W R Berkley Corp (WRB) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to the W.R. Berkley third quarter earning conference. Today's call is being recorded.

The speakers' remarks today may contain forward-looking statements, some of the forward-looking statements can be identified by the use of forward-looking words including "without limitations", "beliefs", "expects", or "estimates". We caution you that such forward-looking statements should not be regarded as a presentation -- 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 31st, 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 materially affect our results. W.R. 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'd like to turn the call over to Mr. William R. Berkley, CEO and Chairman of the board. Please go ahead, sir.

Good afternoon. Thank you for joining us. We were very pleased with our quarter. In line with most of your expectations. We're very optimistic about both the year and next year. Some of the important things to note not only are combined ratios, but that in fact we're just beginning to see the impact of our new start ups. So we're pretty optimistic that our growth can continue or, in fact, even increase as we look into next year.

Before I start to talk about the business per se, I'm going to let Gene go through the numbers. So, Eugene Ballard, go ahead.

Okay. Well, our third quarter net operating income was $173 million, up 47% from $117 million for the third quarter of 2005. On a per share basis, quarterly operating income rose to $0.86 in the quarter from $0.58 a year ago. The earnings improvement over the prior year reflects a 55% increase in underwriting profits together with a 36% increase in net investment income.

With respect to premiums, on an overall basis, net premiums were up over last year by 7% in the quarter and also by 7% for the year-to-date period. Looking at those -- at that premium growth by segment for the quarter, we see regional premiums were up 6% with strong growth in our mid Atlantic and southern regions. That specialty premiums were off approximately 1% as a decline in premiums from construction-related business more than offset growth in other areas.

Reinsurance had another strong quarter with overall premiums up 21% due to the ongoing impact of new business written earlier in the year. Alternative market premiums increased 7%, that's primarily due to growth and excess workers' compensation business. And international premiums were up 26% with another strong quarter in both Europe and Argentina. Included in those segment numbers are $23 million of premiums from the start up businesses that Bill just mentioned that we formed in late 2005.

The third quarter combined ratio improved to 88.5% from 92.1% and the prior year quarter. When compared to the prior year quarter, the third quarter 2006 quarter benefited from lower weather related losses and from less prior year reserve development.

More specifically, weather related losses decreased from $56 million in the third quarter of 2005, which, of course, included hurricanes Katrina and Wilma and Rita, excuse me, to $7 million in the current quarter. At the same time, reserve development decreased from $50 million in the 2005 third quarter to just $6 million in this year's third quarter. Those loss decreases, however, were offset by higher selected loss ratios for the current accident year.

Based on our assessment of the potential impact of anticipated pricing changes, we selected loss picks for the current accident year that on average are 4 percentage points higher than our 2005 loss picks. The combined ratios by business segment were specialty 84.5, regional 90.3. Alternative markets 73.9, reinsurance 101.0, and international 103.1.

Our 2006 paid loss ratio was 35.0% in the third quarter and is now 37% for the year-to-date period. Our paid loss ratio has not exceeded 40% in any of the preceding 15 quarters, starting in the first quarter of 2003 and has averaged 36% over that time period. That level of paid losses is continuing to produce strong operating cash flow including $568 million in the third quarter and approximately $1.7 billion over the last 12 months.

As a result, our average invested assets are up 16% over the last 12 months to $11.7 billion at September 30th, 2006. At the same time, the average analyzed yield on investments increased 70 basis points to 5.2% in the 2006 third quarter from 4.5% a year ago. Together, that gives us net investment income of $146 million for the quarter, up 36% from last year's third quarter.

At the end of the quarter, 84% of our portfolio was invested in cash and bonds with an average duration of 3.7 years and an average analyzed yield of 4.7%. The remaining 16% of the portfolio was invested in common and preferred stock and other investments, including $757 million held in our arbitrage trading account. The average analyzed yield on the arbitrage account was 7.7% this quarter compared with 6.6% a year ago.

Also, if you compare investment income this quarter to the second quarter of this year, it was up $700,000 or 0.5% as the increase in invested assets was partially offset by a decline in the analyzed yield from 9.7% in quarter two to 7.7% in quarter three. That by the way is a fairly typical variation in the arbitrage yield from one quarter to the next.

