W R Berkley Corp (WRB) 2004 Q3 法說會逐字稿

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, 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, 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. Today's conference is being recorded. And now at this time, I would like to turn the conference over to Mr. William R. Berkley, CEO and Chairman of the Board. Please go ahead, sir.

Welcome to our conference call. There were two words that were left out of the list of words for the forward-looking statements. Hope, wish, and desire. It has been particularly rewarding in some ways quarter. And rewarding is an interesting thing to comment on because everyone looks at a company's results, then adjusts for storms, and then moves forward, but in fact, the level of profitability we attained is really a reflection of strategic decisions we made over the past five years to focus our business on commercial lines, to reduce our exposure to the casualty areas, to adjust our reinsurance business, not to be focusing on catastrophe business.

We did a lot of things including getting out of the personal lines business that have caused our business to be less cyclical and less subject to the lack of predictability in any short-term period of weather. Thus we had a really excellent third quarter impacted by weather, but not destroyed by horrendous catastrophe results. The business continues to do well. Returns are excellent. We're very pleased with where things are going. There are clearly parts of the business where price competition is clearly an issue.

At this moment, we have no lines of business where we don't think we can get adequate returns, adequate return again for us is a 15% after-tax return. But price increases are certainly, in some areas, not maintaining above lost costs although across the board on average, especially year-to-year, we still have price increases above lost cost. The quarter, however, clearly sees signs of more competition. And the level of price increases are diminishing or in some actual areas, we're seeing price declines such as in areas of DNO.

Overall, good business, great returns still available. Enthusiastic. Lots of industry issues. And we, at the moment, aren't particularly concerned with meeting or exceeding our return on capital goals. But I'll talk a little more about that after I let Gene go through the numbers. Gene?

Okay, thanks, Bill.

Our third net quarter operating income increased 27% to $94 million from $74 million in the prior-year period, and on a per share basis, that net operating income of $1.06 this year, up from $0.84 and in the previous year's quarter. The primary contributors to this earnings increase were investment income, which was up 39% to $72 million, and underwriting income which, even after the impact of the four hurricanes, was up 20% to $84 million. Our insurance revenues continued to show good growth, although at a lower rate than the first half of the year. Our gross premiums were up 6% to approximately $1.2 billion in the quarter, and our net premiums grew at more than twice that rate, or 13% as a result of our continuing planned reduction in reinsurance purchases.

Our price monitoring reports indicate that price increases averaged approximately 6% during the first nine months of 2004. If you look at our gross premiums by business segment, you'll see specialty premiums were up 8%. And that includes new business from our start-up company, Berkley Specialty Underwriting Managers, as well as strong growth in our commercial transportation business.

You'll see regional premiums were up 14%, with all four of our regional companies continuing to show significant growth. Alternative markets premiums were up 13%, and that's a result of growth in both excess and primary workers compensation business. And our reinsurance premiums were down 9%. That's primarily due to the expiration of a large facultative reinsurance program as well as a reduction in our Lloyd's business. Finally, international premiums were up 12%.

As I said, underwriting income rose 20% to $84 million. And the underrighting results reflect weather-related losses in total of $40 million and that includes aggregate losses from hurricanes Charley, Frances, Ivan and Jeanne, of approximately $32 million. The hurricane losses, by the way, were primarily attributable to our Lloyd's reinsurance business. For comparison purposes, weather-related losses in the third quarter of 2003 were just $14 million. That means weather-related losses added 3.8 points to our combined ratio this quarter, compared with 1.8 points in the prior-year period.

However, this increase in storm losses was more than offset by other underwriting profits primarily for specialty alternative markets and the reinsurance segments. So, on an overall basis, the combined ratio increased just .2 percentage points to 91.9. The loss ratio increased 1.4 percentage points as a result of the hurricanes. But the expense ratio decreased 1.2 percentage points as our premiums continued to grow faster than our expenses.

The combined ratio by business segments were specialty 87, regional 89, alternative markets 94, reinsurance 103, and international 98. The paid loss ratio continued to decline and it fell in the third quarter to 30%-- 30.0%, down from 36.2% in the prior-year period.

