W R Berkley Corp (WRB) 2005 Q3 法說會逐字稿

Good day and welcome to today's WR Berkley Corporation's 3rd quarter 2005 earnings conference call. This call is being recorded. On today's conference the speakers' remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words, including, without limitation, ‘believes’, 'expects' or 'estimates'. We caution you, that such forward-looking statements should not be regarded as a representation by us that the future plans, estimates, or expectations 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 obligations to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

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.

I noticed that as I looked at our printed press release that the preamble disavowing all these things is getting longer and longer and it is sort of like our policy forms. We explain to people why there is no coverage on anything and everything that it is miscellaneous and it is and still doesn't help us.

We had a great quarter. We are very pleased with the results. I will spend a little time talking about our business and let Gene talk about the numbers and then talk about where we are as an industry and what I think are the major factors, then I will be happy to answer any questions.

Overall, the business is doing extremely well. We are in that sweet spot in the business where earned premium levels are coming from peak prices. We are probably at the most profitable time from an earned premium point of view in the cycle and that given recent industry catastrophe events, I would expect that that peak profitability would be maintained a bit longer than I would have thought. So where as I would have anticipated that to sort of dissipate bit, I think it will stay in general where it is for a bit longer than I had originally thought. The business that we see doing the best is through our specialty line business but our regional business continues to perform very well. The alternative market business, excluding the assigned risk plans, is doing quite well. The assigned risk plans are beginning to be de-populated as people search for business, the assigned risk plans, one of the places that we are seeing business disappear from going back into what I call the marginal underwriting pool where people are underwriting the less high quality business at what I would call ‘market prices’. And that's always a problem. At the beginnings of a softer cycle, what you see is the lower quality risks getting priced at standard market rates, so those people don't think their pricing at low prices, but what they are doing is getting lower quality risks. That is the same thing that impacts, especially our business, when standard markets start to bite at some of the business specialty markets if they have been writing for a long time and they do not realize that they are pricing at very low prices because they are looking at things comparable to standard markets as opposed to the profitable pricing on a specialty basis.

But overall, pricing is still quite good. We think that the property pricing is going to improve substantially. We are not a big property writer, although there may be some opportunities in that area. We don't expect a dramatic change what we do. Properties is still not our focus. We don't think it offers the kinds of returns and predictability that we want to focus the utilization of our capital on. But opportunistically we probably will do a little more property business in the next 18 months or 2 years than we have done in the past.

I think that some of the most exciting opportunities are just in our ordinary day-to-day specialty line areas, where people still are paying us for service, paying us for prompt claims handling. We really have started to get rewarded for the efforts we've put forth. Our relationships with our distributions channels have never been better and our commitment to them is, in fact, being recognized. So, we are quite enthusiastic about the business, where we're going. We are more confident now that 2006 will be a comfortably over 20% year-end and we think that the recent hurricane activity will tighten up the overall market and the overall rating agencies tighter demand on capital requirement will cause the business to stay more profitable for an extended period of time. So not only do we think 2006 will be better, we think that going forward for several years, we'll have better returns than we might have anticipated.

So with that I am going to let Gene talk about the numbers with some specificity and then I will come back and give you a little bit more information and then take questions.

Okay. Thank you. I am going to start first with a re-cap of the impact of the hurricanes. As we previously reported our net losses from Katrina and Rita are estimated to be $50 million. That is after re-insurance recoveries, and re-instatement premiums but before income taxes. And the origins of that loss are approximately $30 million from our participation at Lloyd's and approximately $20 million from our own operations in the U.S. including losses attributable to windpool associations.

The gross loss estimate for our U.S. operations, excluding the windpools, is less than $50 million in total and that's comfortably below our available reinsurance protection for each storm.

By comparison in 2004 our net losses from the four hurricanes in the 3rd quarter for $32 million, pre-tax. So that is a difference between '04 and '05 of just $18 million pre-taxes and $12 million after taxes. On a per share basis, the hurricane losses represented $0.24 in 2005 and $0.16 in 2004.

