W R Berkley Corp (WRB) 2007 Q1 法說會逐字稿

Good day, everyone. Welcome to the W.R. Berkley first quarter 2007 conference call. Today's conference 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 such as without limitations, believes, expects, or estimates. We caution you that such forward-looking statements should not be regarded as representations by us of the future plans, estimates, or expectations contemplated by us will in fact be achieved.

Please refer to our annual report on form 10-K for the year ended December 31, 2006, 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 obligation to update or alter it's forward-looking statements as a result of future events or otherwise. And, at this time, I would like to turn the call, conference over to Mr. William R. Berkley, Chief Executive Officer and Chairman of the Board. Please go ahead, sir.

Good morning. We were pleased with our quarter. We were pleased with how business is. We've been pleased with the pricing environment, not that it's perfect, but it certainly is in line with our expectations. The competitive environment is certainly not as pleasant as a year ago, or two years ago, but is such that underwriting margins are available. I'm not going to go into all of the details until afterwards. Right now I'll allow Gene to go through the financial statements and then I'll take you through some of the operating units. Gene - ?

Okay, thank you. Our first quarter net operating income was $184 million, which is a 15% increase over $160 million in the first quarter of 2006. On a per share basis, that's operating income that rose to $0.91 this quarter from $0.79 a year ago. Our net written premiums were $1.255 billion, which was a decline of $24 million or 2% when compared to the prior year quarter. Three of our business segments reported positive growth in the quarter. The regional segment was up 5%.

Alternative markets was also up 5%, in spite of the further rate declines for California workers' compensation business, and the international segment was up 19%. On the other hand, the reinsurance and specialty premiums were down by 19% and 3%, respectively. For the reinsurance segment, the nonrenewal of one large treat accounted for most of the decline, and for the specialty business, the decrease was mostly due to lower premiums related to residential construction wrap policies. Premiums for the companies that we started in early 2006 were $28 million in the first quarter of this year, up from 7 million in the first quarter of '06. Our overall combined ratio improved to 87.5% from 88.2% in the prior year quarter.

The combined ratios by segment were 84.0 for specialty, 89.6 for regional , 78.8 for alternative markets, 96.8 for reinsurance, and 97.1 for international. Our loss ratio decreased 1.9 percentage points to 59.3, with strong improvement for the specialty and reinsurance segments. Our overall underwriting profits included $22 million of favorable development in the first quarter of 2007, compared with $6 million of unfavorable reserve development in the first quarter of '06. Our paid loss ratio was 41.7% in the first quarter, and our pay to incurred loss ratio continues to be quite low by historical standards at just 70.3%. Also, in spite of the decline in premium volume, we still increased our net loss reserves in the first quarter by $200 million, including the $150 million of additional [inaudible]. The overall expense ratio increased 1.2 percentage points to 28.2. This was due in part to the nonrenewal of that same reinsurance treaty which carried a below average expense load as well as to higher profit commissions eminating from reserve reductions and lower losses for certain accounts.

Our invested assets were up $531 million in the first quarter to just over $12.5 billion at March 31, 2007. The increase was driven by cash flow from operations of $356 million, and by proceeds from the issuance of $250 million of senior notes in February. Net investment income increased 26% to $165 million with an average annualized yield on investment of 5.5%, which was up from 5.0% in the first quarter of '06. These overall returns include earnings on the Arbitrage account which produced an annualized yield of 11.2% this quarter, compared with 13.0% in the prior year quarter. The carrying value of the Arbitrage account was approximately $800 million at quarter end.

The average duration of the overall portfolio was unchanged from the beginning of the year at 3.3 years. Our realized gains were $7.4 million, and included a gain of $2 million from the sale of our operations in the Philippines, which we sold during March in a management buyout transaction. Our overall tax rate was 29.5%, and our after-tax income was $188 million. That gives us an annualized yield on equity -- return on equity of 22.6% for the quarter, and a book value per share at the end of the quarter of

Thank you, Gene. I think that when you look at the current year, it's really a continuation of the certainly the second half of '06, which is more competition, lumpier opportunities, varying places where we see competitive forces impacting us and the availability of chances to deploy capital becoming less frequently available and less high quality opportunities. In looking at our businesses, our regional business continues to be performing well. Much more pressure, and opportunity to expand is not as great, but the business continues to perform well, that business is still growing, in spite of prices being down probably 3% year-over-year for the quarter, give or take, that business continues to do well, and we are able to grow the business still.

