W R Berkley Corp (WRB) 2006 Q2 法說會逐字稿

Welcome to today's W.R. Berkley Corporation first quarter 2006 earnings conference. This call is being recorded. On today's conference these remarks may contain forward-looking statements. Some of the forward-looking statements to be identified by the use of forward-looking words including without limitations, believes, expects or estimates. We caution you that such forward-looking statements should not be regarded as a representation by us and future plans, estimates our expectations contemplated by us would, in fact, be achieved. Please refer to our annual report on Form 10-K for the year ended December 31, 2005, 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 be 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 to future events or otherwise. At this time I'd like to turn the call over to Mr. William R. Berkley, CEO and Chairman of the Board. Please go ahead, sir.

Good morning. It seems to be a quarter where many insurance companies have good results. I think that we're pleased we continue delivering returns that are not good but are substantially better than the industry with a return to equity above 25%. I think that we couldn't be more pleased with our business. It's exactly where we expect it to be at this point in the cycle. To deny the cyclicality of our business would be silly. On the other hand, opportunities are always there. Acquisition opportunities, unfortunately, at this point in the cycle are frequently grabbed up by people who don't understand the downside of the business, but internal growth and chances to write new business do exist. Overall, pricing is down modestly to 1 to 2% barrier, occasionally 3%. There are places like California comp where pricing is down substantially more, but it's more than justified by the level of losses. There actually are areas in the business where pricing is modestly up again. Modestly, meaning less than 10%.

We continue to see opportunities on an erratic basis and difficulties on an erratic basis. One of the things that we've been trying to explain to people, and we continue to try to be sure people understand is business is still extremely profitable. Opportunities are still out there. But, unlike 2003 or 2004 and most of 2005, there are not new, tremendous opportunities every day in every segment of our business. We do see these opportunities. Some aren't on a consistent basis. Some aren't as exciting, or some result in other competitors taking actions that we think are silly. But, it's interesting to look at our business. When we look at our growth, and the growth by segment is extremely sporadic. The ranges, for instance, in our specialty business in the first six months of the year, we've had months where our specialty business premium volume has been up 16%, and we've had months where our specialty premium volume has been down 9%. In our regional business, we've had times where our premium volume in one month may have been up 7 or 8%, and the premium volume in another month might be down 5 or 6%.

Alternative markets, the same is true. Up one month by 16%, down one month by 15%. So, that erratic situation is this combination of price change, opportunities for new business, in some cases, particularly unique things. That's mainly true in the reinsurance business, where there's been dramatic changes in volume because of particularly good, large opportunities or the loss of large prior opportunities. But, we continue to get more than our share. Our investment in our new enterprises is just beginning to pay off. It gives us a small amount of new business so far this year, although, we expect we'll see more in the third quarter, and the real beginning of that investment will be visible in the fourth quarter and into the first quarter of next year and on through next year. I think that if I were to lay out one issue, it would be we are optimistic about continuing to be able to deliver returns. We've always managed, not just based on opportunistic managing of our business and seeking out good returns, but also we've managed our balance sheet and our capital structure. So, at the end of this past quarter, we bought back 1,400,000 shares of stock. And in order to be sure we let people understand, we don't have a set price to buy our stock back. We don't have a set plan.

It's an opportunistic view based on our examination of our forecasted returns and the price of the stock. So, we can buy the stock back at less than $32 a share. We expected our book value at the end of this year to be something around $16 a share. Thus, we can buy the stock back at less than twice book, and we were looking for returns in '07 such that we would really be effectively buying the stock back 18 months out or something about one-and-a-half times book value give or take. And given the fact that we think our reserves are pretty conservative and we've got some good values on our balance sheet, we thought that was an attractive thing to do. It's the one plus of our stock having traded down. We think that opportunities is something we had expected to happen when we had our last conference call. We see nothing on the horizon that's going to change our view of the returns in our business. Our loss picks for the current accident year built in what we think are price changes and inflation. So, we think that the current accident year loss picks as presented in our financial statements are such that we continue our conservative level of preserving, and we certainly are pleased with the returns we're generating. And given our increasing capital base, we are quite confident that those returns will continue at least through 2007. And while the lawyers don't want me to project more, there's nothing at the moment that's on the horizon that will cause us to be particularly shocked or surprised at what's going on past 2007, but, obviously, the nature of our business is such the further out you go, the more uncertain. Any projections are. Before I go on, I'm going to let Gene Ballard talk a bit about the financial results of the company, and then I'll come back and answer questions. Gene.

