W R Berkley Corp (WRB) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the W.R. Berkley year end earnings conference. Today's call is being recorded. 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 limitations, beliefs, expects, or estimates. We caution you that such forward-looking statements should not be regarded as 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 the 10K for the year ending December 31, 2005, and our other filings made with the SEC for the description of the business environment in which we operate and the important factors that may materially affect our results. W.R. Berkley Corporation is not under any obligation and expressly disclaims any such obligation to update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.

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. I apologize in advance. I have a cold. If I am not as clear as I try to be, I will blame it all on the cold.

We had another great quarter. We were pleased with our results, business continues to be excellent. While the numbers are a little distorted because of last year's earned order premiums that came in, the quarter showed less growth in spite of that than we expected as did the year being just about 5%. It was a disappointment.

We expect this year will probably be in that same 5% to 8% range. In fact, through our latest reports, which are within days of the current date, we have no reason to believe that our expectations will be fulfilled. Business is good. Fourth quarter is always a bit more competitive than the rest of the year.

We're excited about the year. We see lots of opportunities, there's no question, prices are more competitive. They're not as more competitive as a lot of the surveys you see. I always wondered that when our renewal prices show prices down depending on what line of business from not down at all up to being down as much as 8% or 9%. But on average down something less than 5%.

I always wonder how these surveys come out with much higher numbers. I think they -- they're produced by agents frequently with self-fulfilling prophecies in mind. I have, in fact, called several of the agency groups who put these surveys together and when I ask them about how they do it, they're not very statistically accurate in their survey techniques in what they do. They're directionally accurate. I would agree, prices are going down.

But when pursued as to exactly how they do it, we always wondered how when we have exact numbers on somewhere between 80% and 90% of our renewal business we can be so far off. We think that prices are going down, there's no question. I might add on the 10%, 12% to 15% of the business, we lose that business with substantially greater price decreases. We're still quite optimistic. We think we have lots of margin in the business.

We think we can continue to deliver great results. And we're excited about new opportunities and we continue to see more and more. Before I continue, I'll let Gene talk a little bit about our numbers and I'll try to go through the operating units and then I'll let questions.

Thank you, Bill. So, as you can see, we reported record earnings again for the fourth quarter and full year of 2006.

Our net operating income for the fourth quarter was $194 million, that's up 17% from $165 million for the fourth quarter of 2005. On a per share basis, operating income rose to $0.96 in the quarter from $0.82 a year ago. On an overall basis, our net premiums written were $1.114 billion, which is a reported decline of 3% compared with the prior year quarter.

However, as Bill mentioned, and as we pointed out in last year's earnings release and again this time, net premiums for the fourth quarter of 2005 included an initial accrual for what's called earned but unbilled audit premiums and these are the estimated premiums for audits that have not yet been completed. We made that initial accrual in the fourth quarter and it added $57 million to last year's net premiums written, $45 million for the Specialty segment and $12 million for the Alternative Market segment.

So on a comparable basis, that is not including the unbilled audit premiums. Our overall net premiums were actually up 2% for the quarter and 6% for the full year.

The net premium growth for the five business segments, again not including the unbilled audit premiums were as follows.

Specialty business declined 1% in the fourth quarter and grew 2% for the full year as business from our new operation, Berkley Aviation was partially offset by a slow down in construction-related businesses. Regional business continued to grow, although modestly at 2% for the quarter and 3% for the full year. Alternative Markets business declined 8% in the quarter and 1% for the full year. And that's all due to the impact of lower prices for workers' compensation business in California.

For the rest of the Alternative Market segment, aside from California premiums were up 5% for the year. Reinsurance premiums grew 15% in the quarter and 24% for the full year, due primarily to the placement of several new casualty [inaudible] early in 2006. And International premiums were up 3% for the quarter and 18% for the full year with strong growth during the year in both Argentina and Europe.

The aggregate premiums for the five new businesses that we started during 2006, an annual basis were $86 million, including $43 million that was written in the fourth quarter. Our overall loss ratio was 59.1% in the fourth quarter and 61% for the full year.

The full year loss ratio improved by 1.4 points over the prior year and that's due to a combination of, one, lower weather related losses, two, lower prior reserve developments, and thirdly, offsetting those is higher current accident year loss pick.

