W R Berkley Corp (WRB) 2004 Q2 法說會逐字稿

Everyone please stand by. We are about to begin. Good day, everyone, and welcome to the W.R. Berkley Second Earnings Conference Call. Today's call will be 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, believes, expects, or estimates. We caution you that forward-looking statements should not be regarded as a representation by us.

That the future plans, estimates, or expectations compensated by us will in fact be achieved. Please refer to our annual report on Form 10-K for the year ended 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 it's forward-looking statements, with, or as a result of new information, future events, or otherwise. At this time I'd like to turn the call over to Mr. William R. Berkley, Chairman of the Board and CEO. Please go ahead sir.

Good morning. Well, we were very pleased with our quarter. The year continues to unfold generally as we expected it to. We're going to change slightly the format of our statement because Gene Ballard always complains I steal his thoughts and words, and he's so well prepared.

That I then disrupt his perfectly organized thought pattern and let Gene speak first. That's after I go through all the numbers. But, no, we were very pleased with the numbers. The quarter was excellent. Our general plan, which is to be in business as many segments of the industry, to be able to constantly adjust our focus and our effort. To be in places where we can expand rapidly, and take advantage of sudden opportunities, and all the time building our long-term value, and our relationships with our distribution channel. It certainly is played out in this quarter, and we expect it will continue to do so going forward. I'm going to now let Gene talk about the numbers.

Thank you, Bill. I'm going to start with an overview of our second quarter premium writings. Our gross premiums were $1.131 billion. That's up 12% from the prior year quarter. And that compares with the growth rate in the fist quarter of this year of 14%.

Our price monitoring reports indicate that the majority of this growth was due to price increases, which average 9% for the first 6 months of 2004, still comfortably in excess of our estimated loss cost trends during that time. If you look at our gross premiums by business segment, specialty premiums were up 18%, mostly due to increases for PNS (ph) lines, commercial transportation as well as UK Professional liability. Our regional premiums were up 13% with strong gross again at all four of our regional companies. Our alternative markets gross premiums were up 31% as a result of higher workers compensation premiums in both California and North Carolina.

Our reinsurance premiums were down 3% due to a decline in Standard Treaty Reinsurance, which was somewhat offset by increases in Facultative Reinsurance and Lloyds business. And our international premiums were unchanged at just under $20 million for the quarter. On an overall basis, our net premiums written after reinsurance costs were $1.16 billion, up 16% from the prior year quarter. Our quarterly underwriting profits were a $102 million, and that's up 50% from last year's second quarter. That's a result of the loss ratio decreasing 1.4 percentage points to 62.4, then the expense ratio decreasing another 0.4 percentage points to 27.4. That gave us an overall combined ratio of 89.8% down from 91.6 in last year's second quarter. The combined ratios for each business segment were - Specialty, 86%, Regional, 90%, Alternative markets, 91%, Reinsurance 95%, and International 94%.

The declining trend at our paid loss ratio, as exhibited over the past two and a half years accelerated significantly in the second quarter. The paid loss ratio fell to 31.0% in the quarter, 7 percentage points lower than the second quarter of 2003 and 4.5 percentage points lower than the first quarter of this year. That gave us the second quarter paid-to-incurred loss ratio of 49.7%. That paid loss trend is extraordinary by almost any measure, and even better than our own expectations.

And with this level of paid losses, a larger portion of our incurred losses represent additions to loss reserves including IBNR. In fact if you look at our loss reserves over the last 18 months, our net reserve position has increased 76% from $2.3 billion at January 1, 2003, to over $4.1 billion at June 30, 2004. Approximately 2/3rds of that increase was addition to the IBNR, which has more than doubled over that 18-month time.

