Good day, and welcome to the W. R. Berkley Corporation first quarter 2014 earnings conference call. Today's call is being recorded. The speaker's 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, expect, 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, 2013, 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.
Good morning. We were very pleased with our results, and I'll talk more about it. I think that as we move through the next period of time, I think we'll be able to demonstrate many of the things that we think differentiate our company from many of our competitors. We'll start with Rob talking about our operations.
Thank you. Good morning. The trends in the commercial lines property and casualty insurance market and reinsurance markets remain reasonably consistent with what we've seen over the past few quarters. The two markets, while they are intertwined with one another, continue to march to the beat of a very different drum. The domestic insurance market, while modestly more competitive than in the recent past, still offers opportunities to raise rates beyond loss cost trends and consequently providing us the opportunity to expand margins. In particular, casualty and workers' compensation remain amongst the most attractive. Having said that, this can vary by territory or class. Professional liability overall is flat. Having said that, again, it can vary by class. Non-cat exposed property is also, generally speaking, treading water, while cat exposed property continues to be under mounting pressure. Commercial transportation continues to be the great puzzle to us.
We talked about this a few quarters ago, how it is ripe for change and has been ripe for change for some period of time. When you look at the triangles for this line of business, it's hard to imagine that things have not changed more or hardened. Having said that, when we look at this line, it appears to have some commonality with what we saw in workers' compensation a few years ago. The insurance market outside of the U.S. continues to be reasonably competitive and generally speaking, has not benefited from the type of rate increases that we've seen in the domestic market. Having said that, there are some early signs in some territories that their market is timing for change. On the other hand, the reinsurance market remains painfully competitive.
The combination of an ongoing change in the approach that ceding companies are taking to buying, combined with the increasing participation from non-traditional capacity coming into this space is putting a tremendous amount of pressure on the market. Traditional market participants are grappling with this new reality and trying to figure out what their model will be going forward. While this intense competition to date has been more focused on the U.S. reinsurance market and the Western European insurance market, reinsurance market, excuse me, as well as global accounts, it would seem as though this new phenomenon within the reinsurance space is spreading to other regions. With regards to the company, net written premium for the quarter was $1.53 billion, an increase of approximately 11% when compared with the corresponding period last year.
Of the 11 points of growth, 4.6 were associated with rate increase, with the balance coming from exposure. Our domestic insurance segment had a particularly strong quarter, growing at 14%, while achieving a rate increase of slightly more than 5%. Our renewal retention ratio for the group remains at approximately 80%, giving us comfort that the quality and the integrity of the book remain intact. The company's loss ratio for the quarter was 60.3, which includes 1.8 points of positive development and 1 point of cat losses associated with named storms. As Gene has defined for you in the past, we define cat losses based on PCS or named storms. Having said that, if you adjust that to include unusual losses associated with weather or not typical, one could more than double that number.
By example, in the month of January, in one day at one of our operations, we had the same number of slip and falls that we would typically have in one month. Our international insurance operations overall showed some level of improvement from the fourth quarter, however, continues to be unacceptable. Quite frankly, the performance of most of the segment was reasonably good. The issue lies with our non-Lloyd's European insurance operations. As I mentioned last quarter, we believe that we have identified the issue and have taken the action and are in the process of fully addressing what has been the root of the challenge or the problem. The paid loss ratio for the group was 50.7, which we believe is a very positive indicator for what the future may hold.
The expense ratio for the period was a 33.6, which is an improvement of more than a half a point when compared with the same period in 2013. The expense ratio continues to be a priority for us as an organization, and we expect this improving trend to continue, although it may not be a smooth curve. When we put all the pieces together, the company achieved a combined of a 93.9 and on an accident year basis, a 94.7. Obviously, those numbers would improve on an accident year basis depending on how you handle the cat number. Our balance sheet in general remains in very good shape, and I'll leave the discussion around that to others.
However, I would make the comment that the first quarter of 2014 represents the 29th quarter in a row of net positive reserve developments, and more specifically in the quarter, we had net positive development of approximately $25 million. When we look at our policy year numbers in combination with the fact that we are still able to get rate above loss cost trends, we are very encouraged. We continue to focus on making sure that we optimize the balance between pushing for rate versus adding to exposure count. Thank you.
Thank you, Rob. Gene, do you want to take us through the numbers?