Our specialty business is seeing the most competitve environment in the first quarter. We're being inundated with business leaving for the standard markets. Many of the Bermuda companies are trying to enter the specialty area and benefiting from their lack of taxation. And that entire area is finding it most difficult, especially in the [inaudible] area, but across the board. We're optimistic that that business will hold its own. We've had long term relationships with our distribution channels, and the business, relative to where we were thinking it would be is holding it own.

Pricing is down a little over 3%, volume is down roughly the same amount as pricing is down, but it is more competitive, it's harder to hold our ground, and that historically has under competitive pressure very early in the cycle, and then sort of flattened out, and then as the cycle moves on, it's gotten under pressure later on in the cycle. So it's as we would have expected. Lots of pressure right now. We would expect that pressure will ease a bit as we move further into the cycle, and as we get to the end of the cycle. At the bottom, it will have more pressure. Alternative market business has continued to do well. There's a lot of need for it to continue to do well. Prices are better there because of its focus on workers' compensation.

Workers' compensation is one of those lines that is subject to greater inflation pressure, especially because of medical inflation and wage inflation, which are the two factors that impact that, in the greatest extent in any of our business. I think it's the area where expertise is really important and understanding how to price your business is critical. There are some new entrants that seem to have entered the business without any mathematical talents, and they will find that long-tail business becomes very short-tail business when they have not learned to multiply and divide accurately. Reinsurance business is a business that impacted us most to the point of premium volumes. If it weren't for the reinsurance volume decline, our business would have been on couple of percent for the quarter. The decline was primarily one treaty written by a special section of our reinsurance division, which represents a small piece of our overall business, but they write large treaties, and therefore it's a very lumpy business.

That represented virtually all of the business we lost in the quarter, and it will continue to have some effect, not quite as great an effect, but some significant effect in the second quarter, and it will be virtually gone by the third and fourth quarter. We have reason to believe that we'll be able to pick up new opportunities in that area, which again will be lumpy benefits, also. Our international business continues to do well. It's doing well for two reasons. One, the businesses are doing well. We've expanded the business to Spain, to Hong Kong, and our business in Argentina is doing well, but also the dollar being somewhat weaker, the currency translation is giving us better volume there.

Overall, we think it's been a very good, solid quarter. The business from our perspective continues to be competitive, but within a range that we would expect in the investment area, the increase in investable assets. The better returns we've been able to generate have combined to give us that increasing investment income base, our annualized investment income now is over $650 million, so we're pleased with where we're going, and optimistic that we'll continue to have a great year. Our 22% after tax return for the quarter is not much different than we expected, and in fact, you may recall a year ago it's a number I sort of put on the table. It wasn't hard to figure out, because it really comes about from somewhat increased earnings, and offset by the level of increased capital. So with that, I would be glad, Lisa, to take any questions.

Thank you, and we'll take our first question from Joshua Shanker with Citigroup.

Good morning, everyone. Three questions. The first one is, if I'm hearing correctly, Bill, it seem like you're using the F word, foolish, to talk about certain new inference and what-not. Is there really foolish behavior going on in the market? The second question is I'm curious to get some granularity on what your accident loss picks look like right now compared to what they looked like a year ago, and the third situation, I don't know if I missed this in Gene's presentation, but the high amount of other income in the P & L, some granularity on that.

Okay, let me, first, I think there are people who are here and there going into pieces of the business, new entrants in particular lines that are being foolish. I think it's a very small number and it's especially true in little niches in the workers' compensation business, but I think that it's still a very small little bit. It was particularly on my mind because I talked to someone about -- someone who came in in one area, in one state with a price that was 27% of our price. And you can't -- you can't get there. So, you see new little pieces, little companies coming in and doing that. Which is, you know, It's an insignificant part of the marketplace, but it is people who just look at this as a way to get money to do something with. But it certainly is not the business. Gene will answer the next question. Go ahead, Gene.