In the current quarter, our net loss reserves increased $315 million, including an increase in reserves for losses occurring in prior years, of approximately $40 million. Revenues for our Non-Risk Bearing Services Business increased 7% to $28 million and pre-tax profits on service fee (ph) business increased 9% to over $6 million. Our second quarter investment income was $69 million, up 36% from last year's second quarter. Approximately $8 million of that increase was due to lower interest credited to re-insurers, for funds held. And the remainder was a result of higher invested assets. Our total invested assets were $7.1 billion at June 30th, 2004. And that's an increase of over $600 million in the first six months of this year, and over $1.6 billion, since June 30th of 2003.

At the end of the quarter, our cash and short-term investments were $1.6 billion, and our alternative arbitrage portfolio was $366 million. The average duration for the portfolio decreased to 3.7 years at June 30th, down from 4.1 years at the beginning of the year. The annualized pre-tax yield on the overall portfolio was 4.0% in this quarter, compared with 4.7% in last year's second quarter. And the annualized yield on the arbitrage portfolio was 2.8% this quarter compared with 4.6% last year. We reported realized investments gains of $10 million in the quarter. However, after tax unrealized gains decreased by just over $100 million to $29 million at June 30th, 2004, as a result of a nearly full percentage point decline in treasury and municipal bond yields during the quarter.

Our second quarter income taxes were $48 million, which is an effective tax rate of 30.5%. So in total our net operating income increased 53% to a $103 million. And our net operating income per share increased 51% to $1.18. That's a return on equity of 26% based on net income and 24.5% based on net operating income. At June 30th, 2004, our stockholders equity was $1.8 billion, up 8% for the year, and our book value per share was $21.58. We estimate that our statutory surplus was approximately $2.15 billion at June 30th and that would be a premium to surplus ratio of 1.9 to 1.

Thanks. We're particularly pleased with our results. You know, we operate with one message, and the same message to Wall Street is the message we give to our management, to everyone who operates in our business.

We have that minimum targeted after tax share of 15%. Our targeted return in this environment is 22%. The reason it's not higher is because investment returns are so crummy. If we had better investment returns, or we felt comfortable investing in longer-term securities, our targeted return would be higher. The fact is that our people, every one of our operating units are just out-performing our targets and we continue to be able to deliver those returns in the 25% plus range. And we're - we're enthusiastic about it. And everything we see gives us an indication that nothing is going to change to bring about a reversion to what we set as our targeted return a number of quarters ago.

But, again, the management of an enterprise the size of this, needs to know the bogey is not going to change just because they perform better. You can't keep raising the bogey based on good performance. So we are pleased. We expect our performance to continue at this level. We're very excited. Every one of our operating units did the right thing. And the right thing isn't always growing. Our Specialty unit was the star for the quarter, growing a lot, building value.

We did a couple of particular things that gave us a boost in business, so you'll see more growth there, going forward in the next 12 months. We're excited and we think that our position in that marketplace will continue to increase.

The Regional business continues the disciplined approach. Great results -- they continue to perform absolutely admirably. And that -- in spite of the fact that various assigned risk plans, assessments for insolvencies and so forth have taken a major cost out of that result. So we really paid a price, probably quite significant, over the past year in the area of paying for insolvencies. But the regional companies continue to perform just terrifically.

Alternative market continues to be extremely strong. High fee driven income. The worker's compensation area in California and in North Carolina continues to do terrifically. Our Excess Workers Comp business continues to be focused, doing extremely well, in spite of the fact that we have a number of new competitors who seem not have the actuarial database that we have, and they choose to be more aggressive than we understand why. But it hasn't seemed to have a particularly adverse impact on our results overall.

When we look at our Reinsurance business, our Facultative business continues to be quite good. We're pleased with it. Our Treaty business behaves exactly like we'd like them to do. The people did right thing. When prices started to get easier, they selectively decided not to do certain things. They didn't fail to do almost all the business we expected. But they declined in premium volume by 3%. Now that's not a big decline, but it shows that they were willing to have the discipline that they needed when they needed to have it. And that's a really important thing.