Okay. Thank you. As Rob said, we had another solid quarter with strong premium growth, continued improvement in our overall combined ratios, both on an accident year and calendar year basis, and significant increase in our operating income and net income compared with last year. Overall, our net premiums were up 10.8%, to over $1.5 billion. For the domestic segment, premiums were up 14%, primarily as a result of growth in our two largest lines, other liability, which increased 15%, and workers' compensation, which was up 16%. For the international segment, the premiums increased 18% in terms of original currency and 10% when converted to U.S. dollars. Our reinsurance premiums decreased by 6% as a decline in our Asia Pacific reinsurance more than offset growth in our U.S. and U.K. reinsurance companies. Our underwriting profits increased 28% to $83 million.
The accident year loss ratio before cat losses improved by eight tenths of a point to 61.1 due primarily to higher prices. In addition, our overall expense ratio improved by seven tenths of a point due to premium growth, as well as the benefit of various initiatives underway to reduce administrative cost. That gives us an accident year combined ratio of 94.7, down one and a half points from a year ago. The pre-tax accident year combined ratio for our domestic segment, which represents 74% of our Q1 premiums, was 93.7, and for the international and reinsurance segments, it was 97.2 and 97.1 respectively. Cat losses were $14 million, compared with $5 million a year ago. Most of the 2014 cat losses were actually from two winter storms in the first week of January.
As Rob said, we also experienced more than usual losses in the first quarter from freezes and other unnamed weather events that are not included in the cat loss number. Prior year reserve releases were $25 million this year, compared to $23.5 million a year ago. Favorable reserve development of slightly more than $25 million for the domestic segment was partially offset by very modest increases in prior year reserves for the international and reinsurance segments. Again, Rob mentioned the paid loss ratio at 50.7. That's actually the lowest it's been since the first quarter of 2008. Our investment income was up 24% to $169 million due to a significant increase in income from investment funds, specifically funds that are invested in real estate, energy, aviation, and rail car businesses.
The annualized yield on our overall portfolio was 4.5%, up eight tenths of a point from a year ago. Realized gains were $53 million, up $20 million from a year ago, primarily from the sale of commercial real estate, and unrealized gains increased over $100 million to $510 million at March 31st. At quarter end, our average portfolio duration was 3.4 years, and our average credit rating was unchanged at double A minus. You'll see our effective income tax rate increased to 30.5% in the first quarter from 26% a year ago. That's due entirely to significantly higher income from investment funds and investment gains, which are generally taxed at the full 35% tax rate. We repurchased 4.8 million shares of our common stock in the quarter for $193 million.
I look back since 2006, we've now, actually since the beginning of 2007, we've now repurchased over 76 million shares of our stock or about 40% of the outstanding stock at the beginning of that period. Over the same time, our shareholders' equity has grown by 30%. For the quarter overall, that gives us a 45% increase in net income to $170 million, a 51% increase in net income per share to $1.25, and an annualized return on equity of 15.7%.
Thank you, Gene. Well, we're very enthusiastic. Although many of you might say I'm always enthusiastic, which would be absolutely correct, but who would want a company run by a pessimist? The fact is, we have had over seven years of positive development, which I might point out is twice the average duration of our loss reserves. It would be hard, in spite of at least one person pointing out that they think we're short of reserves, to continue that process if that were the case. There are people who write fairy tales as well as historical facts. We're enthusiastic because the paid loss ratio over time has come down, which reflects reality. We did have a period of time back over 10 years ago, where we were concerned about our reserves, and we changed everything we did about our reserving process and practices.
Now we have a tendency to be more conservative, which in fact, over the long run is probably an additional problem because we end up being more conservative than we'd like to be. Overall, our insurance operating business is good to very good. We continue to get rate increases. When you have 52 operating units, you always have a problem someplace. Overall, we see continued improvement in our underwriting results and a continued decline in our expense ratio. We're very optimistic for our operating results for the year. As to the investment front, for now, several years I've been suggesting we would have improved gains. Improved gains in our portfolio are not a reflection of, "Gee, weren't we lucky something happened?" It was a reflection of our dissatisfaction with fixed income returns and our efforts to find other alternatives. We do not invest in hedge funds.
We have one modest investment in what would be considered hedge funds, less than $100 million in our $16 billion portfolio. All the other investment funds are asset-based funds, lending, or some other type of asset-related income. We sold a building. We made a gain. We've sold some other things, airplanes, which were in a fund and had depreciation, thus a large portfolio of airplanes, which gave us no income, suddenly gave us income as the planes were sold. It wasn't a sudden change. Accounting rules said you have to depreciate the airplanes, and when you sell them, you recapture the depreciation, plus you get an equivalent return. We continue to do those things, and while we believe this quarter in some ways was better than we might have expected, it is in line with our expectation. We continue to believe we can achieve our 15% return.