Just to cover those in more detail. The weather-related losses were $8 million in the fourth quarter and $39 million in all of 2006. That's down from $99 million in 2005 and that represents an improvement of 1.4 loss ratio points.

Prior year reserve development was $7 million in the quarter and $27 million in all of 2006. That's down from $187 million in all of 2005 and represents an improvement of another 3.6 loss ratio points. Those improvements were offset in part by an increase in our loss picks for the current accident year, 2006, which raised by 3.5 points in order to reflect the potential impact of year-over-year price changes.

That gives us an overall combined ratio of 86.5 for the fourth quarter and 88 for the full year. Combined ratios for all five business segments were under 100 for the fourth quarter and the full year. For the full year those combined ratios were 84% for Specialty, 90% for Regional, 76% for Alternative Markets, 99.8% for Reinsurance, and 96% for International.

Our 2006 paid loss ratio still very strong at 41% in the fourth quarter and 38% for the full year. With that level of paid losses and with the increasing investment income we're continuing to generate strong operating cash flow, including $452 million in the fourth quarter and $1.8 billion for the year. As a result our cash in invested assets grew 16% in 2007 to over $12 billion at December 31, 2006.

In addition the average analyzed yield in investments increased almost 1 point in the year to 5.3% for full year 2006 from 4.4% and 2005. So that gives us net investment income of $164 million in the quarter and $586 million for the full year, which are increases of 45% for both periods.

At the end of the quarter,80% of our portfolio was invested in cash or bonds with an average duration of 3.3 years and an average analyzed yield of 4.9%. The remaining 17% of the portfolio was invested in common and preferred stocks and other investments including $782 million held in our arbitrage trading account. The average analyzed yield on the arbitrage account was 11.8% in the quarter compared to 10% a year ago.

Our overall tax rate is 29%, which leaves us with net operating -- excuse me net income of $198 million in the fourth quarter and $700 million for the full year. And finally we ended the year with book value per share of $17.30, which is an increase from the beginning of the year of 29%.

Thank you, Gene. We were pleased with our year, we were pleased with the results.

I'll try to go through a couple high points that are important. I am enthusiastic about this year. It's not that it's not going to be a competitive year. But I point out to people all the time that I've been through this a lot of years. In 1988, I made the worst mistake ever in running the W. R. Berkley Corporation. Prices had started to come down they came down 10% or 12% and I stopped growing and I started to retrench.

And there's no question that growing and becoming bigger is an issue of vanity and we printed cards that said, volume is vanity, profit is sanity. And I believed it, and I still believe it. But the question at hand is knowing when there is profit in your business. And we think there's still a lot of profit in the business as it's priced today. Not in all business, but in some business.

So therefore, we're anxious to try to get a better share of that business at the current time. If prices go down substantially, we might change our view. We can't tell you that. There are lots of opportunities. There are areas where the opportunities have already disappeared.

We believe that we can grow that 5% to 8% this year. We believe we can get a comfortable 20% return. And we think that there will be things that we can do opportunistically within the industry to expand. But we have always, in fact, managed our business on every level, always focusing on optimizing the risk-adjusted return. And we continue to do that, and that's not going to change.

We are focussed on creating long-term value and that's what we do.

When we look at our business, our regional business continues to be good, strong, competitive, more competitive in some parts of the country like the midwest than it is in other parts of the country. It's about a $1.25 billion net premium business. Good margins. We write what would be called local specialty businesses as opposed to standardized kind of businesses. We continue to see lots of opportunities there.

But as that market gets more competitive, we may not be able to grow that business as much as we'd like. So far this year, we've been pleased.

Our Specialty business in general we've seen good growth. We're pleased with how doing. A couple areas are more competitive. Contractors business California especially has become more competitive. That's been a substantial decline in volume for us.

We're pleased with what our people are doing, we think they're very disciplined to understand the business. They're busy trying to get their act together in the changing environment. and focus on adjusting their coverages to be able to be more competitive pricewise.

Frequently customers look at price before they look at coverages. And we have to sell the customer what they want and we're trying to focus on doing that.

Our Reinsurance business, which is roughly a $1 billion business for us continues to do well, focusing on casualty lines of business. They've done constantly improve their selection of customers. We're pleased with where they've gone. It's an area of business that continues to represent an improving result for us.

Our facultative business, which again represents roughly half of our -- roughly the same amount as our treaty business, around $300 million. Both direct and through brokers continues to perform well. We're getting good margins and we're building relationships where companies that need capital on a relationship basis can rely on us because we want to build relationships with them.