The overall portfolio has an after tax unrealized gain of $89 million at September 30th, 2006. The overall tax rate was 29% in the third quarter, which leaves us with after tax net income for the quarter of $174 million. That also gives us an analyzed return on equity of 27% for the quarter and 26% for the first nine months of 2006.

Finally, our stockholders' equity is up 21% from the beginning of the year to $3.1 billion or $16.17 per share at the end of the quarter.

Thank you. Let me just try and cover a couple of things I think are important.

First of all, we were very pleased with the results. The issue Gene tried to point out, which is our really pick loss ratio. For a large amounts of our business excluding the regional business, we have a loss ratio which we pick because the development of those losses takes time.

And we raise that loss ratio, they anticipate loss ratio based on the changes we see in pricing. So you've seen a 4% to 5% decline in pricing and that is built into our accident loss ratio pick for a large percentage of our business. So the lack of improving profitability will continue until our past years develop out and reserves start to be returned to us once we're confident those prior years are closed.

Other than that, the current accident year will be constantly established at what we think will be the developed year based on our anticipated pricing. So we don't put a loss ratio up on long tail lines of business based on reported accident year data because we don't know that.

So we'll go back, probably 4 or 5 years, we pick a series of loss ratios each year adjusting for changes in pricing, but hopefully leaving ourselves a margin for error. So what you're seeing in the current year is an anticipated increase in that loss ratio based on pricing changes.

It is a different way of doing things, but it hopefully allows us to avoid being overly optimistic as pricing declines and then getting overly pessimistic as pricing increases. It allows us to have consistently conservative numbers with the longer term older years releasing reserves as is clear when and if that happens.

We continue to be extremely optimistic. We think '07's going to be a terrific year as '06 is. We think '08 will be well above our target of 15% after tax return.

We started a lot of businesses at the beginning of this year and the end of last year. I'll quickly go through them. What's important is that none of those expenses were deferred, they were all expensed. They've only contributed $23 million in total revenue this quarter.

First we have Berkley Aviation, the Hong Kong branch of Berkley Insurance Company, Berkley Net Underwriters, Berkley Regional and Specialty Insurance Company, Watch Hill Fac Management, Berkley Insurance, Europe operations in Spain. Our new operations in Brazil, Berkley Specialty Underwriter Management Environmental. And we acquired Garnet Captive Services.

All these and new businesses that we expect to allow us to continue to grow into '07 and '08. And we think that we've taken a conservative course by not capitalizing anything, so we would expect that next year these will contribute not only to our revenue line, but to our profitability.

There clearly are areas where prices are competitive. It isn't as easy as 2005. But for the most part, business is still good, pricing levels still allow for excellent underwriting profitability and more than adequate returns.

It isn't true every place, but when we look out, we think that for the most part opportunities exist. We've built relationships with our distribution channel and focus on delivering returns to our customers, not just in terms of lower insurance prices, but in terms of service and understanding what it takes to manage risks. On numerous occasions, we find that people are selecting to do business with us, not because we're the lowest price, but because we help them understand and manage their risk and that is a great value to them.

That aside, it's certain that as we generate more capital, we need to go out and find things to do. We are working to do that. All these new ventures we started last year, we hope we'll have more that we'll get done in the last quarter of this year.

It requires constant effort. But as the time moves on and if we can't find new efforts, new things that reward those efforts, we will continue to examine the opportunities to manage our capital through stock buy backs, through dividends, or whatever it takes to be sure we don't get over capitalized at any point in time, but we keep as much flexibility as possible.

With that, I would be happy to answer any questions. We are, as I said, very enthusiastic about the balance of the year and next year and we're actually even enthusiastic about '08, which even surprises me sometimes. So, Peter, we'd be glad to have questions.

Thank you. [OPERATOR INSTRUCTIONS] And we'll go first to Charles Gates with Credit Suisse.

Good afternoon. I think you went through this, but I missed it. What was the size of the trading account at September 30? That is the dollar sum and what portion of invested assets did that represent?

