W R Berkley Corp (WRB) 2004 Q1 法說會逐字稿

Good morning and welcome ladies and gentlemen to the W. R. Berkley First Quarter Earnings Conference Call. At this time I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation.

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, 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 by us will in fact be achieved. Please refer to our annual report on form 10K for the year end December 31st, 2003 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 turn the conference over to Mr. William Berkeley. Please go ahead, sir.

Thank you. Good morning everyone.

We were very pleased with our quarter. We're pleased with how our business is going. There's little we have to complain about. I think there always are soft spots but by and large they're few and far between. And we remain optimistic about where we see the business and the position we see the business in. I think that there are lots of people out there who correctly say the rate of price increases is diminishing and in some cases such as property business, especially large property business, in fact prices are declining, but in fact, in the casualty lines which represent probably close to 90% of our business, prices are still increasing at rates faster than lost costs are increasing and thus we expect continued improving profitability and as business is written this year, it means it's earned in the following 12 months subsequently and in the case of reinsurance business. We're optimistic looking forward.

We are active managers of all segments of our business. Our operating people manage their own operating units in ways that are not just looking at what's happening today but trying to look ahead, looking for opportunities, looking where things are going to go and planning on that and we here at headquarters try and do the same thing. So some of the results that you see in our financial statement are a reflection of the decisions we've made in prior periods and are coming through now.

One of the examples is in order to avoid which we believe we have successfully done raising new equity capital, we have put together a reinsurance treaty. We did several things, all of which now are helping our -- in fact net written premium increase faster than our gross written premium because in fact we optimized or growth when pricing was at its most attractively fast growing levels.

So that didn't just happen. That happened by plan. We continue to grow. We continue to see opportunities and we continue by again plans to select actively change our business mix moving more and more towards our direct business or controlled business and away from quota share-related businesses where we're effectively lending our capital to people in an opportunistic fashion.

That being said, our reinsurance treaty business in fact didn't grow in the first quarter, primarily because of the elimination of this quota share business and our business with Lloyds. In fact declined significantly because of our planned reduction in our qualified quota share business with Lloyds, all planned, all agreed to several years ago when we entered these businesses. Our expectation was that we take advantage of that, write the business on a direct basis, use reinsurance on an excess basis, effectively to let us grow in both places and then as we scaled back our quota share business that we acquired, taking in more direct business.

So these things didn't just happen. They happened by plan. We're looking at all segments of our business, in our regional business. We couldn't be more pleased with the results. Continue to grow.

Price increases continue in the probably 8 to 12% area, the combined ratio down close just a shade above 85%. You can't get it much better than that, along with that continuing growth in volume. We're particularly pleased.

We're also pleased with the strategy that we're implementing, which is getting out of small, what we believe are more commodity-type businesses and their regions, IE, small business owners policies, policies with less than $1000 premium, and moving towards policies with a higher number of dollars of premium. So you see that, for example, that we had something approaching 10% of our policies with less than a $1000 premium go off the books and we have growth of about 9% in policies with over $10,000 of -- over $1,000 of premium in our regional business.

Again, our effort to go away from businesses that are commoditized and go to businesses where judgment is in fact important. It's why we oftentimes have said our regional business isn't the plain vanilla commodity driven business. It is based on relationships and based on delivering value, loss control, claims responsiveness and responsiveness to our distribution channels.

Our speciality business continues to perform exceptionally well, in almost every area we've seen continuation of price increases in the 10, 12, 15% area. Although, as time goes by we expect that to diminish and we think what we'll end the year at probably the 10% area there. Our expectation is that business will continue to become more and more important and we see opportunities, although the speciality areas property business prices are getting somewhat weaker, casualty business is generally still strong. We expect that business to continue to grow. At a good rate.

One of the highlights of our business has been the alternative market business. Alternative market business has grown tremendously. We're excited about it. It's driven primarily by worker's compensation rates continuing to move up, in part reflecting medical cost inflation.

So the growth in that business shouldn't be too misleading because you will notice our combined ratio for that business is roughly unchanged and that's because as the top line is grown, price increases have continued. Profitability has not gotten a lot better because the profitability is excellent now and worker's compensation, which is a long tail line of business, has the uncertainty of medical costs inflation, so we're reserving it quite cautiously.