We're optimistic about all aspects of our operations, and we continue to believe our investment portfolio will generate increased gains as we go through this year and next year. It is going to be a bit more lumpy than portfolio yields from bonds. On the other hand, we think that people who have tried to get yields by extending the maturity are taking risks that we think are hidden today but are real because our view is inflation is out there. We don't know whether it's around the corner or a mile away, but it inevitably is there. Overall, very positive about the year. Don't see anything on the horizon at the moment that's going to hinder us from having an outstanding year. We continue to be able to grow, take market share because of service and focused expertise, and people want that.
People are much more conscious of the value you deliver through both claims and underwriting expertise. With that, Nicole, I'm happy to take questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star and then the one key on your touchtone telephone. If your question has been answered or you're just removing yourself from the queue, please press the pound key. Our first question comes from the line of Michael Nannizzi of Goldman Sachs. Your line is now open.
Thank you. Thinking, Bill, kind of looking out from here, where do you see the environment shaking out for the rest of 2014 and into 2015 in terms of rate versus loss trends in your domestic book?
Why don't I let Rob talk then I'll add?
Sure.
Go ahead, Rob.
Yeah. It's morning, Mike.
Good morning.
I think our expectation is that we should be able to continue to certainly keep up with and in all likelihood, exceed loss trends for the balance of the year. The only reason or caveat I would throw out there is Parts of our book, and we mentioned this on the fourth quarter call, and I probably should have been more specific about it today, where we feel on a policy or basis, we are making high teens or into the 20% returns. As a result of that, we aren't going to just keep our foot down on the rate pedal as hard as we possibly can because we will be becoming more focused on adding to policy count and increasing share. I think that the market conditions are not going to become terribly more competitive through the balance of the year.
There are some folks that have theories that would suggest that it will become less competitive between now and the balance of the year, depending on certain things that could unfold. As far as our numbers, I think you will see us be able to keep up or outpace loss cost. To the extent that you see us really just keeping up or below loss cost, it's going to be because we are so pleased with the policy of returns we're able to achieve.
Got it. When you talk about those high teens ROEs, is that mostly on the comp side, or are there other long-tailed areas where you're seeing those sort of returns?
I think the answer is that as we suggested earlier, we think the casualty space and in general, and perhaps parts of the workers' compensation market are particularly attractive. At the same time, I would caution one not to use too broad of a brush because it can vary by territory and can vary by class.
Mike, this is Bill. One of the things that's particularly interesting is people see classes of business that look attractive, they find ways to enter, they tend to enter the least attractive places for the business because that's where you can get in. It may be a line of professional liability and say, "Oh, professional liability looks great, where can we get in?" They find where they can get in the easiest is exactly that part of the business that's not attractive. The same is true of particularly states for workers' compensation, in particular areas of the country for other lines of business. One of the things, final answer to your question, is the differential between good places and good niches and bad, has never been greater.
Got it. Thank you. I guess, maybe Bill, you mentioned your sort of 15% ROE goal.
Not 50, 15.
No, that's what I said. Sorry, I have a cold, so maybe that came out like 50. Sorry about that. If we look at the first quarter, we normalize investments, it looks like you're closer to that sort of 10% range. How do you get there? Given the environment you see,
I don't think you're at 10 if you normalize. What I've said to people is, we'll have $25 million-plus of gains, and our partnerships are going to do better than they had. For instance, we had a railcar leasing business that had an especially good quarter because of marking to market the value of the railcars because we got into that business early.
Right.
It's not going to go back to the same level we were at in prior quarters. I think all of that is going to be better, and we're going to continue to have gains, and I would consider the base level of those gains sort of $25 million. I would say with no improvement in expenses or underwriting, we're probably today at $13 and a half, and I think we'll have improvement in underwriting and expenses. I think between now and the end of the year, we'll have at least one or two more significant realized gains. I'm pretty comfortable about that. I think the answer to that also is, we bought back a lot of stock in the first quarter.
Right.
That helps us a little bit also.
