Good day. Welcome to W. R. Berkley Corporation's fourth quarter 2012 earnings conference call. Today's conference 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 limitations, belief, aspect, or estimate. We caution you that such forward-looking statements should not be regarded as a representation by us that the future plans, estimates, or expectations contemplated by us will in fact be achieved. Please refer to our annual report on Form 10-K for the year ended December 31st, 2011, and 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.
Thank you very much. Good morning. We were very pleased with our quarter. We were especially pleased with the direction everything seems to be moving in. Before I go on about my enthusiasm, I'll let Rob talk about the quarter and the year's results. Then Gene will talk about the numbers. Then the real enthusiasm will come through. Go ahead, Rob.
Thank you for the introduction. Good morning. The fourth quarter was a continuation of the story that has been unfolding for the casualty market over the past few years. Growing concerns among certain market participants over prior year loss reserve development continues to serve as a catalyst for a change in behavior. Additionally, there would appear to be an increasing awareness of the impact that diminishing investment income is having on the industry's economic model. While this macro situation is widely discussed, the sense of urgency in tackling these issues seems to vary from carrier to carrier. Having said this, there is an ever-growing percentage of the market that is pursuing rate in an effort to remedy the situation. On the other hand, the property market certainly did not have a business-as-usual quarter. Hurricane Sandy provided a reminder that bad things happen, and on occasion, in a very big way.
Once again, the industry received a wake-up call with regards to the imperfections of both cat modeling as well as local building codes as we endure the impact that a large tropical storm can have on a region. Though many companies managed to make a profit in the fourth quarter in spite of Sandy, the question remains if the industry is truly achieving an appropriate risk-adjusted return for this product, given the level of volatility it assumes. Workers' compensation remains one of the lines of business where the market is most aggressive in seeking rate. Having said this, given how soft the market had gotten for comp, along with loss trend and lower investment returns, it would be premature to view this currently as a greenlight product.
The excess casualty market is also showing early signs of a return to underwriting discipline, as meaningful rate increases are beginning to be attainable. On the other hand, there continues to be naive optimism in much of the professional market, where rate increases remain far too modest. Additionally, the lack of rate increases in both the marine and parts of the property market remain surprising in light of the recent loss activity. The company's rate monitoring of renewal business for the fourth quarter indicated an improvement of 6.5% over the corresponding period in 2011. Our new business relativity was 1.09%, which indicates our new business is priced 9% stronger than our renewal business. All five business segments contributed to this improvement in rate, though not equally, as the domestic insurance segments ranged from 5%-11%. Excuse me.
Also worth noting, this was the eighth quarter in a row the group achieved additional rate, and consequently, the fourth quarter in a row where rate on rate was obtained. While the 6.5% was slightly less than what we achieved in the third quarter, due primarily to mix of business, it is generally in line with what we have achieved in 2012. We remain convinced the market has maintained its pricing momentum, and it has been further confirmed by what we have seen so far with our January 1 business. As in the past, we continue to believe we are obtaining this improved rate without jeopardizing the quality of our book, which is evidenced in part by our renewal retention ratio, which continues to remain at approximately 80%. When one puts these two pieces of information together, it clearly supports the idea that underwriting margin is improving.
Net written premium for the quarter was $1.228 billion. This represents an increase of 13% compared to the fourth quarter of 2011. All five business segments contributed to this growth, which ranged from 20%-8%. More specifically, 34 of the 45 underwriting operations grew in the quarter. When one looks more closely at the growth, you see 6.5 points associated with rate, six points associated with exposure, and half a point with audit premium. The company's loss ratio for the quarter was a 64.6, which includes 3.2 points associated with Sandy. While four out of our five segments were impacted by Sandy, the majority of the loss was in our international and reinsurance segment. The expense ratio for the period was a 33.5, which is an improvement of eight-tenths of 1%. As we have suggested in the past, we anticipated this trend due to our increasing earned premium.
