Good day and welcome to the W.R. Berkley Corporation’s Second Quarter 2016 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 limitation, beliefs, expects, or estimates. We caution you that such forward-looking statements should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will in fact be achieved. Please refer to our annual report on Form 10-K for the year ended December 31, 2015 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. W. Robert Berkley. Please go ahead, sir.

Thank you, Andrea and good afternoon everyone. Again, welcome to our second quarter call. With me on this end of the phone, I have Bill Berkley, our Executive Chairman; Gene Ballard, our Executive Vice President; and new to the call is Rich Baio, our Senior Vice President and Chief Financial Officer. Some of you have had the opportunity to meet Rich. Others, I am sure, will have an opportunity in the future and all of you will be hearing from them today. He has been with the organization for something more than 7 years and the lion’s share at that time, he was our Vice President and Treasurer and we are delighted to have him now in the role of Chief Financial Officer. So, the agenda that we have laid out for you all today is I am going to start out with a few comments about the environment, Then I am going to offer a couple of sound bites on our quarter and then I will be handing it over to Rich, who is going to run through in some more detail highlights from our numbers. And then you will have the four of us at your disposal for Q&A. So turning to the environment, clearly, an interesting moment when you look back on the quarter, flurry of cat activity, nothing particularly outsized, but certainly a reminder that cats do occur. Also, continued dislocation in the marketplace amongst some very large carriers as some of them were managing through a merger or acquisition and others were just going through a meaningful restructuring. And then finally, we have discontinued low interest rate environment around the world and it’s really gotten to the point that it could almost make your eyes tear. In spite of all that, the insurance market seems…

Great. Thanks Rob. I appreciate it. For the second quarter, we reported operating income of $105 million or $0.82 per share, which is unchanged from the prior year’s operating earnings of $105 million or $0.81 per share. As Rob alluded to, earnings reflected a slight increase in investment income and a recognition of net foreign currency gain, which were offset by a modest decline in underwriting income due to higher catastrophe related losses. Overall, our net premiums written increased by 6.4% to more than $1.6 billion, in the insurance segment premiums increased 5% to almost $1.5 million. The growth was led by a 15% increase in our other liability business. In addition, professional liability was up approximately 8%. By workers compensation, commercial automobile, property and other short tail lines were relatively flat quarter-over-quarter. The segment’s increase was understated due to changes in foreign exchange rates. In original currency terms, premiums rose by 7.1% compared with the U.S. equivalent basis of 5%. For the reinsurance segment, net premiums written increased almost 20% to $171 million. This growth continues to be driven by structured reinsurance and a few of the other items that Rob alluded to earlier in his comments. During prior calls, Gene has referenced these transactions, which have very limited cat exposure and carry a lower than average loss ratio, while being partially offset by higher profit commissions. Our overall pretax underwriting profits – excuse me, decreased $7 million or 8% to $79 million primarily due to increased cat losses. The accident year loss ratio before cat losses was 60.3% compared with 60.5% a year ago and comparable to full year 2015 at 60.6%. Although our cat losses were in line with expectations, this quarter we reported losses of $40 million or 2.6 loss points compared with $25 million or…

Rich, thank you very much. Andrea, I think that will complete our formal remarks. So if you could please open it up for questions and again, you have all four of us here to try and answer any questions you folks have. Thank you.

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

Good afternoon. Thank you. The first question on the reinsurance side, the gross – those one-off deals or do you expect those to sort of like continue to see the opportunity there?

It depends on the part of the business. As you may recall, I have pointed to four different areas that were driving the growth. Certainly, it is our hope and expectation that our global property tax business or the property tax business that’s non-U.S., I think that business will continue to grow. We would expect our business and staff that’s focused on South Africa to continue to grow as well. The turnkey business where we offer through our direct back operation domestically, we would expect will grow. And as far as the structured deals, those tend to be one-off, while there can be renewals on those, it really depends on the season. So short answer is that it’s a mix bag, I would suggest to you that this quarter, the planets and stars lined up. I don’t think our expectation is this type of growth necessarily going forward.