The reinsurance business I sort of touched on before, our [facultative] business grew substantially. Our treaty business declined in part through the quota share business that has gone off the books that they entered into always with the plan of letting it go off the books and our Lloyds qualified quota shares down substantially. So it -- while it looks like it's down and that -- one would think that's a function of the market, really in fact it's a function of plan.

International business is sort of on stream. We're pleased with our business in Argentina and our business in the Philippines continues to do well.

I think that before I go on and talk about specifics, I would let Gene pick up. I night just add that two pieces about our investment portfolio. One, the duration of the investment portfolio is more than one year below the duration of our liabilities. It's the first time we've violated our own internal rule of trying to be no more than one year below or one year above the duration of our liabilities and unfortunately, we have concluded that interest rates would move up and we therefore have let that happen.

But we don't have an average duration portfolio. We have a barbell approach to our portfolio. That is we have long bonds and short bonds. So we haven't been impacted as much by the change in interest rates as we anticipated.

We had always expected that the two to seven year area of the portfolio of the bond market would be most affected and in fact that's what happened because of that, even marking our portfolio to market as of today, the net impact is probably somewhere less than $50 million after tax. We would guess that that's a reflection of the long end and the short end while numerically coming to an average duration has not moved strongly. The five year obviously has moved up more sharply and the 10 year moved up more sharply than a longer-term bonds and the shorter-term bonds so.

Overall we're pleased with where we are, cash flow continues to be terrific. We're quite optimistic and we see continued growth in the business, certainly for the for seeable future. We think there are lots of opportunities out there that we can take advantage of and we're moving in those directions.

I'm going to let Gene Ballard now talk about our financial results and then I'll come back on and answer any questions. Gene?

Thanks, Bill.

As can you see from the numbers, we did start 2004 with another outstanding quarter. Compared with the first quarter of 2003, our total revenues increased 36% to $1.1 billion and our net operating income increased 54% to $97 million. On a per share basis, net operating income was $1.11 this quarter compared with 73 cents in the prior year quarter.

Our overall gross premiums increased $150 million or 14% to just over $1.2 billion. As Bill talked about, for our primary insurance business, which is the business written by the speciality, regional, and alternative market segments, premiums increased 21% on a combined basis. And the growth in this primary business was due to year over year price increases which average 11% for those segments as well as higher volume.

For the reinsurance segments, gross premiums decreased 6%, mostly as a result of the planned decrease in Lloyd's quota share business that Bill mentioned. We wrote $41 million of Lloyd's business so for in 2004 compared with 70 million in the first quarter of 2003. For the U.S. reinsurance business, facultative premiums increased 31% to $113 million while treaty business decreased 13% to $93 million.

For almost all of our lines of business, we ceded a lower portion of our gross premiums this quarter as compared with 2003 due to the termination of the aggregate reinsurance treaty that was terminated at the end of last year. As a result, our net premiums increased 22% to approximately $1.1 billion and our net premiums earned increased 36% to $952 million. The increase in earned premium together with our lower combined ratio resulted in a 62% increase in underwriting profits to $93 million this quarter from $57 million in the prior year period.

The overall loss ratio was 63.1% this quarter compared with 63.4% in the first quarter of 2003. The pay loss ratio was 35.6% this quarter, which was the fifth consecutive quarter with a paid loss ratio below 40%. The paid to incurred ratio was 56%.

During the quarter, we increased our net loss reserves by $261 million to 3.8 billion at March 31st. That 63.1% loss ratio almost reflects an increase in our estimate for losses occurring in prior years of just under $50 million.

The overall expense ratio decreased 1.3 percentage points to 27.1% as premiums have continued to grow faster than operating costs. And our revenues from the non-risk bearing services business increased 11% this quarter to $28.2 billion. The pretax profits on that service fee business were just over 20% of gross revenues or $5.8 million compared with $5.7 million in the year earlier period.

Investment income increased 32% to over $68 million in the quarter compared with $52 million in the first quarter of 2003. That improvement reflects lower interest costs on funds held as well as significantly higher average invested assets. Specifically, interest credited to reinsurers for funds held decreased by $7 million and again this was primarily as a result of the termination of the aggregate reinsurance agreement at the end of 2003.