Yes, our accident year loss ratio for the first quarter of '07 is approximately one point higher than the full year '06 accident loss ratio across the board.

Does that deviate from the guidance that you were, seemed to be giving, but maybe I misunderstood two quarters ago, where you said you were taking up accident year loss picks from new business by around 3%?

I think we were to probably talking about the '06 loss ratio.

No, he's talking -- the answer is that you have various pieces that go into that, and I think what we've done is our accident loss ratios by company increase by -- I'm not sure -- the answer is -- I'm not sure Gene answered your question. Our accident loss ratio picks were just as upward for inflation on loss cost by on average 3%.

Okay.

[inaudible] your question. And there are various offsetting things to that. And -- I don't know where we were -

Yes, and I was referring to the accident year selected loss ratio, as opposed to the inflation component of that loss ratio.

Okay. That helps, that clarifies it, thank you. And finally, the other income line?

The other income comes from -- first of all, it was an insignificant, net income was a couple of hundred thousand dollars. Other income was revenue from an investment we made where we bought 100% of a small business and it's in our private equity investment portfolio, but under accounting rules, we show it as revenue, but it's a couple of hundred thousand dollars of income, I think.

Right, we're consolidating it, so we've got roughly $5 million of revenue coming through, and $4.7, $4.8 million of expenses coming through on another line.

Okay.

Where if we present it the way we like to, we would have just showed it as a couple of hundred thousand dollars of investment income, Josh.

Okay. Thank you very much.

But the rules done allow for that.

Terrific.

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

Hi, good morning. I had thought that you would elect - I have three questions, also, like Josh. My first question, I had thought, given the announcement of last November and the pressure on the stock, that you would elect to buy back some stock.

Shows you, you made a mistake.

Yes, that's true. Can you elaborate on that?

Well, the --

I'm sorry?

It was, I think the answer is that if someone called and offered us a block of stock, we might be responsive, but we have opportunities, and we're looking at them, and when we think the right opportunity is around, we'll take advantage of it, whether that's paying a bigger dividend, whether that's buying back stock, or whether it's taking advantage of an opportunity. Patience is an extremely valuable thing in this business, and patience also means not responding to investors perceptions of what we should do, but trying to measure, measure what we ought to do by what we see as the opportunities and where we see them. So, you know, we are very conscious of managing our balance sheet, but the timing of doing that, when we do it, how we do it, is something we want to look at carefully.

My second question, to what extent do you see, either from an industry or company standpoint, volume leaving the ENS area and moving to the standard market?

Certainly, Charlie, as I said, the biggest thing at the beginning of the turn in the cycle, it's one of the reasons I said the ENS business is hurt volume-wise and competitively the most at the beginning of the turndown the cycle, and then at the end of the cycle and in the middle, it's not impacted as much. And it's hurt at the beginning of the cycle, because the standard markets come in and try and take the business away. So restaurants go from the ENS market to the standard market. Tanning salons go from the ENS market to the standard market. Health spas go from the standard -- to the ENS market to standard market. That's the kind of stuff that just goes from one place to the other, and it goes at half the price, a third of the price, because what they do is, they take out the exceptions in their underwriting guides that let these people write this business.

So, right now the ENS being is being impacted by the loosening of the underwriting guides from standard markets, which is one of the reasons that in many ways some of the standard markets are showing price increases. Some of the big standard market companies are talking about, you know, pricing not only not going down much, but pricing going up, and part of that is that they're getting -- they're expanding their capacities and eliminating underwriting exceptions, and getting it at higher prices, but they're still a lot lower than the ENS market. So I think that's, you know, a significant amount of business. Our standard market renewal rate business, we're renewing sort of, somewhere between 80 and 85% of our standard market business, as high as 90% in a couple of places, and our ENS business renews sort of 70%. So that business is what's going away.

My final question, [inaudible] in the earnings announcement last night made reference to something called FASB159, which I believe allows them to essentially record in operating earnings -- unrealized gains on equity investments, you get some of that benefit to the best of my knowledge through the treaty account, specific to M&A activity. Do I have that right?