We increased our loss reserves by $364 million in the third quarter and by $941 million for the first nine months, to just over $4.4 billion at September 30, 2004. Quarterly revenues for our nonrisk bearing services business increased 10%, to $28 million, and the pretax profits on service fee business increased 53%, to $7.5 million.

Third quarter investment income was $72 million, up $20 million from the prior year. Approximately $9 million of that increase was due to lower interest credited to reinsurers and the remainder was a result of higher invested assets. Total investments increased $738 million in the quarter, to $7.8 billion at September 30, 2004. The increase in the quarter reflects operating cash flow of $465 million, as well as the proceeds of $150 million of 15-year notes issued in August. At quarter- end, the average duration of the portfolio was just under 3.5 years, and that's down from 3.7 years at June 30th, and from 4.1 years at the beginning of this year. The annualized pretax yield on the overall portfolio was 3.9%. And the quarter, that compares to 4.4% and last year's third quarter.

The arbitrage trading account was approximately $400 million at September 30th and the annualized yield on the arbitrage account was 1.3% in the third quarter of both this year and last year. After tax unrealized gains increased $68 million in the quarter, to $97 million at September 30th.

So, in total, our net income increased 27% to $97 million, or $1.10 per share. That represents an annualized return on equity of 23.1% for the third quarter, and 25.5% for the year-to-date period. At September 30, our stockholder's equity was $1.976 billion -- up 17% for the year, and we estimate our statutory surplus was approximately $2.2 billion, also up 17%. Thank you.

Well, a couple of comments about the year, and then a little bit about our strategy going forward. First of all, there is a lot of noise in the numbers. We have settled out everything with Gerling [ph] and Tremway [ph]. Some of those settlements included discounts on future payments. But we have now no exposures whatsoever. Lots of those things settled out in complex ways because while we had withheld funds for parts, monies they owed us in some areas had no withheld funds and the negotiated settlements reflected that. That in its entirety has, in fact, run through our statements.

There is a whole lot of other various pieces and things that are through the statement. We're pleased with those results though. And we see lots and lots of opportunities going forward. Our quarter share with Lloyd's will end at the end of this year. But given the opportunities, we think are available in the catastrophe business and on an opportunistic basis, we did enter into a consortium agreement with Kiln [ph] and our quarter share, by the way, with MAP will continue with Kiln, the quarter share will be terminated. And then we'll enter this consortium agreement with the focus on catastrophe reinsurance.

Taking advantage of what we think will be a particular market opportunity due to the cap losses in Japan and the U.S. Berkley Specialty Underwriters Management, which was the piece of business that we took over and renewal rights transaction from Gulf Insurance and subsequently, a group of people joined us to expand that into the entertainment business. We think is a good example of some of the opportunities.

We continue to see where people are looking for home -- home with stable, focused enterprise and we continue to see people talking about the possibility of joining our enterprise. And bringing our view of the specialty business and the opportunities within it to fruition. We sit back, we look. We clearly don't see quite the bright picture that we saw six months ago. Price competition is definitely more of a concern. Six months ago, almost any price we named was something we could get but we're pretty enthusiastic.

I might add just to be sure -- to set the record straight ahead of time, we do relatively little business with the large brokers. Probably in the aggregate -- out of what will be sort of $4.5 billion of premium this year. About $50 million with Marsh and maybe twice that with AON. We have PSAs with three of our 28 operating units.

We commenced our own investigation immediately upon the announcement of the Spitzer process ten days ago. We were surprised at the Spitzer announcement. More than surprised. And the complexity of doing a thorough and complete investigation is substantial because you don't only look at an underwriting file. You look at everything you quoted on. Everything you involved -- were involved in and thus while we have a very small amount of business with Marsh, it still requires a lawyer to go and look at every piece of paper and that's an ongoing process and when it is completed, we'll deal with it in whatever appropriate way is called for. With that, Lori, we're open for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll take our first question today from Charles Gates with Credit Suisse First Boston.

Hey, good morning.

Good morning, Charlie.

I have several questions. My first -- in your closing remarks, Bill, you indicated that [indiscernible] six months ago, price competition is more of a concern. Would you elaborate on that and be specific about specific lines where you see it. I know you referenced DNO, for example.

