W R Berkley Corp (WRB) 2005 Q2 法說會逐字稿

Good day and welcome to today’s WR Berkley Corporation’s first [sic] quarter 2005 earnings conference.

Of today’s conference the speakers’ remarks may contain forward-looking statements. Some of these forward-looking statements can be identified by the use of forward-looking words, including, without limitation, ‘expect’ or ‘estimate’. We caution 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, 2004, 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. WR 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 at this time I would like to turn the call over to Mr. William R. Berkley, CEO and Chairman of the Board. Please go ahead, sir.

By the way, it is our second quarter call, not our first, so in case you think you’re in the wrong place, you’re not.

We had a great quarter. We were pleased really across the board. I’ll try and start by our general view of where our business and the industry is and then turn it over to Gene for the financial review.

I think that the industry is in one of those bumpy pieces where there’s a very uneven change in the industry. Lines of business, segments of the business, are moving somewhat independently. Large Property risks uniformly, prices are down, but prices have been down for large Property risks for awhile. This is just as a result of the declining level of storm activities and increasing profitability that we’ve seen for awhile and therefore, the large Property risks have generally delivered very high margins and that business has become more and more competitive. It’s not an area of the business we’re in very much.

Large premium Commercial lines, both Property and Casualty, are more competitive than small premium things. We touch in that area of the business, but it’s a very small part of our business. We think that that part of the business will continue to be somewhat more competitive. But for the most part there is still rational competitive behavior.

Margins are good and there’s room for price competition certainly in some of the areas. I think that the problem will arise next year if people continue trying to cut prices. You’ll have inflation and price increases -- or price decreases occurring at the same time and it only takes a year of an inflation with price decreases to where your margins erode to where they’re not acceptable. I think that at this moment in time margins are still pretty good even in that area.

The middle market is still excellent. Casualty business pricing is still holding its own, not every place, but almost across the board. Small D&O, middle-sized D&O, and a little bit of Professional lines has some price competition. And again, you are seeing a wide variation in some areas with prices up 5, 8, 10, 12% and other areas where prices are down corresponding amounts.

Overall, we are pretty happy with our pricing levels. I’d say overall pricing is flat for the year, up slightly, for the quarter down slightly.

Looking at it by segments, the Specialty business had an excellent quarter. It was buoyed by the acquisition that we made, the renewal rights transaction with the Gulf, Berkley Specialty Underwriters is having an excellent first year as we just completed the first year of operations. Starting in the next quarter it will be comparison with business already on the books.

And we also have added some additional business in internal growth and segment and the Specialty programs in [Vella] and a couple of other areas that have enhanced the Specialty business, which has really caused the growth.

The profitability has been mashed a little bit primarily because of us doing a line-by-line, area-by-area, loss reserve review, searching to see if there are any places where we thought we needed to do anything with the reserves. We’ve done that with all segments and with our Commercial Transportation area and the Specialty area -- the Specialty Group we decided we wanted to strengthen reserves some.

The Regional business had an excellent quarter. We were very pleased with the results they delivered. It really was an exceptional quarter for them, exceptional quarter on top of an exceptional quarter, on top of another exceptional quarter. While growth has slowed down substantially from where it was, we continue to find opportunities.

There certainly are places where we see irrational competition in one place or another. But generally speaking, rationality still continues to prevail. Pricing is at a sensible level and we don’t see people doing stupid things at the present time.

I think the Regional business is continuing to show that service does sell. Customers are interested in how their claims are taken care of. And, as we all know, ultimately insureds buy their policies from people who they know will pay promptly and take care of their insureds, their needs. And agents and brokers appreciate that.

There will be a point in time where price competition becomes rampant and everyone is focusing on that, but we’re nowhere near that point in time now.

The Alternative Market business continues to be outstanding. It’s a business that at least some parts of it don’t grow as quickly in the second quarter because of the nature of how that business is put on the books. It’s primarily self-insured and business-related self-insureds. It also is where our California Workers’ Compensation Company is. That business didn’t grow in this quarter as much as it did in earlier parts of the year and is not growing as much as other parts of the business, but we’re quite pleased with it. It continues to deliver great returns, terrific underwriting results.