Our International business performed well also. We do have concerns about Argentina. It's obviously a fairly small part of our business, but the environment in Argentina is not as predictable as we'd like. But we have fabulous management there and we're enthusiastic about the country over the long run.

Our business in the U.K., and the rest of Europe is doing well although it is a price competitive environment. Basically, we -- we're quite excited about all of our businesses. Our Alternative Market segment, which showed a decline in premium volume, that decline is really a result of price changes in California workers' comp market.

Just how life is. Benefits change, prices come down, and that's really the driving force between that decline and premium volume. We have not lost customers, in fact we've gained customers, slightly.

So overall, we're pleased with where we're going. We see margins underwriting, getting slightly worse. But in our 2006 numbers, we built in a 3.5% deterioration, which we think is a conservative number. And in our expectations for '07 we built in a number that's equally conservative.

Before we go to Q&A, I'd like to be sure to inform you all. We announced $250 million debt financing about half hour ago of 30-year bonds. And have there have, I'll be precluded about talking about certain areas of our balance sheet related to our debt capital structure. So, I apologize for that. And I would be happy to answer any questions.

[OPERATOR INSTRUCTIONS] We'll take our first question from Joshua Shanker from CitiGroup.

Very nice quarter, gentlemen. My question involves the $7 million net favorable development. I'm wondering, can you give us some details on vintage on how that's developing growth for various years.

Basically, go ahead --

Yes, there were -- among the various companies, there were increases and decreases.

There was reductions in the more recent years '04 and '05 and some increases in earlier years, but nothing all that different from what we've seen during the first nine months of the year.

How is your '03 development?

There's not much development either way on that. We'll be, we'll be playing all that out in two weeks in the 10K reserve table.

Very good. And the second question involves the start-ups per se.

Do you think the start-ups are right on schedule? Are they a little slower to get going given that often new businesses price below renewal pricing? How should we view the current situation there?

I think that one of them -- not wanting to throw stones, so they will be nameless. One of them is comfortably ahead of schedule.

One of them is pretty much on schedule. One of them is a little behind, but coming along well. And one of them is slower than we expected, but that is because the business they're in didn't develop as we thought by choice. But overall I'd say we're probably in aggregate premium volume we did $40 odd plus million in the fourth quarter.

And I would have expected that number would have been more like $75 million if I had been on schedule with $100 million in the first quarter and we're going to be behind that schedule.

Very good, there's no compensation to the directors of each of those businesses based on volume, that's correct, right?

Yes.

Very good.

No one who works in this company gets paid on volume ever.

Very good, thank you very much.

That was, by the way that really was insulting, Josh.

We'll take our next question from Charlie Gates from Credit Suisse.

Hi, good morning. I think Gene said that the yield on the trading account in the fourth quarter was 11.8%-- the analyzed yield.

Yes. That's our merger arbitrage account.

What was the carrying value of the account at year-end? I think it was $757 million at September 30?

$782 million.

Okay, there was the first question. The second question, Bill, could you comment on what you've talked about in the past specific to some business leaving the ENS market and moving to the standard market? How do you see that evolving?

I think it continues to evolve.

I think that by and large the standard markets are trying to pick off the large marginal business that's in the ENS market that can sort of go either way. Maybe it's restaurants, maybe it's other kinds of things that are sometimes ENS business and sometimes not. I think that's the biggest piece there. But I think that's always the first step in this point in the cycle.

And that was really the mistake I made and that was my telltale sign that I made the mistake, Charlie. In '88, when I saw that happening, I said, oh my God, I'm Chicken Little, the world is coming to an end and that was a big mistake. I point out to people that I have a list of the 10 worst mistakes I made, and up until recently the worst one was 1988 when I stopped growing our business, probably cost us $1 billion over the subsequent 10 years.

You commented that you thought competition was extremely tough in California contractor. It was my understanding that for a period of time you had the [Montros] decision, which caused carnage in that market. But basically what's occuring there today?

I think that it's that people are not being as cautious as they have been.

The problem with California contractors is you have a 10-year statute of limitations. And you don't know what the courts are going to say and what's going to happen and what your liabilities are going to be. It's a very long tail line.