That was $757 million and that represents 6.5% of the overall portfolio.

It's a really, it's down sized deal arbitrage account, we've been doing it now for about 18 years. We have never had a losing quarter. We have, I think only had three losing months in those 18 years.

Is the right way to look at the contribution from the trading account to operating earnings of the company the difference between the trading account sum at 9-30 and June 30?

The trading accounts, Charlie? No. The trading accounts gains go into investment income. And last quarter, trading account had a 9.7% analyzed return and with 7.7% this quarter. It's just, it is a bond alternative. It is a very low risk continuous process we probably have 50 to 100 positions.

It's just a bond alternative with what we think is a very small amount of additional risks and somewhat better return. It is not -- it is -- the arbitrage between a signed deal and its closing. So you get somewhat of a better yield.

Could you speak to competition in the excess and surplus lines market? How you see that evolving?

You know, I think in every place in the market there's more competition. I think the biggest competition in the E&S business is the standard lines markets coming in. And that gives us the most concern. The best and highest margin large accounts are taking -- the biggest and largest accounts are going to the standard E&S market. I think that will continue. There are new start ups.

New start-ups have not always proved to be a reliable E&S markets for the specialty wholesalers and they haven't really attracted huge amounts of volume. But, I think the place that hurts us the most is classes of business that were viewed as not acceptable by the standards market and then flow to the E&S market and then they go back to the standard market. That's the part that really has the greatest impact on the E&S business. And it was especially apparent this quarter in a couple of areas where we have expertise.

California contractors being the biggest one where we had a substantial amount of very nicely priced California contractors written out in E&S format. And we wouldn't have written it any way that went to some standard market players and some admitted players at prices substantially less than we were charging. That really was the main driver in our modest decline in our business in the specialty area.

This is my final question at this time, Bill. Does it feel like the spring of '87?

Spring of '87?

You know, basically --

Oh, the spring of '87 when the stock market was in anticipation of October of '87, so I hope not. You know I think -- the answer is it's a little different. I was really -- there's some big companies that are beginning to behave intelligently about using their capital to buy back stock and to pay more dividends. I was really pleased to hear that. I think there are other people who are being more responsible. I think the change in tax rates for dividends and capital are causing people to act that way.

Every cycle -- and I've been through a few -- is a little different. Clearly there are some people who are being aggressive out there in particular lines of business -- I think people are cognizant of the risks of doing business with people who might not be able to honor their commitments.

So I think that -- I wouldn't say it feels like '87. I think the market in this stage the lumpy. It's not everything is great and each quarter and each month things are better. You've got some pieces of your business that are under attack and some pieces of business that are good. You'll have a month that's terrific and you'll have a month that's crummy as opposed to 6 or 8 months ago or a year ago where every month was better than the last month.

I think there's still lots of opportunities and we seem to be able to find them. How long that continues, I don't know, but no. I don't think it's like '87 at this point in time. If it was like '87 I'd really be happy. I'm much more worried about '89.

Okay. Thank you.

We'll hear next from Joshua Shanker with Citigroup.

Hi there, everyone. Piggy backing on Charlie a little bit, about the E&S markets, I realized that you're think things look pretty good, but the standard markets coming in, you see legacy players who are starting up businesses in E&S and there's all those newcomers. Why do you think that the market is behaving responsibly in terms of pricing?

First of all, Josh, I don't think I said it looks pretty good. I think I said it's not a disaster, it's not a problem. I think in general, the market is okay. I'm not sure how I would differentiate choosing words, pretty good, okay. I don't think there are any great issues there. You know, you don't get into this business right away and write lots of business. It's not easy to quote and get business. Most wholesalers and brokers are concerned about longevity. They don't want to get into business with people who are in and out. They're concerned about consistency. There's a lot of pieces to that.

And what I said is, I'm not worried about the new entrants particularly, we view a new entrants to every part of our business. The part of the business that will have the biggest impact on our E&S business is standard markets, deciding to write business that heretofore was in the E&S market. And that is because, one, they're accepted by distribution channels; number two, they have the capacity and the relationship to write the business; and number three, they will price it dramatically cheaper than we will price it.