Total invested assets increased $435 million during the quarter to $6.9 billion at March 31st. Most of that increase was allocated to tax exempt securities, however, we also increased our investment in arbitrage securities by $100 million during the quarter to $414 million at March 31st. Our cash and short-term securities position was $1.43 billion at March 31st, 2004.

The annualized pretax yield on the overall portfolio was 4.3% this year compared with 5.1% in the first quarter of 2003, and the annualized yield on the arbitrage portfolio was 3.9% this quarter compared with 3.4% in the prior year quarter. The average duration of the portfolio decreased to 3.9 years at March 31st from 4.1 years at the beginning of the year.

We realized reported realized gains of $30 million in the quarter and our after tax unrealized gains increased by another 15 million to $135 million at March 31st. Income tax expense was $54 million, which is an overall effective tax rate of 32% consistent with last year.

One accounting note on January 1st, we adopted the consolidation provisions of FASB Interpretation 46-R. That interpretation sets standards for the consolidation of what's called variable interest entities. We did not identify any variable interest entities that needed to be consolidated under this new standard. However, one provision of the standard requires that companies now begin to deconsolidate trusts that were formed to issue trust preferred securities. So upon the adoption of Interpretation 46-R, we consolidated a trust that we had formed for that purpose in 1995 and the impact of this change in accounting was $727,000 after tax, which was recognized in the first quarter.

Net income including gains was $115 million, which is an annualized return on equity of 27.4%. And operating income excluding gains was $97 million for an annualized return on equity of 23%.

Stockholders equity grew an an annualized rate of 32%, increasing 8% in the first quarter to $1.811 billion. That's a book value per share of $21.62. We estimate our statutory surplus to be just over $2 billion and that leaves us with a premium to sort plus ratio of 1.9 to 1.

Okay. You know, I think that we're continuing to expect growth in the balance of the year in the area of 20%, maybe even a shade more. We see increasing opportunities in a few places and obviously more competition in others. In this environment the relationships we have with our distribution channel s really enhance our relative position, so we're really optimistic that not just 2004 and 2005 but some of the plans we have in place for going forward, further ahead will result in our ability to grow somewhat faster than the industry and maintain pricing discipline a bit longer.

With that, I'd open up the floor to questions.

Thank you. The question-and-answer session will begin at this time. If you you're using a speaker phone, please pick up the handset before pressing any numbers. Should have you a question, please press star, one on your push button telephone. If you wish to withdraw your question, please press star, two. Your questions will be taken in the order that they are received. Please stand by for your first question.

Thank you, our first question comes from Jay Cohen with Merrill Lynch. Please stayed your question. Good morning. I just wanted to get some details on the $50million of prior year development, where it was. Were these case reserves, was it IB&R?

By and large -- first I should say that in the past 15 months our IB&R has virtually doubled in the aggregate up to around $2.5 billion, so our IB&R continues to be strengthened and we continue to do that. And some of that development was in IB&R, but there were two major pieces.

One piece, in the speciality area, primarily came from a couple of products cases where defense costs were a multiple of our policy limits, both individual and aggregate, and we had been unable to settle these cases and unable to get out of them and defense costs kept building. So that represented probably -- those probably two, three, four cases where we had defense cost issues on products cases, the biggest piece for speciality.

And then there was round numbers, a shade more than $20 million with respect to the reinsurance book of business in prior years and being candid that I just when we think we're finished with all of the development for the reinsurance book, another something pops up that we never even had reported frequently and it comes out of the blue.

We keep thinking it's out of the way, it's obviously down from 7.7 on a combined ratio to 5 points this quarter and we expect it's going to continue to go away and disappear. I would have expected it to be lower, although you can always have an individual situation on gross adjustment expenses. We did in basically defense costs for these product cases. And we really would like to maintain a very high level of IB&R since we think there's potential inflation in the future and we want to be sure that we're reserved to take care of that future inflation.

Great. And then just to clarify something. You mentioned you expect to see 20% growth. Is that for the full year, for just the balance of the year? I guess it wouldn't be that much different anyway.

No, it's not really much different.

Okay. That's helpful, thanks, Bill.

Thank you. Our next question comes from Jeff Thompson with KBW. Please state your question.

Thank you. Bill, the $50 million in prior year reserve development, would that have been reported differently had the aggregate reinsurance cover been in place?