So in spite of the higher storm losses our 3rd quarter net operating income increased by 25% to $117 million from $94 million in the prior year quarter. On a per share basis quarterly net operating income was $0.88 in 2005, up from $0.71 in the prior year.

Net premiums written increased 7% over the prior year to $1,131 billion. Specialty premiums were up 14%, as a result of the continued strong growth in [ENS] lines.

Regional premiums were up 5%. Alternative markets were up 3% and re-insurance premiums were down 2% due to modest declines and writing across all the major lines.

The overall combined ratio increased by 2/10th of a point to 92.1 compared to 91.9 in the prior year. However, excluding the impact of the hurricanes in both years the combined ratio decreased by a full point to 87.8. The combined ratios by segment, including weather related losses were: Specialty 87.8, Regional 88.5, Alternative markets 79.6, Re-insurance 114.7 and International 92.8.

The alternative market combined ratio improved by 14 points compared with the prior period primarily as a result of lower reserve estimates for California Workers Compensation business. And the re-insurance combined ratio increase by 12 points compared to last year, due to the impact of the hurricanes as well as lower profits attributable to our participation at Lloyd's.

The paid-loss ratio was 34% in the 3rd quarter and its also 34% for the first 9 months of 2005 and that's the eleventh consecutive quarter, starting with the 1st quarter of 2002, where we have had a paid-loss ratio of below 40%. In fact, if you add up all those quarters, the cumulative paid-loss ratio over that period of time is just 35% on an earned premium basis of approximately 8.5 billion.

Net loss reserves increased by $350 million in the quarter to approximately 5.7 billion in at 9/30 and for the year, net loss reserves were up over $900 million, or 19%, and that includes increases in prior year reserve estimates of approximately $150 million. Over that same 9 month period of time the claim counts are up just 3% and the policy count is unchanged.

Service fees were 25 million in the quarter, that's down about 3 million from the prior year. And that is due to the de-population that William mentioned of assigned risk plans that we provide administrative and claim services for.

Net investment income was $108 million in the quarter. That is up 50% over the prior year.

Total invested assets increased to $1.7 billion from the beginning of the year to $10.1 billion at 9/30. And in addition, the average annualized yield on investments was up 60 basis points over the prior year quarter to 4.5%.

At 9/30, 90% of our portfolio was invested in cash and fixed maturity with an average duration of 3.7 years. And the remainder was invested in equity securities including 480 million in the Arbitrage trading account. The annualized yield on the equities alone, including the Arbitrage account, was 7.1% in the quarter compared to 5.2% in the prior year quarter.

Our overall effective tax rate declined to 27% of pre-taxed income from 29% in the prior year due to investments and tax exempt municipal bonds, which increased to 4.1 billion at 9/30 compared with 3 billion at the beginning of the year.

That adds up to quarterly net income of $122.5 million, or $0.92 cents per share, and an annualized return on equity for the first nine months of 23.9%.

Thanks, Gene. We are pretty enthusiastic about the year. I think that our numbers continue to make us more than comfortable with our results. There is always constant debate about the precision in the insurance business. There are tons of estimates that we all make and there's lots of people making the estimates. We try to be as accurate as we can. However, our paid-loss ratio being sustained at this level for this period of time is beginning to indicate to us that our reserves may be more conservative than we anticipated and we'll be reviewing that quite cautiously as we enter into the year-end financial review. It is always something you concern yourself with because you want to be accurate, but you do not want to overstate your results. But that paid-loss ratio sits there and is telling us that we may have been more cautious for the past several years than was required. So, we are a bit more optimistic that we can be comfortable with our numbers, and maybe a little more so. So, those reviews will be a little more intensive in this year and probably in greater detail as we go through the years.

But, many of our lines of business are quite a long tail and require extensive work to get it to that comfort level and we have always had the view that having lived through periods where we have needed to put up extra money and we have had, we were continually disappointed that caution is a better approach. That having been said, our belief at this point is we may have erred a little on the conservative side.