And it's no different than in our specialty business when D&O prices started to go down. They just - they were prepared not to write the business that seemed to be priced inappropriately. The benefits that we're really seeing of the scale of our operation, and the diversity of our operation, is that we are able to find things that still offer opportunities, and we can still grow. Our International business in Argentina continues to do well, and the Philippines is also doing well, although we did decide, at the end of last quarter, to close Hong Kong. We didn't feel we were going to make a profit there within a reasonably foreseeable future. Overall, nothing that I can see on the horizon that's going to change our view. Price increase levels have declined from the beginning of the year till June. Price monitoring still served price increases for the casualty business, significantly greater than inflation.

Clearly, large property risks prices are down, in our experience, 15 to 20%. We also see some softening in large commercialized (ph) risks. There are some brokers that are out there doing their best to cut price. And in those places, you are seeing some decline in pricing. We are still having a retention rate in the mid 80 to low 90% level across the board. And we're having it with price increases, as we stay there, comfortably above the inflation rate. This is a business where predictability is something that's always hard to come by. But, at the moment, while we see the marginal spreads of increases and price above inflation declining, we still see price increases above inflation rates continuing throughout the rest of the year, which really means profit margins will be higher next year than they are this year.

And in fact our paid loss ratio and paid-to-incurred loss ratio continues to give that indication. If you look at our paid loss ratio in terms of dollars, it tells you that with our modest policy count increase, and all that goes with it, we still are quite optimistic that the numbers will be as good, or better going forward, as to margins and return on capital. So we probably seem, at this moment, to be one of the few people that are optimistic. If that's the case, it's only so because of the outstanding people we have in the field, and the relationships we have with our agents. Because, at this point, all of us in Greenwich, are just cheerleaders, because the groundwork is all but done. They do a fabulous job. Steve, we'd be happy to take questions.

Thank you, sir. The question and answer session will be conducted electronically. If you would like to signal to ask a question, you may do so by pressing the * key followed by the digit 1 on your touch-tone telephone. If you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is * 1 at this time to signal for a question. We'll go first to Charles Gates, Credit Suisse First Boston.

Good morning. I had a couple of questions. My first question, what portion of your Alternative Market's line roughly is California comp and what is your assessment of that market?

Roughly $200 million premium is California comp. And in fact, we have given guidance to the people running that company that we wouldn't want it to be plus or minus much more than 5% of our premium. So that's sort of where it is.

Is that in quarter, or is that included on the income statement?

It's in the alternative market segment.

Okay, so it's $200 million on an annual basis, then?

Yes, sir.

Okay.

And you know, we're optimistic. We cut our prices July 1 by 7% percent, our rate filings by a little over 7%. We think that the business will get better. Now, that's a homegrown company. Its run by a person named, Linda Smith, who's -- we think, excellent. And she's built a team of people who have just done exactly what we had hoped. And we're pleased and we're committed to them. And I think they're reasonably committed to our strategy of managing a company to achieve the profitability.

So Bill, that's about 25% of the alternative market ...

Of the alternative market.

And about 4% of all W.R. Berkley for the first 6 months of this year. Okay. My second question, what did you acquire from Travelers? I know you acquired part of the Gulf. But what did you acquire? Can you comment as to what you paid for that, what are your expectations?

Well first of all, it was a renewal rights transaction. We paid a commission based on the business we renewed. It is excess and surplus lines business. We really were pleased about it, because we thought there was an outstanding management team, which was based in Atlanta, and they had a couple of other offices. And (INAUDIBLE) the business in round numbers is about $100 million.

In sales?

Yes.

Yes.

And that's really all I would be -- feel appropriate to say.

The other -- only other question I'd like to ask at this time ...

Charlie, don't say, that you're going to have another one.

No. Come on later, though. I'll let Jay and some of the other guys stand up. But the only other question I was going to ask at this time, how would you assess the E&S market today?