So you can write the business thinking you have no liability and then all of a sudden in year nine of the policy or -- since you wrote the policy, there could be a court decision you can find you have liability. Therefore it's very important in our view to keep defense within limits in California. It's very important in our view to have modest limits because you don't want to cause lawyers to be incited about seeing a huge pot of money at the end.

There are people who are putting out bigger limits, defenses not within the limits and who are forgetting the fact that there is this very, very long tail. When people look at our reserves, that's kind of we're reserving cautiously.

And we're not reserving cautiously because we want to into conservative, we're reserving cautiously because who knows what court decisions will come in 10 years? Who knows what's going to happen? So you get paid a lot of money for the premium and then you reserve and you wait. And if the ninth year after you wrote the policy there's a terrible court decision, you've got a problem. Thank you.

We'll take our next question from Stephan Petersen from Citadel Investment.

Good morning. Gene, I was wondering if you could briefly go over the audit premium issue again for me, so that I can sort of understand, at least the printed decline in specialty net premiums written in the fourth quarter, so that I understand the adjustments that I need to think about there as I kind of project for '07?

Right. I describe a little bit about these are audits of -- for policies where the premiums are based on sales or some other measurement at the end of the policy period.

There'll be an audit conducted and there'll be a final premium adjustment based on the actual sales as opposed to the estimated sales that were the basis of the initial premium estimate. Historically, we had recorded those premium revenues after the audit was completed and billed last year, 2005. We moved to an accrual policy, which is the correct policy under generally accepted accounting principals.

In the earlier years that was such a small item that it really didn't matter whether we accrued them or not. But as that business grew it became more significant. And in '05, we made a decision to make that accrual. There was an additional adjustment in the fourth quarter for $57 million, which was the first time entry to put that accrual up.

Now going forward, we're continuing to book them on an accrual basis, but year-over-year, the change will not be significant. So in the fourth quarter of 2006, the change was $3 million compared to $57 million a year ago.

And that had the effect of sort of, at least on a comparison basis sort of overstating net premiums written in the fourth quarter of '05 a bit.

What it really did is it took premiums that were in '03, '04, '05 and lumped them all in one quarter.

Got you.

Okay. So it's not part of that $57 million would have come throughout the year in '05, part of it probably would have come from the year of '04. So what happened is you have this accumulation building up and it just all hit in one quarter.

Understand. Another quick question, if I do very simplistic math, in terms of the new business, we're running at $172 million on an analyzed basis. I think you've kind of talked about something between $200 million and $300 million for new business generation in '07? Does that sound like you still expect that?

You're talking about our new start-ups?

Yes, sir.

I think what I said is that we had hoped we would have done $75 million in the fourth quarter and $100 million in the first quarter. And I think we're a bit behind.

I would hope that -- it's hard to predict the business as a whole. But I would hope that our start-ups approximately doubling over this next year. It's hard to predict start-up ventures. Certain things that can could could make things much better or otherwise. We're still pleased with them, we're pleased that the people are there. When you have a long-term view, you can't get up set with a quarter or two quarters of delay.

Thank you very much.

[OPERATOR INSTRUCTIONS] We will now take our next question from Meyer Shields from Stifel Nicolaus.

Thanks. Good morning. Let me start with a numbers question. Can you break out the pre and post tax contribution from Kiln to investment in [inaudible] quarter?

It'll be in the K. And I think that it's just not something we've ever done. It's not an overwhelming number.

Okay. With your comments before about how rates --

By the way, there are public companies where we have to be respectful of them also.

That's fair. You talked before about how rates are probably declining less than, I guess a lot of the fevered rhetoric that's out there. Does that imply that when potential acquirers talk about validations being too high, maybe they're not too high, because there's more profitability there?

Well, first of all, most things that have been for sale have not very good quality enterprises. In fact, I have other words for them, but I can't use them. So I don't see those companies as being enterprises that have much hidden profitability. Many of them to survive have printed all the profitability and then some.

I think that there are a number of high-quality companies that have good relationships with their distribution channels, that have plenty of margin in their business and will continue to do so. I think there are -- the fact is in a cycle, one of the things differentiates the quality of an enterprise and its relationships is that extension of the profitability through the cycle. Where you give the customer good service, where you give the client good service and the client's interested in claims service.

And every client you give good claim service to is a client you're going to have for a long time. So I think the high quality companies are able to really extend the renewal percentages.

If I were looking at a company investing in a renewal percentages they're a really key element of wanting to know the enterprise.