We think there are a lot of opportunities still in the business. These opportunities aren't big, $300, $500 million dollar, billion dollar pieces that we can do things in but we do see pieces of business that are $15 hundred or $200 million pieces where we think there are good businesses with good people that want the comfort of our larger capital base and our style of management. And we are talking to people on a regular basis about starting things and building things.

We succeed because we get across the message that everyone that works here is really important and everything they do is important. And having done that and delivering that same message now for 38 years, people actually believe it and it's how we operate our business, so that list of people talk to us and are anxious to join our enterprise, it is getting longer and we are able to be more selective.

So, with that, I would be glad to answer any questions. Greg, if you want to open it up to questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Mr. Charlie Gates with Credit Suisse First Boston.

I had a couple of questions, but first could you comment on your decision to buy in the minority interest in the international operations? How should we--

I think it was always our plan to own it. It was an investment for Northwestern Mutual. I think that it was not a lot of money and I don't think anybody should read a lot into it one way or the other. It was just --- I think our total payment was somewhere between $20 and 30 million and it was--it was something that with all the treacherous things that happened in the financial community in the prior 10 years globally, we escaped without a disaster where Northwestern Mutual didn't make much money or lose much money. We all learned a lot about the global world of insurance, but I think the cornerstone business is there where deposit life insurance business, if you will, saving business in the Philippines and the property casualty business in Argentina, none of which really looked like the Northwestern Mutual model. So, this was just nothing surprising or unusual. I think we are good friends. We are still good friends. I think we have the most respect for them and I think they feel they were well treated and there really was nothing particular to it.

My second question, the assigned risk programs that both you and Gene made reference to were the worker’s compensation programs?

Yes sir.

Charlie Gates. And essentially what you were speaking to was that increased competition contributing to a de-population?

Yes. In other words there were--what really happens is a new player decides to go into the business and [state] and all of a sudden they—they—their pricing is competitive with everybody else, but every broker tries to place their crummy business with them. That is the crummy business that goes into the assigned risk plan that they can't place any place else.

That is why it is tough to be a new player in the market. There is no great impact there. That is just how it is when the business looks attractive. New players come into the market and that causes a de-population in the assigned risk plans because they generally don't compete so much on price as they do on underwriting standards.

My third and final question. Could you elaborate on how you see the devastation in property as a result of these various storms impacting pricing and casualty excess and surplus lines business?

First of all, I think that--let’s talk about some fundamentals. First of all, pricing in the property business has not been adequate to cover catastrophic risks for an extended period of time. And we had a lot of people who were optimistic, then you have states that--that created the Citizen’s Insurance Company in Florida and the Florida—the California Earthquake Pool, and we ignored the New Madrid fault and so we had a long time where we just have chosen as an industry to ignore certain things and we ignore some of those things in the extremes and the casualty business also. So casualty pricing is okay now, and don't think its going to deteriorate as much as it might have. I would have said that 2005 would have been a flat to down 10% year in the casualty business and 2006 would have been down 10%. I now would value, I think, the year 2005 will end up a more flat to up a little in the casualty line and 2006 will be the same.

There will be exceptions. There are people out there who are doing pretty dumb things. They are anxious for cash flow. They need to pay their property claims. They just are incredibly naïve and they are the same people who are frequently naive about their property writings. And--and they are writing to the losses they have every day or the claims they pay everyday. I mean we lost a piece of business to one of the established enterprises and we lost a piece of business at a price that was less than we had written at in 1999, and we looked and said "The good new is they will go broke quick", because the pricing they are making, they will have a short tail line because it was so low. So, there is on occasion a person or two who is doing stupid things. But for them most part, we would tell you that pricing is rational, sensible in the casualty lines and I would say overall flat to up a little bit, and I think it will be that way next year.

Thank you.

Your next question comes from Mike Grasher with Piper Jaffrey.

Thank you and congratulations on I think a very stellar quarter despite the storm events. I wanted to follow up on that question with speaking to your comments around causing the business to remain strong. I think you kind of worked in some comments about agencies in there. Do you would think that by and large it will be due to the agencies tightening on the companies or do you expect some competitors to actually leave the market on their own? Be it closing the doors or other reasons?

