W R Berkley Corp (WRB) 2007 Q2 法說會逐字稿

Good day and welcome to the W. R. Berkley Second Quarter 2007 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 limitation, believe, expect or estimate. We caution you that such forward-looking statements should not be regarded as a representation by us such as 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 ending 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 its forward-looking statements whether as a result of new information, future events or otherwise.

At this time I would like to turn the call over to Mr. William R. Berkley, CEO and Chairman of the Board. Please go ahead, sir.

Good morning. We were pleased with our quarterly results. While by necessity our premiums were not quite where we'd like them to be, the by necessity part refers to the fact that underwriting discipline is required as you enter a soft market. And as you begin to enter the soft market we probably are a bit more disciplined than we might be next quarter or subsequently because we are trying to be sure everyone is paying attention to pricing changes, terms and condition changes.

As we said, overall pricing is down about 5% year over year. That's an acceleration from the prior quarter where it was 3, 3.5%. There's some lines of business that are substantially worse like DNO which is down 10 to 15%. There's some lines that are doing better. Clearly things like California Workers' Comp. where the pricing is down substantially, that change in pricing is a reflection of the change in benefits we still think opportunities exist there.

Overall business still continues to be good. We are still able to generate on an underwriting new basis, underwriting profits. We continue to see new opportunities but they are fewer and harder to find. We think that there are skilled people out there who bring value to the table and we are always looking for them to talk to them. We found several this quarter that we think will add to our business going forward. Some of our start ups that we entered into a year or a year and a half ago have not generated as much business as we expected. We think that they are merely slower in getting started and the softening market has made it a bit more difficult. We still believe that it's a better avenue to move ahead with such businesses, in most cases. Rather than pay very high premiums for existing businesses going into the softer cycle.

When we look ahead, we expect, as we said for our returns this year to still stay comfortably over 20% and we are optimistic that we can do as well next year. But that naturally depends on the rate of softening in the marketplace. We've stepped into the phase of managing our capital and in fact we've bought back in the aggregate since the second, in the second quarter and on into the third quarter, a total of 5,675,000 shares of stock, a little less than -- actually a little more than $32 a share. We also bought back, I might point out, at the end of last year 1,400,000 shares of stock.

Overall we think that continues to be a good use of capital when the stock trades down. We think that there's lots of value in our business that will be realized over the next few years. And we think that this is a good use of our capital as opposed to increasing our dividend where people are effectively receiving money whether they want it or not in the event of paying a larger dividend, people pay taxes. If they want to maintain the ownership they then have to reinvest so they pay 15% tax on the money they get and then have to buy back as opposed to using the cash to let people who want to reduce their holdings (inaudible). Overall we are pretty pleased with where things are going. Our goal is to continue the increase that long-term compounded return on capital as we've done for the past five years up from just under 15% to where we are a little over 16% and to move that up in the 18 to 20% area. We think with our reconfigured enterprise which is focusing on commercial lines we can continue to do that. We are still looking at opportunities but, opportunities that give us great returns are more difficult. I am going to let Gene talk a little bit about the financials then I will come back and answer questions and I think that will be the best way to get at things that are interesting to you.

Okay. Thank you, Bill. Well for the second quarter of 2007 our net operating income was 187 million, which is a -- that resulted in a 13% increase over 166 million in the second quarter of 2006. On a per share basis operating income was $0.92 this quarter, up from $0.82 a year ago. Bill talked about the share buybacks. He mentioned the 5.7 million shares. 3.3 million shares were actually repurchased in the second quarter and 2.4 million were purchased in July. So one of the things I wanted to point out is that since the EPS calculations are based on a daily average, they don't reflect all the share buybacks that have occurred so far. They don't include obviously any of the shares we bought back in July and only partially reflect the shares we purchased in the second quarter. But if you push those repurchases back to the beginning of the quarter on a pro forma basis it would add another $0.02 to the Earnings Per Share for the quarter.

In terms of our premiums, our net premiums written were 1.137 billion. That's a decline of 81 million, or 7% from a year ago. Most of that decline is due to the same three factors that we mentioned in our last call. First it was the nonrenewal of the large reinsurance contract. Second, the continued slow down in premiums for residential construction business. And, third, further rate decreases for California Workers' Compensation business. That reinsurance contract that was not renewed actually expired in September of 2006. So there will be one more quarter this year where that nonrenewal effects the year over year comparisons. Those three factors were the main reasons for the decline in premiums for the Reinsurance, Specialty and Alternative market segments which were down by 21 %, 9% and 2% respectively. On the other hand regional premiums were up 2% and international premiums were up 17% with another strong quarter in both Europe and Argentina.