So roughly the 19% year-over-year growth, would you say the 3D business on the structured deals is unlike accounts the majority of it or...?

I am not suggesting that. I am suggesting that I don’t think we are going to continue to grow at 19% quarter-over-quarter.

Okay, that’s great. And then on the insurance side, it looks like you have a pretty healthy growth on the other liability lines was as professional lines, like where do you see a surprising advantage right now?

I’m sorry, where do we see those, could you repeat that where do we see what?

Sure. Where do you see the pricing environment right now in these lines now and also these growth, how will that impact your sort of like mix of loss ratio going forward?

Well, the other liability or what we refer to as casualty in general is pretty wide and diverse as is the professional space. So we are growing in places where we think the margins are attractive. So, I guess, ultimately from our perspective, we think that this will be accretive to our business and help us achieve our targeted returns.

Okay. And then your new business, you mentioned about the high net worth business as well as the Asia business, could you talk more about these sort of new hires and new startups and what would that impact on your expense ratio in near term?

So, just to touch on the overall expense question and perhaps this will give a little bit of insight or color for some on the phone. When we are starting a new business, the expenses associated with starting a new business or expenses that we maintain the holding company or corporate, once those businesses begin to operate, which oftentimes can take a little bit of time between when they are hired and when they actually start writing business, but once they start writing business, that’s when you will start to see them participate in the overall ratios, including the expense ratio. So, the two businesses that you are referring to that we referenced in our release, one in the high net worth space, from our perspective, we think that, that is very much a specialty business. Many people think of the personal line space as a commodity business and they are certainly parts of it that our commodity business. But ultimately, we like the high net worth space because we think it is a specialty business that targets an audience where they value claim service, they value service in general and they are willing to pay for that value. As far as our expansion into Asia, it’s a team of people again that are focused on the commercial specialty business. They have a great track record. They have great relationships. We don’t think that this business will be overwhelming from a scale perspective anytime soon, but if we take a long-term perspective and you think about where the global economy is likely to grow over the next few decades, Asia is likely to be a big part of that and we feel as though as we manage the business and position it for the future, we need to be learning and participating in a thoughtful and straightforward way and the people that are managing the capital in that region on behalf of the shareholders we think are more than capable of doing so.

That’s great. If I may add one last one on the $130 million pre-tax gains on the Aero Precision divestiture. First, two things on that, first is that was earnings impact going forward? And then secondly is that sort of like how do you think about the proceed? Are you going to invest in other deals like private investments or like could be used for the capital management, including buybacks?

The issue is when we get the money, we will make a decision on how we use it, but it’s a holding company and we will make our own decision as we do with all holding company funds. As to affect earnings, the third quarter will close sometime the end of July, the end of August in that period of time. It’s hard to tell just what it will do. There is an ongoing basis. It will have some impact, but we also are always looking to buy things in that area and expand. So, it will have an impact in the very shortest run, but we would think that in the longer term, we would expect to expand that aviation business again and restore it to its level of profitability.

Great. Thank you so much for all the answers.

Thank you. Our next question comes from the line of Ryan Tunis of Credit Suisse. Your line is now open.

Hey, thanks. I guess my questions are just a little bit more on the structured deal and reinsurance. I think Rob said first of all that the margins are a little bit lower, but the risk rewards is a little bit better, in other words, there is less downside. What would you say the target combined ratio is on these structured deals that you have been doing?

So, that’s just not something that we are going to get into on the call. I would tell you that we are not going to deploy capital unless we think it’s a reasonable risk-adjusted return, but how we price individual transactions, that’s just not typically something that we would get into that level of detail. What I would tell you is that while the upside may not be as attractive as some other activities, the downside is very limited. And the commission, the ceding commission is on a sliding scale. And then again, as I mentioned earlier when we look at the capital exposed, we think it justifies the utilization of the capital. But as far as the details, I am not sure if that would really make sense for our shareholders to get into that level that we...