Well, you know, I think that price competition is not ever across the board. Not ever. Is generally not across the board.

DNO is an exception. With all that went on, DNO prices went through the roof, especially in the excess areas. DNO pricing came down and was more competitive. We're not in the big DNO market. We're small DNO. But prices are still generally adequate and giving us good returns. I think that the message I'm trying to suggest is that prices are now generally keeping up with lost cost. I think Gene mentioned that our average price increases for the nine months are 6% which is about what we would estimate lost cost increasing. Therefore, our margin is not increasing.

So, when I say prices are more competitive, our profit margins are not increasing. Now, there are a lot of people that say we're making enough money. Now, I, on behalf of the shareholders never think that's true. However, there are those that would suggest we are having an adequate return and therefore, increasing margins is not a bad thing. We just have to -- in order to continue to get new opportunities, we just have to find people who can help deliver those opportunities to our Company. So, I don't think it is -- other than DNO, it is here or there. It is one line or another. It is not a particular -- across the board one place. You can have competition on one area in the southeast and you can have competition at something else in the west. I think that the current level of profitability of the business is such that increasing margins aren't necessary. So, it doesn't surprise me.

Is it fair to say it is like 1987?

I would say it is sort of halfway between '87 and '88. '88 is where you started to see some areas of pricing ease up and others flatten out. So, I would say '87, '88. Hard to tell.

You have to remember that you know, everyone looks and says storms don't count. And then the same people on the other hand talk about all of the new capital that goes to Bermuda. Well, in fact, more capital was destroyed in the storms than went to Bermuda. So, you know, let's understand ourselves that this was a hugely destructive quarter from the point of view of capital accumulation in the industry. And we certainly could still have some more exposures to that. And Europe still hasn't gone through their catastrophe season.

So, there is a lot of stuff that is out there. But I think as a simple sort of equivocation one could get in the position of saying '87, '88 is a reasonable thing. I might add there were -- at least four years if not five of pretty excellent profitability subsequent to that.

What is the time period roughly of the European storm season?

It is basically winter.

Ok. The only other question I have at this time and I'll let somebody else -- you probably saw this announcement by AJ Gallagher that they this year's subpoena from the State of Connecticut requesting information concerning possible violation of antitrust laws. Is there anything you can say about that?

I think that to say much more than I did already about PSAs is difficult. I think there are many, many issues that relate to the brokers and most of them don't relate particularly to the companies or so -- although some do. The fundamental issue is what impact did brokers have to reducing the competitiveness in the marketplace by allowing people to bid on business. And how transparent were they in what they told their customers. If you tell your customer you work for them exclusively for them and get paid for them, and that's not the truth, you have a problem.

We all know if Goodyear wants to sell tires and they give an extra $5 a tire rebates to the tire dealer, no one thinks it is illegal nor is anyone surprised the tire dealer pushes Goodyear tires. I don't think it is the commission--contingent commission in and of itself. It is what and how you hold yourself out, the transparency and how you make your decisions as to what you candidly say.

So, I think there are antitrust issues. We all know that every market wasn't equal. And brokers favored other markets but I think it is something that time is going to have to tell. As I said earlier on the call, I was more than surprised at what Mr. Spitzer found and given my obvious uninformed status, I hesitate to talk about these other things.

Thanks, Bill.

We will now hear from John Keefe with Ferris Baker.

Hi, good morning. Two questions. Bill, I think you may have addressed the first. Did you say in the post-hard market in the late '80s, early '90s, that you subsequently had four or five years of profitable growth?

What I said is market -- price increases peaked in '87. Prices came down ever so slightly in '88 but '88, '89, '90, '91 and '92 were incredibly profitable years. The industry was delivering excellent returns and we had excellent returns.

Bill, assuming that we're behind the peak now in pricing, would you expect another extended period of excellent reported returns? Maybe starting out deep into '06 or further?

I would expect them and I've said, I would expect the returns to continue to be quite good. If anything, I think that based on our paid loss ratios, we may, in fact, be being too pessimistic about our current year loss ratios. It is hard to get people's mindsets to go from being pessimistic and beaten up to reflect how good the business seems to us on a macro basis.