Well, I think that the fact is that—I'm not sure what you mean about agencies—what--?

With regards to the rating agencies?

Oh. Oh rating agencies. I think the rating agencies are going to begin to get a little tougher stance. I think that they are going to be a little bit more concerned about pricing adequacy and what people are doing and I think that by and large, people who are aggressive and are not rational, are not rational in not just one place, they are irrational in other places. And--and when you fall in love with numbers and you fall in love with probabilities and you decide that common sense has no place in your enterprise, you fall into a trap in this business. And I think that the rating agencies are sized to be more sensible and they are looking at limits and they are looking at what people do and how they behave and I think you're going to find that it is not going to be so easy to be a new entrant into the business with new capital. I won't say no matter how much capital you have, but it is going to take more capital to be rated and you are going to need not just some capital and some people. You are going to need sound business plan and you are going to have to do more limits testing and I think the agents are going to have to be looking at who they do business with. And so I think there's a lot more of that stuff that is going to happen and you will see rating agencies much more willing to down grade people.

Okay.

And I think the last piece is, you are going to find out Sarbanes-Oxley's is going to really test what a lot of people have to do because many people were through their CAP limits and now are all dealing with their retention, so a 10 or 20% increase in their aggregate loss can mean a huge change in their retention and those rating agencies sitting here are not looking at the same things you are. They are saying "Hey, a small increase in your gross loss could mean a huge increase in your retention and a huge increase in the net to your aggregate capital account. So for many people who are through their re-insurance program and have no capacity, they're going to really be at the edge of what Sarbanes-Oxley is meant to address.

Okay. And then could you walk us through your –the California--the state of California, the lines and rates and what you see out there?

Well, I think that, that the only thing I am prepared to talk about briefly is California Worker's Comp.

Mike Grasher. Okay.

And it's the area that is hardest to walk through because it's sort of like the classic random walk-through theory of what is going on, and you have some really sensible people who are saying benefits have gone down, prices should go down and prices are down a lot probably between 25 and 40% depending on class type and whatever, so those price reductions which you are going to see in our gross premium volume in California are going to basically be what people, in fact, lower the prices by in California, and for us they are already reflected. And that's based on what I think the California legislature did and I think it was smart stuff they did. They lowered some benefits; they put some rationality in the litigation mess. There are two worries you have facing you. Number one, he who giveth, can take away. So, the next step is the legislature may decide to take it away, and then you have to get your rate back. How long will it take you to get your rate back? What are you going to do? And that is a worry we have. It is one of the reasons California Comp has been restricted internally to be less than 5% of our business because it's always been a risk and you can talk to the smartest people in California about it and it's the issue warn they worry about the most. And the second piece is that you have people who have grown a lot in California Comp through aggressive pricing and don't realize that they can't respond quickly. They may not be able to get off risks quickly. That this is a very regulated state. And therefore, people behave in ways that may not make logical sense if the regulators decide that they want to do things differently. So, we have worries about California. We think as much as we may disagree with the Insurance Commissioner and legislature about some things, they did rational and intelligent things in the change in benefits and they got a real benefit in pricing. And we will see if everyone continues to be rational.

Thank you for your comments.

Your next question comes from Mike Dion with Sandler O’Neill.

A couple questions. First off, was there any positive and/or negative reserve development in the quarter?

There was probably close to 150 million but—for the 9 months. For the quarter—for the quarter it would be something like 70.

A little less than 70. I think it had 60 something.

And that was some positive development?

No, negative.

That is negative development? Any color you can provide on that or--?

The re-insurance lines and commercial transportation at the two places we saw some increases in worker's comp and some payroll development.

But, but again I think it was consciously--One of the things you have to be careful of is when you look at our paid-loss ratio and you look at our aggregate, some of the development is us sort of going through everything and being sure that we have adequacy in every place that we think we need it and so we are putting up money in commercial transportation and we are putting up money in re-insurance. We may find that—that we have got – we have redundancies in some other places, some of which we are taking down and we have not been as aggressive, as probably focused, at bringing those redundancies down because the results have been so good. We have been mainly focusing on problem areas.