Sure, sure that’s fair. But I guess, just from an accounting standpoint, I think I heard that 25% of your earned premium this quarter within reinsurance was coming from these deals and I think you also said that they tend to be one-offs. So, maybe just looking for some visibility over the next few quarters on to the extent that you don’t do any more of these sort of where we should see the combined ratio and reinsurance even out, I guess, maybe the right way to put it?

Yes. I think the way you might want to think about this, well, first of all, this isn’t just like some flurry of deals that we have done in the last 90 days, while this perhaps spiked up a little bit that in part is because we have reduced our participation in some of what one might define is the more traditional components of the market. So, the structured component is standing out a bit more. But from our perspective, from a combined ratio normalized for tax and perhaps the loss ratio getting incrementally better, I think if you look back to where we have been over the past few quarters it’s probably not a bad data point.

That’s helpful. Thanks.

Thank you. Our next question comes from the line of Michael Nannizzi with Goldman Sachs. Your line is now open.

Hi, Mike.

Hello, sir. How are you doing?

We are all good. Thank you. How are you?

Good, thanks. A couple of questions for you on the Aero Precision sale, Bill, I guess, that was one piece of Aero Precision and it looks like it was just maybe one region of that business. I am just trying to get an idea, is it possible to understand whether on a percentage of revenue basis or percentage of something basis, percentage of profit basis, what was the contribution of the business that was sold?

It was the largest single part of Greenwich Aero, but it wasn’t all of Greenwich Aero and we acquired Aero Precision rather, I think 3 years ago and we will reinvest some part of that money and expanding into other kinds of specific areas that offer us other opportunities in the aviation. We think we have expertise in areas having to do with the aviation business. So, we will continue to look. But it had a varying percentage of the business that has not been a business that has consistently had earnings that are highly predicable quarter-on-quarter.

Got it. And did you give the proceeds number from the transaction? I don’t know that we have the gain number, but I don’t know...

No, we didn’t.

Okay. And then I noticed you guys pick up some debt in the quarter. I was just curious, I mean, the financial leverage is a bit higher than it’s been started by to get picked up a little bit a couple of years ago when you guys pre-funded some debt. Just wanted to understand how we should think about that? I mean, you got a couple of issues coming due in, I think ‘18 or ‘19. I was just trying to get an idea, is this where you expect or you plan to be running your leverage? And is there a reason why you have chosen to take that up?

Rich, you go ahead.

Sure. So as you pointed out, we do have some maturities coming due in 2019 and 2020. In light of the interest rate environment, our expectation was to try and take advantage of the coupons that one could benefit from. And so as we evaluated our capital stack, we determined that it would be more efficient to have hybrid capital in our overall debt and hybrid structure. And so to that end, we – effectively, our pre-funding, recognizing that the leverage ratio is a little bit elevated from where we would like it to be, I think we target kind of 32% to 33% over the short-term.

So, Mike, we like the trust preferred instruments. We like the duration gives us lot of flexibility. We like the 5-year call option. And it’s hard to know when interest rates are going to be moving up, but it seemed like a reasonable window. And is there a little bit of short-term cost? Yes, there is. But as Rich suggested, it’s an opportunity to pre-fund and obviously, rating agencies are comfortable with this.

Right, okay. And then just one quick one on the expenses, so when we back out the FX, it looks like the other expenses were a bit higher and then relatively short as to my estimates the expense ratio overall especially in insurance is a bit lower. So, is some of that sort of the expense initiative that you are talking about with regard to these new sort of businesses that you are talking?

That’s right, Mike. As you recall, over the past, call it 12 months or so, we have started quite a number of new operations, some of them standalone, some of them in an incubator that will get folded into an existing operation. And from – as I mentioned earlier, we tend to put the expenses prior to operational into the overall expense. So for example, the high net worth as well as Asia, that’s coming through in the corporate expense. And there are a couple of other bits and pieces that are just in there that in there as well.

Got it, okay. And so then when we look at the expense ratio, excluding those, so we could expect to see more expense coming through that line as you are building. And then...?