So, there is always some slop over-- the bad into the good years and the good into the subsequent last good year. So, I would expect that on a financial reporting basis, we'll have a number of good years and on an accident year basis, I would think you'll have at least four or five years that will be good.

If you look at the historic charts of accident year results of the industry, tremendous improvement in profitability at the start of the improvement in the cycle. The first three years, tremendous improvement in profitability. And this is looking at the prior two cycles. A slight drop in profitability, then a long period of relative flat results and the last three years of the cycle, catastrophic results. Terrible, terrible results. And it has been that way for the prior two cycles.

So, it sounds as if there still are several good years of accident year results in front of Berkley.

I would use more than several, but my lawyers wouldn't allow me to say that.

Ok, good. Bill, my second question is could you comment on the impact, if any, of reserve development in the quarter?

We haven't really gotten those numbers tied together. We're working on them. Reserve development is a mathematical calculation but for example, the discount that we accepted when we settled on growing in Tremway [ph] since we don't book reserves at a discount, we book them at full value, the discount which I think was sort of $10 or $15 million, became a development issue. So, we're trying to get that out and get it all worked out so we can explain it in the queue. So, I can't give you an accurate answer at the moment. We will have it shortly. But that is a good example of why the complexity.

You know, the reserve development as presented is merely a mathematical calculation but from our point of view on an economic basis, we think we settled out because of moneys we held and so forth for Tremway [ph] and Gerling [ph] and got out in great shape. But there was a discount. And we then marked those up to full value reserves so that shows us the prior year adjustment. So, we're trying to work out reconcile all of those things.

Well, in prior quarters --

By the way, I should tell you that I would expect prior year development is going to continue to reflect the same kind of prior year development that we have been having for the prior 18 months or so.

With the settlements with Gerling [ph] and Tremway [ph], would that have influenced the reinsurance combined ratio which came in at 102, I believe?

No, not consequentially. The reinsurance combined ratio is mainly impacted by storm losses. They took the brunt because they have the quarter share business with Lloyd's. So, we've had small storm losses for the hurricane in our regional and specialty business. The bulk of that 30 odd plus million, $32 million of storm losses was in the reinsurance section in the quarter. I think around $25 million of it was there. So that $25 million represents almost 10 points on the quarter's results.

Ok. Very good. Thank you.

With Markston International, Roger Lav [ph] has our next question.

Good morning. A couple of questions, please. I'm assuming since volume is slowing a little bit that the need to issue equity or equity-like insecurities has diminished. That's question number one. Question number two is given the restructuring of the enterprise that you mentioned or that you talked about, do you think Berkley can, if you will, dampen the cycle to avoid -- or less exposure to the catastrophic end of the cycle and final question, is given your pricing outlook, do you think 2005 earnings can come close to 2004 earnings?

First thing, I think we told people in the last conference call we were not anticipating needing to have an equity raising and our view has unchanged from that. There always can be an opportunity that would cause us to change our view. But based on just running our business day to day, we didn't think then and we have no reason to believe now, in fact, more so. We don't expect.

Number two, I think that the business is less cyclical from a catastrophic point of view because we've gotten out of the most volatile areas of the business and I might add most of the places that we've gotten out of the areas of volatility didn't give us the kinds of returns you should have received given you were willing to assume the volatility. So, as to short-term volatility, we've substantially improved our position.

I think that the cyclicality of the business will improve because in part of the businesses we're in, but I think that more and more participants in the industry have more information, better numbers, and have a better sense of what's going on. I don't think it will eliminate the cyclicality of the business but I do think it will make more people cognizant of really what's going on within their own company, and I think Sarbanes-Oxley is going to be a big help from that because people will have to sign on their statements and maybe they'll take their reserve positions a bit more seriously.

That aside, part of the nature of this business which has adverse impact on everybody in the industry is that brokers in general, a few may be exceptions, place business with the lowest price market. And the lowest priced market isn't always the financially most stable market. And that is okay because they're guaranteed funds so most of them can say well, don't worry, customer, you'll get taken care of. So, we do need to really get by and eliminate some significant part of that cyclicality, a review of the existing guarantee fund might be a good thing in hand, too. But I think there will be a diminishing level of cyclicality in the industry and I think our cyclicality will diminish substantially more than the industry as a whole.