In general, the excess and surplus market is good. There are some competitors that are somewhat less responsible. You know, people forget that -- you know, inflation creeps up a little, and prices stop going up. And it only takes 18 months to two years for prices to go from being more than adequate to being barely adequate, or not adequate enough. So you know, prices are fine. Prices are still going up. The E&S market in general is strong. There are those people who are out there doing stupid things. There are a number of people who are in the E&S marketplace who may not survive, because they're doing such aggressive things. Even the long tailed business will become short tailed because they're not getting enough premium to make it a long tailed. But, at the moment, I would say 90% of the excess and surplus bonds players are being rational, responsible, sane, doing smart things.

The only other question at this time, I didn't understand was I didn't understand how long tailed becomes short tailed.

Because if you collect enough. If you have -- if the premium should be $1,000 and you only charge $200, you've paid it all out. You've paid all your premium out at the end of the year and you have a lot of liability left. So it's become short-tailed because the duration of your cash is very short.

Okay. Thank you.

We'll go next to Jay A. Cohen, Merrill Lynch.

Couple of questions. The first is, on the Specialty business, you sort of alluded to some of the things you were doing to drive growth in that business. I'm wondering if you can be more specific. And then secondly, if you could just talk more about the $40 million of the unfavorable prior year development. Where it came from, a lot different accounts, one large account, kind of characterize it a little bit.

The Specialty business, I think fundamentally, all we're doing is paying a lot of attention to our distribution channels. Working hard, focusing on places where we see opportunities. You know, I think that it's the blocking and tackling of the business every day, Jay. I don't think it's particular -- it's surely not brilliance in Greenwich. It's a bunch of people in the fields who are working very hard to be sure we don't lose our opportunities, and that we're responsive to our customers. By and large, the $40 million of prior year development, for the first time, there was only about $20 million revolved around our reinsurance books. So that's beginning to decline, and we would expect that will continue. The rest was sort of spread out amongst all the companies with a bit here with and a bit there. One of the things that happens -- when times are good, people, sort of, go back and look at all their cases, and look at how they're reserving, and they say, you know, "Is there any place that we're short? Is there anything bad that can happen?" And one of the things you get is people trying to be sure that there are no holes in some pot, some place or another. And they carefully review all their old cases, as well as all their current years, to insure, in times as good as we have now, there's nothing that they have overlooked. So I think that's really what's going on. And it's really spread out, a couple million dollars here and there, but no particularly big thing. And I would expect, for the next couple of quarters, you're going to find everybody trying to see, is there any place that they may have overlooked in opportunity to take some money from me.

That's helpful, actually. The ...

Not to me.

Well, the answer was helpful, that's all. The Gulf deal, when does that close, and when would we start to see some premiums flow through there?

The first week in July it closed. It'll build up. But you have to remember; written premium and earned premium aren't the same thing. So you know, we didn't assume anything under premium reserve. So the written premium will start to - you'll really start to see it in the third quarter, at an accelerating rate. But earned premium - you know, it's not going have - it's not going to be fully in place until, really 12 months. So it'll be an increasing issue.

Great. Thanks a lot.

And next up is Jeff Thompson, KBW.

Thanks. Bill, I just want to follow up on your comments on D&O. How competitive is it, and why, do you think?

Well, first of all, we are in the relatively least competitive segment of D&O market in smaller companies. We're not in the Fortune 1000 D&O business, for the most part. So, while our D&O is competitive, it is not as competitive as the larger company D&O market, and the most competitive section is the excess D&O market. Now competitive has to be understood in terms of change in pricing, not pricing adequacy. Because excess D&O prices skyrocketed over the prior 2 years. So pricing for excess D&O may still be adequate, or more than adequate, but they've come down a lot. Pricing as the limit was almost flat from the first million, right up to $25 or $50 million. So excess pricing had gotten too high to come down now. I'm not commenting on whether or not it's too low.

But you did say in that ...

But, but, but ...

it may grow in that area ...

Let me finish.

assuming it may have been too low.

Let me finish.