Net premiums for the companies that we started in 2006 were 29 million in the quarter, that's up from 13 million a year ago. Production for these companies is behind where we expected it to be at this point but we are expecting that to pick up soon. And the two companies that we started earlier this year are on track to begin writing business in the second half of the year.

Our overall combined ratio improved by one percentage point to 87.9. The combined ratios by segment were Alternative markets, 81.4, Specialty, 82.1, Regional 91.1, Reinsurance, 97.1, and International, 99.1. Our loss ratio decreased 2.4 percentage points to 60.1 with strong improvements in the Specialty, Regional and Reinsurance segments. Our overall losses also benefit from 32 million of favorable prior year development in the second quarter which compares with 7 million of unfavorable prior year development in the prior year period. Weather related losses were 16 million this quarter compared with 20 million a year ago.

Our paid loss ratio was 42% in the quarter and our paid to incur loss ratio was just 70%. And in spite of a 4% decline in our YTD premiums our net loss reserves are up buy over 500 million for the first six months of the year including almost 225 million of additional IBNR. Overall expense ratio increased 1.4 percentage points to 27.8. That increase reflects both a decline in premium volume as well as higher underwriting expenses including commissions and internal costs. Our invested assets were up 645 million from the beginning of the year to 12.7 billion at June 30, 2007. The increase was again driven by strong operating cash flow which was 280 million for the quarter and 637 million for the first six months. Invested assets at the end of the quarter included unrealized gains after tax gains of 46 million. That's down from 126 million at March 31. That's primarily as a result of the increase in long-term interest rates during the quarter.

Our net investment income was 169 million, up 16% from the prior year period. And the average annualized yield was 5.4% for the quarter. Investment income includes earnings on the arbitrage account which reduced an annualized yield of 11.1% this quarter compared with 9.7% a year ago. The carrying value of the arbitrage account was 823 million at the end of the quarter. The average duration of the overall portfolio was 3.5 years. That's up slightly from 3.3 years at the beginning of 2007. Our other income you'll notice is up significantly and that's because it includes 15 million from our alternative investment portfolio for companies that are consolidated because we own more than 50% of their equity. Most of that other income is offset by expenses that are included in operating cost and expenses on the P&L.

Our overall tax rate was 29.4% and our after tax income was $191 million. That gives us an annualized return on equity of 22.9% for the quarter and a book value per share at the end of the quarter of $18.52.

Let me try and give you a quick update of our various segments and a couple of other important things that we think you need to be aware of and then we'll answer questions. I'll try and make them brief so we have time for questions. As far as the Specialty area goes, a bit more competitive than we would have anticipated mainly due to new entrants, (inaudible) vehicles coming through Bermuda, other foreign companies coming in as well as standard markets entering the business and discounting prices substantially.

The real problem there, is we are losing our biggest accounts because that's where people are attacking first. In several cases we lost every very large account we had on renewal at significant price reductions. 20, 30% price reductions to standard market companies, the Specialty business continues to be disciplined. We are pleased with their performance. There's a focus on the bottom line, a real understanding what has to happen. There is still some parts of that business which are not as competitive and offer opportunities. We hope that that will continue but we know ultimately that it's a piece of the business that people are attracted to. They enter the business without the experience and discipline that's required. And they lose money pretty quickly.

As far as our Regional business, excellent performance, people continue to focus on service. That won't lose its volume as quickly because the service element is very important. People remember that those customers are there to get their claims paid promptly. Again, our biggest risks are being targeted but we've been able to hold our volume there. Overall we are optimistic that that business is going to hold together pretty well for some time but near the end that price competition will get crazy, also. But for now we are quite pleased with how we've been able to do, selling service, selling the delivery of those services. Alternative market business continues to do well. The main reason that premium is down is because of California Workers' Compensation. Our Service business continues to do well. We are overall quite pleased with that business. It does have some competition.

We've been targeted by a couple of companies who feel like our underwriting skills set a stage for them to just offer a discount on any business written by any particular one of our companies. That's the price you pay for being successful. But ultimately, again, the service element is something we think is something they can't match. The Reinsurance business has been a problem, a good example would be when someone goes out to quote the business and we ask questions the response comes back, well, you want to know any questions, if you have any questions, there's no sense, we are already over subscribed so we will just drop you. That's a really bad sign in the marketplace, (inaudible) reinsurance business and even some areas that there's much less there but the (inaudible) business, insanity seems to have moved into that area quite quickly and people have lost their minds. There are a number of companies that don't even ask for loss runs. We look there and say, just shake your head, wonder how quick will the end be in the reinsurance marketplace.