Yes, I mean, but recognize, that's a short-term -- those are short-term transactions, and, you know, that just adjusts, you know, day to day, but those are short-term transactions. The place that will really impact people, it's going to this global accounting standard where fair value accounting is sort of a halfway step towards fair value accounting, and, you know, it's typical of accountants, they sort of fit with lawyers and actuaries, when they can't make up their minds, they go halfway, that way you're totally confused, so now you can get to mark assets up to their fair market value, and you get to choose which ones you mark up. You don't even have to mark them all up.

So, it's really going to be tough for all of you guys who are analysts, because I can mark my building up, this fancy building in Greenwich real estate by many millions of dollars, but I won't mark my crummy building in downtown wherever down, so I'm only going to -- it's the reverse of European accounting. You get to mark things up, but you don't have to mark things down. It's the stupidest damn thing in the world, but I had to promise Gene Ballard that I wouldn't call accountants stupid more than once, so I'm not saying anymore about it, but I promise you if I were an insurance company analyst I would lose sleep over this 115, and I would be sure to ask every analyst call, tell me what you did on 115, because it's a real tricky thing.

159, I'm sorry, I saidI 115 - 159.

Because unlike our trading account where it really runs through on a continuum basis, so all it does is let you adjust the values, but the transactions close constantly, this is talking about long-term assets and other assets that you may not sell. So I own buildings, I own other things, you know, it's -- it's really -- it's an interesting thing. But it will not -- since it's selective and by choice and only up if you wish to, it's not a good thing, it's a really bad decision by the accounting standards board.

Thank you.

Next we'll go to Michael Phillips with Stifel Nicolaus.

Thank, good morning, was there - Gene mentioned $22 million of favorable development. I was wondering if there was any unfavorable for any of your segments [inaudible]?

Nothing of consequence. I think reinsurance had a slight number, but nothing of consequence. As all of you know who follow the call, we are constantly looking at old years trying to find places where there might might be anything that warrants us putting money in, and we're just constantly doing that. You might note that our increase in reserves were unusual this year. In the first quarter, we had $200 million increase in reserves, but only $50 million in case reserves, $150 million went into IB & R, which is quite an unusual thing. So we constantly are looking at those old years, and where we can stuff them and put them back to be sure that we're adequate in those old years, and as the best of my knowledge, I think only reinsurance is that right, Gene?

Yes, that's correct. And it was a pretty small number.

Okay. Good. Thanks. If my math is right, the tax rate on your net investment income seems to have crept up in the last couple of quarters. I guess first is that right? - think it is. And if so, you know, kind of what's behind that. It looks like from a mid-24 to over 26 now?

Just hold on one second.

Yes, it's, I guess, throughout -- for the full year of '06, it was 25, and for the first quarter of '07, it was 26, so it's just a balance of how much of our investments are municipals, versus not municipals.

Okay. Good, that's fair enough. And then finally, just kind of a small numbers question. Do you happen to have the margin on your services fees - for the quarter?

About 10%.

Around 10%?

And it generally runs around 10%, between 10 and 12%.

Okay. Perfect. Thanks very much, guys.

Next is Jay Cohen with Merrill Lynch.

Yes, a couple of questions -- I guess -

You need three questions to keep in line, Jay.

I can come up with three, I'm sure.

Thank you.

With the reserves, the release in this quarter was quite a bit higher than the pattern we had seen in the past. You take that with the fact that if you looked at your statutory filings from my standpoint it was pretty difficult not see a redundancy less than a billion dollars, especially from the '06 year. Given those two factors, should we expect to see a more consist release of reserves like we saw in the first quarter?

Jay, we don't plan releases of reserves. We want everyone to be comfortable with their numbers. As I've said before, it is the belief of all of the people at the holding company who are involved with the oversight that our reserves are comfortable and maybe even more conservative than we would like them, but our reserves, from the perception of the people in the field, are adequate, and we're constantly in that dialogue of examining and re-evaluating those reserve levels. I think when you see the various numbers that we've seen, they all tell you our reserve levels are quite conservative. I will go through briefly with you some of those numbers that we think. We start with the fact that of our increase in reserves, 75% of our increase in reserves went to IB & R. That's a reasonably telling number. Number two, our paid-to-incurred was 70%. That number also tells you something.