When one puts the picture together, you end up with a combined of a 98.1. However, when one adjusts for storms as well as reserve development, we believe the company is running at about a 96.5, which is an improvement of approximately 3 points when compared with the fourth quarter last year. This improving trend should continue as higher rates and increased volume continues to be reflected in our earned premium. The company's balance sheet remains particularly well-positioned to take advantage of this improving environment. This is demonstrated not just by the high quality of our investment portfolio, but also the strength of our reserves, again confirmed by 24 consecutive quarters of positive development. So far it appears as though our 2010 and 2011 accident year picks are holding. With every passing quarter, it is becoming more apparent we are entering a hard market.
The number of carriers seeking broad rate increases continues to grow. The minority of companies that continue to act irresponsibly is a dwindling population. While it is true we have not yet reached the point where there is low-hanging fruit, it has been many years since we as an organization have been so encouraged by the market.
Thank you, Rob. Gene, do you want to pick up, please?
In spite of the impact of Sandy, we were able to report significant growth in our net income for the quarter due to higher investment income, substantial realized gains, as well as improvement in our core underwriting margins before catastrophe losses. I'll start with underwriting. As Rob mentioned, premiums were up 13% to just over $1.2 billion. The growth was pretty evenly spread across the group, with alternative markets up 20%, international 16%, reinsurance 15%, specialty 11%, and regional 8%. Our underwriting profits were $24 million in the quarter, compared with $34 million a year ago. The overall combined ratio was up 1.1 percentage points to 98.1. The increase in the combined ratio was the result of our losses from Storm Sandy.
Although relatively modest considering the size of the industry loss, our net loss from Sandy of $40 million before tax added 3.2 percentage points to our overall loss ratio for the quarter. We had significant reinsurance recoveries from both our per-risk reinsurance treaties as well as our catastrophe reinsurance treaties. The losses by segment are in the earnings release, but one thing to note is that we allocate reinsurance company recoveries to specific business units based in part on the unit's share of the cost of the treaties. As a result, recoveries by company and segment are not directly proportional to the growth losses incurred, and that's why you see relatively smaller Sandy losses for the specialty and regional segments.
Our underlying loss ratio before catastrophes and reserve releases declined two percentage points from a year ago to 63% due to the impact of year-over-year price increases on underwriting margins. As Rob said, we expect that trend to continue as business we've already written at higher prices is earned over the next four quarters. Favorable reserve development was $20 million, or 1.6 loss ratio points in the quarter. That's down from Q4 of 2011, but right in line with reserve releases for full year 2012, which averaged $26 million per quarter. Approximately half of the favorable development in the fourth quarter was attributable to the reinsurance segment. Our expense ratio improved by 0.8 percentage points to 33.5%, again, as a result of price increases and growth in premiums.
The alternative markets, regional and international segments reported lower expense ratios with international down six points as recently started companies have achieved more scale. The specialty and regional expense ratios were up slightly due to higher ceded reinsurance costs and higher commissions, including contingent commission accruals. Our net reserves increased $91 million in the quarter to $8.4 billion at year-end, and the paid loss ratio decreased by two percentage points to 57.0%. Investment income was $152 million, up $35 million or 30% from a year ago. The increase was due to investment funds, which earned $27 million in the quarter, compared with a loss of $12 million a year ago, with stronger earnings this quarter from both energy funds and real estate funds.
Income from the remainder of the portfolio was down $4 million or 3% to $125 million in the quarter, and the annualized yield on the overall portfolio was 4.1% for the quarter and 4.0% for all of 2012. We also reported realized gains of $116 million during the quarter, including a gain of $68 million from the sale of one of our private equity investments. At year-end, 84% of our portfolio was invested in cash and fixed income securities with a duration of 3.4 years and average credit quality of AA-. The pre-tax unrealized gain on securities that are carried at fair value was $797 million at December 31st. We paid out $1.09 in dividends during the quarter, including a special dividend of $1 per share in December, and we also repurchased 170 shares of our own stock at an average cost of $37 per share.
