. - President and COO: Being more cautious as I was at the second quarter of last year because always we have surprised that the second quarter, you may recall my comments the second of last year. I was a little cautious because the rate increases were not as much and they came back to be in the second half of last year. I'm little more cautious, but in principle I don't have any different feeling. You are trying to think you are part of (indiscernible) 7 or 8 or 8 to 10, the answer is the mid-point to serve an 8% kind of rate increase so we're really quite optimistic.
Eugene G. Ballard - SVP and CFO: A typically don't breakout this level of detail, but if you look at our rate monitoring for domestic insurance it's pretty much there right now. So the 65.5% that we shared with that include activities outside of the United States if we focus on the reinsurance in the U.S., its right where we're talking about it would be.
Amit Kumar - Macquarie: Maybe just going back to the discussion previously on new entrant in this space. Can you sort of refresh us or may be just talk about what impact you might be seeing form the new entrant?
William R. Berkley - Chairman and CEO: What company you're talking about?
Amit Kumar - Macquarie: Are you seeing the team is or that matter of accounts.
William R. Berkley - Chairman and CEO: There is no new entrant in our space. That's why – as for a country – if you talk about Berkshire Hathaway, there are in a lot of people space, but generally not in our space. They may come in some of our space, but our space is much more people intensive, broker intensive. They are not interested in our space. They have few good people writing large risks. It's not the heart of what we do. Our biggest risk is probably not big enough to be their smallest risk. Will they eventually move into areas that we do business? Could well be. But for now, they are just not in our space.
Operator: Josh Shanker, Deutsche Bank.
Joshua Shanker - Deutsche Bank: My question is for Gene. I wanted to walk through a little bit of the book value per share move between this quarter and last quarter. I assume it's obviously mostly investment losses and what not, but can we go to where that's happening?
Eugene G. Ballard - SVP and CFO: Where the investment declines are?
Joshua Shanker - Deutsche Bank: Yeah. So is that munis, is that corporates that's across the whole book.
Eugene G. Ballard - SVP and CFO: It's across the book, munis and corporates would be the majority of it, because that's where lot of our investments are, but it's across the book, fixed income book.
Joshua Shanker - Deutsche Bank: Does that mean, and maybe it's – comps are for better pricing, that it's going to be difficult to grow book value in a rising and straight environment? Obviously we know that's true intuitively, but is that – is this core anomalistic or does a 35 basis point increase in rates eat up and invent of possibly a book value growth?
Eugene G. Ballard - SVP and CFO: We don't – in a short period towards the end of the quarter, 65 basis points or 75 basis point change in interest rates is sort of a normal change and we don't think it's continuing. Clearly, if we have 65 basis points or 75 basis points increase in rates given the short duration of our portfolio and new cash flow our rising investment income would very quickly offset that. Obviously, we kept the relatively modest duration in our portfolio. So, it is painful, but it is reality. There is good and there is bad, higher investment income and your unrealized gains go down in the bond portfolio. That's how life is at the moment.
Joshua Shanker - Deutsche Bank: On the currency translation I am surprised there was a currency translation gain in the P&L in such a tough quarter. Maybe there is something behind it that I don't understand?
William R. Berkley - Chairman and CEO: Nobody gave us any credit for the fact that sterling went down at the end of last quarter it came back in the past quarter and that was the biggest single part of it. We have a lot of money invested in sterling.
Eugene G. Ballard - SVP and CFO: We also have some foreign branches that have functional currency is there, local currency and they have investments in U.S. dollars and in the case of the Australian branch, for example, the U.S. dollar appreciated and that's FX gains for them.
Operator: Gregory Locraft, Morgan Stanley.
Gregory Locraft - Morgan Stanley: Just wanted to follow up on I think you had mentioned the expense ratio was going to begin improving more than it is improving now and we'd see a pick-up in that in the back half. I just wanted to clarify, did you mention that's going to be as much as 100 basis points in, let's say, 3Q, 4Q?
William R. Berkley - Chairman and CEO: No, we didn't say that.