Normally you would say, if you looked at the duration -- and by the way, this is a speech I've given for at least seven years. The duration times your expected inflation rate, minus a hundred percent, gives you what your paid-to-incurred's should be, as a reasonable approximation, so our duration is somewhere -- our loss is somewhere between three and four years. We would say a balanced inflation rate is about 6%, sort of 4% regular inflation and 8% medical. So we said 6%. Sort of 20% as an inflation. With that duration, maybe 18%, maybe to 22%. So anything with a paid-to-incurred of less than 80% means we're probably being cautious in how we're establishing reserves. People who have paid-to-incurred's over 100%, generally one should say they're being pretty aggressive. It's the kind of thing you saw in 1999 and 2000.

Finally, if you look at our pay-loss ratio, still, five years after the cycle turns, right around 40%. I think all those things together tell you our reserves continue to be cautiously established and cautiously evaluated, but it isn't evaluated by some great plan. It's evaluated quarter by quarter, company by company, with us wanting to be sure that we're not going to find any bad surprises.

Got it. Next question. There was a chunk of options that -- for you that were expiring -- I think it was in May, and I know that you were not still in the stock, you were simply exercising the options. Are you done with that process now?

I have exercised 2 million of the 3.7 million shares for cash. I have 1,700,000 shares more that I have to decide what I'm going to do with. I have various choices of what I'm going to do. I've already put $40 million roughly of new cash into that stock. What I do with this last 1,700,000 shares, or 1,800,000 shares, I don't know, but I have roughly two and a half -- I guess three weeks to make a decision.

You give it to me, I can make the decision for you, if it's bothering you.

I appreciate that, I appreciate that . But, you know, one of the things that's interesting is, just so everyone understands, options are great, and they make you lots of money, but coming up with $40 million of cash effectively 60% of the value of the option, and fully 50% of the, in the money costs -- is cash that people have to put up, and me, just like every other senior employee and junior employee in the company has to come up with a lot of money to exercise options, and when they do that, and they keep any quantity of those shares, it's a big investment in the company, so, it's easy to say when it's not you who have to write the

Fair point.

I might add that before Sarbanes-Oxley, we were able to help people do that by lending the money to do that, and then the problem became abused with various companies and that no longer is possible.

Got you. And then last of my three questions.

That's your fourth question, but we'll let it pass.

No, that was just three. The treaty in the reinsurance business, the treaty, was it one that was, that you decided to non-renew, or was the, did the [inaudible] client make a change?

It was one we -- we have one segment of our treaty business that does special customized large treaties that are very unique and serve particular purposes, and this was one of those.

Was it a finite-risk type of thing?

You've heard all I'm saying.

Fair enough. All right, thank you.

We'll go next Larry Greenburg with Langden McAlleney .

Thank you, and good morning, and I promise I'll have fewer than three questions. First, can you just give us a little bit of color on where the reserve releases came from by segment? And, secondly, maybe an update on your premium outlook for your 2006 ventures as we look forward?

Sure. The reserve releases primarily came from preferred employers, and then a couple of the specialty companies, none of the reserve releases were stretching those companies, and, in fact, we think those companies are still conservatively reserved. They were -- they were -- you know, there were occasions where the people in the companies didn't actually want a release reserves, but they had no rational argument any longer why not to. But it was amongst three companies, and it wasn't particularly -- none of them were consequential.

As to our start up, I think we did about 28 or $30 million from our '06 ventures. I would expect that would continue to increase quarter by quarter. You know, my -- I would hope that by the fourth quarter, that number would be certainly more than $50 million of business, maybe as much as 75 or $100 million, but it's hard to tell, but the business is certainly gaining traction. It was 28 million versus 7 million. If you took out the volume loss and reinsurance and added the new volume in, that would effectively have made all of the rest of the business flat. So, you know, we think that will add, and there are other pieces we're trying to add. And I might add that I guess half of the start ups are making money, and we think they'll all be making money by the end of the year.

Are there any that have deviated substantially from plan?

Yes. One.

Better or worse?

Worse than planned, and no I'm not going to discuss it.

Thanks very much.

We'll take our next question from Mike Grasher with Piper Jaffray.