The underwriting results were helped in part by that review we talked about, about claims, when we have not even completed our review of the California Comp business, but it’s clear we were probably overly conservative when we set up our reserves for California Compensation business. And now having really defined and experienced the level of benefits in California, we’ve been able to re-evaluate the reserves and we will have completed that reassessment, I hope, by the end of the year and we think the reserves probably are more than adequate in that area of our business.

We would expect that while there have been substantial reduction rates based on the level of profitability that we’re seeing on a re-evaluated historic basis, the readjustment of rates will still allow for substantial profitability.

The Reinsurance business continues to move along. We’re pleased with how we’ve done. It has really created Facultative our quota share business with Lloyd’s and Berkley Underwriting Partners. All parts of the business are moving along and doing well. While we continue to have some adverse development from the past from the Treaty business, the rest of the business continues to do well and Berkley Underwriting Partners especially has shown significant growth in premium volume as some of their MGU business, in which we have invested a lot of time and effort in getting underway, is beginning to add premium volume.

Overall, that business is excellent. We continue to be selective in who we do business with, weeding out who we have done business with in an unsatisfactory relationship and choosing to expand in the places where we’ve had good relationships. Obviously, that’s a part of the business where selectivity in who your partners are is critical to the success of your enterprise.

Our International business, which is a small part of our business, had an excellent quarter. Great underwriting results. We continue to see excellent performance in Argentina in the Property Casualty business. And we’re especially proud of the people in the Philippines who have gone through turmoil and have run our Life business in an outstanding way through the most difficult times.

So, we’re enthusiastic. As we said towards the end of last year we’re confident that we’ll be able to deliver returns comfortably above 20%. I have to admit that the returns this year are a bit better than I would have expected, but we’re certainly happy with the returns we’ve gotten this quarter. And I think that’s going to cause this quarter to be anything other than the standard for the rest of the year. And we’re again comfortable at this point in saying that we see nothing to make 2006 returns being anything but above 20% again.

So with that I’ll turn it over to Gene and then I’ll answer your questions. Gene?

OK, thank you, Bill. Well, as we reported in yesterday’s earnings release, our second quarter net operating income -- that’s excluding realized gains -- was $130 million, which is an increase of 26% over the second quarter of last year. On a per-share basis, the operating income was $0.98 in the quarter, up from $0.78 a year ago.

The growth in our quarterly earnings was driven by a 36% increase in investment income and a 16% increase in our underwriting profits.

As Bill said, our premium growth was in line with our expectations and actually slightly ahead of the first quarter. For the second quarter the net premiums written increased 12% over the prior year period to $1.135 billion. The Specialty segment reported the highest growth rate at 22%, and that’s primarily as a result of new business in the 2 units that Bill talked about -- Berkley Specialty Underwriting Managers and [Vella] Insurance Services.

Growth rates for the other business segments, which were also in line with our expectations, were 6% for the Regional business, 5% for Reinsurance, 1% for Alternative Markets, and 13% for the International segment.

Our overall combined ratio improved by .6 percentage points to 89.2%. The Alternative Market combined ratio improved the most, almost 10 percentage points, and again that was due to the reduction in loss estimates following the reassessment that Bill spoke about of the favorable impact of Workers’ Compensation reforms in California.

The Regional combined ratio decreased almost 2 points too, and this was due to improved results in our Mid-Atlantic and Southern regions. And in addition, storm losses for the Regional segments were just $12 million in the second quarter of this year, slightly below $15 million in the second quarter of 2004.

The Specialty combined ratio increased about 2 points due to the higher selective loss ratios in certain lines, including Commercial Transportation.

The increase in the Reinsurance segment’s loss ratio of about -- combined ratio of about 2 points reflects a change in business mix, including the reduction in business written through Lloyds.

And the International combined ratio was 92.5%.

The paid loss ratio continued to be well below historical levels at 35.6% in the quarter. We added [Conet] loss reserves in the quarter, which are approximately $5.3 billion now at the end of the quarter. We added $286 million in the second quarter and $550 million in the first 6 months. Those additions included additions to prior-year reserves in the first 6 months of approximately $70 million, which is about 1.5 points -- percentage points of the beginning year reserves.