So we see the entire classes of business leaving parts of the E&S shop going to standard markets. But right now as of today we've still been able to find enough opportunities and prices that are good enough that I'm not particularly concerned. That doesn't mean I think it's still good. It doesn't mean it's bad. It's okay. And we have plenty of margin in there.

When you do become overtly concerned, are we going to see it hit your net premium line quickly or will it slowly seep in?

Well, first of all, you know, as I said to you, when the market changes, it's not a hocus-pocus everything changes. It changes line by line, area by area. What you saw in our specialty business this quarter was construction defect business in California. And you saw instantly. And you may see another line of business or something else where people go and do foolish things and then you'll see that instantly.

It's unlikely that all of our business will be hit all at once and all of a sudden. It just doesn't happen. And just as well I can tell you there are opportunities we see that we think represent good opportunities to expand that people are still throwing up their hands and walking away from.

Okay, very good. Regarding your reserves, in the last Q you put a section about the last 10 years on a 37% increase for long tailed lines in terms of your reserve estimates. I'm estimating right now -- it looks like I only have a statutory blink -- probably about a 7% reserve decrease for the most recent accident year '04 to '05. What gives you confidence given the volatility of those longer tail lines to take your estimates down to this point for the near term stuff?

Yes, I guess you're looking at the annual statement and seeing the '04 --

Yes, and I'm kind of summing up a bunch -- the liability lines to some extent, which is hard obviously. It's a rough estimate.

I think it goes back to a lot of what Bill was talking about earlier in the call that we're setting the reserves initially based on pricing indications and over time moving more towards what we see coming through in the experience.

You know, I think you have to be careful in looking at our reserves as they're laid out there because for our own purposes, we may choose to be cautious in one period of time and be less cautious in others or we may find that we've allocated our reserves not in exactly the way we want to. So you might find that it looks like reserves came down in one period and one area and went to another.

I would suggest insurance is a business of large numbers and it suffers today of over analysis and a view of precision that I only wish were true. If it were so true, we would all get the prices right, which I'm sure you and I have talked about, Josh. We don't get the prices right by line, by state, by class very well. On the average, I think we do okay. So I think that you have to be a little careful when you look at the minutest detail as opposed to looking at where the aggregate reserves are for all of the years and where they trend and how they go.

I think that the goal is to be sure your aggregate position on reserves is as conservative as you can. And we try and have each year as accurate as we can, but the places we have the greatest worries is where we've put our emphasis.

Well, I do understand. I apologize, one more question about specifics and of course you can choose not to answer. I'm curious to know if 10 months into 2005 when you consider how '04 was developing, if '05 was developing 10 months into '06 at about similar levels of favorable development?

Of course I'm not going to answer that. You knew that ahead of time.

You can't hurt me for asking.

No harm in asking anything. Thank you, Josh.

Thank you.

Next we'll hear from Doug Mewhirter from Ferris, Baker Watts.

Hi, good afternoon. I had two numbers questions. First of all, you mentioned that you had $6 million of net adverse reserve development. Was it sort of a little bit on each line or was there a large positive on one line and a large negative on another line that was partially offset?

No there was no particularly large numbers any place. You know, I think that we had some international development in workers' comp, and we had a little bit in one of the regional companies. And then we have here and there, a little bit of positive development. But, you know, the aggregate swings were never very much and I think the only positive of any consequence was really in our California workers' comp business. But $6 million on our reserves is not very much.

Yes. The second question I had is, what's your estimate or if you know the pretax margin on your servicing business? On your servicing fees?

Give or take. It ranges from 18% to 22%.

Okay. Now just a market related question. I know last quarter you were talking about -- and everyone seeing the California workers' comp market, the premiums were just dropping rapidly. And it put some pressure on your alternative markets top line. But you seem to have kind of recovered that and you've shown us pretty good growth. Is that directly -- is that related to something you're doing in California to make up for that? Or is it in other markets?