Eugene G. Ballard - SVP and CFO: I think what we said was that we were pleased that the improvement in the expense ratio was as it was and we think that it's an example of exactly what we said what happened as the earn continue to build and we could leverage the platform. Furthermore, it's our expectation as that earn continues to build that you will see further benefit coming through.
William R. Berkley - Chairman and CEO: Specific we said was we expected an improved loss ratio and expense ratio would end resulting in probably couple 100 basis points improvement in the combined ratio by the time we got to the fourth quarter.
Eugene G. Ballard - SVP and CFO: I'll just add. I think 3.75 point improvement in the expense ratio over one year period is in line with our expectations, it's not bad. Remember, you've only got sort of a third of your expenses that are going to improve because the commissions sort of stay where they are, so it's only the 12% to 13% that's left that's going to improve as a result of the earned premium increase.
Gregory Locraft - Morgan Stanley: Then something that was in the release. I don't know if it was mentioned in the commentary, but you mentioned, I guess, some capital gains sort of balance of the year, and I think in the past you had some private equity stuff coming through. Do you anticipate more harvesting or something or…?
William R. Berkley - Chairman and CEO: We have said to people that we expect continued capital gains. In the balance of the year we've had in excess of $50 million of capital gain. So far this year, we would expect certainly some level of additional capital gains. You never can time those exactly, but there will be some certainty this year.
Gregory Locraft - Morgan Stanley: Then the last is just more just stepping back. If you set out in '10 and said you get 18% cumulative pricing, here we are three years hence. If you just look static at the combined ratio, projected for '13 versus '10, there is not a whole lot of improvement, couple of hundred bps, but it's not what I would have thought plus 18?
William R. Berkley - Chairman and CEO: With the answer to your question as we think we've probably been a little cautious in examining where things are and we would expect that more of that result will come through to the bottom line as we are more comfortable with this lower inflation rate – lower medical cost inflation rate particularly than we had anticipated. We have assumed a fairly higher medical inflation rate in our reserving than has in fact come up. So you'll as we have become more certain that that is not going to come and bite us that I think some of that 18% will become visible in our reported numbers over the next 12 to 18 months.
Eugene G. Ballard - SVP and CFO: The 18% is a written calculation (indiscernible) basis the price increase will be a little less.
Gregory Locraft - Morgan Stanley: So Bill that will be – I guess if the current medical loss trend holds then it would come through as higher reserve releases.
William R. Berkley - Chairman and CEO: There is some improvement to come as there was some caution and concern over what would happen in all of the changes in our medical issues and healthcare issues and there was caution on our part in our reserve to that part of our business, which is not insignificant.
Operator: Vinay Misquith, Evercore Partners.
Vinay Misquith - Evercore Partners: The first question would be the impact actually of Berkshire. We know that they don't pay in the same lines of business that you guys pay, but just curious on the overall market impact, do you think that your competitors would now seek to write smaller business and how hard is that going to be for them to do that?
William R. Berkley - Chairman and CEO: Well, first of all, skills and distribution required to write the kind of business we do is really quite different than what they do. Second of all, Berkshire is been right at a profit. My friend Mr. Gene is absolutely determined to get his share of the market. But not, I emphasize not at any cost. He's is going to write the business where he thinks he can make money. Nobody should be afraid of that competition. He's going to give good service, give good capacity and he's going to want a share of the market and he's going to do it through those basis, but he's not going to be a price cutter. Some people have entered the business to buy their share. I think Berkshire by and large is going to try to do it in other ways using their capacity, their credit and their ability to put large lines down. But I don't think most of the people we compete with have the market position or the underwriters to move down to write smaller risk. Eventually could there be a problem? Of course. Eventually, they all can write personal lines too, then you should worry about stay firm in all states. But for now, I think they are going to have a battle and I think it's more likely that some of the non-Berkshire companies may decide to cut price to hold on to market. But I don't think Berkshire is going to be a market leader in pricing. I think they are going to be probably a market leader in capacity and quick answers, that's something they have.
Vinay Misquith - Evercore Partners: My concern was more about the (non-Berkshire) companies and the (Berkshire) companies?