It’s almost like an incubator, if you will. And once they leave the incubator, then it shows up in expense ratio. So you will see a spike in the corporate then you are going to see that evolve over to the expense ratio. And then as they hit maturity or the earn gets some level of critical mass, you will see that expense ratio start to come down as that earnings turns off.

Got it, okay. And then when we look at the segment and that 60 basis point year-over-year improvement in insurance and expense ratio, which is reflecting the continuing businesses, we should be – that level of expense is reasonable for the way that you are going to be accounted for that business on a go forward, at least as a starting point?

Look, I think it’s a reasonable number to start with. But obviously, as we move – as businesses mature and they go – and they are up and operational, then it’s going to flop over and hit the expense ratio and it might move it up. So as things make their way down the assembly line, it’s the numbers we are showing up in different areas, if you will, whether it’s corporate expense or expense ratio. The improvement that you saw in the expense ratio this quarter is consistent with some of the things that we have chatted about in the past on these calls is the result of the maturing of some of the operations in the earned premium growing. So again, as we are starting new operations and they migrate from corporate expense into the expense ratio, you will see that expense ratio go up and down.

Got it, okay. And last question, just on these new initiatives, do you expect a natural expense ratio for the businesses you are starting to meet different at maturity than the remainder of your business?

Some of the businesses will take more time to mature than others. But ultimately speaking, we believe long-term that our expense ratios certainly will be in the low 30s, and we are going to keep trying to push on that in a sensible to the extent we can push that further.

Great. Thank you so much.

Thank you.

Thank you. Our next question comes from the line of Arash Soleimani with KBW. Your line is now open.

Thank you. A couple of questions here, I think that the high net worth business was described by one of your competitors as being $8 billion to $10 billion currently in annual premium, but having the potential to hit $30 billion or $40 billion, just curious if you would size that market similarly?

Well, I think that people can define that market in a variety of different ways and if you talk to 10 different carriers, they will probably tell you 10 different definitions as to where the high net worth markets start. I also think it depends on the territory, whether you are talking about the U.S. or whether you are talking about global and I think it also depends are you just talking about auto and homeowners or are you including fine art, jewelers, block, etcetera, etcetera. So like many things in life and certainly this industry, definition is key. But we do believe that it is a meaningful market, where there is not only dislocation, but there is quite frankly enough scale that there is opportunity for multiple carriers to play and find different ways to bring value to customers.

Thanks. And then can you just remind us some of the business mix changes that are helping the core loss ratio?

The business mix changes that are helping the core loss ratio, generally speaking we will disclose some things in the Q. But we are not – we don’t really get into the specifics as to what the margins are by product line and that level of granularity. What I would suggest is if you – I know it’s a bit monotonous, but if you go back and hear our comments from today and in the past as to where we think the best margins are, that’s usually where the improvement is coming from.

Okay, thanks. And lastly, can you just mention any impact, if any at all, that you expect from Brexit on your business?

Well, I have a couple of thoughts, but in addition to title of Chairman around here is also Chief Economist, so I’m going to leave that to our Chairman to reflect on.

First of all, we in fact had set up a company in Liechtenstein well in advance being cautious and wanting to take no chances. So we are equipped to do business in the EU in domicile other than the UK. So from a legal point of view, it won’t have an impact on us if we did that some time ago. Clearly, that impact that’s based in the London market continues to be there. We don’t see it disappearing, so we think London will continue to be the center of the insurance business in that part of the world. And from a regulatory point of view, we think we can protect ourselves, so we don’t really see a major change or a significant impact.

Okay, thank you very much for the answers.

Thank you. Our next question comes from the line of Larry Greenberg with Janney. Your line is now open.

Thank you very much. I guess this is just a modeling question, but can you tell us what percentage of the investee revenues was represented by Aero. And then is there kind of a new normalized run rate for the investment funds line that we should be thinking about?

Rich, do you have any comments that you would like to make or...

I will just say that the – as it relates to the investment funds, we have assumed now the variability as we have seen over the quarter, so I don’t know that that’s something you can really predict or provide guidance for.

Yes. I mean it changes substantially quarter-to-quarter. And it’s not – it doesn’t model particularly well.