Good morning. Follow-up question here. If my numbers are anywhere close to accurate, it looks like the risk to capital basically has gone from, you know, 1.7, just two years ago, to about 1.3 today. And I understand, Bill, your comment about having patience. However, is there a particular level of risk to capital, or another metric that maybe we can focus on, where you begin to lose your patience and become more active?

I think the first thing we're really looking at is, we've had a number of opportunities that have sort of been in the pipeline that we had hoped to get done before year end that just seem to be taking a lot longer than we expected. So we're trying to wash those opportunities through to either get done or not get done. Once those are finished, we're then going to have the ability to look and say, okay, what do we do? I think that when we say what do we do, we have a couple of choices. For first choice is we can buy stock back. When you buy stock back, you have look at what's the right timing to buy stock back. Last time the market sort of got softer, we bought 25% of our stock back in total, but we bought it back too early. And we don't want to spend our money, and then find that the stock is a lot cheaper later on, and we don't have the resources to do that. I thought I was really smart when we bought back 25% of the company, and I found out in hindsight, looking at the situation, I wasn't as smart as I thought. So I'm a little cautious there.

The other choice is to pay out more as dividends. I don't know that that does a lot of good for my shareholders. They get cash in their hands, me being the largest single shareholder, so it may do some good for me, but I'm not sure it's the right strategy. But I think that I would expect in the next 60 or 90 days, these things are going to start to become clearer, and we do recognize there is a time constraint in the value of this or the attractiveness of buying stock back and it's the attractiveness of getting money to shareholders. But one of the problems you face in a long-term business is the element of timing, and how to time what you do and when do you do it, and there is this window where everyone gets concerned, and if you have resources, you can take advantage of that. And that is before the cycle turns up and it's obvious to others, so it's not so easy to get capital, but it's when everyone else is desperate, and you can get opportunities. So, you know, there's a lot to consider. This business has always been run with a view to maximizing the long-term benefits of the shareholder. And it will continue to be run in that same manner.

Okay. Sounds good. And then you've been fairly vocal on Bermuda and certain constituents, or constitutancies utilizing or abusing the tax advantage of Bermuda. Do you have any additional thoughts or color regarding that, or can you give us your thoughts on where we might be headed with regard to the taxation issue in Bermuda?

Well, one never can anticipate what the Congress of the United States decides to do. They're in charge. It's their decision. I think it's clear that tax policies established by the government impact where and how people do business. The vast majority of new capital in the past few years has gone to Bermuda because of the tax advantage that Bermuda has created. The fact is that many of these Bermuda companies have set up U.S. subsidiaries, and written business here and then reinsured in Bermuda. Companies that merely are reinsurance companies and operate on a global basis, I think that's fine. Being in Bermuda, you choose where you want to be. But it's clear that the world is becoming more and more of a global place with people electing to put their capital where they can minimize their taxes. And I think that's fine. That is what you want to do for your shareholders.

However, the consequence of that is you have to recognize as a government taxation model, you then make it very difficult, if not impossible, for your domestic companies to compete. That's the situation that exists today. And our government has to decide whether business generated in America from American companies and policyholders, the revenue that is derived from these people should be subject to U.S. tax, and that's the question. And right now, if you're smart and shrewd, you can take money from all over the world and move it to tax havens and not pay tax. It's happening not just here, but happening in the UK. People are doing it from Lloyds, people are doing it from all over. So that's the ultimate question that people are going to have to decide. And how do they want governments to get revenue to support their societies. And I'm not suggesting they're wrong in what they're doing, I'm just suggesting that the consequence to our society as it works creates a problem, and the government should be cognizant of the problem that exists, and if they leave it as it is, the result ultimately will be all insurance companies leaving the U.S.

And might that include Berkley itself?

We have to cross that bridge when we come to it.

Understood. Thanks for your comments.

We'll go next to Daniel Baransky with Fox-Pitt Kelton.

Yes, most of my questions have been asked, but I'm just curious, not to belabor a dead horse here, but on the reinsurance treaty, is that more a function of -- could we read anything about the competitive landscape in the reinsurance segment from that, or is that just sort of an internal decision?