I don't think so. I mean, you know, you have to remember that the aggregate reinsurance, you know, we would put -- we put investment income into it and it has a stop loss element. So it might have been somewhat less and investment income would have been somewhat less, but, you know, I think in total economics, it wouldn't have been different. You don't -- you would have seen $7 million less of investment income, Jeff, and that $7 million would have been used up with some of that development but, you know, -- so instead of 50, it would have been 40. But it wouldn't have been -- it wouldn't have gone away.

So the loss ratio won't look too much different in the future or could we expect it to be a little more lumpy?

No, I don't think -- I don't think they're lumpy. I think what's happen something you're seeing some unusual things from prior years come through. I don't think it's any lumpy. I think that -- I think this development is going to effectively go away. I think that our IB&R is getting to the point where most anything that happens will probably run through the IB&R.

I think that in the case of products cases, it was a particularly unusual situation, relating to a particular couple of states where you can't tender your limits, you have different defense obligation than you do in other places. So we had an obligation to defend that exceeded the policy an we tried to tender our limits and were precluded from doing it much and we think we've tried to cover that matter going forward. So, no, I wouldn't think things would be lumpy at all. I think that that's why we put that treaty in place to allow us to build up our IB&R. It's up by -- it's a $1,200,000 higher than it was with virtually the same policy count, the whole purpose of increasing that IB&R is so it's not lumpy.

Okay, and then your comment on the growth of 20%, I'm curious, what are you assuming for rate increases for the year if they were 10% this quarter?

I think that rate increases were around 11%.

I'm sorry.

A shade over 11% for the quarter. And we would expect that rate increases will continue the year. I think we've told people it will be 8 to 12% for the year. That's sort of where we would expect them to continue and we would expect policy count to be sort of 7 to 10% in the regional companies. The reason that you will see premiums grow faster than that is because of getting rid of this commoditized premiums and going to the higher level premiums, so policy count doesn't change as much see premium growth changes there. We're seeing other places where we're doing some of that. But that -- that's where we're expecting it to take place.

Okay. And then one final numbers question. If I take net written premium to gross written premium, the ratio, it was 89% this quarter versus 84 in the prior year. Is that about what we'll see for the year, run rate about 89%?

Let me let Gene answer that because I think that that changes a little bit as various pieces fall into place but I think -- go ahead, Gene.

I think you're right, it could change modestly but it will be in that same general area. And the other thing I was going to point out is a significant portion of that is not really external reinsurance that we're purchasing. It's things like involuntary business and assigned risk plans that the company assumes in and then reinsures back out to works comp pools and things of that nature. So we don't actually buy that much reinsurance but on a run rate basis it will be in that area.

I think our total reinsurance purchase is probably certainly well under 5% of our total premiums.

Okay. Great. Thank you.

Thank you. Our next question comes from Charlie Gates with CSFB. Please state your question.

Hello, Mr. Gates.

I had a couple of questions. One, do have you the number that was similar to the $50 million for additions to reserves in this year's period for the prior year period?

It was a little bit more, but not consequentially more. I think that it was -- if you said 60 million, it would probably be okay. But I think that it was really made up of a lot -- quite differently, Charlie. I think that last year we saw development through the -- across the board but focused on reinsurance here in the speciality area we had just these particularly couple of cases that we felt we should not run into IB&R because they were so unique.

The second question, the $7 million or I believe it was said that there was a $7 million pick up to investment income as a result of the cancellation of the reinsurance program.

Right, I think I told people in the fourth quarter conference call that we would have roughly a $4 million after-tax benefit from the cancellation of this as we got the investment income on that pile of money that came over.

Is that something recurring for --

Yeah, it will be every quarter.

So every quarter this year basically I get something on the order of this -- it's $4 million post tax?

Yeah, give or take that's a fair number.

So that's $16 million that -- unless I listened to that conference call before I didn't know I had

Yes.

Okay. My third question, part of the reason for your sales growth is the fact that much of your business is casualty. Roughly what portion of your business is casualty?

I would guess it's more than 85%.

Okay. And then my final question, if you were to look at these recurring announcements concerning the -- and this is an industry question -- the World Trade Center Trial, what do you think are some of the ramifications of that?