Okay sorry.

Large company's D&O pricing has come down substantially as has higher D&O markets. But in fact, we haven't shrunk particularly dramatically in D&O. But I think that -- I was trying to indicate that the pricing level was down modestly, but in fact, our volume was only down, I think, 3 or 4%, maybe 5% in D&O. So it's not like it fell out of bed.

Okay.

I was just - I was trying to explain why the rest of our business was up to 0 -- 21%. And reinsurance and D&O was down like 3 or 4%.

Okay.

But you know, D&O in total -- you know, was down roughly 5%.

All right. Are you still offering a premium growth outlook for this year and next year? Or do you shy away from that or?

Jeff, I don't shy away from anything. We still expect we'll grow for the year at 15 to 20%.

Okay. And on the cash portion, that $1.6 billion, what -- is that yielding around 1%? What should we assume there?

That's yielding about1%, and you know, my forecast for results of interest rates has been consistently wrong now for 15 months. I can't give you a better answer. I thought rates would be 50 basis points higher now, than they are.

Join the club. Is there something that could get you to move some of that into investments, or should we just assume we're going to hold tight on that still or?

I have no crystal ball at this moment in time.

Okay, and this is my final question. Your premium to surplus ratio is getting pretty healthy. 1.9 to 1. As I look forward it's just, to me, going to get even better. Are you foreseeing in the near future a time where you may be in excess position with regards your capital and what you might do?

As anyone who follows Berkley Corp knows that we have always followed a course of -- manage our capital, buying our stock back in, doing whatever. And with the current situation, with taxation on dividends, and capital gains at 15%, we will continue to manage our capital appropriately. I think that we're going to work on trying this year, to seize any opportunities, as we plan to grow. We think this is probably the last year where those opportunities will exist and be significant. So we're going to probably try our best to see if we can find some external opportunities in the balance of the year. I would expect that as we start to generate capital, in excess of our needs next year, we'll be assessing what to do. But we are believers in aggressively managing one's capital.

Perfect. Thank you.

We'll take our next question from Mike Dion with Sandler O'Neill.

Good morning, Bill. At the outset you had talked about -- although Excess Workers Comp is doing well, you saw a number of new competitors that were aggressive. Can you elaborate on that a bit please?

Well I think there are a couple of people. Excess Workers Comp is significant premium area, and it's one where the skills to enter aren't always something that the entrants possess. They can put down a line and quote business, without knowing what they're doing. And there are several people who are financially well qualified, who've decided this looks like a good line of business. So we have a couple of companies in Bermuda, who've decided that this is a business to get in, who truly don't have a clue. I mean, we have invested multiple millions of dollars, and years, to build a huge actuarial database. It's as big as the NCCI's database and in some ways, more sophisticated, as to excess information. And, you know, we don't know how people get in the business, who don't do that. And just based on a time of how they hire a person, and when they get in the business, we don't think they have any idea about what they're doing. It's a very, very long tailed line of business that has many factors in, and when you combine multiple variables over a long-term of period of time, as Mr. Luthway (ph) at Lloyds found out, God, the chain of the -- the long multiplication chain can easily, easily bankrupt the most brilliant underwriter. So we just think people don't understand what they're doing. It's a terribly deadly line of business.

And if you could just remind us how big a business is -- that is, for Berkley right now.

It's about a $350 million on an annualized basis, business for us.

Great. Thank you very much.

And our next question will come from Bill Witt (ph) with Morgan Stanley.

Good morning. Was wondering if you could - few questions. First, if you can provide an update on commercial transportation. I think you commented that that's an area that has seen growth. I'm interested on your view on competitive trends there.