William R. Berkley - Chairman and CEO: I am not really worried. There are bunch of them that compete in that area and they don't compete with us. It takes a huge amount of infrastructure and lots of people and lots of systems to write the kinds of business we write. It just isn't the same thing.
Vinay Misquith - Evercore Partners: The second question is on the top line growth in the domestic insurance. You've seen the gross written premiums sort of slowed down over the last three quarters. Just curious what's happening there and do you expect the continued slowdown for the near term?
William R. Berkley - Chairman and CEO: Rob?
W. Robert Berkley, Jr. - President and COO: We have seen a little bit of a slowdown. Having said that there is nothing as far as market conditions go that leave us to believe that you are going to see the growth slowdown altogether. Obviously, we are getting healthy rate which on its own is going to help drive the growth. As we've seen margins get to the points that we find particularly attractive we will working very hard to try and add policy count and we as a group are all on board with that idea. I think part of the slowdown in growth has to do with some of the start-up companies. As we have discussed with you and others in the past when the companies first are in their infancy there is a fair bit of low hanging fruit that they've been able to grab because of file relationships and then they have to work through it every day like everyone else. I think some of that low hanging fruit is gone and now we are out there chopping away just like everybody else trying to build the business in an intelligent way. I think really the big driver of growth is going to be how much rates move up and when we start to see more and more parts of the marketplace get to the point that we think, the margin that's available is particularly attractive and then we will be opening up this even wider.
William R. Berkley - Chairman and CEO: Putting all that aside, our goal has always been a focus on profitability and that's going to continue to be the case and we'd like to grow as much as we can. But it's always goal of profitability first.
Vinay Misquith - Evercore Partners: Just one numbers question. For the net investment income on the core portfolio, can you give us a breakdown between the fixed income, real estate and equity space, if you have the number?
Eugene G. Ballard - SVP and CFO: What we've disclosed in the release is the arbitrage return and the fund return, and then the core portfolio, I don't have a further breakdown for the rest of portfolio here, but we'll have some of that in the 10-Q and you're welcome to call.
Operator: Michael Nannizzi, Goldman Sachs.
Michael Nannizzi - Goldman Sachs: Just one question first off. I saw a lift in reinsurance premiums in the quarter, a bit more than we expected. Could you just talk about first off maybe, what drove the change for you and second if you could just give a little context on what you are seeing in that market. I'm assuming most of that is casualty reinsurance business, but if you could just give us a little context that would be great?
W. Robert Berkley, Jr. - President and COO: As far as the lift in the Reinsurance that was primarily coming as a result of growth in our reinsurance activity outside of the U.S., and probably the lion share of that growth outside of the U.S. Reinsurance segment was coming from our European operations, as it's getting up and running.
Michael Nannizzi - Goldman Sachs: Then as far as your growth otherwise, I mean, are you growing in areas where you are seeing – well, exposure growth in areas where you're seeing the most rate or how should we think about what's driving top line growth, whether it's in that Reinsurance segment or elsewhere, is it rate or is the question?
W. Robert Berkley, Jr. - President and COO: We write very little property cat in our reinsurance portfolio. That's not something that we choose to focus on. We write a little bit of it, but not in a big way, hence that's why you consistently see us underweighted as far as natural catastrophes when you look at what our results are compared to most organizations are scaled, so that's by design. The growth as I suggested earlier is mainly areas – more than half at this stage coming as a result of rate and then where we find attractive margins that's where we are trying to expand the business from a counter exposure perspective as well. Those opportunities present themselves, Mike, both domestically as well as outside of the U.S. both in the casualty lines as well as some of the property like shorter tail lines.
Michael Nannizzi - Goldman Sachs: I think you also alluded to a bit in your comments Rob, the amount of your business for getting reinsurance obviously, but the amount of your business that is syndicated business or primarily access versus just Berkley writing in a whole risk policy?
W. Robert Berkley, Jr. - President and COO: Yeah, I don't have the specific number off-the-cuff, but I would suggest to you that the lion's share of what we do are from a policy count perspective is what we write the whole risk. So for example, approximately close to 90% of our policy count are policies that have a limit or capacity of $2 million or less. So they won't be exactly to those numbers but its pretty close. So when the comment was made earlier that we play on a different part of the universe than many of these other commercial markets that hopefully puts it in perspective.