But again, I point out that if those last three years, the downcycle has beat the hell out of you. Most of the rest of that cycle. We have not given people a forecast although we have told people that our goal is to have an adequate return. We still believe that we'll be able to have more than a 20% return next year.

Thank you very much.

Jay Cohen with Merrill Lynch has our next question.

I have a bunch of questions. Some are just clarifying. Maybe I'll start with those. The $10 to $15 million of the settlement or the discount you had with Gerling [ph] and Tremway [ph], that as I understand it would be an expense that runs through the income statement.

Yeah, well, yes.

So, that activity hurts your earnings by $0.07 to $0.11, roughly.

It was adverse development, yes. It had an adverse impact. As I think I mentioned, Jay, there is a lot of noise in this statement with a lot of different stuff like that.

Ok. I guess related to that, as I recall, you said you would expect to see continued adverse development in '05.

No. What I said is someone asked me what was the level of adverse development and I said I thought the quarter and the balance of the year will be reflective of the past 18 months.

In other words, I didn't answer specifically because I told him there was a lot of noise in this discount from Tremway [ph] for instance, was in. There were other things so I couldn't give a specific answer, but I said in principle, the adverse development for the third quarter and what I would expect in the fourth quarter would be similar and reflective of the same kind of adverse development we saw through the prior 18 months.

But no comment on '05 at this point?

You know, I wouldn't comment but I sure hope we're finished with it.

Ok. Next question, gulf. Were there any premiums from the gulf renewal rights deal in the quarter?

About $20 million of written premiums. No consequential earned premiums, $3 or $4 million maybe.

One would think that opportunity there probably is somewhat better than that on a run rate basis going forward?

We would expect so. But it takes time. We just started that business effectively in July, and you've got t get business up and written and renewed and so forth. So, I think you'll see that business picking up. But, in addition to that, as I say, we have other kinds of things like that where there are teams of people are talking to us.

Ok. Two comments then one last of big question for you. The first comment is the trend in your paid losses, the way they're going, it looks like next year, your clients will be paying you.

That's what we're hoping. That's actually what we're hoping.

I have it in my model. I guess related to the bid rigging allegations, the fact that you were surprised. My sense is you're not a guy who's surprised by too much that happens in the industry. I guess then two questions related to it. One is, do you think it was given that, pretty isolated and then secondly, could you speculate on what the model might look like going forward. In other words, all of these PSAs, the insurance companies aren't going to take that and put it in their pockets. It will get spread I assume between lower prices or higher commissions. Any guess as to how it might play out?

I think first of all, while I can't speak for any other companies, or about how this all works, one of the things you have to recognize is lots of the stuff that goes on between broker and underwriter goes on at a relatively low level and when I talk to a guy who works for us who was an underwriter for one of the giant insurance companies 30 years ago, he said every now and then a broker would call and say, God, I need to fill out a slip. Can you just give me a quote so I can put it in. Don't worry about it.

So, I think what evolved is a practice that took place once a year because a broker never got his stuff done and wasn't meant for any purpose other than because the guy was supposed to get three quotes. I think what you saw is you saw it carried to where the result was less than appropriate behavior. And I think a lot of people were surprised. I think we all viewed brokers as trying to get the best price for their customer. So, I can't comment more.

I think that there are several things that will have to change and I think that there are a lot of people that are throwing up ideas. I think first of all, I think transparency is the start of one. If you're telling customers you're going to represent them, you're going to have to either represent them or let them know that you're going to get paid something else. I think that you're going to have to have not just full disclosure, but disclosure as to the specific relationships.

I think that if you have different contingent arrangements with different companies, you're going to have to monitor the fact that that doesn't impact how you place the business as a broker. And I think every company is going to have to have a real monitoring process to ensure that they don't do throw away pricing. That they give their best, most competitive price and that it gets delivered to the customer. So, you know, I think there will be some changes. I think that, you know, the problem in part is that some brokers control large segments of certain lines of business and if you want to write the business, you have to find a way of making it attractive for the brokers to do business with you. And those brokers will use that power, are able to generate additional fee income for themselves. And if they treat all as equal, that's okay.