176,000 shares.
Sorry. That adds up to net income of $165 million, an annualized return on equity of 16.7%. That gives us an ROE of 12.9% for all of 2012. That's 2 points higher than full year 2011 and just 2 points shy of our long-term goal of 15%.
Thanks, Gene. As I've said innumerable times, this is a long-term business. We saw these changes taking place and beginning to evolve a while ago. We're seeing the fruits of our investment in new startups that have taken place over a number of years. The benefits of startups are twofold. One, as opposed to buying something, you don't get someone else's problems, and two, you don't get intangible assets on your balance sheet. You get to tax deduct the expenses of building the business, and you don't have carryforward issues as you go forward. We're seeing the rewards of that, and we expect to continue to see that. We're very enthusiastic about going forward where we see changes.
While various people may say they had great increases of 5% or 7% or whatever, first of all, everyone has to keep in mind, price increases start from whatever pricing level you have, and different people have different strategies to acquire new business, to grow their business, and no one should try and get this to a fine point that the difference between a price increase of 6% or a price increase of 7% is material over the short run. We think that we push the market as best we can every day, and most of our companies are prepared to not write business if they can't get what they think is an adequate pricing level. Because of that, some of our companies have grown while others have, in fact, not grown at all. We think that's the strategy and the strength of our enterprise and our structure.
We continue to seek out and, to some extent, find new and unique investment opportunities that allow us to get better returns. We expect some of our private equity investments will result in further realized gains this year. We have found some new things to invest in that we think will give us subsequent returns because, in fact, you're always investing for the two or three year ahead future as you look for those kinds of opportunities. We believe that this is just the beginning of improved results as earned premium reflects those price increases. We think that it'll continue, and it needs to because, in fact, a lot of people will be surprised at how much returns will be impacted by the current lower rates.
If you're in the reinsurance business, you need seven points on your pricing just to offset 100 basis points decline in investment returns. If you're in the standard markets, price increases have to be three or four points. You not only have to make up the decline in prices since 2008, but you have to go further than that to offset the investment income. People haven't yet fully recognized how much they have to raise prices, but it's beginning to happen and people understand that whereas in the past, a 95 combined would give you a good result, today you've got to get that combined and down into the area of 90%. We continue to work towards that improved combined ratio. We think we're on our way. We expect that we'll see continued improvement as our earned premium reflects price increases, and we're extremely optimistic.
With that, Mercy, do you want to come on and we'll take questions?
Thank you, ladies and gentlemen. If you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Joshua Shanker from Deutsche Bank. Your line is open.
Yeah, everyone. In terms of looking at the combined ratio compared to where it was two years ago before the price increases, it's not yet materially better. I know that takes time for written to become earned. Is that happening more slowly for any reason? I would have thought it would be better now given the rate increases that you've reported.
Well, I think that first of all, you have cat in there this year.
Well, you even take the cats out. I would take the cat from the development out and look at it, I guess.
I was just going to add, if you take the one-timers out, Josh, I think that things are improving, perhaps not as quickly as some would expect. In part, that's a result of, quite frankly, how we pick our design picks. As we've discussed in past calls, because of our sensitivity to trend and inflation and things of that nature, it's not just a straightforward, simple formula how things will flow through. Just because you get X points of rate, it's not just completely flow through. Depending on the line of business and the product, we make certain assumptions as to how we see future loss costs. Is it going to come through? Yes. Is it going to come through more and more as the earned premium builds, as you suggested? Yes.
As, again, we've suggested in the past, we don't want to declare victory prematurely on our business and let the full rate increase flow through because, again, we like to err a bit on the side of caution when it comes to our picks.
I think you also have to recognize that there was more positive development when you go back to 2010, for instance, by a significant amount. I think the positive development in 2010 was sort of 4 points better than it was. While the loss ratio looked the same, in fact, there was really 4 points of more positive development in 2010 than there was in this year. As there becomes less positive development, the current accident year is picking up that slack.