Well, I think that you -- I think that you have to understand that we have different companies in the alternative market segment. Our preferred employers, in fact premiums are down and we continue to have pressure there and while we're doing well in account size because of the change in rates, our premiums are down for employers. That's pretty much offset with Midwest Employers Casualty where the results were very good and they've been able to gain market share with their analytic programs and skills that they bring to clients where they bring risk analysis to clients and we've been able to get substantial business, not based on price, but based on risk mitigation services.

Okay, thank you, that's all my questions.

We'll hear next from Jay Cohen at Merrill Lynch.

Yes, good afternoon.

Hey, Jay. You're getting old, you always used to be first.

Slow with the buttons these days. Two questions. Just to follow up a little bit on the reserve development, the net $6 million in the quarter. Did that reflect maybe a more substantial reserve release from more recent accident years and an increase on older years?

No, it did not.

Okay. Second question is the reinsurance business. Is this a business -- should we expect it to stay around 100 from a combined ratio standpoint?

I think that it's a long tail developing business. I won't say it'll stay around 100, but I think it generates excellent returns at that level and we're going to be cautious in how we examine the reserves since we've screwed it up for so many years. We're going to be cautious before we take a reevaluation of that reserve position. You know, having been optimistic for so long at the wrong time, eventually even we will learn not to be optimistic too quickly.

I guess last question from a capital standpoint, it sounds as if there's nothing imminent from a capital return standpoint given the potential opportunities to grow some of these newer businesses. Is that fair?

Well, the answer is obviously when you're returning 27% of your capital and we don't think we're going to grow at 27%, we're generating additional marginal capital of a significant amount. The question is what opportunities will come our way and as you and most of our investors know, we are very disciplined in our approach to acquiring things or expanding. So we think there's still some opportunities.

We're looking at opportunities that are attractive. We're talking to teams of people that we find quite interesting. But we are -- we're going to proceed with caution. But if there was a particularly attractive opportunity to buy back stock came along, we would probably think about it. But at this point, we think it doesn't serve our long term shareholders for us to say we're going to buy back stock.

We're going to be opportunistic to help get the right return. But clearly we are -- there's nothing that I can see on the horizon that will use up all of our capital unless we can find some attractive acquisitions.

On the acquisition front, are you seeing more sellers out there?

The problem is that there are more sellers, but most of them want to sell the business for prices that make you laugh. That you ask questions that even a rudimentary knowledge of the business would tell you are simple. Like we want a random examination of case files and sellers tell us, what are you crazy?

People are out there talking about buying business via private equity or other insurance companies where they're not taking the appropriate levels of caution. We are cautious people. This is my money you're spending as far as I am concerned.

We will buy things, not just based on the price, but based on a real assessment of what's out there. This is a business where the liabilities are treacherous and we do not wish to get stuck in such a pot.

Great. Thank you.

We go next to Bill Wilt at Morgan Stanley.

Hey, good afternoon.

Hello, Bill.

Hi there. Of the many new businesses that you've started and listed at the beginning of the call, which ones warrant the most attention or I guess -- ?

Bill? Hello?

Can you hear me?

You went off for a minute.

Sorry about that. I was talking about the new businesses that you ticked off at the beginning of the call. Which ones warrant the most attention or said another way, have the best, from your perspective, the best or most interesting growth prospects?

I think in the short run Berkley Net Underwriters, Berkley Aviation, and Berkley Accident and Health will probably be the places that write the most potential business. Each one of those can be, you know, $100, $200, $300 million of business over the next 24 months on an annualized basis. I think the others by and large are smaller opportunities and in the long run they can develop.

Garnet Captive will help our alternative market business expand in the captive business. We're pleased with the people. We think they're just terrific. The environmental division sort of is just another arrow in our quiver for our specialty business.

The Brazil business is going to be a relatively modest sized business and it'll grow as we learn about Brazil. Spain is the same. It may get bigger faster, it's not going to be a huge business.

Our additional Watch Hill Fac, it's a $40, $50, maybe it will be a $100 million business in a few years. But Berkley Net Underwriters could be quite a bit bigger as can Berkley Aviation and Berkley Accident and Health. So I think if you look at those -- those are the three that are most likely to contribute the most to the top and the bottom line over the next let's just say 18 to 24 months.