Thank you, Bill. Well, for the second quarter, our net operating income was 166 million. That's up 27% from 130 million for the second quarter of 2005. And on a per-share basis, that's operating income of $0.82 per share, compared to $0.65 a share a year ago. With respect to insurance revenues, our net premiums written were 1.22 billion in the second quarter. That's up 7% over the prior year period. And as Bill talked about, we had expected to see and did see more variability among the business units this quarter. In the Regional segment, for example, we saw premiums grow 6% in the second quarter after decreasing by 1% in the first quarter of this year, even though there were really no obvious changes in the marketplace from one quarter to the next. In the specialty segment, we saw our second quarter premiums up 6% for the E&S lines, but down some 8% for [admitted] lines as a result of lower premiums for D&O business and certain specialty program business. The reinsurance segment had another strong quarter, with overall premiums up 33%. That growth was primarily due to approximately 42 million of new medical malpractice reinsurance business that we discussed briefly in our conference call last quarter.

For alternative markets, as we expected, premiums decreased by 12%, due to the impact of year over year rate decreases for workers' compensation business in California. And for the international segment, premiums were up 33% with strong growth in both Europe and Argentina. As Bill talked about, two of our four companies that we formed at the beginning of this year have started to write business and accounted for premiums of 11 million in the second quarter. We do expect those companies to continue to grow, and for the other two companies to begin writing business in the third quarter of this year. The second quarter combined ratio improved to 88.9% in 2006 from 89.2% in '05. The improvement was due to less prior year reserve development this year and to an overall expense ratio. Whereas we increased prior reserves by approximately 40 million in the second quarter of '05, in this year's second quarter, the change in prior year reserves was really insignificant, up just $7 million on a base of 6 billion of beginning of the year reserves. That improvement along with the lower expense ratio was partially offset by higher second year storm activity in '06 compared to '05 and by an increase in our selected loss ratio for the 2006 accident year. All five business segments had combined ratios under 100, with specialty at 85.7, regional at 92.2, alternative markets at 74.9, reinsurance at 99.6 and international at 92.5. The increase in the regional loss ratio was due to the higher weather-related losses in the Midwest, which were some 20 million in this quarter, compared with about 12 million in the second quarter of '05. The paid loss ratio was 38.0% for the second quarter. It was 37.9% year-to-date, and if you go back four-and-a-half years, going back to 1/1/2002, on a cumulative basis,it was 38.2%. So, it's been remarkably stable throughout that period of time right up until this quarter.

And, of course, with that level of paid losses, our operating cash flow has remained very strong with 348 million in the second quarter and approximately 1.8 billion over the past 12 months. That's helped us grow our investment income, which was up 55% to 145 million in the second quarter. That increase was due to a 22% increase in the average invested assets and a 29% increase in the average annual yield, which on overall business rose to 5.4% in the second quarter compared with 4.2% a year ago. At the end of the quarter, composition of our portfolio was mostly unchanged. We still have 80% of the portfolio invested in cash and bonds, with almost half of that tax-exempt bonds. The average duration is down slightly, 3.9 years at June 30th, compared with 4.0 years at March 31st. And the average annualized yield on the fixed income portion rose to 4.7% from 4.1% in the prior-year quarter. The remaining 15% of the portfolio is invested in common and preferred stocks and other investments, including approximately 750 million in the arbitrage trading account, and the average equity yield rose to 7.4% in the second quarter from 5.6% in the prior-year quarter. The overall tax rate was 29% in the second quarter, and that leaves us with an after-tax income of 165.5 million. That gave us an annualized return on equity of 25.8% for the quarter, which as we note in the release, is our 15th consecutive quarter with an ROE above 20%.