It's a line of business that - first of all varies substantially in geographic business. We are in the business on a long-haul basis for Carolina Casualty and on a regional basis through each of our regional insurance companies. By and large, you know, I would guess that overall, we'd probably do $500 million in commercial transportation, of which about 250 million will be (INAUDIBLE) in the casualty and the balance will be the regional businesses. It's a business that is reasonably priced now. We think prices are good. It's a business that has suffered enormously on occasions, with just a few stupid competitors. Interestingly, enough, Bill, it was a business that had the sharpest turnaround in October of 2000, when Frontier and Reliance went out of business. It was the business that had the sharpest turnaround. Our volume in the year -- in the 18 months, really, from August of '98 till October of 2000, our volume went down from a $110 million to $39 million. Because we just -- we were selling at Carolina at a price where we were losing money. And in one month, our volume -- in the month of October of 2000, our volume was back up on an annualized basis, to basically where it was before we started to go down all because Reliance and Frontier went out of the business. So you had two people who were there and who had terrible impact on the pricing of the market. I give that comment because it's a business that has the possibility of a lot of volatility with just a few reckless players in it. We think we're in the business; we're doing well. We're pleased with what we're doing and we're pleased with the people. For the most part, I think it's a pretty rational business now. And it's generating pretty good underwriting balance (ph).

Okay, good. Thanks for that. Another question there. Recognizing upfront, the perils of using market averages and trying to apply those everybody, I guess there's been lot of pricing data that's come out over the last -- you know, the last couple of weeks, most of which, I think, suggests that on average, rate increases look to be -- look to have fallen below what I would guess would be reasonable expectations for lost cost trends, you know, 4/5/7%, perhaps, depending on the line of business. Just curious, if you could square that and some of those market-pricing indications with your views that you know, Berkley rate increases are still -- sounds like -- comfortably ahead of loss cast trend.

Well, first of all, I can assure you, I've been sitting here thinking and waiting for that question, and I anticipated it. And we've looked at lot of factors. There's even somebody who wrote before we had our press release, that they wondered how we would figure that out. It's really hard to explain some things because, unfortunately, I'm restricted to rely upon data. And we have very specific data as to renewal pricing. It's not what I think. It's not what I wish. It's - express-less (ph) data. That, having been said, as I said to you -- or this group, the spread has been declining month-to-month from January until now. But at this moment in time, we still see price increases higher than lost cost. And other than medical cost, we see inflationary lost costs increasing at sort of, 3%. And when you add in medical, which we view as about 8/8.5%, we think you'd probably get -- depending on the line, anywhere from 4 to 7%. So I would agree with your number. And, for the most part, price increases are higher than that. And on average, they're higher than that. So, you know, it's hard for me to explain it. I understand what you're saying. And one of the things that's interesting is, for example, June price increases were much better than May's, because we do it on a month-to-month basis. So there's more significant volatility than you would think. I don't have a better answer. I was out talking -- I spoke at an independent agent's convention last week. And I was with 6 or 700 insurance agents. And that's the topic I talked -- I talked about two things. I asked them to give us more business, and I asked them about pricing. And that's sort of my broken record. And their responses were interesting. Their responses were -- you know, for most general business, if they're happy with the agent and they're happy with the customer, they don't mind a modest price increase, or flat pricing. If the agent is in the position where they have to go shop, it's flat to down 5% frequently. But by and large, you have -- in our customer group, that's true in the Regional business. In the Specialty business that's just not the case. In the Specialty business, we're still seeing -- I would say, across the board price increases. And there's also a trend towards more stable markets, more certainty. And a lot people are getting out of that business. You have people leaving the business. You have Gulf getting out of the business, and a number of others. And then there are a number of people who - people who are concerned about doing business with. So, so far it's okay. But I understand your question. That's the best answer I can give you.

Very helpful. Thank you.

We'll take the next question from Ron Mofin (ph) with Capital Returns.

(INAUDIBLE) asked my question. Thanks a lot and good luck.

We will move on next to Adam Star (ph), with CRM.

Hi. Can you can hear me?

Yes, sir.

Yes, is there a seasonality in your business? Or is there another explanation of why in every business that Specialty premiums were down from first quarter levels?