And the Aero as a percent of total investee revenues?

The answer is I can’t tell you, but if you call Rich Baio off tomorrow, we can give you the answer to that. I don’t know offhand.

Thanks.

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

Good evening Jay.

Good evening Rob. A couple of questions, first the buyback activity. I guess given the accelerating top line growth and also given the added debt, is it reasonable to expect buybacks to be fairly close to nil in the near-term?

Jay, I think first off, the trust preferred that we issued, while it looks like debt, as far as our room in our basket, we get equity credit for that. So I just wanted to clarify that. In addition to that, while certainly the growth is there at this stage, we are generating a fair amount of capital and we think that we are well positioned to have over the coming quarters, barring the unforeseen event, flexibility as it relates to special dividends, repurchase of debt or repurchase of equity or stock. As you have heard from our Chairman in the past, our approach to returning capital to shareholders varies and it all depends on what we think is the most appropriate at that moment in time. But we do think that there will be a capital in all likelihood available to return to shareholders over the next several quarters.

That’s great. That’s helpful, Rob. Second question, you talked about some of the pricing trends that you are seeing, I am wondering if you could talk about what you are seeing from a claims standpoint. And I guess to highlight one line of business, worker’s compensation, specifically what you are seeing from a claims standpoint there?

Generally speaking, we continue to be pleased with the frequency trends there. There are some outliers. I referenced Florida earlier as a place that personally, there is the daylight is out of me as you maybe aware. They are – basically what they are doing is retroactively they are changing the benefits and fees. And as a result of that, what people thought their lost costs were, those are changing. So, the idea of lost cost and what people have thought they were when they priced the business may not prove to be reality.

That’s on workers comp by any other lines of business where the claims trends are surprising to you at all?

There is nothing that’s outstanding, but I think as we have commented in the past, we continue to see potentially early signs of an uptick amongst the plaintiff bar and how well organized and focused they are and has again come through in the comp line and we are seeing early, early signs that it may present itself in other lines. Certainly, not at the point that anyone should hit the panic button, but from our perspective, it’s something we are paying attention to.

Great. Thanks for the comments.

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

Hi, thanks Robert. Actually, can I ask you expand that last answer about the Florida comp? I just want to make sure I have understood my reading of the issue. Can you just give me a sense, I know obviously a lot of the concern is on new business, but my understanding is it also applies to any sort of open inventories and share of unclosed claims. Can you just give a general sense of something we are writing in workers’ comp in the state of Florida, how much of their essentially back reserves might be exposed to this?

Yes. Honestly, I am not the Florida comp guru. There are other people who could opine on this. We do not have a lot of exposure there. I think we have a whopping $5 million or so of premiums. So, it’s not a big deal for us. But what I have heard and again don’t go on this please, check it out yourself, but it is retroactive. It is on claims that are open and I have heard some commentary where there are some people that are actually trying to open old claims. So, this could potentially be quite meaningful. Again, I am not the expert. I would encourage you to talk to others and quite frankly a great resource is NCCI.

Exactly, exactly. Great. And then just most of my other questions were answered. I guess, just one thing to pile on off the aviation question is I think the reason people are asking so much is just it’s a hard line to model as you guys say. And just it would be unfortunate if you were to miss next quarter, Q4 or whatever it is, for something you could disclose in advance on the aviation. So, if there is any color, maybe you can put on the Q that would help us model that would be much appreciated?

It’s hard to give you an answer when we don’t know it.

No, I understood, okay.

Part of it is we don’t lose the earnings that we closed. We don’t know the date that we closed. So, that’s a starter for why we don’t know the answer. So, there is lots of reasons. We are not avoiding the answer. We just don’t know it, giving the wrong answer generally gets people a lot more unhappy.

I understood. Alright, thank you.

Thank you. Our next question comes from the line of Jamie England with [indiscernible]. Your line is now open.

Hi. Rob, I just wanted to call [indiscernible] nice with the companies that are sort of interesting times. And I am trying to get a sense of where you think we are, meaning if you look back over 10 years, you guys have had ROE of 14%. You have got book value per share growth, nice double-digits, what to you is the most important metric and what do you think about your ability to achieve that over the next 10 years?