Got it. Great. Just last quick one, if I could, Rob, on Europe, and you mentioned that it was, I guess, the non-Lloyd's Europe insurance operation where you were making some changes or taking some re-underwriting actions. Can you talk about where you've seen the growth in that international book recently, and what's the overlap with the area that you were talking about?
Sure. Let me first talk to you a little bit about where we've taken the action and what those areas are. One is within the U.K., a part of the professional liability space, a particular class in that. There was a subclass in Spain within the professional liability space as it relates to healthcare. In that subclass, we have taken action there as well. Finally, related to the surety line in Europe, specifically Germany, and we have taken action there. As far as the growth opportunity, probably the leading growth opportunity there is coming out of Australia.
I see. Got it. Not within that area of business.
No. The places that we are taking action to eliminate, we are reducing or eliminating, we are not increasing. The growth is coming from places like Australia. We're having some growth in the Scandinavian territory, not in some of the professional lines within Europe and U.K.
Great. Thank you very much.
Yeah.
Thank you. Our next question comes from Amit Kumar from Macquarie. Your line is now open.
Yeah. Just two or three quick questions. First of all, going back to the discussion on capital management, does a big ramp-up in buybacks suggest that perhaps you see better value in your stock versus writing more business going forward?
No. What it suggests is we think we'll have a lot of capital gains, so we'll generate more capital than our planning anticipated, we have more resources to buy back stock. We think our stock is attractively priced now. As we have said a number of times, we think that our balance sheet is very conservatively stated, both because of our reserving and because we have assets that we carry a cost because of the nature of the accounting rules that we think create value, and therefore, we think the stock is attractively priced. Given that, we'll convert some of those to real value. We think it's attractively priced, as we convert those to real value, we'll have more revenue than we anticipated. We have the capacity to buy it back while keeping in mind the rating agencies want us to maintain our level of capital.
Got it. That's helpful. That's somewhat similar to what you had said in Q4, I think I get the point. The second question I have is on the discussion on reinsurance global. I know that you talked about the non-notable losses. The loss ratio for reinsurance global was elevated at 64.6 versus 55 in Q1 2013. Were there any one-timers in that number too?
Gene, I believe we had some positive development coming through a year ago. Is that correct?
Yes, we did. Yeah, an accident year basis.
That was the big difference.
Yeah.
If you strip the noise or the development out, what's a good sort of underlying run rate number to think about?
In terms of a loss ratio?
Yes. Loss ratio.
We're like in the low 60s now.
Low 60s, okay. That's quite helpful. The final question I have is for Bill. Recently, we've seen, I guess, a return of consolidation discussions in Bermuda, and I know this does not somewhat directly relate to you, but could you sort of refresh us what your view is on consolidation at this juncture of the cycle for William R. Berkley and some of the properties which might be for sale?
We manage our business for what's in the best interest of our shareholders, all shareholders. Unlike some companies, every single senior person here has their maximum economic gain by having the stock do well. We therefore will always look at buying, selling, or doing whatever is in the best interest. At this point in time, we're always hearing about opportunities.
The opportunities have to create value for our shareholders. We think there'll be a lot of consolidation, especially of what I call the billion-dollar club, the people in the reinsurance business who have a billion dollars plus or minus of capital and don't fit in the marketplace where we have so much mobile capital, people can step in and offer cat protection and so forth. We think that unless you're a specialized reinsurer in that billion-dollar class, a lot of those people are going to disappear. In addition to that, it's going to be hard for mid-size players in that same size category to continue to generate value unless they have a real special niche. I think there'll be substantial consolidation in both the insurance company and broker side.
Haven't we been talking about this for some time, and yet the consolidation really hasn't happened. What do you think has been sort of the factor which has restricted more consolidation in the space?
Well, you heard my starting point, which was that in this company, the senior management of the company have more vested in the value of the shares of the stock than they do in anything else, which gives them the same interest as the shareholders. I think in many companies, the senior management is more interested in their jobs and their pay than they are in what's best interest of the shareholders. It's very hard to differentiate that at all times. I think there's a lot of people convince their boards or otherwise to do what's not the right thing. The right thing isn't always to sell at the highest price. The right thing is to create value for your shareholders over the long run, and that's not so easy.
Okay. Thanks for that insight. Thanks.
Thank you. Our next question comes from Ronnie Bobman, Capital Returns. Your line is now open.
Hi, good morning. Rob, in your prepared remarks, then even I think in the Q&A, you mentioned work comp. Again, not broadly.
Yep.