Net investment income grew 36% in the quarter to $94 million. Our average invested assets were up 28% and the average annualized yield on investments was up 30 basis points to 4.3%, even though a higher portion of our portfolio is invested in tax-exempt bonds.

Total invested assets were $9.3 billion at June 30, 2005, up over $900 million from the beginning of the year. Of that, 90%, or $8.3 billion, was invested in cash and fixed income securities with an average duration of 3.7 years, which is unchanged from the first quarter. The remaining $1 billion was invested in equity securities, including $460 million in the Arbitrage Trading account. The annualized yield on equities, including the Arbitrage Trading account, was 5.6% in the quarter compared with 5.4% in the prior-year period.

The decline in market interest rates during the quarter resulted in an increase in after-tax unrealized gains of approximately $62 million. With that our total after-tax unrealized gains were $112 million at June 30, 2005.

Our overall effective tax rate declined about a half of a percentage point to 29.3% in the quarter to again to the increase in the portion of the portfolio invested in tax-exempt securities.

All that adds up to a quarterly net income of $134 million or $1.01 per share. Our annualized return on equity for the first 6 months was 25% and our book value per share at June 30th was $18.59.

Finally, today we are closing on the sale of $250 million of Trust Preferred Securities. The securities have a 40-year maturity, a 5-year call, and a coupon rate of 6.75. We intend to use most of the proceeds to redeem $210 million of currently outstanding 8.2% Trust Preferred Securities that are callable in December of 2006.

Thank you.

Well, again, we were very pleased with our quarter and year to date. The things we measure, such as return on equity and the kinds of issues we try and address, such as book value per share and our investment income per share, as well as underwriting profitability, all gave us record results. Most decidedly, we really don’t see any terribly serious problems sitting on the horizon at the moment.

We continue to selectively find opportunities to expand. It’s not to say that there aren’t competitors out there that are doing things that are irrational. It’s not to say that there aren’t people doing dumb things. It’s not to say that there aren’t reinsurers who have resources and are deciding not to pay even when they should.

These are the day-to-day problems that exist in our business today and we’ll continue to see a greater differentiation between those companies that are successful and focused and those companies that don’t.

So, with that, Jeff, I’d be glad to have questions.

Thank you, sir. [OPERATOR INSTRUCTIONS].

And our first question today will come from Joshua Shanker from Smith Barney.

My first question involves the Specialty business. Can you compare and contrast the growth profile or the lack thereof among [Vella] on Nautilus and Admiral?

Well, we generally don’t talk particularly about various segments. I think that -- and also it varies quarter-to-quarter more than would be a meaningful thing. I think that the one key thing, Josh, that I think is important is that Admiral’s large risk business is the business that grew the least of all the Specialty areas of the business. And construction-related business, especially in the West, grew the most of all the related business. And I’m doing it by [inaudible] because it isn’t uniform by one company or the other. While we manage our businesses that way, the activity is by sort of classes of business and they all write some of all of those things.

[Vella’s] construction business grew the most, but Nautilus and Admiral have construction business that also grew substantially. Admiral’s large risk business grew the least. Neither [Vella] [inaudible] other than construction, they didn’t have a lot of large risk business and Nautilus doesn’t have a lot of large risk business.

Construction business is a bigger part of [Vella’s] business, so they grew more than the others, but that’s because of the business itself.

Well that certainly answers my question all the same. Just a couple of administrative issues. In terms of the loss ratio in the Alternative Markets area, and I just assume that this structural change in California that enabled that, it’s a one-time item that should not be repeated in coming quarters?

Well, I don’t think -- we have -- we’re going through it a piece at a time. I think by the end of the year we’ll have gone through it all. I don’t think we’re through it all now because one of the things you have to do to evaluate where you are is look at the -- what’s a series of changes in benefits. And while the Commissioner and the California Rating Bureau and all those people have vast numbers of actuaries and people who can make these sweeping evaluations and they may well be precisely right, we need to look at each of those changes and apply it to our reserves and our book of business.

So, I would expect by the end of the year is gone, but there could easily be other changes in the balance of the year as we go through a piece at a time of that business. Our goal is to have reviewed that fully before the end of the year.

OK. In terms of the offering today, is there a timeline that you can point to revolving the redemption of the Trust Preferred Securities?