Well, if I look at X development in cats, I have a 64.1% loss ratio for 2010 for the full year, and for 2012, a 63.6%, about 50 basis points of improvement. I don't know, my numbers aren't quite right there.
I don't have the sheet right in front of me.
Go ahead.
It's all right.
It's not quite right, but it's directionally right. I think that it was slightly better than that. The answer is it has not fully gone in. I think we are also probably being a little more conservative in our loss picks at this point in time because we're more concerned than, candidly, than seems needed in the current environment. We're probably more concerned with inflation than many of our peers.
Okay. Then on-
Our current loss picks are probably a bit more conservative.
On your optimism, you're as optimistic as ever. Although, I think at this point you would've thought that rates could be approaching 10% on renewals, given what you've said in the past. Are there spoilers out there that are preventing you from reaching?
I think what I said is in 2013, I expected price increases to be in the 8%-10% range. I'm hoping that that's the case. I think that no business that's led by a pessimist generally succeeds, and that is my view, yes.
All right. I think there's something to that, Bill. Thank you very much.
Thank you. Our next question comes from Amit Kumar from Macquarie. Your line is open.
Good morning. I guess this relates to the last question on pricing increases. Maybe just talk about what you might be seeing for 2013. Do you see that 6.5 already turning to sort of 7.5, eight-ish? Just because this is the fourth quarter, you've gotten rate over rate. Maybe just talk about the directional trends till now.
I'll make one comment, then I'll turn it over to Rob. I do think that one thing we saw differently than some other people, we did see better prices in October, November than we did in December. December was a more competitive pricing month.
It's hard to look. It still goes month to month how competitive things are. Rob, you want to comment?
Yeah. I guess just to add on to what you said a moment ago, that it's not unusual. You see people trying to make their-
Yeah
Their year-end budgets, they give the full court press, if you will, in December. Having said that, in spite of that full-court press, the environment was still one where it was pushing for more rate. Our general view is that you will see the marketplace looking for as much of a rate increase or more during 2013. Trying to predict with such a fine brush, if you will, down to what would some might suggest are basis points, that's a pretty slippery slope. Generally speaking, there's nothing that leads us to believe that 2013 will not be a continuation of what we saw in 2012, and it's more likely that rates will continue to build, if you will, from where they are rather than erode or diminish.
Hmm. That's interesting. I guess the other question is also on margin improvement. My sense is, I guess what you're saying is that if loss costs remain at similar levels, simplistically, we should at least see a 300-plus basis point improvement for 2013. Maybe it's too simplistic, but is that fair?
I think that we would expect that overall, the improvement in margins 2013 to 2012 should be in that level.
Okay. That's all I have. Thanks.
Thank you. Our next question comes from Vinay Misquith from Evercore Partners. Your line is open.
Hi. Good morning. The first question is on the expense ratio. I'm just curious, we saw some expense leverage this year. Do you expect to see more of that in 2013 versus 2012? Has the build-out of the platform really been finished in 2012?
I think that, yes, you'll see more expense benefits as time goes on. As profitability increases, there is more both incentive payments to producers and to management, but we think that overall the expense ratio should come down significantly.
Okay, that's helpful. The second question is on growth opportunities. We have heard from a few other players, maybe one other specialty player, that maybe there is some more business coming into the excess and surplus lines market. Have you seen that trend increasing recently?
This is Rob. The answer is that we are seeing more submissions coming in. I would suggest that the specialty market population is growing, but it certainly has not reached anything approaching what traditionally we have seen in a hard market. You can see, as throughout we have commented on occasion, throughout 2012, you can see that groundswell beginning to build, but I do not think that we have fully hit our stride yet. It is coming.
Vinay, I think that if you were to ask us what is a little different about this market change, I think that is one of the things that we have not seen as quickly as we would have thought appropriate for our expectations and our look at the market. That really is, we would have thought that there would be a lot more business flowing into that specialty market than seems to be flowing into that market at the moment. It is coming, but it is coming much slower than we would have expected.