Thank you, Gene. I think it's important to note that unlike many of our competitors who have a large segment of business and property business and who pay a significant price during the recent storm season and got lots of benefits this quarter, in spite of the fact that we didn't benefit by those property loss ratios being so low in this quarter, we were still able to generate returns in excess of most of them. We think we continue on the right track. We're very pleased with where we're going. Business continues to be strong. While we have to admit there are occasional competitors who behavior in irrational ways, the biggest fear we have that we're addressing, is naive new capital, making acquisitions where we feel there'd be great opportunities for us, and those acquisitions are disappearing into various venture funds that don't recognize the volatility of the insurance industry. So, that prevents us from deploying our excess capital in those acquisitions, because we continue to be disciplined in that area. That's one of the other reasons we were more willing to buy back some stock a bit sooner. Before, in the last cycle at this point in time, it was easier to find things to buy at rational prices. Today there's large amounts of private equity capital in what I call naive capital. Naive from the point of view that the risks in the insurance business out there, and that really has kept us from being able to find opportunities, external to our ongoing business. So, with that I'd be happy to answer any questions.

[OPERATOR INSTRUCTIONS] We'll take our first question from Charlie Gate, Credit Suisse.

Hi. Good morning. Could you speak to the contribution, that is the investment income contribution, from the merger and arbitrage account in this year's quarter versus last year's quarter?

Yes. I have to get the numbers. I think it's it's better, but --

The trade account return was 9.7 this quarter compared with 2.5 a year ago in the second quarter.

That's on an annual basis, 7%, so, it's 49 -- so it was $10 million. So, that probably accounted for about $7 million of additional investment income.

Approximately $7 million additional?

Right. That accounted for $7 million of the additional investment income.

My second question, could you elaborate on the competitive environment in excess and surplus lines, casualty markets, and in your comments, or your answer, could you respond to the competition in commercial auto insurance?

First of all, I think competition exists across the board. Recognizing there are a few aggressive people always at this time in the cycle, but they don't have enough capacity or enough relationships to take all the business. So, I would tell you that in general, the excess and surplus lines of business pricing is from flat down 10%. There are occasions where you get the standard market coming back in and that you see them quoting prices of 30% of our renewal, especially on the largest E&S risks. So, you see people who left particular areas of business because of its risk and volatility, and out of the blue, you'll see one particular risk that's gone back to the standard market for some reason. But, I would say across the board, your seeing probably prices down something less than 5% in the E&S business, and for some segments of it you're not seeing pricing at all down. I think in commercial auto, prices are down modestly. It's not terrible. There's one company that's particularly aggressive that we see in a number of places, and I would say there's sort of taking prices down. I think we've learned a lot because of our issues and concerns. So, I think at this point in time, my assessment of commercial auto is that we've been in a reunderwriting mode now for 18 months. We continue to work on that, and pricing is probably down a little bit, but not particularly bad yet. It is aggressive, however, in the large fleet business, which is not where we compete for the most part, Charlie.

Where would your commercial auto business principally be focused?

We're on what I would call the small fleet, large privately owned groups. So, five units to less than a hundred with the sweet spot sort of being 25 to 50 units.

Your comment that you saw where some business was going back to the standard market, and in that regard, it could represent a 70% price adjustment --

These are on an especially large risks. The standard market is getting a bit more aggressive on large risks. Things with premiums of 3, 4, $500,000, where the standard market is anxious to get that premium back.

I guess my final question. Are there any specific lines where you see that kind of recurrence of the standard market?

No. Although, we see recurrent companies doing it. There's no particular lines. I think that for a short time, you saw some companies actually we thought were really smart doing it, and they got back, very quickly, under control. But there are still a couple of people out there being aggressive, wanting to get volume at the expense of profitability. I think there were a few other people doing it, but they're back under control. I think for the most part, there are just a couple companies out there being very aggressive, but as long as that's the case, it's okay.

Thank you.

Thank you. We'll take our next question from Joshua Shanker with Citigroup.

Good morning.

Good morning, Joshua.

A few questions. The first one involves the investment portfolio. According to my [inaudible] calculation, your yield on investments has expanded by about 110 basis points over the past year. Obviously, there's been a duration expansion. What's the makeup of the portfolio, even over the last six months changing?