Well, we’re -- we’re going to -- we technically can’t redeem it until December of next year.

In the open market potentially.

Right. And that’s why we may, if there are opportunities that present themselves we’ll buy some. We have $15 million that we’re going to redeem that we bought back a while ago and we’re going to redeem probably inside this week, next week. And we’ll look for opportunities to buy back also.

But we did the financing because we thought 6.75% for this kind of debt for this term was attractive, along with the ability to basically call it after 5 years without a penalty. So we thought it was a good opportunity to replace basically the debt at this price.

Very good. And finally, in terms of -- is it possible to find out what the IBNR numbers in the loss reserves right now?

I couldn’t give it to you with absolute precision. If you want to give Gene a call by Friday or Thursday he’ll have that number. He may have it now, but I don’t think we have it right here now.

OK.

The total IBNR at June 30th is $3.1 billion.

The total is $3.1 billion.

Thank you very much.

Up from $2.7 at the beginning of the year.

So, it’s up $400 million for the year.

Thanks, that’s a quarter.

And we’ll now move on to our next question from Sandler O’Neill’s Mike Dion.

Just a question on the reserve study that you did. If I heard you correctly, the only thing that’s outstanding in terms of your reserve review before yearend is the Workers’ Comp.

No, no, he asked a question. The question was, was the improvement in the Alternative Market loss ratio driven primarily by California Comp and was that a one-quarter change due to the reserve review. And I said to him that it was due substantially because of that and there may be other changes as we go through the balance of this year, but it will be done.

But we’re reviewing all of our Company-by-Company, line-by-line reserves, so by the end of this year we hopefully -- we’re going to try and look at are there any other things that have changed that are out of the ordinary that would give us reason to re-evaluate reserves some place or another. Is there anything that gives us cause for concern? Are there trends that have changed?

We’re just trying to be particularly cautious in an environment where change is rampant. Has there anything happened that would cause us to rethink any area of our reserves? So that was why the discussion was specifically about California.

We’re going -- it’s a process we go through, but it happens California stood out because it was such an enormous change of benefits that impacted that. And that’s why our rates went down by so much.

I see. Now, outside of California Workers’ Comp, which it looked like you lowered your loss ratio expectations there, and in Commercial Transportation you increased your loss ratio. Is there anything else outside those 2 lines that you have done so far that caused you to kind of move your loss picks?

No, not really, nothing of consequence. I mean, we’re constantly looking -- part of the nature of being effective at managing this business is trying to look prospectively at changes and being sure you understand what’s going on. And while we’re not allowed to give you anything prospective that you should use in our forecast, what our job is as managers is to try to look prospectively at changes in legislation, in court decisions, and say, “Is there anything that’s caused us to change how we think about where things are from where we were before?”

So, our job is to constantly look at that and say, “Hey, is there any place where we need to re-think things?” And those are the areas at this moment where we’re trying to adjust. But it’s a constant process and it’s a constant I tell Gene he’s wrong and he tells somebody else they’re wrong, and it’s a constant battle, internal disagreement, if you will, about what it is and getting it right. Because getting it right isn’t one person’s opinion. It’s a dialogue and a debate amongst a lot of people trying to get it right and trying to think of everything.

Fair enough and just one last question.

Something that has always bothered us. We just haven’t seemed to get our reserves and our loss picks right. We’d be great for 2 years and terrible for 2 years and we’ve gotten to where we just said we need to do some things and get better. We’ve got a new fellow in there who is President, who came from a Division at the Admiral and we think is an outstanding fellow. And we’ve got a real focus on trying to get it right.

The other thing we’ve realized about Commercial Transportation is, although we’re not as smart as a lot of the people who set rates, we really conclude the idea of excess limit loss factors for Commercial Transportation is bull****. I’m not supposed to say that word. Stick your finger at me.

And that is -- once you go through the limit and have a bad loss, whether you have -- if you have a $1 million limit, it’s a $1 million reserve. If you have a $2 million limit, it’s $2 million. Those numbers -- we just weren’t adequately reserving for severity in Commercial Transportation. And I think that that’s going to prove to be a real problem in all Commercial Transportation rating, not just for us.