Okay. That's helpful, we'll keep an eye on them, thank you.

And we go next to Meyer Shields at Stifel Nicolaus.

Thanks, good afternoon.

Good afternoon.

I don't know if I'm over parsing your words, but you mentioned that you're changing your loss ratio picks to reflect rate changes. Did you intentionally not say that terms are conditions are changing?

Same issue. You are parsing my words.

Am I parsing them too much?

Yes.

Okay. Has there been any impact? I don't know if this is pressure or on rates from the fact that a lot of major wholesalers are now owned by private equity?

It hasn't had much impact so far. I think that the answer is that most of them are being run by the same people who've done a good job and who have run them historically. It hasn't been a major issue for us. It could become an issue. One never knows. It certainly is a possibility. But I think that for us it has not been a major issue.

Okay. And the last question if I can. In terms of walking away from business that's underpriced, what's the line in the sand in terms of return?

Well, first there's a key element within your statement and that is we know exactly what underpriced means. Which I hope we know, but life has said we're never as certain as we would like to be. So understand that. So that makes it difficult to really do the -- I would generally say that we'd walk away if we didn't think we'd get better than a 15% after tax unleveraged return, which would generally convert to sort of a 20% pretax leverage return, which will give us more than a 15% after tax. So we're looking for effectively a 15% kind of return.

You know, part of the problem is, you know, the ability to forecast investment income, interest rate, how long your payment pattern is, severity, frequency, and all of the things to go with that in this constantly changing environment is not as precise as we'd like. In 1979, I created this huge matrix, a book of matrices of forecasted loss ratios and investments income and average leverage per line of business per state based on court calendars and all this. It was brilliant.

The only thing was it had absolutely no relevance to reality. I think one of the things you learn is you try and make your best judgments as to where you go and what you do. But in principle, 15% unleveraged, pretax return. If it doesn't pass that test, we're not going to want to do the business. And in some lines of business, we need even more than that.

Okay that's very helpful, thank you.

We'll hear from Mike Grasher at Piper Jaffray.

Good afternoon. Just wanted to visit into commercial auto here for a second. Maybe some of the landscape right now in terms of what you're seeing on the pricing environment.

Basically commercial oil pricing is flat. We have a few aggressive competitors. There's a couple of guys based in Texas and the southeast that are more aggressive than we'd like and we don't understand what they're doing that run MGAs and in fact, have borrowed paper. Most of the companies that are in the business are pretty responsible and we're pleased about them. But I would say in general, the pricing is flat.

And then how do you distinguish between the commercial auto that maybe is in your specialty lines verses that that's in your regional in terms of exposure, profitability? What -- how do you differentiate between the two?

The regional business is not long haul; the specialty business is primarily long haul. The regional business is in general short, intermediate haul. It would be very unusual for any of our regional business to write truck insurance where the trucks are running more than 500 miles. There may be an occasional exception to that.

Whereas the Carolina, you know, they're running long haul stuff that runs big distances. And the commercial trucking also, lots of the commercial transportation is business that's part of other businesses. Some of it is local trucking companies, but a lot of it is part of other businesses whereas Carolina is generally speaking, fewer trucking business.

Okay. And is there any difference today in terms of the competitiveness of each one of those individually?

Well, I think that the part of the long haul truck business that's most competitive is the large fleets and that's something we're not in. And it's in fact, the area of the business that's most competitive and, you know, every place there's big premiums at stake, you have people competing most aggressively.

So large fleet business which is something we got out of sometime ago is really the most aggressive part of -- the most aggressively priced part of the transportation business. We are not in that, we have not been in it for a long time.

Okay. Thanks.

We go next to [Kurtis Filler] at PPM America.

Good afternoon. I had a capital management question. Following your announcement last week to redeem $210 million of your sub debt, it will take your leverage down a little bit, would -- do you have any plans or any intention to do something else in the debt markets?

First of all, that we announced effectively we were going to prepay when we issued a replacement for that maybe 12 or 18 months ago. We effectively pre-replaced it when interest rates were lower. We had an issue to pre-replace it. We already effectively own give or take $100 million of the stuff. So a lot of it is already bought and owned by us and we're prefunding.