It hasn't been much duration expansion really at all. You have to remember what's happened with short-term rates. Just the rollup of our portfolio, first of all, you've had 1 billion, $800 million of cash flow. So, that's a big piece. Second of all, you've had, effectively, 2% average yield in short-term securities rolling over to become five year, 5% average yield. So, the whole $2.5billion short-term portfolio has increased its yield by probably 300 basis points. So, those are the two things that really have been driving it for the most part.

And the second question involves share purchase versus special dividends. No one likes to give special dividends. Do you have a very high stock price compared to your peers? Your thoughts on special dividend in general.

If there's ever a company that would like to give special dividends, it's this one, since I'm the biggest single shareholder by a lot. I think that the ultimate use of special dividends does less to enhance shareholder value when business continues to be good than volume-backed stock or finding new opportunities. If, in fact, we didn't see good prospects for our business, then special dividends would be the avenue that we would probably follow, because it would be silly to buy back your own stock if, in fact, you were, in essence, not generating good returns in your own company. So, I think as long as we see good prospects, I think buying back our own stock is the right thing. But, honestly, if the stock has been at 40 instead of at 32, I'm not sure what we would have done. It's a constant judgment. I have no interest in telling people what we're going to do. We're going to do what we think is best for our shareholders at any moment in time. But special dividend is a way to use money when you don't see a way to use it within your business, and you don't think repurchasing stock is advantageous for some reason or other.

And in terms of your view on the level of moderation and opportunity, [inaudible] repurchase means the opportunity are moderating. They haven't gone away, but they're moderating to some extent.

Well, again, it's a combination of opportunity. That was a single stock purchase transaction. Someone offered us a block of stock, and we took advantage of it. We weren't out shopping. I think that we also had several things that we had looked at that we would have liked to buy that went for prices that were so far in excess of what we thought the fair value was. We just shook our heads. And, therefore, we just wondered what investors were thinking about. So, I think we also are generating a lot more capital then we're going to be able to use. When you're generating 25, 26% return, and even if we are on a higher side with 10%, that means we're generating an extra $300+ million dollars in capital this year and probably the same next year. So, that's a decision of how and what do we do with the capital.

Well, perfect answer. Thank you very much.

Thank you. We'll go next to Michael Grasher with Piper Jaffray.

Just a couple of quick follow ups. What's left on the authorization for share repurchase?

I think about 3 million. Just about 3 million. We have no hesitation to get an increased authorization.

And your targeted risk to surplus ratio?

Depends. It's not an ongoing issue. It's a constant evaluation of where are we in the cycle. I think risk is not -- premiums to a surplus or reserves to surplus. It's got to be -- the risk is relative to the exposure in your reserves and in the premiums you're write. So, today we don't think we have much risk, if you will, in our reserves or in the business we write. So, we will be, truly, willing to be a lot more leverage than we are now. Two years from now, we might be wanting to be a lot less leverage than we are now. So, I think it's a constantly moving target. I would say on the outside we're going to stay under 2 to 1, which is where we were at our most aggressive, and we're about 1.3 to 1 now, and I would think that that's more conservative than I'd like to be, but one has to hope that they find opportunities, but that's a continuing evaluation.

That's helpful. And then speaking of opportunities, as Gene mentioned, 11 million in new enterprise premiums in the quarter. How quickly or where do you think that goes over the course of the next 12 months?

I think what we told people back when we sort of started them was, we expected this would be of some consequence by '07. Consequence to us means measured in the hundreds of millions of dollars of premium for these four start-ups. I think that's sort of where it is. It's hard to tell. A couple of these lines of business have big renewal dates where big pieces of the business come up, and will we be fully up and ready to write the business. And we continue to examine, on a macro basis, industries where we think there are really good opportunities. But if I had to guess, it would certainly be multiples of this by the fourth quarter, and I would expect in at least several hundred million dollars of business next year if not more.

Okay. And then just a reminder, the four line, or four different ventures would have been aerospace, sports, entertainment?

No. Aviation.

Aviation.