I think a lot of people, including reinsurers, are going to have to re-evaluate excess limits on Commercial Transportation because what our experience has been and what we’ve seen is the price you charge for $200,000 excess, at $300,000 it’s probably the same rate you need for a million, extra million, because once you have a severe accident it’s the same exposure all the way up. Maybe it’s different when you get $5 million, extra $5 million, but for the first few million dollars it’s a straight line. And I think we didn’t reserve adequately and I think that reinsurers didn’t either.

Fair enough. Thanks for the color.

And we’ll move on to our next question from Charlie Gates from CSFB.

You made reference, I believe, to this new program at [Vella]. Is that the program reference to the annual that basically provides a wrap-up policy for large residential development projects?

Yes.

What is that?

It’s a wrap-up --

No, but is that basically something that came about as a result of [Montrose] years ago, a picture of the contractors’ liability?

The answer is it’s a particular form of policy we’ve used for large contractors that is a very carefully and uniquely designed product that we spent a year with lawyers and contractors designing a very special product that we think is unusual and quite specialized in the field. I’m not going to really discuss it in any greater detail, Charlie.

OK. My second question, one of you indicated that during the first half of the year you added $70 million to reserves for earlier losses. Could you share with us the 6-month number for last year as well as the second quarter of both years?

I think last year it was a little over $90 and this year -- of the $70 we had $40 in the first quarter and $30 in the second quarter and last year we had --

It was roughly half.

And we had roughly $45 million in each quarter last year.

OK. Bill, historically I have felt that to some extent the E&S business was the industry’s safety valve and basically, as pricing grew dramatically a lot of business -- and underwriting became tighter, a lot of business would shift to the E&S market. And then as competition would re-emerge, the E&S market would contract. 1) Is that basic thinking valid? and, 2) To what extent do you see that in your business today?

I think it’s valid, but I don’t think it happens right away. I think the -- I think there’s a -- the E&S business is not one business, Charlie, it’s a multiple -- it’s multiple pieces. There are some pieces of the E&S business that really is Specialty underwriting that everybody acknowledges as Specialty underwriting. And that doesn’t go back to the Standard market. It just stays in the E&S market.

But then there is some business that, because of its complexity of policy form, or whatever, they may well might go back. And then there is some business that just sort of suits that distribution. And then there is, likes to say anywhere from 20% to 50% of the E&S marketplace that sort of goes back and forth.

The easy piece of that business is already starting to go back. Let’s say restaurants, bars, suntan parlors are sort of going back to the Standard market now. But that is still -- that’s probably 10% of the E&S marketplace at the moment. And that’s starting to migrate back to the Standard market.

Standard markets don’t do a good job. The first bite, when it starts to go back, they do okay, and then it starts to get mis-rated and misclassified and mis-priced, and 5 years down the road they’re losing their -- a piece of their anatomy on it and that’s because they mis-priced, mis-rated it, and misclassified it. And by that time that suntan parlor, restaurants and bars have expanded to nightclubs, business clubs, other kinds of things that are a little less marginal and a little worse.

And by that point in time they’ve mis-priced and categorized it all because they’re so anxious not to lose the renewal that they’re treating them more and more like Standard risk. And then you’re at the beginning -- you’re at the end of the cycle.

So, you probably have 2 more years before you start to lose the bigger chunks of the business, so you probably have until 2007 to expense. Next year it’ll still sort of be just the restaurants, the tanning salons and bars. For 2009 it’ll sort of be all of that stuff and somewhere around 2010 or 2011 you’ll have whatever craziness you’re going to have in the cycle and they will be trying to dump it.

But it’s a longer cycle than people think and business stays better longer. And I think there is actually even a chance that the cycle will prove to be a little less severe this time and maybe a little less foolish.

Is that because of the level of interest rates in the market?

I think you have 3 things. You have Sarbanes-Oxley; you have interest rates; and I think that you’ve got a lot of people now having new fear and are getting the message that they don’t want to overstate. That would be too cautious. Overly caution is something that people never were afraid of. They always felt like it’s alright if I’m conservative. I think people are getting the message that the standards are now be accurate. Don’t be too conservative; don’t be too aggressive; be accurate. And I think the idea of accuracy will narrow down the extent of volatility and cause people to attempt to be more precise in where they go.