Well, I think you have a disproportionate number of renewals on January 1 for most all the businesses.

Okay. Because you know, with the description you've given, you know, some of the businesses I wouldn't think are necessarily year-end business. You know, some of the regional businesses. Some of the excess and surplus, those kind of things that come up on an opportunistic basis.

The policies are not opportunistic, risks are opportunistic. But in fact the - the fact is that, you know, there just are more renewal policies effective in the first quarter than most any other time.

All right. Thanks.

And by the way, January, the month of January, and the month of July are far and away the biggest renewal months.

Thank you very much.

Just a reminder everyone, * 1 at this time for questions. We will go to Steven Gavios (ph) with (INAUDIBLE).

Good morning. Bill, I'm wondering if you can give us more color on the opportunities that you're seeing going forward. You know, a lot of the other companies that we've talked to so far, have talked about seemingly diminished opportunities of well-price business, and it sounds like you're taking a different tack. Can you talk about where you see that coming from?

Sure. A lot of companies choose to blame their problems and their difficulties on the distribution. And when the environment gets more difficult, they get more difficult with the distribution. And we found that that ended up making people happier to do business with us. And that's been a good thing. Also, a number of companies who are under stress and whose world use (ph) with uncertainty -- have agents that are worried about why and what will be their future and their relationships. So those people are coming and talking to us also. So we're viewed as strange and frightening as it is, as one of the established enterprises that has a fair level of predictability. So, we're getting people coming to us, who are seeking stability. And you know, we're fairly predictable. So we're just benefiting from the uncertainty that a number of our competitors seem to have.

I didn't understand your point about the distribution side. What are these other companies doing that are angering the distribution, plugging the flow into your company?

Well I -- some of them are saying, "Well, we have a minimum volume. You have to give us more volume. So, you know, we can't do business with you if you don't give us -- let's just say at least a $1 million in premiums." So the agent says, "Too bad." And then instead of giving them the minimum -- the increased minimum premium, they take the premium they had and give it to other people.

Okay.

That would be an example. Another example might be that companies change strategies, change managements. Change -- I mean, change -- people who are in the field are dealing with customers need predictability because they're the middleman.

Yes.

And every time something changes, every time a strategy changes, every time you zig or zag, it causes disruption for them. And those are the things that make them attracted to us. Because we're dull and boring and do the same thing all the time.

That's all. Any particular lines of business where you're seeing this happen more than others?

No. It's -- you know, there are specific competitors that may do it that give us an opportunity, one opportunity in one event and then another opportunity some place else.

Thanks for your thoughts, Bill.

We will take a follow-up question from Charles Gates, Credit Suisse First Boston.

Thank you, Charlie.

I'm back. What was the number equivalent to the $40 million of addition to reserves for losses in the second quarter of last year?

I think it was $60 million. But it was a much different number too.

What does that mean?

Well, basically, I think $45 or $50 million of it was from the reinsurance company. And this year only $20 million was from a reinsurance company. And the other $20 million was spread amongst all of our other operating units. A bit here and a bit there, as I said, sort of, filling every hole they could find.

A second question. I think you indicated either in your prepared remarks, or in answer to a question that, going forward, you were going to be seeking external opportunities. And I wasn't sure what that meant. Was that the Gulf? Was the Gulf ...

The Gulf would be an example. And you know, we're just on the lookout to take advantage of disruptions in the marketplace.

Okay.

We think -- and by the way, we're not going to go buy someone's problems, or take over someone's problem. That's not what we do. We leave that to others who are far smarter than us. We look for opportunities that we think are good enterprises, good people. That some external measurable, understandable event has had an adverse impact on what they do. We're not smart enough to fix a serious problem insurance company. It takes too long. And the cycle is too far towards the peak for us to try to do that.

From a historic perspective, and this is the last question, I promise. Do you think it feels like -- is it '87, or is it 88?