We bought it back and we're just going to pay ourselves off. The net amount is probably $110 million give or take. We're -- we have no fear of debt, we have no fear of borrowing money. Most people would view us as the most willing insurance company to be leveraged up in the industry. But it's not the right thing to do at the moment.

Okay. Thanks.

We'll hear next from Dan Baransky at Fox-Pitt Kelton.

Yes, thanks. I have a few questions. Do you actually have the dollar amount of the arbitrage portfolio this quarter?

We gave it to you. $700 --

I mean the actual return.

Yes.

Yes, for the third quarter was $14.5 million.

I guess more importantly, how should we think about that what that can return on a quarterly basis? Is it just based upon the number of deals that get done in a quarter per se?

It's been consistently, basically if -- it's been probably 200 to 300 basis points over LIBOR.

Okay. Great, that helps a lot.

Actually, by the way, the past 18 months it's been better. I gave you a long term average. It's been probably 400 basis points over LIBOR recently.

Okay. Great, thanks. Is the way to read your commentary on the reinsurance operation and the margins there is that it's probably actually running better than what you're looking at now and you're just being cautious on your picks?

No, I think the way to read it is that the ability to forecast the outcome for reinsurance business, especially casualty business reinsurance business, especially casualty business is a difficult thing. And therefore, with uncertainty, one gets more cautious. Yes, it's a line of business we're cautious in, but we're not trying to be cautious. It's that it is the most or -- it's one of two or three areas in our business that is extremely difficult to forecast. My own personal opinion is that we are being conservative.

The reason for that is it's a line of business that I call pig on pork. What that means is their business is going to get better and we get a piece of their business with leverage on it. So if their business is better than they anticipated, our business with leverage would be better than we anticipated on top of better results for them. That's why when the business gets bad, they misestimate -- it's worse than you anticipate and for us it's worse.

So therefore, there's more volatility in the actual year by year results that people end up smoothing because the estimating is so difficult. We're just trying to be cautious because we clearly got it wrong in '99 and 2000. And we don't want to get it wrong again.

Great. And the last thing, is the international combined ratio in the quarter, anything going on there of note?

Fundamentally it was Argentina workers' compensation. We looked at it and decided. Most of our competitors at Argentina do not put up IB&R and we decided we still want to be cautious and we reserved with IB&R.

Great, thanks. I'll let someone else ask questions. Thank you.

And we go next to Stephan Peterson at Citadel Investments.

Real quickly, I was wondering if you would retouch the reinsurance comments. Despite your caution in terms of reserving, you've seen some pretty nice growth there both in the second and the third quarter. Where are you seeing the opportunities? And is that a business mix shift? Is it just being in the right place at the right time?

It's some particularly attractive specialty niches where we've written individual transactions on a particularly unique or special basis. It's not across the board.

Yes, yes. and then just a quick numbers question. The $23 million of new business premium for -- for some of the new ventures, was that in the quarter?

That was in the quarter.

That was $23 million in the quarter. Okay. Terrific, thank you very much.

We have a follow-up from Charles Gates at Credit Suisse.

Other than the contractor liability business, where else do you see this shift from the E&S market to the admitted market?

I think that's the most grievous change we've seen. But I think if you looked at -- that's big premium stuff. Charlie, if we looked at it and we gave sort of an across the board judgment about it, it's all of the big premium stuff. It's -- the bigger the premium, the more likely it's going to go to the standard markets.

Is there some characteristic of the contractor liability business that has changed, that's contributing to this? That's my last question.

Doesn't have to be your last, Charlie. Yes. It has the biggest premium based on the exposure and therefore a superficial examination looks attractive, but it is a very long tail line in California. There's a 10 year statute and therefore people get to book great numbers if they wanted to and find out they're wrong 5 years down the road. So it looks really good.

Okay. I'll give you one more question.

Thank you, Charlie.

You were the one who raised the issue of '89. Now in '89 you had Hugo, you had the California earthquake, but basically you had pricing going the wrong way?