(inaudible) business though continues to hold up although volume is going down there because people are less willing to see business in an effort to keep the premium volumes up. We are optimistic that that business will hold together all right. We have excellent people, we are pleased with where we are going and we are pleased with the discipline shown by the people in the field and we are perfectly prepared to have our premium volume go away and maintain our staff. We think we are in great shape for that. International business, again, we are very pleased with our people in Argentina. They've gotten us through the traumas of that country over the years. They've done an extraordinary job. We are quite pleased with how they are doing.

In Europe we made great progress. The market has gotten more competitive there in the casualty areas. That -- that discipline is going to cost us volume and our people there know that we are prepared to lose the volume if that's what it takes. Overall a number of non-domestically owned companies are being crazy in their pricing. Their pricing Long Tail business very aggressively. Almost aggressively enough to make the long-term business short term. And that's just part of the cycle. It's one of the interesting things, it's why foreign entrants into our casualty market enter in and leave fairly quickly and think it's the market that's wrong as opposed to their pricing. We think that, if anything, the down trend will accelerate next year. And and it's like that will certainly by the end of '08 underwriting profits will be very difficult to come by.

We are optimistic from our own point of view. We think that our reserves are very comfortable. We think that we are looking cautiously as where we stand and we are optimistic that we will continue to be able to deliver outstanding returns certainly through next year and we are optimistic past that. But obviously the future is always uncertain. And the level of lunacy in the insurance marketplace surprises us all at times.

With that I should only mention one other thing about investments and that is I mentioned the capital gains in my comments in the press release. We've invested more and more money in our portfolio into alternative investments and other things. And in fact in the first six months of the year, because we owned more than 20% of a number of these things, we have approximately or actually a little more than $5 million -- a little less than $5 million of losses recorded in our investment portfolio on an operating basis, though , from these investments, even though we believe the investments are worth more than we put in and even though the losses were expected under the current accounting rules we have to consolidate those losses. That tends to exaggerate the swings that will come from those losses since we don't do it in a partnership, we do it as direct investments. We think that probably leaves us a cushion as some of these losses or these enterprises go public or get sold, we will not only do away with the losses that are reported on our income statement but we will have either operating or capital gains depending on what happens. So we think that's a real positive that's sitting there as we shift our investment portfolio around. With that, Jennifer, we would be glad to have

Thank you, sir. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We will take our first question from Joshua Shanker with Citi.

Good morning.

Good morning, John.

Bill and Gene, I hope you'll indulge me, I would like to review some mistakes that Bill says he has made in the past and put them in the context of what is going on right now with the company, the first one is as recently as last quarter you mentioned that one of the biggest mistakes you ever made was pulling out of the market too early and now you are talking about aggressive pricing. Where has the inflection point been between last quarter and this quarter and what are the tell tale signs that have really gotten you uncomfortable?

You know, I don't think it's -- first of all, I think in the last soft market there was direction from me about slowing down at Facultative ReSources and Admiral Insurance Company because prices were turning down. If anything there's urging from me at this point that prices are a lot better now than they are going to be. We should find new business. So the difference whatever happens now and what happened then is I'm cheering to write more business because I think prices are not as bad as they will get. I think it's inflection point really is that on our large accounts there is incredible competition, Josh, where prices aren't down that average 5 or 7%, where prices are down 20, 30, 40%. That's -- That's the real difference between the quarters change where you're seeing big price cuts on our biggest accounts. I would be misquoted if I said it but in one of our companies, I think we lost every single one of our ten biggest renewals. Now it wasn't a significant percentage of our aggregate business but it was a reflection of where the competition was going.

If I look at the Specialty business I think it was down 8% this year and you said your rate is down about 5%. Can I infer from that that while you are losing your large accounts you are actually growing in small accounts?

No, because the 5% was, in fact the aggregate amount we were down. I don't have my pricing chart in front of me, but my recollection was Specialty was down -- let me pull out that sheet -- the pricing sheet that we have. Just give me one second. Specialty in fact pricing was down, the E&S pricing -- total Specialty was down 5.8%. So, I would guess what you should infer is that we probably have relatively more small business and less large accounts. So with policy accounts I would guess that it would be fair to say we lost that -- a big part of that, too, I might add was our construction business -- rack construction, rack business in California which just has vanished effectively both because construction is down and because there are people who are writing it at half or less than half of the prices we were charging.

Okay, very good. The second issue, the story of you selling stock in the past to by a house, the worst mistake you ever made, all the stock sales that you did this quarter, just to confirm they've all been either for tax issues or to pay for your new stock, that's correct, yes?