But I think that while the nature of the business doesn’t let you be extraordinarily precise, at least that people make an effort to be more precise, you’re going to find the level of volatility will decline. But I think you’ll still have a cyclical business but the degree of cyclicality may diminish somewhat.

Our next question today will come from Mike Grasher from Piper Jaffray

Congratulations on the quarter. It was very nice. I wanted to ask a couple of questions on the premium growth. How much sort of related to simply rate increases versus new accounts on the ledger?

Premium growth -- basically overall our premium growth was flat. I don’t think there’s any real --

I guess particularly in --

I’m talking about price levels. Pricing levels for the quarter, I think for the year they were probably up a couple of percent. For the quarter we’re flat. We were up a little more at the end of the first quarter, although the last month of the first quarter we thought prices honestly would be down more in the second quarter than they ended up being. The second quarter -- April was softer than May and June, pricing competitively, which was surprising.

So, there is some increase because we’ve added certain -- a small amount of business that were -- construction accounts that were more price sensitive. But by and large I’d say that you -- probably we’re talking about the growth was primarily additional business.

OK. And then with regard to the Alternative Markets, it sounds like the market in California, I think you mentioned that California Workers’ Comp didn’t grow as much. Where are you seeing, or where are you taking price increases?

Well, California Comp prices are down basically more than 15%, so, certainly not in California. The price increases are up in Construction businesses, construction-related businesses and some Professional Liability areas. Excess Comp, and Comp in general prices are better across the board at modest levels, but not every place.

But California Comp, prices are down, D&O prices are down. I’d say that Standard Commercial lines prices are flat and slightly down in some places.

We’ll now hear from Alison Jacobowitz from Merrill Lynch.

Most of my questions have been answered, but I was just wondering on the subject of competition if you’re seeing any new entrants into the marketplace? Is there anywhere people that you haven’t mentioned already are most obviously withdrawing capital or drawing too much capital added in your view?

Alison, I think that -- my lawyer is looking at me with daggers at the moment.

Oh, I’m sorry.

That’s all right. I don’t mind. I always look back at him with daggers. The answer is that some of the -- some of the -- most of the serious players in the business are behaving with reasonable and rational constraint. The problem you always face is one aggressive player can create an environment that’s a problem.

But today the aggressive players are the brokers. The brokers are busy talking down prices more than the reality of prices, led by some of the middle-sized brokers where they’re busy telling everybody how prices are down. It’s interesting from some of those same brokers we’re not seeing prices down.

So, I see less craziness than the brokers would like to let everybody believe, but I think that -- I would say most of the market is pretty disciplined. There are -- there are a couple of very large international players that are more aggressive than I understand why. But other than that I think there is general rationality.

And our next question today will come from KBW’s Jeff Thompson.

I wanted to follow up on your comments on Commercial Transportation. Was that directly related to long-haul truck, or is there something else in there?

Long-haul truck.

And then second, you made a comment on, I guess, a little worry about what would happen if inflation sparked up and we still had price competition. When you talk about inflation -- and we’ve been thinking in terms of loss cost trend as well -- do you see that potentially moving because of economic forces or changes in policy terms where conditions are loosened?

I don’t really see conditions changing a lot. I think that what you’re going to start to see here that you need to worry about is general overall inflation changing. And I think that that’s probably just an overall concern I have. If you’re running at an 85 combined or an 88 combined and you’ve cut your prices by 10%, you have instead of 2% inflation, 5% inflation, you’re all of a sudden taking your 88 combined to an underwriting loss.

And I think people are sloppy and aren’t cognizant what all that means. There are some Mutuals in the upper Midwest that are talking about that don’t make 20 points in underwriting profit, cutting their prices 20%, and I just don’t think they have a clue to what’s going on.

OK. And then finally, can you just talk a little bit about capital management? We’re talking about loss cost trends as well as premium growth and competition. How do you factor it and when do you decide it makes sense to step on the pedal as far as capital management?

Every day we think about optimizing our return and how much capital we have and what’s there and we look ahead; we don’t look back. No different than we use this money now that we’re going to need out ahead if we keep earning 24, 25% returns and driving book value. Even at a higher rate, obviously, you get to the point where you have a lot more capital than you need when you’re growing at 8 or 10 or 12%.