You sort of caveated that to a degree. I had two questions in the work comp area. One is, does your California work comp book fall into that sort of attractive categorization or one of the caveats? Then I think you also mentioned 16% growth in workers' comp. I was wondering if California or other states was a particular driver or not a driver of that. Thanks.
Yeah. As far as comp goes, you're right. We did suggest that it varies greatly by classes within the comp space, it also varies greatly depending on the territory. We think that whether it be workers' comp or any line of business, the places where it typically gets ugliest is where it becomes most attractive because the pendulum tends to swing in the broadest manner. As far as workers' compensation goes in California, certainly historically, California has been one of those markets where the pendulum has swung very broadly. There are opportunities in California that we think are attractive currently, there are some opportunities in California that we would not touch with a 10-foot pole. The growth that we have had in workers' compensation, there has been a meaningful amount of growth coming out of California.
It would be wrong to reach the conclusion that is being solely driven by the growth that we're experiencing in California.
That sounds like a very delicately and selective response, but I suspect.
Given who I'm surrounded by in this room, you would understand if you could see them all. He has two lawyers. He has all these people and he has me, all being careful that we're happy to inform people, but we're not happy to inform our competitors.
All right. Fair enough, gentlemen. Good luck and hope it continues.
Thank you.
Thank you. Our next question comes line of Vinay Misquith, Evercore. Your line is now open.
Hi, good morning.
Good morning, Vinay.
Just looking at the pace of rate increases. I think you mentioned it was 4.6% overall for the company this quarter. I think last quarter was 5.7%. Curious whether that's a function of the market, which I thought you said was kind of stable, or you being sort of trying to gain more market share because you think that you're adequately priced.
It's a combination of both. Specifically, the domestic business where we are getting a bit over 5%, there is a place where we are seeing opportunities to lighten up our foot on the rate accelerator a little bit because we are quite pleased. To make a long story short, it's really a combination of both. I can assure you though, that we are not going to be writing business where we can't get an adequate rate in order to justify the utilization of the capital.
Okay. Secondly, your retentions in the primary insurance in the domestic insurance went up.
Yep.
Just curious if that was just business mix or are you choosing to keep more net on your books?
The retention as far as how much we cede versus what we keep net?
Yes. Correct. That was up modestly this quarter.
Yeah.
It's even more.
I think it's up modestly. I don't think that there's a lot to it. Having said that, I would tell you that we continue to, like others, examine our reinsurance purchasing, and are considering whether the way we've been buying reinsurance historically will be the same approach that we take going forward, or whether there are opportunities to try and optimize that. It is certainly possible that you will see us retaining a bit more going forward. We are going to be examining that. As far as what you're referring to right now, I don't think it's particularly material and would not suggest that you read too much into that at this stage.
Okay. That's helpful. Just one last follow-up. On the non-cat weather, you said towards that about one point on the combined ratio, you would think?
It becomes a little bit of a slippery slope, no pun intended. How do you define that? We've tried to come up with what we would suggest is a very black and white definition in using PCS.
The reality is, after the winter storm season that we've had, clearly PCS does not fully encapsulate all of the weather-related losses that are atypical or not the norm. Whether it be a roof collapsing or pipes breaking or slip and falls. Gene and I and others, we hear about this in our dialogue with our colleagues, it doesn't get incorporated in. How one wants to calculate that, again, turns into the shades of gray, when Gene and I did our back of the envelope with the assistance of some colleagues, we were getting to something that is comfortably one point and arguably well north of that.
Okay. That's helpful. Thank you.
Thank you. Our next question comes the line of Mark Dwelle of RBC Capital Markets. Your line is now open.
Yeah, good morning. A couple questions. Can you just remind me on your reinsurance business, that business is still predominantly a casualty-oriented business, right? What percentage is property?
I would say maybe 20%, if that, is property. Having said that, I would tell you that the vast majority of the property business is risk as opposed to cat. The cat component is quite modest.
Okay. To the extent that you're feeling competition pressure, price pressure in that business, it's really more a derivative of just a lot of capital sloshing around as compared to direct alternative vehicles or anything directly attacking your core markets.
Yeah. At this stage, I think that's right. You've gotten somewhat of a ripple or a domino effect where you've seen some of this alternative capital coming in and trying to play the property or property-related game. That in turn is driving some of the traditional players to be feeling the pressure in the property space and to be looking to participate in a broader manner in the casualty space. I would suggest to you so far, because of the, quite frankly, the skill of our colleagues, the balance sheet that they operate from, and the service that they provide and their intellectual capital, we have been reasonably insulated compared to many others that are front and center in some of the, I guess, parts of the reinsurance marketplace that are very much in the crosshairs of some of this alternative capital.