Sure. Fair enough. One last numbers question. Since the business mix has changed a little bit, just curious what your normalized cat loss ratio should be for the year.
For 2012, or?
No, for 2013.
2013. It's pretty hard to say, historically it's been around two and a half points.
I don't think our business mix has changed so materially. I think that we do have a little more exposure on a gross basis, but we have been pretty good at buying strategically and spending a lot of our own money on it, reinsurance. One of the things that I find interesting is that people always say, "If it weren't for cats, we would've had X result." In fact, the reason we have better results is because we buy reinsurance, and it impacts our results every year because we pay premiums for it.
Right.
I think, in fact, the two and a half points, probably three on the outside, would be what we would expect, and we wouldn't think it would be much more than that. The rest of our cat gross exposure is, in fact, in our reinsurance line, reinsurance purchase.
Okay, that's helpful. Thank you.
Yes, sir.
Our next question comes from Meyer Shields from Stifel Nicolaus. Your line is open.
Morning, everyone.
Good morning.
Rob, I take your point about not reading too much into small fluctuations in terms of the average renewal premium rate increases. I guess one thing that stands out is that, at least in the last hard market, you did see what was very clear acceleration from quarter-to-quarter in terms of the magnitude of rating increases, and I was wondering if you could talk about why you think we're not seeing just more obvious acceleration.
Well, I think it depends on when you choose the point in time that the market started to turn. If you choose the fourth quarter, if you will, of 2001, then that's one thing. If you look back to, in our opinion, when the market really started to turn, which was late 2000, I think you would see, again, much more of an incremental building or a gradual groundswell that came about. I think that it is likely that you are going to see the momentum build. Will it be as a perfectly smooth curve? No, I don't think so, but historically, I'm not sure if it's ever been.
Okay.
Obviously, just to add to that, I think if we have a noteworthy event, that could be a shot in the arm, if you will, that will change the circumstance. I also think, as I suggested in my comments, and others I suspect have discussed the impact of investment income, it seems to be something that everyone in the industry is talking about, but very, very few are actually contemplating that when they think about how they price their products. I think that possibly could be the second shoe to drop.
I think that I might add that the cycle for the E&S business especially was down much harder. The bottom of the cycle was harder, you really needed those tremendous increases in prices just to get back to equilibrium. This cycle was not down as hard, you didn't have what I call a fear event take place. That fear event still hasn't taken place. It was the World Trade Center that was the fear event. At the bottom of the cycle, things started moving up, they moved up, then they started to turn back down again. The fear event didn't take place. It was merely the issues that caused the normal cyclical swings in the business.
Okay, that makes perfect sense. I wanted to ask quickly about the recent hire for Southeastern Standard Lines. Is there something that you see particularly attractive about that market, or is it just an area of growth?
I think all of the above. We think it's an interesting part of the country which has performed reasonably well and has good future potential. We also philosophically have a view as to how big a regional company can be from a territory before it really is no longer a regional company. We concluded that Georgia was a state that we wanted to have more of a presence in, and we wanted to have our base, if you will, to serve the surrounding states more local as far as its proximity to those. It was really a strategic decision of a combination of the talent that was available, how we view the marketplace, and our view as to need to be somewhat local in a region of the country, truly to have a differentiator as far as your business model.
Let me go off on a slight tangent and say we have a different view than most of our competitors who have a business and then think they grow by expanding and extending. Then you get to be an almost national company instead of a regional company, or a specialty company that keeps adding new pieces to it as opposed to our view, which is you keep small pieces that are close to the customer, close to their specialty with great expertise, that you don't have to succeed by having a bigger and bigger company. Those aren't our views. We were in some of the states around Georgia.
Georgia's a big state, a state where there's lots of opportunities, and we felt like this was a real opportunity, and we didn't want to have one of our companies from three states away decide to move in and be another non-local company there. We think that's the strategy, to keep units small, keep them close to the customer in everything we do. We think that's one of the core ways we differentiate ourselves. The guy who's making all the decisions is going to be in that marketplace.