I think that that’s a continuum and if we had an opportunity where we’ve decided that we ought to do something and buy stock, we’d seriously think about it. But for the moment, we’re sitting and hoping we have some opportunities. It’s less and less likely we’ll have opportunities and at some point in time we’ll say there are no opportunities. The only opportunity is that [inaudible] use our capital and manage the internal capital because the external opportunities are unattractive.

And we’ll now move on to Citadel Investment Group, [Stephan Pearson].

Most of my questions have been answered. Just a quick follow-up for Gene. And if you mentioned this I apologize; I didn’t catch it. In the Specialty, the net written premium growth, did you break the organic versus the renewal business out there?

No, we didn’t.

Can you take a stab at that, or -- I know that --

You mean in terms of price changes?

No, no, in terms of just net written premium growth. How much of that would be considered sort of organic or new business versus what you picked up with the renewal rights transaction from Gulf.

OK, I understand. Yes, the Gulf contributed -- the Gulf written premiums in the quarter were just over $40 million, from Berkley Specialty Underwriting Managers, which is -- actually, some of that’s Gulf and some of its from organic.

Probably $30 million from the Gulf renewal rights transaction.

Yes.

OK. That’s good. I just wanted kind of a thumbnail in terms of how to think about the future growth. Thank you.

And our next question today will come from [Ron Bobbit] from Capital Return.

A quick question on the Commercial Transportation business. I was wondering how big that is. I guess what you mean is the long-haul trucking. And what is [inaudible] changes there? And then, you made a comment, Bill, in discussing the transportation area along the lines that you’re not the only one -- you’re constantly working to get things right and correct where mistakes are. And unfortunately, you’ve had to work in that area. But you’re not the only ones you believe who are sort of suffering that fate in Commercial Transportation or just long-haul trucking.

We were talking about excess limits reserving when we talked about the issue of Commercial Transportation and long-haul trucking. So that was the discussion we were talking about, getting it right for reserves. It has to do with effectively, the frequency of large losses and --

Whatever it may be and whatever [inaudible]?

No, frequency of large losses for Commercial Transportation.

I thought you also sort of added a comment that you didn’t think you’re the only carrier that has had trouble or is having trouble in that area.

Right, for Commercial Transportation.

And sort of why do you think that? That’s what I was wondering.

Because we are familiar with what’s going on and where it’s happening. I just think Commercial Transportation excess limits have ended up being more of a problem because severity of accidents has gone worse and that’s just our experience for what we’ve seen.

And then, is there any [inaudible] rate action on your -- in your book?

Rates are something that are constantly under review by state, by class. It’s a constant process. But rates are always being reviewed and in the case of Commercial Transportation we’ve raised rates probably between 3 and 5%. But the fact is rates are constantly under review. We’re not a company that does things, if you will, in a uniform national basis. It’s done by class of business, by state, but in the case of Commercial Transportation rates are probably going up, not down.

OK. And then, on another topic, on the reserve study work that’s been done, I think you said that’s something that you’re always doing.

Yes, but you’re -- we’re always -- it’s not a reserve study. It’s studying reserves. A reserve study is what you people say we’re doing a big reserve study. We are constantly studying and examining our reserves. It’s every day, every quarter, every week, to look for changes, to see have we missed anything. It’s trying to get it right. It’s not we’re having a reserve study.

OK, so there’s no change this year from what you’ve done in years past and always doing.

It’s no. It’s exactly correct.

And we’ll now hear from Ferris Baker and Watts’ John Keefe.

Bill, I’d like to follow up on that last question. I guess with respect to your Commercial Transportation book of business, at the top where were the levels of premiums written and at the [inaudible] what do you think the level of premiums were?

First of all, you’re assuming they’re going down and I’m not making that assumption at all. We’ll do $275-$300 million of business. That’s what we expect to do. That’s up from last year. And that’s the long-haul truck business. We have lots of other Commercial Transportation in our Regional business. And in our Regional business we haven’t had these kinds of issues. We’ve only had the issue in our Specialty segment and this is getting taken out of proportion to what’s going on in this phone conversation.