Okay. Thanks for that. Changing gears. On the domestic business, you commented on the overall rate environment in terms of your own experience. Are you seeing much differentiation in rate gains between, say, your E&S book and your more standard lines book?
The answer is that we're seeing more differentiation, honestly today than we saw last year this time. It's not an overwhelming amount.
Which one's better?
What product line you want to talk about?
Well, I guess, broadly differentiating. If you're saying it's more differentiated now than before, that would imply one's better than the other. I guess you can answer it how you like.
Let me try and answer it in what will be somewhat of a sanitized way, I think it'll be hopefully helpful to you. I think what you're seeing in the standard market, particularly national carriers that by and large are the ones that set the tone for the overall market, because as their appetite ebbs and flows, that determines how much falls off or spills over into the specialty and more specifically, the E&S market. What we've seen in the first quarter as far as national carriers, I am generalizing now, is they are taking their foot slightly off the rate pedal and looking for ways to try and not shrink their business as far as count goes. They have been grappling with this balance between rate and growth for some period of time.
National carriers in general, what we saw, particularly in the quarter, when it's a line of business that they think that they have their head around and they're happy with the margin, they are becoming a bit more aggressive. Not significantly more aggressive, marginally more aggressive. Having said that, simultaneously, we are seeing them become increasingly selective in the marketplace and where they are choosing to participate. There are a growing number of examples of where they are kicking business out of the standard market, it is going into the specialty and E&S market.
That's helpful.
One other comment I would suggest to you that there seems to be an increased focus on large accounts amongst some of the national carriers. I don't know if it's pressure on field underwriters that they feel like they need to make a budget, and it's easy to write large accounts to get there, but that would be another nugget of something that we're seeing out there.
Would you characterize these subtle shifts as maybe the opening shots of the ultimate turn in the market that we may eventually see? Would you just see these as just the ebb and flow of emphasis within a portfolio of risks?
I think I could probably argue either side, to tell you the truth. Having said that, I'd like to think that this is the further indicator that at some point there will be further tightening. Honestly, I do not participate in the internal meetings of some of these national carriers to understand how they're thinking about the business.
This is Bill. I think one of the things you need to recognize is the unforeseen event is what changes the pattern of behavior. The advent of big data and all kinds of analytics, and people's belief in the certainty of such, is taking us down a particular path. Even the best actuary who's old enough to be experienced knows that it is that unforeseen event that gets you. I think that what's going to surprise people is that unforeseen event when it comes, and a lot of people have bet big amounts on the certainty of the actuarial science and the mathematics of big data. It's hard to predict one way or the other, but you know it's sitting out there, and you know the history of this business always surprises you by that unforeseen event.
The best example was all the mathematical models said Katrina was a $15 billion storm.
I appreciate your insights. Thanks very much.
Thank you. Our next question comes to the line of Robert Farnan of KBW. Your line is now open.
Hi. Thanks, and good morning. A couple of quick questions on the different segments. In the global reinsurance segment, gross written premium was down for the quarter. Given the competitive pressures in that space, would it be hard for us to imagine a case where you're going to have much growth in that line, in that segment for the year?
Well, as far as the reinsurance goes, as Gene referenced, a fair amount of the reduction that you saw there had to do with also a change in our appetite for property exposure in Asia. We certainly remain a participant in the property reinsurance market in Asia, but we made a strategic decision to dial that down a bit and to be a bit more selective perhaps than we had been. I think that was probably the biggest contributor to that.
Okay. The decline in the property in Asia, that would likely impact the next few quarters as well. Is that-
I think that you should assume that you Well, I don't have the numbers in front of me, Bob, I can't be very granular about it. I think you will see that we are going to continue to reduce our participation in the property reinsurance market in Asia. Consequently, it is very possible that will be impacting our top line.
Okay. All right.
As it relates to the other markets, I think that there's probably some level of opportunity, but not as strong as you'll see in some of the other segments.
Right. Okay.
We always had a saying, volume is vanity, profit is sanity. We're not interested in being a big reinsurance company and losing money.
Good thing. In the international insurance segment, the expense ratio is around 40%. Just kind of curious if you have a target expense ratio. Are you looking for that in space as you guys try to gain scale there?