Okay. Fair enough. My next question would be just—if you could provide a little bit more color on your appetite for additional property risks. As you said at the outset, the companies overwhelming casualty focused, but with--

I think the answer is we are not going to go and set up a Bermuda Company to write catastrophe business. Okay? That we are not going to do. Will we increase our participation in Lloyd’s? Maybe. Would we expand our E&S faculty—excuse me, property business a little by being a little more willing to write business? Sure. We are not going to make a dramatic change and go do—set up a big property program or something. On the other hand, we will go out there and try and do some things where we think there are opportunities that will both be profitable and help our distribution channels serve their customers better. It is a win-win.

Okay, fair enough, thank you.

Our next question comes from Alison Jacobowitz with Merrill Lynch.

It is actually Jay Cohen, can you hear me okay? A couple of questions. Just one more time, just looking at the reserves you sort of suggested that you would be taking a closer look at the reserves year-end and it sounded as if you would be looking at the more recent years and you even suggested that there are some redundancies in there, of course at the same time you have had this consistent prior year adverse development as well. Will you be looking at that as well, to maybe sort of take one final stab at get—at getting that behind you?

Jay, I think that the process we go through is one of looking at every company and trying to get it right. And then we look at - and do it on multiple levels. We do it on the individual company, financial and actuary level. We do it on our corporate actuary level and then overall corporate levels. So we have multiple levels coming together to do this. And I think that what I am really trying to tell you is as follows. If our duration of our liabilities is about 3 and ½ years and for more than 3 years, our paid-loss ratio was under 40%, which is almost the duration of our liabilities, at the point when our paid-loss--when our paid-loss ratio equals the average duration of our liability, that paid-loss ratio should equal or approach the effective incurred loss-ratio at that moment of inflection. And when it doesn't, that is telling you, you may have reserved more cautiously than you should. So there are some macro tests that are saying that our numbers in the aggregate may be too conservative. Although all of our examinations on a company-by-company basis still tell us, while we may be slightly conservative they are more likely to be right on. So we are trying to reconcile that number. But each quarter we go with a paid-loss ratio this low, we all get concerned that we are in fact being more cautious than we should be.

That is a good answer. That helps me. I guess to follow up on that then, lets say you do a more in-depth study and you do realize that there has been a – yes hello?

Jay, Jay – I cannot – what I am trying to tell you and everyone else is that we are concerned we are being too cautious and that is really all I can tell you. If I could tell you more, I would have reflected that in my financial statements already.

No, I am not asking that, what I am saying is, if indeed you find that you are too cautious could it suggest that, assuming pricing stays fairly flat, then next year you'd have to assume a lower loss-ratio effect.

I think that, that would obviously be the care. On the other hand there would also be inflation that would likely inflate losses by 3 or 4%. So it depends on how much that was the case, but it would certainly make you more positive about next year.

Okay that is great.

Your next question comes from Stephen Pearson with Citadel Investment Group.

You hit my question, thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from Joshua Shanker with Citigroup.

Good morning there. A few questions then you can through me off, because I have a bunch of them, if I have too many. But the first thing you mentioned that might make a foray into property to some extent with better rates, what kinds of lines would you guys enter?

Well as we tried to say, we will just expand the stuff we do, we may take a little bit bigger piece in Lloyd's or we might be a little more aggressive in our property faculty or in our E&S faculty. We are not going to go out and do new things.

Okay, very good. In terms of, there has been a lot of talk about rating downgrades in just some companies that were thought to be capitally adequate on the property re-insurance front, but have raised a lot of capital and so the risk management has come under fire as a result. Are there some re-insures, who in the future you would choose not do business with, who as a year ago you thought were more secure credits?

Of course, in fact we have taken three guys off of our list.

And –

Fortunately they do not owe us any money.