Online workers compensation, medical, soft loss business, health and accident, if you will, and another facultative reinsurance operation. The facultative reinsurance has really got off to the fastest start. Aviation is next. The health and accident and online workers' comp were slower because they require more infrastructure.

Okay. Thank you.

Thank you. We'll take our next question from Jay Cohen with Merrill Lynch.

A couple of questions. Just to clarify the question on the merger arbitrage. You talked about the return being 9.7% versus 2.5.

Right. On an annualized basis.

Correct. One would assume the 9.7 is closer to your expected return than 2.5% annualized?

The merger arbitrage -- what we do is announce [inaudible] merger arbitrage is related to a multiple of the ongoing interest rates. So, when short-term rates were 1%, a 2.5 or 3% return was sort of, was okay. When short-term rates are now 5%, 9% is probably okay too. So, this is for us, has always been viewed as an alternative for short-term money, because, in fact, we can take your money in and take it out. It also has to do with liquidity in Wall Street firms who have big desks that do this, Jay. So, it's going to move as some multiple between 1.5 and 2.5 times, whatever short-term rates are.

So, the 9.7% is not some unusual, outsized number at all?

No.

Okay. Next question, probably just a quick one. I think I know the answer, but catastrophe risk has gotten priced up pretty dramatically this year. You made your views on cat risk pretty clear over the years, but given how much the pricing has improved, maybe more so than people would have expected, have you reassessed your willingness to take on some additional cat risk?

Well, first of all, we looked at it in January, decided prices weren't so good. Prices got better, and we increased our cat exposure modestly, but to the tune of probably just $5 million of additional premium. So, nothing significant. I think it's something we constantly look at. Our capacity to take on that risk gets greater and greater as our income stream get greater and greater. So, it won't create extreme volatility for us. The problem you have to look at in catastrophe risks, which is one that investors, I don't think are as focused on as we are. And as you and I have talked about, from my perception, this is managed as though I'm worried about all this money like it's my money, and the perception that I worry about is, I see insurance departments forcing you to renew your risks. You can't cancel. That's why we got out of personal lines business, but it's a big problem for Allstate and State Farm.

You see litigation creating uncertainty about what's covered and what's not. You see, in fact, even E&S companies being forced to renew in some states. And when there's a crisis, you just don't know how the government is going to behave. And the history is that they will behave as appropriate to respond to their voters, and not to the insurance industry. And, we have yet to get real recognition that everyone would put economic rationality in. We would have better building codes. We would have less losses. But, until I start to see that recognition of economic reality, I'm not going to jump in. If I start to see that happening, I'm more willing to step in, and we have done it in a few places. Where we've been pleased with that economic reality, we're more than willing to take risks.

Okay. That makes sense and consistent. Last question, I'm not sure what the question is, but I guess it's related to reserves. You've had this relatively low pay to incurred ratio now for several years. And given that trend, one would sort of expect to see some more material net reserves releases. And I saw in '05 you were releasing some of the more recent years, still adding to the older years, but given the trend, is it a crazy thought to sort of expect some more material net releases of reserves going forward?

Well, first of all, four and a half years reserve is, roughly, is 40% [paid]. And that really makes people like me, who have a tendency not to sleep well, sleep better. But, I don't see why -- our returns are over 25%, and I don't think taking more risk and uncertainty is what we ought to be doing. We ought to be looking to be as cautious as we can, and as time evolves we'll be more certain about it. I do believe we have more conservative reserves today than are required. However, that isn't the view of the people in the field. And, I keep telling everybody that, and I talk to people here and they say no one believes Bill Berkley, who's such an aggressive guy, would let us keep those of conservative reserves. But, in fact, the problem you face is persuading, as opposed to directing, people that their reserves are too cautious and conservative. And that's a constant process. It is something that goes on all the time. So, my guess is, you'll start to see some of those things happen. But, any examination of our dollars or reserve per policy would tell you that our reserves are more than double per policy what they were three years ago. So, that would give you an indication that our reserves are probably cautious, but if we had higher returns than 25% people would just tell us it's a onetime return, it doesn't matter.