I think there are a couple of things there. One has to do with commissions, quite frankly. The commissions that you have to pay in different parts of the world are higher than we would like. I think the second piece is that we have some operations that we started up in certain territories where they don't have the critical mass as of yet from an earned premium perspective. We haven't been able to get the full scale to leverage the fixed expenses. We expect as far as the expense ratio and our internal expenses, we expect that we will be able to continue to try and leverage that. We are focused on trying to bring that in line. Certainly, scale will help, we are looking at how we are spending money and how efficient we are.
As far as commissions go, to a certain extent, they are what they are. Obviously, we examine that as well because it is a material cost of doing business.
Right. No, I understand that the expense ratio in that segment is going to be higher than the others. I was just curious, thinking on a combined ratio basis, maybe, just what kind of combined ratio are you looking at in that segment to achieve acceptable returns?
We need to get into the low nineties.
Okay. Very good. Thanks.
Thank you. Your next question comes line Jay Cohen of Bank of America. Your line is now open.
Yes. Thank you. I guess you briefly mentioned early about some of the alternative capital that you see in the property reinsurance space, but you've had at least one competitor now start up a fund attacking casualty reinsurance.
Yes
Two questions maybe. Do you see that as a trend? Secondly, is there an opportunity for you to do something in that space?
I think that there's two things. You're talking about Watford and Arch, I think that we think it's a good opportunity. It's different than we would do it. We think that it's a thoughtful approach, it's different than we would do it. We think there are opportunities to manage alternative capital, it's got to be very long-term alternative capital from our point of view, because we view this business a little differently than most people, we think it's a long-term business. We think it's probably not best designed for hedge fund kind of investors who, for the most part, don't have a long-term view. We're just trying to think about it and mull over how we think we want to do it and where we want to do it. Clearly, more and more people are looking at the industry.
The problem with most people's views is they look at the industry as lower risk than it is. Over the very long run, it's a very low-risk business. Over any three to five-year period, it can have much more volatility than people think. Many of these investors are investing in riskier kinds of securities. The composite of those packages result in higher risk insurance enterprises. It's an interesting thing. It's going to continue. It's going to represent opportunities. We've been looking at it for an extended period of time. I would hate to tell you, in fact, since Max Re, which was the first one down the line, we've been looking at it. That tells you how slow we are.
We're slow because we think the risks are hidden and unforeseen, every time we think we figured it out, we find out there are some things we hadn't thought about. I wouldn't be surprised if we didn't find some way we thought appropriate.
Great. Thanks for your thoughts, Bill.
Thank you. Our next question comes from Kai Pan of Morgan Stanley. Your line is now open.
Good morning. Thank you. The first question is about the insurance segment, domestic, the year-over-year improvements on the loss ratio, accident loss ratio, ex-CAT. Remember about a year ago when some of your peers are showing big improvement because of pricing increase the last two years, you were a little bit below peers. At that time, you mentioned that you had some pushback from your actuaries, and they want to be more conservative, taking accident initial pick. I'm just wondering, going forward, as the rate actually increase and starting to sort of slow down a bit, the gap between the pricing and the loss cost trend narrow, are we going to see sort of like a slower year-over-year basic loss ratio improvements?
You're actually now becoming more confident because the past year development that it will be able to sustain the level of year-over-year loss ratio improvements?
Yeah, thank you for the question. From our perspective, as we suggested, we tend to, for better or for worse, take a cautious approach to coming up with our initial loss pick, and then as more information becomes available and they become more seasoned, then we will tighten those picks up. Certainly, we did not want to declare victory prematurely with not just the rate increases that we've achieved, but some of the adjustments we've made in our underwriting appetite as well. If you will, rates plus selection and terms and conditions. I think it is fair to say that generally speaking, we as a group have not taken full credit for all the benefit that we believe is likely to appear over time.
Having said that, as I suggested earlier, we are not an organization to declare victory prematurely. To your point, I think it is very possible you will see our reported results improve from here.
I would now add, but now the lawyer is looking at me with evil eyes. What I would suggest is the spread between the incurred and the paid loss ratio of 10 points is much more than one would normally expect, and especially given the growth rate. I think that what that's probably implying is that we're booking somewhat too high an incurred loss ratio at the moment. As we move along in the quarter, we hope to persuade the actuaries that they're being a bit too cautious.