Well, I think that the biggest ramification is we and all the brokers should look in the mirror and be ashamed that we can't agree on forms and definitions in a far more clear manner. I think that this shows the poor drafting of much of -- much of of our policies and I think the most important thing from our point of view, W. R. Berkley Corporation, is how important terms and conditions are, and how our improved terms and conditions and the industry's improved terms and conditions haven't yet been reflected in the reported financial results of the companies. But that aside, you know, it could be that my historic view that our inept reserving was the number one problem of the industry, I may have to reconsider that and think that our inability to get common sense, clear and concise policy wording may usurp that title as the number one stupidity of the industry.

The comment about we haven't seen the benefit yet of terms and conditions, that's because basically you only see that over the period of time that the policy is in force?

You really see it over the time the policy is in force but more importantly when claims get settled.

Okay.

Because, you know, it's the definitions and the terms that ultimately determine what you pay and how they're settled and that's when the -- really improved terms an conditions start to benefit.

This is my final question. If I have -- and can you say this for the industry as opposed to Berkley if you want -- if have you a typical casualty claim, how long does it take for that typical casualty claim to be settled?

I I don't think there is a typical.

Okay.

I mean, I just --

How would you answer the question then?

How I would answer the question? I don't know --

Maybe it was a poor question.

The answer is the duration -- I think there's two issues with duration, how long it takes to pay the claim.

Yes, sir.

And that's the duration which involves investment income.

Okay.

Okay. So you had excess worker's comp, or you have malpractice, or you have disability issues and stuff, that takes a very long time and a very, very slow payout but in fact, you know about the injury or you know about the claim quickly. And then there are other kinds of issues that take a long time before you ever hear about the claim, which may well be something like products liability or medical malpractice where there's a long development period where you never even know there's a claim.

So I think that there's two different pieces to that and those two issues affect reserving. They don't necessarily reserve -- affect the knowledge of the claim. I think that very few claims can't be established in probably three, four, five years. They may be paid out over longer.

The exception being products and malpractice where you can have a very long period before you find out about the claim.

Thank you.

Obviously, when you're excess or when you're reinsuring, it's when you get notified and that notification is a problem and in fact, the development reinsurers are seeing now is really to a very large extent late notification of claim as well as all of our inept establishing of reserves, but late notification has compounded that.

Thank you. Our next question comes from Mike Dion with Sandler O'Neill.

Good morning. With the changes out in California in terms of the worker's comp reform, what is your appetite to increase your exposure to the work comp line out there and also as a follow up, what's -- kind of rate increases are you seeing there and what do you expect to see going forward?

Our excess comp is a nationwide book of business. It's not related to rate increases and it's not -- most of these changes address underlying and lower level expenses as opposed to long-term benefits. So it's not going to have a big impact on our excess comp and we dot no write a lot of California excess comp at the present time.

As to our California comp company, we have had a view that we don't want to become too dependent on California comp, primarily because it is such a political line of business. We just don't want to get in the box. So, you know, we've sort of said that it's going to keep between 5 and 6% of our overall premium volumes, so, you know, it may grow another 20 to 30% but it's certainly not going to explode. I would think that the changes that have been put forth by the governor will result in slowing down of rate increases and everyone's going to try and figure out what all these changes mean. But I think that California comp is probably reasonably prized today and other than medical cost inflation, which is a huge problem, I think that this is a real sign that there's some serious thought going on about California comp and price increases are certainly going to moderate.

And that's coming down from what level where you're at right now?

Well, we're not -- it's not coming down. It still would be an increase in our current pricing and our current volume, but it will -- you know, we think that right now we're probably returning at the rate of around $200 million of comp business in California. And, you know, it could get up to $250 million. We wouldn't want it to get to be more than that.

Great. Thank you.

Thank you our next question comes from James Elman with Seacliff Capital. Please state your question.

Yes, two questions. One, could you just give us a quick review on premium price increases besides workers comp that you just mentioned? Where are the price increases, where are they strongest, where are they weakest across your lines and also by size of business, is it pricing stronger with larger deals versus smaller ones? Go ahead.

Why don't you go ahead with the second question.

The second question is could you comment on how you're positioning the company for rising interest rates?