No, this is a piece of business that is done on one-off transactions that are designed for various issues that we do a reinsurance transaction when a company is in the process of raising capital, and they may need a quota share treaty for a period of one year. There's a hundred reasons, but these treaties are written and always meant to be written for one year and not for long term. So this is nothing to do with any competition or anything.

Okay. And I was wondering is there any lines that perhaps you're not in now that you find particularly interesting, or any areas where you think you might see some dislocation that you can take advantage of, or areas you might look to expand into?

We answer is, being candid, every line we're not in, we look at all the time, because we like to be in anything we think is profitable, but if we told you that, then everybody would know what we thought were the good opportunities, so I wouldn't want to comment, no.

Okay, great. Thank you, that's all I have.

Thank you very much.

We'll go next to Scott Heleniak with Farris Baker Watts.

Hi, good morning. Just wondering if there were any areas where pricing is just very inadequate. I know you mentioned construction, California workers' comp where I guess you're probably not renewing a lot of business. Any other lines that come to mind.

I think the California wrap business has gotten to be quite silly. We wrote it on a nonadmitted basis. People are writing it on an admitted basis at very low prices, and we think that some areas of DNO are priced at sort of foolish levels. There seems to be no consideration given to a number of exposures that we think are sort of sitting there. So, you know, I would say DNO, wrap business, I think also on high level exposures, excess umbrella, other kinds of things that are way, way up above attachment points where people can say it will never get there - people are selling that coverage pretty cheap. It's one of those areas that as markets get softer looks more attractive, because the probability of loss is small. So, naive people frequently are attracted to that one in a thousand loss exposure, and write that business. Unfortunately, the pricing is priced at one in 2,000 events, so there's a high loss ratio.

Is the pricing down 15 to 20%, or so, on average in those lines?

Oh, no, no, that would be good pricing. Oh, no. A lot more than that.

Okay. All right. Then any change on the M&A outlook for the year? Are you seeing more opportunities out there in the marketplace, or do you expect to see kind of a down tick just because of a soft market?

I think more people are trying to find ways to deal with expenses and get together. I think there's certainly more talk about activity. There's some better small businesses that now aren't seeing in the opportunities to become large businesses, so we hope that we'll get some better opportunities, but, no, I think there are a lot more people out searching around for new homes.

Thank you. That's all my questions.

We'll go to Steve Roseberry with Diamondback Investors.

Hi, good morning. I had one question on the ROE comments from the press release and one question on the Bermuda tax issue. On the ROE comments on the press release, can you give us more color as to how you sort of define the returns in excess of 20% into next year, as you see it? You know, should we think of that as maybe as just the first half, or how are you guys thinking of that?

The reason we were vague is because we wanted to be vague. The answer is we were careful not to say through next year, and we were careful to say not through the next 12 months. We gave ourselves the right to be a little vague, because there's a lot of change going on, and we're not certain. We're pretty pleased, and we surely would hope that we would be able to get above 20% returns for next year, but we wrote what we wrote intentionally.

Fair enough. Could you comment on what you think the incremental-like lever point is that people just aren't appreciating when they -- working through your model last night, I really struggled to get to 28% ROE, when I compare it to current consensus numbers for '08, so it looks like there's something a lot of people, myself included, are missing.

I can't tell you what other people look at and how they make their judgment.

Okay. Fair enough.

I can only tell you when I look at the numbers of where -- and I know what we're planning to do and where things are, that's sort of where I am.

Uh-huh. Okay. And on the Bermuda thing, if we fail to get any sort of meaningful progress here in the efforts you've touched on, you know, what point to -- you know, if at all maybe it's farfetched to think about, but is there sort of if you can't beat them join them type thought process here, at what point might you at all think about that, and is there any, is there any tie, if there is any thought process there to, you know, how you guys are managing your capital presently?

I think that for the moment we're optimistic that we'll be able to deal with the Bermuda issue. I think that -- you know, I think when this session of Congress ends, we'll review that and examine where we are and what are the options we have, at which point we may consider it, but there's a whole series of ways to address taxation issues. Moving to Bermuda or the equivalent is only one of them. There are other ways to do this, none of which do I think are good. I believe that we just have to see how it all plays out. I think that ultimately insurance is just -- is a piece facing us now, and we'll see see how it plays out, but we will have a very good idea, and I will have a better response for you, I would expect, by the time we're into the third quarter.