I think it's - we're probably in a '88 or '89. I think that the rate of price increases have clearly gone down. And as Mr. Witt (ph) mentioned, most of my competitors are feeling it worse than we are at the moment. But whether I'm right or they're right - see, to me, is sort of irrelevant. The market doesn't fall apart, and there's no signs of it falling apart. It's how long do you keep getting improved spreads, that we think we're continuing to get them. And we certainly expect we'll get them this quarter. Whether we get them next quarter. We think we will. Which really means profit margins are going to be better all through next year. But you know, profit margins are terrific, and the level of profitability is terrific. So we're enthusiastic. But you don't have accelerating increases in profitability, your level of profitability may be increasing at a slower rate, or may be flattening. But we have increasing volume. We think -- we think all of our pockets are full. So we think that development is going to be disappearing. And we think we'll have a build-up investment income. So we think our returns are going to continue to be excellent. But that's sort of where we are. But I think that -- we would say that we're sort of, '88/ '89. So we think level of profitability, underwriting lies. Maybe it's 12 months away from being at its peak. Maybe it's six months away from being at its peak, on an earned premium basis. We think it's probably, certainly 12 months away at the closest, maybe it's even a little further.

Thank you.

Tim (ph) do you have another question? (INAUDIBLE) with JJ Capital.

Hi Bill. Just a follow-up industry question. I think I recall Charlie asking that question in this first quarter. And I recall your response was more like 1987 to '88, if I'm not thinking about it correctly. Did you view this July renewal season just generally for the industry as being tougher/more competitive and/or surprisingly worse than initial expectations?

No, I was trying to be more industry-focused than Berkley-focused in my response. You know, I think we're doing better than the industry. So from a Berkley Corp point of view, we're still seeing improving margins. I think as the industry as a whole I've come to believe what everyone else is saying. They're not doing as well. So you know, '88 was a different year for different companies also. So you know, I think that you have to be careful -- not fall into the trap. I think the profit margins for W.R. Berkley Corporation will continue to improve through next year for sure. And earned premium profit margins will probably be better, at least through the first half of 2006. I think, for the industry, earned premium profit margins probably will peak in roughly 12 months from now. So I think what we've got six months to a year more improvement in our margins than our competitors.

Understood. And thanks for the thoughts, Bill. Just one follow-up industry question. There's been some work done about environmental liability coming back. And I just wondered if you could offer your views on whether that's a near-term risk for national companies or if that's a bit further out.

You know, I think that the issue of who's responsible for the unintended consequence of environmental, and asbestos, and all of these things is a societal issue that's certainly not been faced (ph) particularly well. I think that this is a big industry. We're going to end up paying more. We're fortunate that we weren't a very big company back then. In fact, we really only have very, very modest exposure. Our total A&E reserves are about -- I think serve around $35 million. You know, it's just not significant and that's because we weren't -- we have no significant business that goes back that far. I do think a lot of old companies are going to find, they have exposures that they didn't know they had, just like asbestos, because you had no policy aggregate limits. You had no recurrence limits. You had no good definitions of coverages. So I think that that's where a lot people are going to get hurt. But I do think the courts are getting more conscious of these kind of exposures. And I think that there's more time being spent on trying to figure this stuff out.

Thanks very much.

And we'll go next to Jay Cohen with Merrill Lynch.

Actually, my question was answered. Thanks.

And we do have no further questions at this time. I'll turn the conference back over to Mr. Berkley for any additional closing remarks sir.

Well, I thank you all very much. We couldn't be more excited and pleased about what's happening. And, again, I want to reiterate, what's really happening is the hard work that was put in advance (ph) over the past few years is now showing up. And it's showing up because of the incredible efforts being put forth in the fields by all the operating companies. So we intend and expect that the next several years will continue to generate these extraordinarily good returns. So thank you all very much.

ll right. Steve. Thanks.

Thank you. Once again, everyone that does conclude today's teleconference. We do appreciate your participation, and you may disconnect at this time.