Thank you for that. A second question is regarding to your international segments. The loss ratio, accident year loss ratio, ex-CAT actually deteriorated a bit the last two quarters. I just wonder, is that related to the issues that Rob mentioned earlier or some business mix shift change?
No, it's related to the issues Rob spoke about, and we're managing through them at the present.
Okay. My last question on the investment portfolio. We saw an interest rate having been going down for years. Last year we see some hope of higher interest rates. Now this year, that expectation had to temper down a bit. I just wonder, what's your outlook for interest rates, and how do you position your portfolio accordingly?
It was very diplomatic to say it was tempered. I would say our hope for interest rates going up were dashed. I think that we're searching for asset-focused investments that give us a yield or a more predictable gain, that the return is in the five, six, 7% area, that whether it accumulates and is realized at the end of a period of time or comes ratably doesn't matter to us, but it does give us lumpier results. It's hard to find things, especially where we historically have invested, because there is so much liquidity in the system, and liquidity in the system that's brought about both by the policies of the various central banks. No one should forget that the number of older people who are saving money for retirement is increasing also. The aggregate savings are increasing on their own independently of this.
From our point of view, we don't see interest rates moving up certainly for 18 months or more. It's hard to search for things that are going to give us a good return. We don't want to take the risk for when it happens and extend the duration of our portfolio, because then you're in a position of exactly at the wrong moment to have a longer duration. We intend to keep the duration of our portfolio between three and three and a half years, which is sort of less than the duration of our liabilities. Search for other opportunities that give us what we would think are a good attractive long-term yield. We don't see interest rates going up for certainly more than a year, probably 18 months. Even then, we don't see them going up very dramatically.
We don't even think global interest rates reflect the softening economy in China. There's very little differentiation for quality. If you buy a five-year Spanish government bond, it yields the same as the U.S. Treasury, or maybe that does show quality. Okay.
Thank you so much for the answers.
Thank you.
Thank you. Our next question comes from Ian Gutterman of Balyasny Asset Management. Your line is now open.
Hi. I think most have been answered. If I can ask Gene just one numbers question. Do you have any color on the reserve releases within the U.S. segment, either by line of business or by accident? You're just trying to get a little flavor for those?
No. We'll go into a little more detail on that in the Q. I don't have anything more to add to it right now.
Okay. Anything that seems different than what we would've seen last year?
No.
Pretty similar? Okay. Pretty similar. That's what I was trying to get at. Okay, thank you.
Thank you. Our next question comes from Joshua Shanker with Deutsche Bank. Your line is now open.
Thank you for taking my question. First of all, I just want to point out the egg on my face with the new disclosures on workers' comp. Congratulations on that, they were excellent, and thank you. The second issue, two things that Rob mentioned. One is the possibility of retaining more risk in terms of our reinsurance purchasing.
I don't think that's what he said.
Oh, that's not what he said. Okay. That confused me. Yes. I thought that he said he might consider retaining more, and if he didn't, I was trying to understand the math behind it.
He just didn't say retaining more risk. He said changing our reinsurance retention.
I think he did say retain more, but maybe I'm wrong. Skip that if that's not what he said, because I didn't understand that. That would be the question.
Josh, I think the point is that right now we cede somewhere in the neighborhood of $750-ish million of premium into the traditional reinsurance market, so to speak. We, like others, are looking at that, and we continue to look at that to make sure that what we're doing makes sense.
The reason I said you said retain more risk, and I was trying to be explicit, we're trying to examine the premium we cede and understand are there ways to change our reinsurance program. That may or may not mean changing the risk profile we have.
To retain more premium without retaining more risk.
I didn't say that.
Josh, I think the answer to your question is that we buy a fair amount of reinsurance now, and we continue to examine that and think about whether what we're doing makes sense prospectively.
Okay. Fair enough. The other question relates to the 100 or more basis points of winter weather non-cat losses. Would that be compared to 2013 or a typical winter? Because I think 2013 was particularly benign in terms of winter weather.
I think the answer would be both.
Both. Okay. I'm not sure how to do that, but I'll work on that answer.
I don't think it really matters. You'll do it however you want to do it. Could we go on to the next person, please, Nicole?
Again, ladies and gentlemen, if you have a question at this time, please press star and then the one key on your touchtone telephone. I'm showing no further questions at this time.
Okay. Thank you all very much. We appreciate it, and as I said, we're very pleased with the quarter, and we expect the year to continue to show better returns. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program.