I was trying to respond to a discussion about reserve changes. This is sort of ordinary course kinds of things and this is not an earth-shattering kind of thing. We raised rates 5% to 87%. This is not an earth-shattering thing. It was only my trying to explain to the one small question and it’s now taken this to where it seems that everybody seems to think it’s a big thing. It’s not a big thing.

Point taken, Bill. That’s a fair answer. Let me get some color about another business line, or segment, and maybe this is kind of a [inaudible] issue as well. But with respect to that large ramp-up account that you mentioned earlier, who was the incumbent carrier on that business? What was that carrier’s profile?

I’m not going to discuss that.

Can you talk of what led that piece of business to come to market?

No. It’s just not an appropriate discussion.

And at this time we have one question remaining in the queue and that comes from Ken Zuckerberg from Carlan Advisors.

Bill, thanks for the comments about the U.S. market. However, earlier today we heard some concerns raised about the London and European markets. I just wondered if you could give us an update of what you guys are seeing there through your affiliates and through affiliated investments.

I think that Europe is more competitive generally than the U.S., primarily because again the brokers seem to have more to say about pricing in Europe than they do here because of the nature of how they price and place business. It’s a line slip mentality. The broker effectively sets the initial terms frequently.

So, if you recall a few minutes ago I mentioned the issue that the brokers are busy trying to talk down rates here and seem to make it like it’s more competitive than it is. Well, in Europe what they do is they get to write the line slip and then go and place it and then they try to find somebody who will sign on to whatever they think they can sell.

So, it’s a different dynamic over there. Therefore, you’re seeing more price pressure currently. It’s a hard thing because you get the first person to sign on at the lowest price and then you need to have everybody else get a strong backbone and say, “We’re not going to do this.” So, it’s a harder and more difficult dynamic and the brokers here are going to -- are doing their best to get that dynamic here. It just doesn’t work as well here. There are some notable leaders who would like that to happen here.

So, Europe is more price competitive because of the dynamic of how that market works. Like it again less so than they’d like to talk about, but certainly it is more dynamic. You do have more competition for reinsurance market sharing in Europe than you do in the U.S.

I think that there are some segments of the business that are still pretty good in Europe. There are some good opportunities. But it is -- the dynamics of the marketplace in Europe are different.

And we now have a follow-up question from John Keefe from Ferris Baker Watts.

Gene, did you mention what the tax rate was on the investment portfolio?

I gave you overall tax rate, but the tax rate for the 6 months, effective tax rate on investments was 24.5%.

And we do have another question from Kenneth Billingsley from [BDNT].

My question is, you’ve mentioned that you believe that the market in general has been very rational with pricing and are you just being opportunistic with the growth that we’re seeing while the Specialty -- other Specialty peers are holding the line? And do you see them hold the line for more than a few quarters if you’re being opportunistic?

Well, I think, when we were talking about our business, our business has grown in specific areas where we’ve added business, where we’ve taken particular [inaudible] or driving groups of people to come. I think that the core of our Specialty business has grown at very modest rates. Our pricing in our Specialty business is up slightly, not down. I think our price monitoring would tell you that Specialty pricing is up slightly.

And I think we’re doing okay, but part of it is, I think that service and we have always invested in service. We continue to do so, from expanding our facilities to building new computer systems and doing things that focus on delivering better service.

If you take away -- if you just look sort of our Standard businesses, we’ve grown reasonably modestly and mainly through price increases and policy count. Not a lot in Specialty.

So you don’t believe -- your comment on what the other competitors are going to do, but you don’t believe they’re going to feel that they’re missing the boat and potentially accelerate price declines?

I think most people are being responsible. I do think you’re going to see that some of the marginal players with marginal ratings and no financial resources are being forced out of the business because they can’t [inaudible] ratings and/or don’t have the financial resources to stay, so I think you’ll probably have a half a dozen Specialty companies that are finally paying the price for ’98, ’99, and 2000 and are going out of business.

At this time, gentlemen, there are no further questions. I would like to turn it back to you, Mr. Berkley, for any additional or closing remarks.

Thank you all for coming on the call. It was a great quarter. We expect the balance of the year to be at least as good and have a great balance of the week. Thank you.

Thank you everyone for your participation and that does conclude today’s conference.