Okay, and do you see the ones—do you think there is going to be a spike to quality in general? Or do you see everyone finding business in the hardening property market?

I can't tell you what everyone’s view is going to be. I think that there is clearly going to be a lot of concern about people’s willingness to take financial exposure. And I think the rating agencies appropriately, and anyone who has been on our calls for any length of time has heard me laugh about the rating agencies and the people like RMS who give these probabilistic models, they just do not know what they are talking about. They just—they put a lot of numbers together but they are no better than making them up. And 1 in 100, 1 in 250, 1 in 1000, maybe it is 1 in 1 million; they have no idea. And we saw it in Katrina. Now I'll get 14 phone calls by lawyers waving at me and saying for me to shut up. But the fact is that—that you have to underwrite these things to AMLs, to absolute maximum loss and if you do not have an absolute maximum loss, you do not know what your exposures are. And I think that you are going to have a new set of underwriting criteria. And you need a lot higher rates with the higher values. And I think when you start to put all these things together high limit catastrophe coverage's may not be available at any rational pricing. And therefore, all excess limits, all high limit property covers, may have to be totally reconsidered as to their pricing levels. There are a number of people who have written large property risks who will never get the capacity back that they had in 2005. And that means there may be opportunities, but the opportunities will give you a huge amount of volatility and then there is the question - can the people who need to buy the protection be able to afford the economical cost concomitant with that risk? And there is real question whether they can, whether they like it or not. So I think that those are the issues that are going to be faced. But why - the cheapest insurance is not to buy any and sometimes some of these people are buying these high excesses from people who might as well not buy them because they have no chance of getting paid.

Now, in terms of your strategy, I have looked, the numbers are fantastic, and you have a great diversification strategy that is really working for you. Is there any--what is the real risk near terms to your predictions about maintaining a 20% ROE over the next year? What would then call into question?

I think for over the next year we are okay. I have to justify that to the lawyers before we could write it down. So I think we are okay for the next year.

Well, what's lying in the face of making that the prediction wrong?

I am not sure what would happen. There is--what always happens in this business is the unforeseen event and that is always what happens and if I could tell you what it was, we wouldn't have written it down. So there is always the unforeseen event. But, I do not know what it is. And I am not trying to be cute. We think it is a highly likely event, but there is always that unforeseen event that goes wrong. That somehow or another bites you when you do think it can happen. The coverage that you did not think you had, the exposure that you did not think you had. We heard about an insurance policy we had that had flood, it wasn't supposed to have flood. Fortunately there was no claim, but we found out we had a policy out there that included flood that was not supposed to. You yell, you scream, and you are embarrassed and upset, but what if you had had a claim. It would have cost you a million dollars. So, it's always the unforeseen event.

Sure, sure. And then finally, I guess, back on February, you had said that you were very comfortable with the first call consensus, which at the time would have been a 365. Are you still comfortable with it today? For year-end 2005?

I do not even know what it is.

I do not know what it is. I am saying, that number, you are comfortable with that back then, I am trying to gauge your 4th quarter confidence a little bit?

I don't give a quarter-to-quarter estimate. Whatever I said then, I have not changed my view. We are going to have a great year. And I am pretty happy with the year. If anybody has changed their estimates in the past 24 hours, I am more than happy to say our numbers will beat or exceed where our forecast is.

Wonderful. Well, thank you very much. Great quarter to you.

Your next question comes from Mr. John Keefe with Ferris Baker Watts.

Yes, thank you, Gene, a simple numbers question. Do you have the balance for cash and equivalence at the end of September?

Yes, well we sometimes quote the under two year short-term investments [fee] with a maturity of under 2 years--

Right.

And at 9/30, that was at $2.7 billion, and $2 billion at 6/30. 2.2 billion [indiscernible].

Okay--

You will notice the cash value flow was just been an overwhelming number. It was I think $600 something million.

Yeah. I recall. And that was your market cap. That is amazing.

I remember when the market cap was less, John. You had just recommended at 600 million. We had already gone up 50%.

Right. William, can you comment on opportunities of challenge or what you are seeing going on in the specialty segment?