Look, I think ultimately we believe our model has worked well and we think the fundamentals of that model will continue to serve us well and that is really a focus on expertise and a focus on parts of the market where its expertise that are the great differentiators and we continue to do that as we build out new operations and we continue to invest from the perspective and our existing operations and bringing in new talent. So, clearly, there are a lot of variables, a lot of questions as to how the business will operate over the next 10 years, and that ranges from predictive modeling to analytics to how product in many parts of the marketplace will be distributed and the list goes on from there. But fundamentally, we choose to participate in parts of the market that are not easily commoditized. We want to participate in parts of the market, where it’s people and expertise that makes the difference and we believe that approach has served us well and we believe it is applicable going forward.

Can you speak to the question about sort of metrics and what you think is the most important things to you?

We focus on risk-adjusted returns. All returns are not created equally and we try and evaluate the risk that we are taking on and what is an appropriate return is associated with that. Ultimately, we are focused on obviously we are going hand-in-hand with risk-adjusted return, ROE.

Okay, great. Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Josh Shanker with Deutsche Bank. Your line is now open.

Thank you. Good evening, everybody.

Good evening, Josh.

Can we talk a little bit, we got election seasons coming up about what you think the chances are for bipartisan tax reform?

You know what, in addition to being Chairman, our Chief Economist, he is also our Chief Lobbyist. So, I am going to yield to him on that one as well.

Hi, Josh. How are you?

Hey, Bill.

Tax reform, I don’t know who is going to be elected President. Probably, either of the above will be a good outcome. I have no idea whether we are going to get tax reform or not. I think that the reality is that the tax system is not working, not just for the insurance industry, but for lots of parts of corporate America and how people behave or what people do. Will we get tax reform? We sure should. We need it. I spent last time in Washington as I become less enthusiastic about something happening. Last week, I spent time with our lobbyists and talked about it. It was more optimistic, because as they don’t have much choice. So, I am slightly more positive than I was 2 years ago, but you surely can’t bet on it.

And what about in the UK, I heard the rumblings of the UK taxes might come down, maybe benefiting Lloyd’s and whatnot in order to compete with EU?

They are talking about lowering the tax rate in the UK from 25 to 20, but they – I think they are talking about a lot of things in the UK. They haven’t yet turned in their resignation from the EU and we don’t know what’s going to happen there. So, I think there is a lot of uncertainty. We don’t – I am just sort of trying to keep our company in a position so we have the optimal level of flexibility. That’s why we haven an EU domiciled company as well as a UK domiciled company. We are just trying to sit here to be sure we can do the best for our shareholders for the best return. It’s why we are investing in different kinds of things in fixed income securities, because we couldn’t get great returns that way. And we are just trying to be as nimble as possible and so we feel like we have some way to judge the future and it’s pretty comfortable.

Alright. Good luck, guys. Good luck. Take care.

Thanks, Josh.

Thank you. And our next question is a follow-up from the line of Kai Pan with Morgan Stanley. Your line is now open.

Thanks. Just a number question, the $16 million to reserve release, can you breakdown into the insurance and reinsurance segments?

Yes. Generally speaking, we don’t get into that detail in the call. It will be in the queue as it is – as it has been in the past.

Great. Well, thanks.

Anything else?

I am showing no further questions at this time. I would now like to turn the call over to Mr. W. Robert Berkley for any further remarks.

Okay. Andrea, thank you very much and thank you to all that dialed in. Again, from our perspective, we think the business is particularly really well positioned. We think the investments that we have made over the past few years and continue to make today are going to serve us very well over the foreseeable future. And as a result of our structure and the people that make up the organization, we are able to find opportunities and for that, more specifically, very attractive opportunities to make good risk adjusted returns when others that have a more traditional structure and perhaps you are not as nimble are not able to identify these type of opportunities as easily as we believe we can. So again, thank you for calling in and we look forward to speaking with you in about 90 days.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.