But if, in fact, they use that additional fee income to favor one or the other, there is a problem. So, my guess is one of the answers to that will be all contingent fee arrangements between a broker and its companies are going to have to have some greater alignment. I think the difference between companies will have to be made clear by brokers also. So, I think there is going to be a lot of changes and in the meantime, we hope that the turmoil will prove not too destructive because I think unfortunately, most of the distribution system is outstanding and does their job and does the best they possibly can for their customers. Unfortunately, it is not clearly proven that that's not universally true, however.

Thanks for the answers, Bill.

Vinay Saqi with Morgan Stanley has our next question.

Thank you. I believe you mentioned that in certain lines of business, rates were not keeping transit lost cause. I was hoping you could add some color as to which lines they were.

I commented that the most obvious one that universally is DNO. I think that there are other places but it is spotty. It is not nationally. You might have one area or another in one part of the country or another that you know, we have in small commercial lines business. Maybe more competitive in one place or another.

Much to our surprise, there are some people being aggressive, pricing in contractor's business in New York state. It really is not a universal thing. That's really all you would expect at this point in the cycle. Analysts try to aggregate everything but in fact, as the cycle changes to become more competitive, individual companies, individual underwriters, individual branches, each take their own competitive mode and try to look at this in their own way. The only uniform thing that we've seen is DNO.

All right, thank you.

With Sandler O'Neill, Mike Dion has our next question.

Good morning. Given the strong growth and alternative market segment, maybe you can just take a moment to elaborate what you're seeing there and also curious as to your appetite for workers comp, both excess and primary.

Tell me exactly what you want here. Be a little more focused on your question.

Sure. Net written and the alternative market segment was up 25% in the third quarter, which was clearly larger than many of your other segments. I was wondering what was driving the numbers there in the third quarter in particular, if there are any kind of one time events that hit in the third quarter and then, second question to follow up with that would be just worker's comp in general, both primary and excess. What your appetite is for that business.

The gross premium was up 13%. And I think that that was really spread across the board. Our self-insured pool was the biggest one of those pieces. But you know, I think that growth came really because of opportunistic things, not across the board. That's an area where you know, there's nothing special happening there, Mike.

Ok. Fair enough. Then on the worker's comp, I take it from your last comment that it is not necessarily comp-related.

No. No. You know, I think that what you're really saying -- what you're really seeing here is sort of year-over-year changes, price increases in the excess comp area year-over-year. Really driven by medical costs which really require that excess comp prices to go up. And I think if you look at it as a group, lost costs for worker's comp are going up more than in most areas. So, that's particularly there.

So, you know, let me put it this way. I don't think my profits are on the whole, the mid heavy CC part or California comp or whatever. I don't think my profits are getting better. I think the price increases there are needed to keep pace with lost cost increases.

Ok. That line particularly, you're still seeing margins -- price increases exceed lost costs or are they roughly in line with lost cost inflation?

I would say if they exceeded, it is marginal.

Ok. That's helpful. Thanks, Bill.

Next we move to Mike Grasher [ph] with Piper Jaffray.

Good morning. Congratulations on a nice quarter. Just with regard to specialty and regional, given your comments around the current pricing environment, and on a go-forward basis, are these growth rates that we saw in the top line pretty much what we could sort of look to for 2005?

You know, I can't give you that answer, Mike. We're examining our pricing. We're examining whether or not where our level of profitability is for our current book of business. You're certainly not going to see dramatic increases in volume. I would be happy with 8% to 12% growth rates in internally in the regional and specialty business. Maybe we could do a little better in the specialty business because, in fact, we're adding a couple of units.

Ok. That's helpful. Thank you.

We have a follow-up question from Charles Gates from Credit Suisse First Boston.

Bill, I guess most insurance industry observers think that two of the issues of import specific to the election next week are TRIAD, one and two,tort reform. If you were to simply look at the presidential election, what other issue do you think is of consequence for the insurance investor?