Second question is easy and that is we have -- while it doesn't look like we have the same amount of cash, that's because we now have a portfolio that is in various adjustable rate securities which have an average duration of .15 years, but we still have about a billion six to billion seven of cash in short-term securities with a combined duration of less than 30 days. And that number is increasing. So that's how we're positioning ourselves for rising interest rates and we think the place interest rates are going to increase the most at the moment are -- is in that intermediate term period, two two to ten-year period and we have few investments in that area.

As far as rates go, we really view some of the details of that as competitive, but I'll give you a general view and that is, you know, we think that our average rate increases for our regional business are probably going to be 8 to 12% for the year. We think for our speciality business, will probably be 10 to 15%, and you can't really put a number on our alternative market base. Reinsurance prices are generally up for our casualty business but again, it -- it's a multiple because we charge a percentage of the originating premium so you're going to get a benefit of the average increase.

But clearly, the measure we are concerned about and it just seems so frustrating because we can't get the message across is it'ss not just premium increases. It's net premium increases over lost cost increases. And those numbers are still excellent.

And from our point of view, even one or two percent premium rate increases above lost cost increases is a huge improvement in profitability, a huge opportunity to take advantage and generates very, very substantial increases in earnings. And those numbers are still very substantial and we expect that they're going to stay significant at least through the next two years. We think that spread is the number everybody's got to watch and, you know, there are particular parts of that that have you to worry about. As to how you get impacted. So if certain types of inflation start to sky rocket, it could create a risk. But at this point, the spread is positive and it's -- it's far more positive than profitability would indicate at the moment.

Just a quick follow up, when will we start to see that positive spread start to result in higher levels of profitability?

Well, our profits are up 50 or 60% and they've been that way now since 2001, so I think it is. I think that that continues to do that and we need to ensure that numbers are up. We have -- as we said, we increased our IB&R by $1.250 billion in the past 15 months and we continue to build a strong balance sheet that allows us to ensure that future inflation won't have an adverse impact on us.

One quick final follow up is just looking at numbers that people on the sell side have for your quarterly earnings progression, they have earnings below the $1.11 that you just reported for some of the out quarters for the year. Do you expect to have linked decline in earnings on a quarterly basis?

Linked? What do you mean?

Second quarter versus first quarter this year and third quarter versus this coming second quarter.

Well, we told is that we would have at least a 22% after-tax return this year and we told them we would expect that next year we'll be at least as good if not better. Second quarter can occasionally have some weather impact, although we're far less weather related. I don't see any reason why we would continue to significantly exceed where people are but -- we don't really -- we don't measure our business on a quarterly earnings basis. We think that's -- for the insurance business the road road to disaster.

Very good. Thank you very much.

Thank you. Ladies and gentlemen, as a remainder, should have you a question, press star one at this time. Our next question comes from Bill Wilt with Morgan Stanley. Please state your question.

Good morning. You just touched on the question I was going to ask about lost cost trends. I wonder, maybe specifically, are you seeing any of the beneficial impact of whether it's declining frequency, tort reform, you know, beginning to show up in the claim trends kind of an actual versus expected analysis of say policy years '02 or '03?

Bill, you know, the only part of the numbers that we're sort of looking at and sort of scratching our head about is how low our paid loss ratio is. And your paid loss ratio is the only thing that relates to improved terms an conditions and all those things. So if you would look at our paid loss ratio, which has never been where it is, and it continues quarter by quarter to decline, one could reach a conclusion that ours and everyone's estimated losses are not going to be as accurate as one might historically think. Because of those improved terms and conditions. It's a very slippery slope, however, to leap at those paid loss ratios at this moment. But it certainly gives a sign that the benefits of terms and conditions as well as general trends would make you feel that everyone in the industry, including us, may be overestimating loss ratios.

I think those are very fair paints. Has your generalizing across different books, if it's at all possible, has your assumed lost cost trend begun to come down? In other words, the lost cost trend assumption used in pricing be begun to moderate to reflect any of the positive things going on in the industry?

Frequency is generally slightly down. But severity is not. So I think that when we look at book that that's sort of what we see and that is this decline in frequency but certainly no decline in severity at this point in time.

Very good. Last question, if I may, just wondering in the transportation business, the long haul trucking and other areas, commercial auto, how sensitive would you anticipate that would be to a pick up in the economy?