Okay, fantastic. Thanks so much.
Our next question comes from Brian Meredith from UBS. Your line is open.
Yeah, thanks. Good morning.
Good morning, Brian.
Morning. A couple questions here. First one, Rob, Bill, I wonder if you could talk a little bit about what you're seeing with respect to loss trend. You mentioned that inflation is a bit of a concern for you. Is it still running kind of what you said it was in the third quarter, and what gives you some concerns about potential trend acceleration?
If we break trend down maybe into medical versus everything else, Brian, medical continues to be, I think, a concern for all industry participants. As far as everything else, trend still seems to be somewhat benign, but we have a general concern as to where inflation is going, and we think that we will not be completely insulated from that. Obviously, it was referenced a few moments ago as it relates to the investment portfolio, but that clearly impacts us on the risk-bearing side of the business, how we price our product, and how we reserve for it. Again, what we've experienced so far doesn't necessarily give us a big reason to pause.
It's more as we look out the front windshield and see what may be coming our way, that we feel as though it is prudent not necessarily to assume that future trends will necessarily be what we've experienced to date.
Brian, this is Bill. I think that to add to that, as Rob said, when you look out the front window, you try and look ahead. For us, first and foremost, insurance companies, in spite of what people talk about, do better in inflationary environments than in non-inflationary environments. We're not afraid of them. There's both two things that impact it, and you have to be prepared for them. The risk of a fixed income portfolio with a longer duration and the risk of an investment portfolio That can't keep up giving you returns.
I think that what we're trying to say is we're trying to be careful in establishing our reserves, assuming that within the life expectancy of that duration, which is three and a half years, give or take, that we've considered that sometime in that period, inflation will come home to roost, and we want to be sure we don't have an adverse surprise there. The other thing is, in our bond portfolio, we're going to just constantly be watching that duration. The duration has come down over the past couple of years a little bit, and it's likely to come down a little more as we look out. If we do nothing as far as cash flow and reinvestment, our duration comes down from 3.4 years to 2.4 years.
It may not come down that much, but our duration is clearly going to shorten up over the next 12 to 18 months.
Great.
We think inflation is out there, and while we don't know when, we think it's clearly going to be out there.
Great, thanks. Second question, Bill, on the 15% ROE target, which you hope to achieve here, I'm just curious how likely do you think that is achievable given that there's a lot of other companies out there that have basically lowered their ROE expectations in the current interest rate environment? They're happy with either high single digit or a low teen return on equity. Do you think you're going to face some resistance there, or do you think you can still achieve it in this rate environment?
Well, if you lower your target, you're surely not going to exceed it. We believe that it's achievable, we'd rather have that as our goal and our target and fall short, than say we're going to settle for a lower target. It is going to be tough with this interest rate environment. There's no question about it. Every single person in the management team talks about it. They understand it. Clearly, we did a little better at that with our 12.9% return this year. We think that in 2013, we'll be able to do better than that. Whether we get to 15 or not, I can't tell you. Everyone in this company is really cognizant of it. Our long-term incentive plan that was established five years ago paid out, and it only paid out about 57% because we didn't hit that 15% return.
If you don't meet the standard, lowering the standard doesn't help. We believe that for us to achieve outstanding results for our shareholders, we ought to keep that target. That's not to say we think we'll make it every year, but I certainly wouldn't lower it consequentially.
Great, thanks. Bill, just one quickly. Could you give us your thoughts on what you think is going to be happening with interest rates here over the next 12-24 months?
Well, in the shorter end of that, I think interest rates are not going to move up very much. In the long run, I think you're going to probably see interest rates move up. I think you have so many variables in the concept of one world between Europe, Japan, China, and the U.S. It's no longer this forecast of what's happening in America. It's really a much more of a global picture, and currencies trade so freely. I don't see anything happening that's going to cause interest rates to move up in the next 8-12 months. I think as you go out further than that, I would expect interest rates to move up.