If I see a company with a renewal percentage and anything below 60%, I'd question the quality of the enterprise.

So I think that -- we think that we deliver things other than price. But the fact is prices are going down. They're not going down as much as some of these various public announcements. Our numbers say prices are down from 3% to 9% and an average of roughly 5% year-over-year through year end December.

Okay. That's helpful. Turning quickly to loss reserves, I guess with regard to the comments you made about long-term business always having the potential for adverse development a few years down the road --

I think I spoke specifically in that case of California contractors where you have 10 years before you have your tail closed off. So I was speaking specifically about that business.

Okay. Fair enough. All right. I'm going to stop here, thank you very much.

Moving along, we'll take our next question from Mike Grasher from Piper Jaffray.

Good morning, gentlemen. And congratulations on a great 2006. Question on the retention levels in the alternative markets business. You mentioned you weren't losing customers at all, but have you seen any change in terms of the opportunities with the softening in the direct market?

First of all, Mike, be sure you know we lose customers every day. So, when I say we're not losing customers -- don't -- let's not extrapolate that into not losing customers, we lose customers every day. We just have a very high retention rate. Our retention rate at our lowest company is in the high 70% and is over 90% in a number of our companies.

Understood.

I think that some of our businesses get targeted because we're known as good underwriters and we have competitors who go after our business, particularly. And that's okay, and that's the nature of things. I think that particular areas where we've got business there is more competition and in the alternative market area, there are places where there's a lot more competition.

But I think that as far as I know, other than here or there, there's nothing that's disrupting our normal every day plans or that's surprising or unusual or out of the ordinary. Now that can change tomorrow.

You have one person who decides they're going to go after a major program or a major thing and it could be disruptive to one of our units. It still wouldn't be disruptive to Berkley Corp., because there's no major program that counts for more than $10 million or $20 million of business, maybe $30 million. So, there's no individual program that's going to be disruptive. It's the benefit, when I was small I always denied the benefit of being large now we're large so I can tell you that the benefit of diversification is no one program is so important.

Understood.

You have to make good of where you are.

Okay.

And then within the Reinsurance segment, you mentioned sort of the treaty being the relationship business and talking about helping companies that need capital. Can you share with us sort of the spread in terms of the size of those companies that you're working with in that business line?

I think it's an evolving mix. I think at one point we were regular reinsurer, a commodity reinsurer 10 years ago and we did [expletive]. We made a lot of changes and continued to make the changes.

We clearly haven't made all the changes, although I think we made most of them of trying to do business with people who would value our capital and our expertise. And we continually bring expertise and knowledge to the game and try to deliver value to our customers and find customers who want companies who can deliver the value and expertise and who believe in long-term relationships. So if there's a hiccup, we don't get upset. We think that we've reduced the number of treaties from something like 500 down to 200. And I think with bigger shares of fewer companies and smaller companies.

Okay. Thanks for taking my question.

[OPERATOR INSTRUCTIONS] Your next question from Tom Cholnoky from Goldman Sachs.

Good morning, Bill. Tom Cholnoky.

Good morning, Tom.

Quick question, I guess unrelated right to your results. You've been fairly public about your -- about the Bermuda companies and their tax advantage. We've been hearing rumblings that Rangle is thinking about introducing a bill, but he's meeting a lot of resistance from fellow democrats. I was just wondering if you could give us, perhaps an update of what's going on there?

Well, I can't tell you what's going on in Washington because I have no idea. I can tell you that ultimately the American insurance industry can't survive in this current state of taxation. If you examine what's going on -- in 1975 or so we started the Reinsurance Association of America with Signet Star. And all the American reinsurers joined.

Today, the only two American reinsurers that are members are Berkley Insurance, which is Signet Star, and Berkshire Hathaway/General Re. Everyone else is a foreign reinsurer because they've all left. That will be in my opinion what will happen to the insurance business in America. Because people like us and the Hartford and the Chubb and everybody else have a huge financial disadvantage and we cannot survive with that.

So Washington is going to have to make a decision on how to address that issue or to lose those businesses. And I can't tell you what's going to happen. It's an issue that they'll have to address. And we're trying to be sure they address it and understand the consequences of the current state of affairs.

So have they, Bill, actually been floated to Rangle's committee?

I really don't think I want to comment any further on that.