Well, the combination of a pick up in the economy with increasing fuel costs should probably offset each other somewhat. Pick up in the economy should help that business somewhat on the other hand, historically when that happens, people drive more hours and you have more accidents. The offset to that is with fuel cost rising to the degree they have, there will be more pressure to maintain speed levels because the dramatic improved mileage can you get for that lower speed. So at this point, we don't see anything happening that give us any concern yet.

Very helpful. Thank you.

Thank you. Our next question comes from Ron Bobman with Capital Returns.

I hope you're right on those ultimate loss ratios.

So do I, but if -- one can't predict yet.

Right, right. I actually had not two unrelated of a question in the loss area, and I'm sorry if I missed it. For the most recent quarter, I was wondering what was the quarterly, I guess, accident loss ratio that was being booked?

Well, we had the $50 million of increase in estimates --

Not counting that. Just the current --

I was going to say, if you take that from the 63 reported, it's about a 58 is what it converts to in terms of the current.

Okay. And Bill, earlier, I think in response to a question or part of your prepared remarks, you gave some color about the -- some of the case reserves -- case incidents and thus the case reserves driving the $50 million increase for prior years business. And it also sounds like you're somewhat indicating that -- for the balance of this year you're hopeful that the prior year reserve additions, you know, are cut in half relative to this first quarter --

We think that the year development going forward will continue to decline. You always get some from these assigned risk plans because state funds don't tell you what's happening. I mean, we had I think in the fourth quarter we had, you know, 10 or $12 million came in and I can't tell you that's the exact number, but it was a significant number from assigned risk plans that nobody ever told us about and the nature of how you report it, it looked like development because they gave us notice on prior years. So putting that aside, you know, I think there will be a continuing decline in adverse development and my guess is -- I would have thought we would have been, you know, at a lower level now than we are. But in fact, obviously my assessment was not correct and I think that it is continuing to go down and as I said, half of which I can identify and --

It sounds like you're hopeful or you're hoping that the steps are larger than the sort of 5 or $10 million increment that we've just seen quarter over quarter.

Hopeful -- I mean, I -- hopeful is wish.

Can't go the bank, right.

It's not a wish. It's we have every analytic reason to believe.

Okay. Good luck and continued success.

Okay. Ladies and gentlemen, as a final reminder, should you have a question, please press star one at this time. Thank you our last comes from Charlie Gates again with CSFB. Please state your question.

Is there any offset to the $7 million pretax, $4 million post tax pick up to investment income that we should be looking for?

Not really, Charlie. What effectively we did is we accumulated that money and that -- over a period of a few years and that effectively gave us the start to that increased IB&R for that increased retention. So that huge increase in IB&R is the reflection of that higher retention and it's in all of the lost costs already.

My final question is a generic industry question. From your vantage point, from an industry standpoint, does the competitive environment feel a lot like 1987?

I would say that in some way else it's like '87 and other ways it's not. I think that you don't have general euphoria that you had in '87. I think people are a lot more restrained and I think there are a lot more people now that have problems that they haven't addressed. There are a half a dozen major companies that have significant problems sitting out there. I think profitability is good. You know, I don't think we're quite there. '88 was a fabulous industry year, as was '89 and '90. Things would have started to turn down in '92 if it weren't for Andrew. You know, I think and we're not quite -- you know, it's hard to have an analogy. We're not exactly in '87 but we're certainly moving in that direction.

Thank you.

Okay. Is that it then? Let me just give a quick final couple of comments.

One of the reasons we're enthusiastic about our business is that we're quite pleased with our returns, especially when we examine them in light of the levels of risks we think are embedded in our business. We think we have rebuilt our balance sheet to be the same conservative balance sheet that existed in 1996, when we felt very comfortable with our reserve levels. We see returns continuing in the mid 20s, certainly for the next several years and that means a substantial build up in book value. Unlike in the earlier periods in the '80s, we did that in part by having our investments long and stretched.

We think we'll be able to keep those returns up not just because of underwriting profits, but we think that as we invest or short-term money and cash flow continues at higher rates, we think there will be a dramatic improvement just from that billion and a half, $2 billion of cash that gets invested. We think that alone can generate substantial improvement in our returns.

So we continue to see opportunities to grow, not just this year and next year but going forward. Clearly, price increases are going to diminish but they're still well above lost costs and improved income ought to continue to drive our returns well into mid 20s for at least the next several years if not longer.

Thank you very much.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties my now disconnect.