It also sounds like you're committed to the integrity of the entire actuarily process too.

Well, the fact is it is a problem that we have, and corporate actuary here shares my view. But, he also believes we need to persuade the people in the field, because it's an issue that -- they went through this process when we were short, and you need to persuade them that getting it right is really what we want to do.

I assume these are some of the same people lived through the late 90's, early 2000 timeframe?

Yes. We don't believe in a recycling. We believe in getting the benefit of what we already paid for. They learned on our nickel, so we might as well take advantage of what they learned.

Great. Thanks.

Thank you. We'll take our next question from William Wilt with Morgan Stanley.

Good morning. I guess coming at the reserve question a different way or just following on what you just explained. What would --

Aren't you and actuary, Will?

I was waiting for you -- I thought you were going to throw them under the bus more than you did.

No. Some of them are good guys. They actually get it right.

I know a few are good guys. But could you, I guess taking it to the next level, where you to begin to bring some of those reserves back into the income statement, what would be the inference in terms of the feedback loop between reserving and pricing? Does that portend a faster decline in casualty rates if you start to -- you or just others in the industry. Once you recognize the --

First of all, our pricing wallet, it is reflective of reserving. We have separate people who examine the reserves and set pricing. So, for instance, in one of our units, they might say, it's great to have [inaudible] loss ratio, but we probably have a greater margin here. So, you've got -- the underwriters are told you have some flexibility. So, one of the benefits of being a smaller company is the pricing actuaries get to talk to the underwriters. They don't send memos out to 6,000 underwriters. They go and talk to the 20 people who do it and say, look, I know what pricing we're printing, but there's probably a level of conservatism in there, so you've got the flexibility. So, I don't think that would have a dramatic impact on our pricing. And, honestly, I've been trying to persuade the actuaries that our reserves were some level of overly cautious for 18 months to very modest avail. And, it isn't that I truly haven't tried to persuade them. It's that you have -- ultimately, if you want to have integrity in the system, and the way our business works is, you do your very best to persuade them about these issues.

Makes sense. And the second, if I may. An industry question, but also for implications, if any, for Berkley. Your thoughts on the, for D&O, O&E, the implications from the backdating of options investigations.

First of all, just for the record, in fact, of all of our D&O, we have one company that has given us notes with pretty modest exposure. I think it's a problem. I think these things have issues, but the biggest problem is, I think it shows, clearly, there was a group of entrepreneurial businessmen who, for various reasons, just looked at the world in a different way than the underwriters did, and these are just things you didn't think about. And, my guess is for, we are a small -- we write a lot of D&O coverage, but it's for by and large smaller companies, but I think it's going to be a complicated issue. I don't think it's going to be huge numbers, and I also think it can be undone. You take the options back. You get the money back. The people are there. The options are there. So, I don't think it's going to be a huge dollar D&O issue. I'm naive enough to have been shocked at the whole thing.

Very helpful. Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Meyer Shields of Stifel Nicolaus.

Good morning. The $7 million in net reserve strengthening that was reported in the quarter, is that discount in lending, or that a re-evaluation of full-value losses?

Re-evaluation.

Okay. Also, can we get the amount of servicing expenses in the quarter? It looks like the margin there is down year over year, again. I'm just trying to confirm that.

It's actually up. Let me grab that. Service fee profits were about a little over 5 million in the second quarter of '06, compared with just under 5 million in '05. So, it's not up much. It's up slightly.

Basically, for all intents and purposes I would have said it's, basically, flat.

Okay. And turning to the international operations, I guess two questions. First of all, it looks like net to gross premium ratio dipped a little bit, and I'm wondering if that's because it's a new venture or if there's something else underlying that?

I'm sorry. It looks like --

The ratio of net written premiums to gross written premiums is down a little bit.

The one piece of that growth came from a particular piece, a large piece of business, where as part of that we see this 50% on a quarter share basis.

Okay. Is there anything in Latin America that presents a market opportunity similar to what you're seeing in Europe?