Okay. Great. Thank you.

We'll take our next question from Larry Greenberg with Langen McAlenney.

Good morning. Thank you. Just a couple quick numbers questions. Just, I know it's a small number, but just for my clarification. Was the $7 million of development positive or negative development in the quarter?

That was a reserve increase.

A reserve increase. Thanks.

Negative development.

Yes. Yes. And --

And by the way, we will continue any time we have pockets where we think we can strengthen reserves, we will continue and try and do so.

Right. And was there any reestimation for Q1 through Q3 losses in the fourth quarter?

Yes, there always is, but it didn't add up to anything too significant in terms of the overall loss pick for the organization.

Okay. Just looking forward, the full year loss ratio might be a better starting off point than the fourth quarter.

Yes, if you normalize it for storms and development, there's not -- there's not much variation in the underlying loss ratio throughout 2006. So not sure one quarter's better than another.

I think the bumps quarter to quarter come about because of quirks that are internal. You may have more storms in one quarter, you may have other things that happen. But I think that if you look at the year, the full-year's loss ratio, I think that'd be a good thing. We effectively raised your loss ratio from that and if we were conservative in '06, we'll continue to be conservative in '07.

Thank you, that's helpful.

Moving on, we'll take our next call from Kenneth Billingsley from BB&T.

Good morning. I just wanted to follow up on the development questions. A lot of the peers have been releasing reserves on '04 and '05 business, yet you guys have booked loss ratios that seem to be in line or even greater than the peer group. So could you just comment on how you may be looking at the business? Where you're booking higher loss ratios yet not having positive development there at the time?

Well, they don't have their sons in the business. I do, and I therefore have to worry about what happens over the longer term. So I have to be sure the reserves are adequate when he takes over too. So we just want to be cautious and conservative and be able to adequately consider what's going to happen over the longer term future.

It's interesting, if you look at this industry and maybe it's -- maybe it's my fear in remembering when we were little. But in the past 10 years 220, 230 companies have gone broke. And 52% of those guys went broke, went broke because they had inaccurate loss reserves.

I remember that every quarter and I talk to Gene and say remember that number. We don't want to be on that list ever. So we try and be sure. And we haven't been as conservative through the history of this company as we are now, but we can afford to be now. Maybe these guys can't afford to be now. We have great numbers, great returns, and we can still be conservative.

Okay. And the last question is earlier in the call you said that you had a top 10 list of biggest mistakes. And it may have been, maybe just improper wording, but you said until recently, number one was 1988.

Yes, it was not a bad word choice, it's true.

So could you say -- you said it was until recently, what's number one now?

I have to let time go by before I humiliate myself.

Very good.

You have to humiliate yourself about the stupid things you do after it's time enough to be humorous about it.

So when would be a good time I could ask this question again?

That is the senior officers of the company laughing at me. You don't have to worry, they'll point it out to me and remind me.

Okay. Thank you very much. Good quarter.

Thank you.

We'll take our next question from Chris [Viareal] from BPI Investments.

Hi. Good morning. And thanks for taking my call. My call is for Gene. Gene, just a quick question. I believe you said you had $7 million of net negative development. I guess you guys have been releasing reserves from the '04 and '05 accident years and strengthening earlier. Can you please quantify how much was actual negative development and if there was any positive development offsetting that, please?

Yes. I mentioned earlier that we had some positive development in '04 and '05 offset by some negative in some earlier years. We'll lay all that out in the 10K we'll be filing at the end of the month. But beyond that, I don't have all the numbers year by year, company by company.

But just to be clear, there is some positive and negative development in the quarter, is that correct?

Yes, there is.

Okay. Thank you.

We'll take our next question from Ron Bobman from Capital Returns Investment.

Bill, I always thought the biggest mistake was selling stock many years ago to buy your first house or something --

That was -- the biggest mistake fortunately isn't in terms of money anymore, it used to be in terms of money. Now in humiliation and stupidity.

So is that raising the bar or lowering the bar?

It depends.

Anyway. I just had one question --

Just along that line, I met -- actually a week ago, the first investor, a fellow named Duncan Miller who bought $12,500 worth of stock in 1968 at what was then the unbelievable price, this is before any splits or whatever, of $0.50 a share. And his $12,500 of stock is worth a shade over $30 million.

Wow.

So the house, he reminded me how expensive that house was.

Nice move, Duncan.