I think ultimately, the industry faces with TRIAD, tort reform, a real issue that says where do we stand and what are we doing to the public's confidence. And how do we get there. So, I guess that the fundamental issue we face is the confidence the public and the legislature that the numbers we present are correct and what we do is correct. And you know, whether we get there or not, I don't know.

So, you know, I only can tell you that I think TRIAD, tort reform are the most pressing ones but they all circle around the fact that our industry is not well-trusted and thought of by the general populous and by the legislature for a whole array of reasons, and Mr. Spitzer's allegations don't help those matters. We really, as an industry, need to rethink how we present ourselves and if we can't put forward a better base, if you will, and a better appearance for what we do, then we're going to have a problem.

I mean one of the things that I find interesting is Mr. Spitzer's allegations are quite interesting but usually, when you're busy doing the kinds of things you do, you make high margins and this is a business whose average return has been something approaching a government bond over the past 10 or 15 years. So, it is hard for me to imagine that he can't do a lot better in presenting ourselves.

I might add on the other hand when you think about the allegations Mr. Spitzer has made, brokers did manage to get very high returns.

Thank you.

We have a question from Jeff Thompson with Keefe Bruyette & Woods.

Bill, I had two questions. I don't mean to beat a dead horse in Sarbanes-Oxley. Maybe I didn't understand your comments, but it would seem to me with this disclosure, it is more difficult for companies to sort of manage reserves on the front end of the good news and then lie about reserves on the bad end when things get worse over a pricing cycle, so I would think it would serve to shorten the whole pricing cycle.

You know, I think that in theory, you're right. I was on a panel with three other corporate executives, and we disagreed completely about the aggregate amount of the storm losses from the three hurricanes. And you know, at the end, I said to them, I said this shows the problem with the industry. That we look at the situation and we're all operating with different set of assumptions, all reasonable or rational but because of the inherent leverage in the process, we reached widely different conclusions. So, yes, I think there will be a reduction in the level of volatility of the cycle and a shortening of the cycle, but it won't be eliminated because there is a huge number of assumptions that go into making rates, establishing pricing, establishing reserves.

So, the cycle can't be much shorter than a year or two longer than the lost reserve duration. So if you look at Berkley, where we have probably a 4.5 year duration, we won't know the result of the first year of the chain cycle with certainty for basically 5.5 years. So, no matter how careful you are, there is a huge amount of judgment. That judgment diminishes, but there is a lot of judgment. Remember, duration is the average period, not the full pay period. So, there is still a lot of judgment in that process.

Well then, this is actually a related second question. I know you talked about the cycle in the late '80s saying that when it slowed down, you should have grown more.

Yes.

You sort of missed an opportunity. How do you know when to pull the trigger? I'm hearing companies already saying you know, the rates aren't adequate. We're not going to write it. I get a sense it is early to make those comments. And how do you think about it and how are you going to look at that as we go through this slower period?

Well, first of all, obviously you know, the implementation strategy in a company is one of their competitive advantages. So, I'm not anxious to go through the details on how we look at it but I think you hopefully look at the underwriting year results. And know how much flexibility you have, but the reason we cut back in 1988 is because we didn't know or realize how profitable the business was in 1987 and '86. So, if we had, we wouldn't have cut back. So, the first thing we need to do is get a real good handle on how profitable our business is in our current years.

Ok. You can't comment more than that?

The answer is, we're going to continue to write all of the business we can that's going to deliver targeted return which is where we are right now. We think that target ought to be around the 20% after-tax level.

Great. Thank you.

Mr. Berkley, it appears that we have no further questions at this time. I'll turn the conference back to you for any closing or additional comments.

Thank you all for listening. We were really pleased with the quarter. I'm pleased with the quarter.

As I said, more than anything else because the results of the quarter, forgetting about what analysts work after, whatever, really reflect our strategic decisions as to how we managed the Company and we didn't go out there with strong losses. We didn't go out there with those problems. So, thank you all very much. Hopefully we'll have a great quarter. Fourth quarter, we're excited. Bye-bye.

Thank you, everyone. That does conclude today's conference. Thank you for your participation. On behalf of Berkley Corporation, I would like to wish everyone a great day.