William R. Berkley - Chairman and CEO: By the way you could extend that, there's probably 98% of our policy count, about $5 million or less. So it doesn't – it's really very small number of policies that are out there that compete where the Berkshires and the AIGs for the most part compete.
Michael Nannizzi - Goldman Sachs: Then just one last one, just on the balance sheet a bit here. So debt-to-cap, if my count is right it's about 33%, so that's up a little bit from some new debt and then the negative impact of (OCI) and then I guess the buybacks, that's a relatively high level for you. If I look back historically I think it was higher last year, it was close to that level last year, but if I remember you guys had pre-funded some debt at the beginning of '12 that was set to mature later in the year. How should we think about that in terms of propensity for buybacks or the potential impact of further negative march if rates continue to rise. Where are you comfortable with that number being and…?
William R. Berkley - Chairman and CEO: We're at the high end now. I think that we wouldn't want to go consequentially more than this. It went to 34% it would be alright because it marking bonds to market, that's consequential risk we take. But in general the stock buyback came was a reflection of our capital gains that we realized outside of our ordinary income stream and that's sort of how we look at buyback at the moment. We think our capital base is sort of at the leverage point where we are okay, but we would expect it to start to come down. Everything else depends on level of risk at any moment in time. We actually see the risk in the business at the moment declining because we see opportunities that will present themselves so we think our underwriting margins will expand and so our returns will go up. So, therefore the risk relative to leverage compared to returns will be better. By the way that ratio, I think, is closer to 32 than 33 at the moment and our goal is to sort of move it down from there closer to the 30 level.
Michael Nannizzi - Goldman Sachs: I guess a question will be if rates do continue to go up, I mean, I would imagine that we will continue to see that mark-to-market come through for you and for others. Do you weigh that less or do the rating agencies or whoever you are kind of – you want to make sure is satisfied with that is that a factor that you will kind of take into consideration separately or is that kind of all baked into your hope to kind of – expectation to kind of have that quotient gravitate lower?
William R. Berkley - Chairman and CEO: Everything is baked in because if it wasn't we wouldn't be doing our job. That said, we have a relatively short duration portfolio which reported 3.2, 3.3 years. That's after our various mortgage portfolios duration is moving up a little with everything else moving down and they moves up because as interest rates move up the duration on those things extend. So, we think we're in pretty good shape. We have pretty good cash flow, not great cash flow, we think cash flow is going to pick up. So, we think that the duration is moving down, and therefore, automatically as we move towards the end of the year that duration is going to come down. Our cash position to reinvest in higher rates assuming rates really move up significantly. But honestly, we're worried about inflation, less today than we were yesterday, and we think the positive impact on inflation in our business would be much greater than the negative impact on inflation on our bond portfolio. Historically, this is a business that has done much better in inflationary times than otherwise. So, yes, we have that concern and we're certainly have that, but if we start during the kinds of money we expect we can certainly handle any impact of decline in the bond portfolio without any worry at all.
Operator: Douglas Mewhirter, RBC Capital Markets.
Douglas Mewhirter - RBC Capital Markets: You guys formed a new unit in the quarter. Obviously, you're optimistic about the market. But are you seeing a lot opportunity to add new units in 2014, assuming the market conditions are kind of standing where they are? Or is that mostly just going to kind of the ramp of the existing units that you've placed in the past few years?
W. Robert Berkley, Jr. - President and COO: From my perspective I think likelihood you are going to see a fair bit of organic growth through existing operations over the next several quarters. As far as new operations we certainly are consistently talking to people, we're trying to be selective, it's hard to know exactly what opportunities will present themselves tomorrow or not. So, it's difficult to speculate as to whether we will be starting many or few or no new operations next year, but certainly we continue to be out there and open to discussions, but in any event certainly we would expect there will be meaningful growth coming from the already established companies.