He still has all the stock too.

I just had a quick question. Will you comment on what you're seeing in commercial auto? Competitive environment. Thanks a lot.

I think the primary is pretty stable up to the first, probably, $1 million or $2 million. Excess is coming down, probably inappropriately because our own measurements would tell you that the rates and the excess never got quite to where we'd like them to be. But in general, primaries, okay. And it needs to be.

It's just, it's a line where a lot of people lost a lot of money. And it's not a long tail line, it doesn't generate huge investment income. And it's not a huge return line. It's an okay return line. If prices decline significantly, it quickly goes to the red.

Moving on, we'll take our next question from Charlie Gates from Credit Suisse.

I didn't understand the last answer, Bill with regard to how would you characterize competition commercial auto as through, I guess Carolina [inaudible]?

We write commercial auto in our regional companies, as well as Carolina. And what I'm telling you is, it is competitive, but prices are fine on the primary commercial auto lines.

On excess, it is more competitive and prices are declining. Excess pricing in our opinion should be much closer in line to the primary pricing, because accidents, when they happen, frequently go through whatever limit of coverage there is and therefore we think excess pricing was barely adequate before. And with the decline in excess pricing frequently, the price levels are not enough. Is that clear?

That was better. The other question I had was can you apply on how you see the workers' compensation market evolving 2007, 2008? and in your answer, could you speak to whatever is occuring in California?

That's a -- first, workers' compensation is a state by state issue. I think, generally, wisely people are cautious about workers' compensation. You have some Bermuda companies who are deciding they can write direct workers' compensation and they're not as well attuned to what that is as they might be. But we think workers' comp prices in general are okay. California prices are down a lot, but appropriately because, in fact the benefits are down.

California actually, I have to give them credit, it's a crazy place, but they really did the right thing. They cut the benefits and they let the rates come down. They've pushed hard and the rates did come down, they've come down a lot. And they've done a good job.

I think it continues to be a pretty competitive market, but prices have a wide range, some high priced guys and lower priced guys. There are clearly some people who are doing crazy things in California. But there are people doing crazy things in individual lines all over.

In general, I would say workers' compensation is priced okay. Few states more competitive than you'd like, but it's a line of business that pricing at this point looks reasonable.

Final question. When you say crazy things, you mean they're very, very competitive from a pricing standpoint?

Aggressive, very competitive on pricing point of view. Some are paying higher commissions. It's just various competitive things to buy business. And we think some of them are doing prices in certain places where they have no hope of making money.

If you were an analyst, how would you ascertain companies that were doing that?

Well, that's why I gave up managing money and came to run an insurance business because it's a lot easier.

Okay. Thank you.

Moving on, we'll take our next question from Stephan Petersen from Citadel Investment.

Thanks. Bill, you sort of waved us off asking about the debt in the capital structure. But could you talk a little bit about your thinking in terms of potential share buy backs?

Clearly cash is not an issue right now. But your stock has been certainly robust, certainly earned sort of a robust multiple. Have you updated your thinking in terms of stock buy back?

First of all, my stock is cheap.

Okay.

It's not a robust multiple.

Because multiples have a relationship to what you can earn on your capital and the quality of the enterprise, and relative to what we earn on our capital and the quality of our enterprise compared to many of our competitors, I don't think we're particularly overpriced at all. I think there are other companies that are in that same category.

The market doesn't do a particularly good job in differentiating in quality of earnings and returns. But that being said, we've said the same things about stock buy backs. We're opportunistic, if somebody had a good stock and called us and offered it to us, we might well be interested. We did in the past, in the last market cycle, buy back a lot of stock.

And we were premature in when we bought it back, I don't want to be premature in buying stock back, but the fact is that we'll see what opportunities we have, and the reality is that you manage the business using all the leverage you have. And that's one of them.

Okay. Thank you.

We'll take our next question from Meyer Shields from Stifel Nicolaus .

Thanks. Just one quick follow up. Can you -- let me start again, is there any pressure from your distribution force for higher commissions? It seems sort of typical in a soft market and I'm wondering how it's manifesting itself now?

We don't have any pressure.

Okay. Thanks.

Not only that, the issue hasn't even been raised.

And at this time, Mr. Berkley, it appears there are no further questions.

Okay. Thank you very much.

That will conclude today's conference, we thank you for participation. At this time your phone lines may now disconnect.