I think Latin America is very move on its own market. I don't think it really is moving like Europe. I think the legal system in Latin America is under some upheaval. I think all the political stuff you're seeing in some countries is putting some pressure back on the system, again, for enforcement of policy terms and conditions, which I think gives you some concern about inflationary pressure and the intention of these things. I think in much of Latin America, the crises that arise are the unwillingness to maintain a resolve. The resolve comes about when a crisis happens and solutions are put in place, and the pain for the solutions build over time, and then the resolve gets less certain. I think that in some places you have just throw everything out, which we seen in places like Venezuela. And in some places like Argentina, I think they're grappling with how do you fix the problem, solve the pressures that people genuinely have and keep the system working. It's a difficult task, but I think that the problems in Latin America are regulatory and [inaudible] and inflation, which is different. The prices in Europe are primarily pricing competitive.

Okay. Thank you very much.

Thank you. We'll take a follow-up from Charlie Gates of Credit Suisse.

I guess the first question, the additions to reserves for earlier losses in the quarter, did I misunderstand was $7 million that was 5 in the prior year period?

7 million was developments for the prior year, but --

When you say prior year period, for the second quarter of '05, it was somewhere in the neighborhood of 40 million.

So, it was forty in the second quarter of '05, and it was seven in this year's period?

Right [inaudible] prior years, but loss reserves are up, basically, at this point $500 million for the first six months of the year.

Okay. My second question, in the RLI conference call last week, basically, they said that they thought that in commercial auto for large fleet, the pricing off 10 to 15%. And they identified that as arguably, other than California comp, the most competitive sector of the market.

If you recall, Charlie, I said we don't write large fleets.

How do you define a large fleet? That would be like --

The answer is, we write five -- fleets with five to 100 units with our sweet spot being 25 to 50, and clearly 100 units is far from a large fleet.

My final question, you have this line in your news release about naive capital.

Right.

What is naive capital?

Charlie, naive capital all these private equity guys buying these servicing companies and doing all this stuff, thinking that we looked at a service provider and it does workers' compensation providing of services. And they have this projection that the equivalent premium volume is going to go -- continue going up by a certain percentage a year without considering the fact that California comp prices are going down. Therefore, your revenue, which is a percentage of the premium, is going to go down, and somebody bought that business at what we think will be probably 40 times earnings in 2008. And, we looked at it and said, what's going on? And the answer was, they were naive. They believed the business was going to continue in the same direction with the same momentum as it did in the past, because it's called service. And, in fact, it still is related to the premium volume generated by the industry. We also see people looking retrospectively at the profitability of the excess and surplus lines business, or in fact, other business and then in effect projecting that out and entering the business or providing capital to people who are in the business. And, these are naive people who believe this is not a cyclical business. It's a not a bad business. It's a terrific business. I'm not suggesting it's a bad business, but naive capital comes in and takes away what I call at external opportunities that, historically, we would have had opportunities to buy. So, in the history of the cyclical business, at this point in time, we would have had other things to buy at attractive prices. And, we wouldn't have started to buy back stock now.

If you were to look at the rearview mirror, when did you last see this naive capital entering this industry?

It's really hasn't ever been here to the extent it is. This is the insurance/service industry piece of private equity, where you've got all this capital looking for opportunities. And there's some that's really smart and doing great. I don't want to put a blanket comment out, but there's others that are being pretty aggressive.

Is this how you characterize some of the people who have gone into Bermuda with regard to investing in new property catastrophe reinsurers?

Charlie. I'm not going to --

Okay. Thank you.

Charlie, by the way I always get myself in trouble by saying names. You're not going to get me again.

Thank you. We'll go next to Ron Bobman with Capital Returns.

My questions were asked, although, I was amused at the contrasts in describing these entrepreneurial managers taking advantage of the option plans, and at the same time, describing the lunacy of these buyers of insurance services business. But, congrats on a good quarter, and thanks a lot.

[OPERATOR INSTRUCTIONS]

Well, I thank you for taking the time to be on our call. We are very pleased with how business is, and we honestly don't see anything, certainly over the next 18 months, that's going to change the direction of this. And, honestly, if it weren't for the lawyers I probably would prognosticate further, but I'm not allowed to. Have a great day. Thank you.

[OPERATOR INSTRUCTIONS]