I think that the opportunities are always more difficult as we have gained in scale and size, to find new things to do that we can turn up and we are devoting a lot of time and effort to finding those things. And I think it is where we have done well is by finding particular businesses to buy or start and we are out there constantly turning over things to do that, and we have got a couple of things we are hoping we are able to get going in the next 60 or 90 days. And we are continually out there, but it is not a particular thing. It is just new opportunities, different ways of looking at things. Looking at segments of the business and seeing if there is a way to dice it or slice it a little differently. It is not anything in particular.

I see. What opportunities might be similar to say the gulf renewal rights deal?

We are certainly looking at renewal rights transactions in some of the them, but again, we would rather maintain the business we have and work on, focus on, our balance sheet, reducing our capital, than expand into areas that we do not understand or we can't manage the risk. So we are anxious to grow. We are anxious to take advantage of opportunities. We think business is going to be good. And we see lots of opportunities at the moment. But we are not going to do things that change the overall risk of the enterprise.

Okay, very good. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from [Felice Gillman] with Genova Capital.

William, just--you made some interesting comments on re-insurance and the availability of high access cover. At the same time, I think probably anybody who invests in insurance access is probably getting one call a day for, you know, talking about some new vehicle that is starting up. Can you just talk a little bit more about how you think that is going to play out and are we just going to see a new wave of new players to replace the old players? Or--

First of all, I think that most of the people in this business are not doing it in a way that gets you an appropriate risk adjusted return. Because I think what happens is, they start down the road to do this, and then they do a hundred other things and they destroy the opportunity. I think you can look at some of the people that got hurt badly in Katrina, and they lost everything they had made in the prior three years. And Katrina was a bad hurricane but it was far from the worst scenario you could have painted. People like to act like this was the one in a thousand year storm but it wasn't. It wasn't anything like the one in a thousand year storm. A storm in Galveston Bay, a storm in Tampa Bay, Miami, there were so many places that would have been so much worse. This was not this thing that they are talking about. It was a bad storm and don't misunderstand me, it was terrible because of loss of life and because of a lot of other things, but as far as insured damage goes, this was not the storm to end all storms by a long shot.

I think that—that most of the people haven't done their numbers in understanding how much capital they need to write how much business and where they have to have the attachment points because, I believe, the rating agencies have maintained their standards of performance will require people to have a loss if they have AML, or an absolute maximum loss, of all they put out in any one zone, to use no more than 60% of their capital for one loss or 100% of their capital for two losses. And that means you can sustain two losses because most people have to sign on with a certainty for two losses when you take the business. So I think that that changes the available returns for people in most cases and what people are doing with raising the capital is they are busy giving these RMS models based on PMLs and I don't think that they come up with the returns that people really expect and they are getting up front big fees and big margins and restricted stock and all that stuff and investors are being fools. Fortunately it's not something that we are prepared to do or put our name on because we've had plenty of opportunity. And we just don't think most of them are worth doing from the investor point of view and therefore we are not going to put our name on it in any way, shape, or form.

Gotcha. Thanks.

Your next question comes from Kenneth Billingsley with BB&T.

My question is regarding distribution and prior to the recent hurricanes, you were not cutting back on top-line growth like other competitors. Now, following the hurricane have you had any kind of competitive advantage from a distribution standpoint since you've had an appetite for running more business and if there was a competitive advantage, how long would you see that lasting?