Thanks.

We'll take a follow-up question from Michael Phillips with Stifel Nicolaus.

That was good, thanks very much. Bill, in your early comments, to answer one of your questions you were talking about business moving from ENS to standard and you talked about how it's harder for ENS at the beginning and end of the cycle, but not at the middle. And you talked about at the beginning restaurants now health spas everybody --

And, by the way, I was talking about as the cycle slides down. So at the beginning of the downward part of the cycle, the middle versus the end of the downward cycle.

Okay. But what -- I think you described examples of what happens at the beginning, what did you mean by why it's harder for them at the end of the cycle?

At the end of the cycle, everybody is just madly competing for business, so people just are doing incredibly stupid things.

So it's kind of --

What brings about the end of the cycle is people losing all sanity in competing for prices.

Same kind of mentality at the beginning, it sounds like, though, right?

Well, no at the beginning what's happening is you have your standard markets just coming in taking away what's really the outstanding --

The borderline.

That's in the ENS business, the ENS market.

Okay. Thanks very much for the clarification.

We'll take a follow up question from Charlie Gates with Credit Suisse.

Hi, just two questions this time. Question number one, could you elaborate on the competitive situation in California workers' comp? That was my first question. Then my second and only other question, if you were to look in your rear-view mirror, where do you think the industry is today relative to the past? That is, what period of time in the past do you think is most similar to the environment we have today, sir?

Okay. Think that California comp is reasonably competitive. Prices still are such they allow for underwriting profitability. You are seeing people out there doing foolish things on occasion. There are particularly aggressive competitors here and there, but I would say that there are generally speaking people in the market who are behaving sanely. There are exceptions, but there are always exceptions. California, by it's very nature, huge marketplace, you know, very -- lots of change, lots of volatility, so, you know, there are exceptions, there are people being aggressive, but the heart of the market is sensible in that it's still profitable underwriting-wise. There's some people that have tried to maintain very high margins. Our view is maintain good underwriting margins. We're not the highest margins in the state, but we have good underwriting margins, and then there are other people who are more aggressive.

I think that you have roughly an 11% proposal for a decrease in rates, and, you know, my guess is that they're sort of pushing the envelope now as to being able to continue to make money, and the question is, is the legislature going to take away some of the benefits you got for when they effectively rewrote all the comp laws, and that's the risk you take. You know, the leader in workers' comp in the California market have consistently gone broke, and it's always been because you've got the timing wrong for what's happened, and I think that it's really an important thing to understand that the legislature can screw this all up. They've had great declines in rates, and the insurance department is prodded and gotten everybody to sort of bring rates down substantially. If you find changes in the legislature, you will see rates going the other way, and you'll see a much less competitive marketplace. As to where the pricing environment is, my guess is you're around 1994, '95. Prices have started to go down. They're still rational. The real -- the real question you're going to have is two issues, will Sarbanes-Oxley cause people to have more realistic views of their pricing, or will they stretch it out?

And you've got to remember, Andrew caused people to sort of be more optimistic that prices would jump back up, because prices had sort of started on their way down in 1990, '91, and then Andrew sort of gave everyone some hope, and everybody got enthusiastic again because of Andrew. I think that -- my guess is that, you know, you've got at least prices down at a continuing moderate rate through this year and next, with sort of '09 being the array of mayhem that comes about when people lose rationality. So my expectation, Charlie, is that we have continued moderate price competition through '08, and sort of the bottom of the cycle in '09.

And by the bottom of the cycle when the competitive fires become most intense?

Most intense. And sort of, you know, as we get towards the end of that, things starting to change and pricing starts to moves up in 2010.

Thank you.

And at this time, we have no more questions in the que. Mr. Berkley, I'd like like to turn the conference back to you for concluding remarks.

OKay, thank you, all, very much. We're enthusiastic about the year. We think we will be able to deliver that, and obviously when we make our thoughts about our returns public, we do so understanding where and what that means, and what that means we need to do to deliver on those returns, so they're not made randomly. Thank you, all, very much. Have a great day.

This concludes today's conference call.