Yes. '88 was peak underwriting profitability probably and '89 was the beginning of the downturn in pricing and all that storm activity in North Ridge and all of that didn't change the direction of pricing. So, you know, I think '89, I think we're more like '89 where we really don't see a change in pricing. I think a really severe catastrophe loss would sort of slow everything down. But Andrew didn't really change the direction either. So I think pricing is okay. It was okay in '89 and it was okay for 3 or 4 years after that.

People have to remember, pricing is going to be fine for a while unless something very strange happens and returns are going to be fine. I don't think a lot -- I think it surprised me how many people are taking down reserves now, but everybody's got to look at the thing. I think that this business and pricing are going to be fine for a while. I think you've certainly got at least a few years of good profitability. I think accident year loss ratios, probably it'll be '09 maybe it will be 2010.

We'll go negative and then I think you'll have a period of couple of years, at least where profitability is less robust. So I think for now you surely have at least two maybe a little more years of terrific industry underwriting profits and for us we would be more optimistic than that.

Thank you.

[OPERATOR INSTRUCTIONS] And we go to Kenneth Billingsley at BB&T Equity.

Hi, good afternoon. I wanted to just kind of follow-up on some of the pricing comments that you mentioned. And specifically some of the brokers have already mentioned that the regional market has become very competitive. Can you comment first maybe on your contribution to that competition? And maybe the impact that it will have driving national players to get a little bit more competitive?

You know, I think the regional business has been a very profitable business. I think it's -- pricing as you can see our combined ratio went up. And we expect it is somewhat more competitive. For most people, they think California comp is regional business too and clearly pricing is down a lot there. Business is competitive. I don't think it's particularly as competitive for us as it is for others, but it continues to be such.

And I guess, I think what I was trying to say is that they're really aggressive about keeping and going after business.

Our average prices in our regional companies are down less than 5%. So that ought to answer your question.

Okay. And well the follow-up to that is what cross sell opportunities exist between any business that could shift from maybe specialty to regional as more competition comes on board? Do you have things in place from a communication standpoint?

I'm not sure I understand what you mean.

Is there potential ability to retain customers as national players cut prices and you would lose business out of some of your specialty operations? Are there opportunities -- ?

The answer is, our customers are brokers and agents, so it's up to them to decide how and what they want. We do have some overlap in who we do business with. And there are specialty people who give us specialty business in lots of companies. And we have specialty agents and brokers that also do some regional business with us. But, you know, you have to remember that we use this distribution system and we don't tell them what to do.

On the other hand, they also don't have to take orders from any of the other big companies either. They get to choose where they think they do business and the way it serves their customer best.

I understand you're not directing the brokers. Is there an opportunity there to encourage the potential shifting in cross selling? Or do you see that -- ?

Is that really -- it isn't how the distribution system works. It just really work that way because the specialty business distributes primarily through wholesalers who do business through retailers. The regional business does business with retailers. There is cross-selling amongst some of our various companies and they do work together on products. But it isn't as simple nor as direct as that especially not with respect to the regional business and the specialty business.

Alright. Thank you.

And the final question comes again from Charles Gates.

I apologize.

I thought you said you were finished.

Hopefully I'm not finished yet. Hey, if the democrats win in November '07 with regard to the house, what is the impact on the property casualty on the industry? That is the last question.

You know, I think if the democrats win it's okay. I think that all aside, you know, I think that the democratic leadership understands the issues that we face just as the -- most people understand it is a problem, I think the democrats winning is fine.

Thank you.

Mr. Berkley, we have no further questions in the queue. I'll turn the call back over to you, sir.

Thanks. Thank you all very much. We continue to be extremely optimistic. We have all of those new enterprises that we think will substantially contribute in increasing ways. This is the first quarter that we got any substantial contribution in top line and really virtually no contribution in the bottom line.

We think you're going to start to see that increasing and be a major contributor next year. I'm sure Mr. Wilt will hold me to that measurement. I can count on him all the time. Thank you all very much and have a great day.

That does conclude our presentation for today, thank you for your participation, everyone have a great day.