Thank you.
Thank you. Our next question comes from Jay Cohen from Bank of America. Your line is open.
Thank you. Couple of questions. I guess one question on the alternative market segment. It looks like the loss ratio there was quite a bit lower than it had been running. I'm wondering if there's anything unusual there.
Yeah. Well, that's the segment that's been achieving the highest rate across the group. It's predominantly workers' compensation. We're seeing more of that benefit come through there than we are in the other segments.
Got it.
alternative market is primarily
workers' comp
workers' comp, that's where the biggest rate increases have been.
Got it. Can you also tell us how the arbitrage fund did this quarter?
Essentially broke even for the quarter.
Okay. Lastly, Bill, you had mentioned that you are finding newer places to invest. If you could talk about what you see some of those opportunities are.
Well, obviously, I have to talk retrospectively because the best and clearest example is for about three months, we found mezzanine mortgages that were opportunities because they were loan to value and still in the range of first mortgages. A mezz mortgage where loan to value was under 60%, where we could get 6% or more. That only lasts for a short period of time, so we put to work, let's just say $100 million or $150 million, and the market changed, and that rate came down to 5%. There are other things like that where we provide debt financing in small quantities for special projects that aren't so big to attract big investors, but we can step in, get done, and do it for particular funds that have special purpose vehicles where we're very well collateralized two, three, four, five to one and give us the opportunity.
People who have lots of time to do that, they don't have to wait for us. They don't need us. We're continually finding those things. The biggest problem, Jay, is that they come in $50 million or $100 million pieces, and it's very difficult to find out how quickly they're going to last. You have to be cautious and not put so much money in any one of them at any given moment in time. These smaller pieces give us diversification, but by the time we go for the second piece, other people have found it, or they've found other people. It's a constant hunt for opportunities, and it continues and we've got a couple of new ones that we're just doing, but obviously I'm not anxious to talk about them because I'm not anxious to make the investment cycle shorter than it is.
It's short enough already.
Yeah. I guess the other issue for the investment income is if you're shortening duration, that's got to put some additional pressure on the fixed income portfolio.
I think I said we will take advantage of shortening duration as we see this move ahead. I'm not expecting that certainly for the next six months.
Got it.
I think we will, somewhere in the 12-24 months period, try to do that. It'll also depend on how many of these other opportunities I can find to give us some benefits.
Got it.
I think we sit here and say that in the short run, inflation is a trouble. In the long run, inflation is a benefit. Knowing when you pull the trigger to protect yourself from the short run is a critical management responsibility.
Yep. Thank you.
Yes, sir.
Thank you, ladies and gentlemen. If you have a question at this time, please press star one. Our next question comes from Amit Kumar from Macquarie. Your line is open.
Just a sort of a clarification on the prior discussion on margin. When we were talking about that at least 300 basis point improvement, did that also include an improvement in expense ratio, or is that in addition to that?
That was what we thought would be our gross improvement. We could benefit more, you have to understand there's also a negative impact from expense ratio because of change in accounting. Where that exactly falls out, I'm not sure. We were giving you an approximation. Someone asked us, would there be any we should see at least, and I said yes. I'm not trying to make your job easier, Amit.
Okay. That's all I had. Thanks.
Thank you. I'm showing no more questions at this time. I'll turn the call over to Mr. William R. Berkley from further remarks.
Well, I think that one of the things that differentiates is how well they prepare for the future, how carefully they look at the future, and how they make strategic decisions. We think we do some of those things especially well, from buying reinsurance to investing, to expanding and a strategy of managing businesses that are close to the customer. We're very enthusiastic. We do see that 300 basis points improvement in margin. We think that the adequacy of our reserves has never been stronger, and we're very excited over the next several years to take advantage of what's clearly a hardening market. Can I say that it's the hardest market ever? Certainly not. Is it going to allow for profitability in a more than adequate way? Absolutely. Thank you all very much. Have a great day.
Ladies and gentlemen, this does conclude today's