William R. Berkley - Chairman and CEO: I think Scott, it's more likely, given that we see is that we're going to find groups of people or pieces that we would add to where we are or what we're doing as opposed to whole new units. We have lots of units that can expand and find opportunities to do things. So, I don't think you're going to see as many new units if any over the next 12 to 18 months. But we may add groups of people who fit into one of other businesses. So, you shouldn't take that we're not going to (indiscernible) out there seeking and talking to teams and people, so it's just less likely there will be new units.
Douglas Mewhirter - RBC Capital Markets: Then just a quick question on the revenue from the wholly-owned investees, that's been of quite a bit year-over-year for this year. Just wondering if there is – is there a lot of seasonality in that line, I know it's mostly private – I think private equity aviation investments, is that a good run rate to use…
William R. Berkley - Chairman and CEO: It is, the aviation business made an acquisition and it's running at a much higher rate than it did last year. So, I think the third quarter is a good – second quarter rather is a good indication of how it's going to run through the balance of the year.
Douglas Mewhirter - RBC Capital Markets: Then just a last question just on the investment portfolio. Do you expect to see, obviously you don't know what the market is going to do, but do you expect to see corporates kind of continue to move up as a percent of portfolio, the munis did move down as a percent of portfolio which I what I guess we're seeing the most here now?
William R. Berkley - Chairman and CEO: In fact recently it went the other way. Let's just say in the past 30 days we probably invested $150 million, $175 million. $100 million or $125 million went to munis versus $50 million into corporates because that was the relative attractiveness. It was wonderful to declare bankruptcy and suddenly the whole municipal market was terrible for a short time and people redeemed their municipal bond mutual funds and there were opportunities. So, we're an opportunistic investor. I think that overall at one point we had over 50% of our portfolio in munis, we're not going to get there, but as far as the balance going between let's just say 28% and 35% in the municipal market, that's a function of opportunistic investments.
Douglas Mewhirter - RBC Capital Markets: Did you have any exposure to the Detroit bankruptcy on the muni side?
William R. Berkley - Chairman and CEO: No. By the way, I sort of chuckled a little about every one talking about the $18 billion Detroit disaster. But I think only $1 billion or $1.5 billion of that was municipal bonds the rest is the pension fund. So it wasn't quite as big disaster for the municipal market as people thought.
Operator: Jay Cohen, Bank of America-Merrill Lynch.
Jay Cohen - Bank of America-Merrill Lynch: Couple of questions. The first one was just a numbers one that I missed. The share buybacks in the quarter I know it was modest what was the number of shares?
Eugene G. Ballard - SVP and CFO: 776,000.
Jay Cohen - Bank of America-Merrill Lynch: And the total price chain?
Eugene G. Ballard - SVP and CFO: 31 million.
Jay Cohen - Bank of America-Merrill Lynch: And then separately, I guess, one line of business in the U.S. that kind of jumps out as far as growth goes is other liability and that can mean so many different things to different companies. I am wondering if you can give us a little bit of insight into what's driving the growth in that line of business.
William R. Berkley - Chairman and CEO: E&S.
Jay Cohen - Bank of America-Merrill Lynch: And what classes of business, Rob?
W. Robert Berkley, Jr. - President and COO: Really, it is across the board. There is certainly some in the professional space as well as some in the excess and umbrella space as well.
Jay Cohen - Bank of America-Merrill Lynch: You've suggested that you are seeing a shift into E&S from standard markets. Can you quantify at all what your submission activity looks like in your E&S businesses?
W. Robert Berkley, Jr. - President and COO: I don't have specific metrics to share with you on this call but certainly we are seeing signs of growing number of submissions coming out away. But unfortunately I am sorry I don't have any specific metrics to share with you at the moment.
Operator: Thank you. I am showing no further questions at this time. I'd like to hand the conference back over for any closing remarks.
William R. Berkley - Chairman and CEO: We thank you all. We are exceedingly optimistic. We think our numbers have been cautiously presented. We've been a little more pessimistic than seems appropriate about medical inflation. We expect that (analyst) were more and more comfortable with where those numbers come out. I expect that will result in more positive outcomes, the balance of the unit into next year. Thank you all very much. Have a great evening.
Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.