We have fortunately never been in a mode of not writing business if it's available and at what we think is a rationale price. There are times that it's a competitive advantage; there are times that its not. I am sure our E&S companies found it a competitive advantage for the past few weeks to write back property business. And the people they did business with found it nice that they had a home to go to and we probably wrote some more business but more importantly, we got across the view to our distribution channels that through good times and bad we're there, we're a consistent player, we do the same thing we did yesterday, it raised our prices a little, but we basically were there the same way. And we didn't raise our prices 30 or 40%, we raised our prices 10%. And if fact, we didn't raise our prices every place so—I think the cornerstone to what we think we do better than most people is we have a disciplined pricing environment, we are there all the time. So, times like this reinforce the value for our distribution channels that were there and yes, I think we got some real benefit by it. I will tell you that unfortunately from my wife, I've spent a lot of time in the past seven weeks visiting agents on the road and I've probably seen 500 of our largest agents and they all, in fact, recognize that and you could dramatically see a change post-Katrina in how important they recognize that commitment was. And the past two weeks when I sat down and talked to agents from the mid-Atlantic region of the U.S. as well as some of our specialty agents, they well knew how important it was that we were there and we were there the day after Katrina the same way we were there the day before. So, yeah it has given us a benefit.

And let me--You said you were planning on expanding slightly in some property line majority participant end, but did you see that benefit on some of the casualty lines as well?

I think some, but—but that—that I think we got the benefit again because we were consistently there. I don't think it was—I think we got a little better pricing at a little better response from our customers more than anything else.

Thank you.

The next question comes from Kevin Shields with Philadelphia Financial.

Hey William. Could you give us some additional color and characterize how you view re-insurance counter party risk? And whether it is enough that you not be given AMLs for counter parties that you would take them off of your list. Or do you have absolute maximum losses for all the counter parties that you had?

We buy in large do not buy much re-insurance. Our total cost of re-insurance outgoing is probably less than 4% of our total premiums. And most of that is catastrophe premium clash cover. So we do not buy a lot and the stuff we buy, we buy it from people who we think we are unquestionably comfortable with. Our list of approved across the board re-insures is less than 10 in the world. So we have a very selective list. If we think that we need to calculate that we probably take them off of the list.

Thank you.

You have a question in queue now from [Ken Zuckerburg], from Carlin Advisors.

Good morning William. It is an industry question. When I look at some of the losses from Katrina and Rita, as reported by some of the national primary companies, I am confused in at least one case, by how large the loss was given that companies relative share on the homeowner market. Which leads me to believe that Inland Marine may have been the culprit there. Can you just speak to that a little bit and whether or not there is any concern in your mind that adverse development from the hurricanes might come from Inland Marine? And then also maybe you can remind me and maybe others, is that a business line that you see or do you see opportunities and/or are you very active in? Thank you.

Actually the only thing I can think of is this is interruption that could be significant. I think that, first of all, there is--other than the homeowners there is substantial commercial property. But the two areas that I think are going to be the surprises in Katrina, are going to prove mold and business interruption. I think that what exactly has been written, how it has been written, how limited or unlimited those things are, are going to be big issues. I think that you have a lot of people who do not really understand their insurance coverage’s, their limits. You're going to have a lot of agents that are being put out of business, who are having a hard time getting organized. We were the first company in Mississippi to be down there with satellite phones and we have settled most of our claims already, and we are done. But if you have a claim in a large commercial building and you have the business, and the office, and the whole thing, it is going to be very hard to figure out how to settle what your exposure is, where it is, how much do you have to pay, and a lot of theses things are not black and white. So I think it can be easily be a lot of development and a lot of issues. So I do think there is. And I think what makes this a unique situation, that if I were an investor I would be worrying about, every single company who has used up their existing re-insurance capacity and is back to their own net, I would have to keep in mind that that development, which may not be big as a percentage of the gross, may be very big as a percentage of the net. And it all comes back to that. And those people have a big problem because of their Sarbanes-Oxley issues. How do you report that? What do you put down? And how do you get some sense of accuracy, no matter how hard you want to try and get it right.

Thanks very much William. That was helpful.

The next question, again, from John Keefe of Ferris Baker Watts.

Yes, Gene, can you tell me what your [IBMR] looks like at the end of September, a dollar amount?

Yes, hang on one second.

He is getting old and his memory is not that good anymore John. He has to look it up. When he was younger and just joined us, he would know it off the top of his head.

It will be $3.3 billion at 9/30 and that is up from $2.7 billion at the beginning of the year.

Thank you very much.

And gentlemen, there are currently no more questions in queue at this time.

Thanks a lot. Have a great day.