First of all, what I did is, I did a cashless exercise of an option. And that meant I gave the company 990,000 shares of stock in exchange for exercising about 1.5 million that I kept. So overall -- I had invested in the past 18 months, or maybe a little less roughly $35 million of cash to exercise options and pay tax in new shares. And this last exercise I decided that I would do a cashless exercise. So while it appears because of the nature of how you have to do it, that I sold stock and then exercised an option what I really did was effectively a cashless exercise. So I didn't -- technically I sold stock and then exercised options. But what really happened is I did a cashless exercise and that paid for the option and paid the stock on the exercise. It's sort of misleading when you hear that you paid $6.70 to exercise per share of stock because you then have to pay 42% tax on the difference. So effectively on 1 million shares of stock, I have to put up roughly 65% in cash no matter what -- how cheap the price was. So that was all for cashless exercise of one piece that's going to be exercised.

Okay, and the final question involves your comments last quarter about the company buying back its stock too early and that being a big concern for you. How do you know right now that you feel comfortable that the company won't be buying back its stock too early potentially?

I think people misconstrued that statement when I made it and unfortunately lawyers have a lots to say about what and where you say things. The issue was I didn't want to buy the stock back when we had lots of opportunities to use the money. The goal is to optimize the use of the money and to buy the stock back when the alternative uses of the money weren't there to invest it at more attractive returns.

So we concluded when we looked at what we think our balance sheet is made up of, what are the assets and liabilities, what we think the real values on the balance sheet are and the price of the stock and said that we think it's a very attractive use of some of the capital. So we spent roughly $230 million over the past 8 months, 10 months, 12 months, I guess its less than 12, buying back stock. If a wonderful opportunity came along and gave us a better return that would be great or honestly if the stock traded at too high a price and there were no opportunities we would then go to a dividend mode because if the stock traded at too high a price and we didn't think would give us a return we might elect to use our excess capital to pay a dividend. So I think it's a constant judgment about where things are, how do you optimize what's best for your shareholders. There are a few interesting opportunities, but they have to be able to give us a better return than we think investing in our own stock and if investing in our own stock is such that the price was very high in all likelihood you would see us pay an extra special dividend.

Okay, well thank you. Very clear, Bill, thank you very much.

We'lltake our next question, Charles Gates with Credit Suisse.

Hi, good morning. My first question, in your initial remarks, Bill, you indicated in one portion of your business you'd lost I believe every large account we had. Could you drill down on that to some extent? What would be the approximate size of accounts that we are talking about?

They were all -- they were all -- none of them were giant accounts. They were really just effectively $100,000 or more. We lost every account that was more than $100,000 that got renewed in that quarter, in last quarter. It was only for one company.

Can you identify that company?

No, of course not, Charlie.

I mean your company as opposed to the guy who was taking it?

Of course not.

Okay. Fine. It was a good question. A second question for you. in your remarks you said something effective to pricing is crazy. What specific coverages were you referring to in that comment?

No, I -- I think what I said is that there are areas where people are behaving as lunatics where they have no idea of the loss cost. We have new people especially some owned by foreign companies that are quoting on excess Workers' Compensation which has a seventeen-year duration that is, they are just pricing the business at half what have we estimate the loss cost to be.

So there was an Alternative markets comment, then.

There was an Alternative markets comment. But there are other places, too, when we see people, we joked at yesterday's staff meeting that people are writing reinsurance without seeing even loss runs. We said the next thing that is going to happen is nobody is going to ask for policies to be signed or applications to be signed. I mean, people are behaving in ways that tell you they stopped thinking about what they are doing on business. How can you write a reinsurance treaty without seeing loss runs? So those are real signs that people have disconnected from their brain, their behavior. And it's astonishing and it's just -- it's the kind of thing that tells me maybe the cycle is going to be shorter and there will be more debts.

The conclusion that people I think are going to take from listening to your call is that you're significantly more cautious or negative than you were three months ago. Is there anything wrong with that comment.

It's wrong. I'm really optimistic, actually. I wouldn't have bought the stock back if I wasn't optimistic.

But I mean from the standpoint of pricing for the industry.

No, I think by -- actually I think by and large most of the people in the business are really being pretty sensible and smart. It's not -- it's actually not that the vast majority of the industry is being dumb. The vast majority of the industry is being rational and intelligent and thoughtful. I think that what you are seeing is a few idiots being totally crazy and no that would be a wrong conclusion. But the pricing levels in some narrow bands move to the prices that the idiots want to charge. So I'm hoping that the people get the message that have courage, they don't have unlimited capacity they'll go broke quickly.

To what extent is the standard markets company's coming into the E&S area.

I think significantly and here and there it's with more aggressive pricing than they should be. But, again, it's not across the board craziness. The craziness is very spotty and here and there but when it's crazy, it's really crazy. I mean it's just lose your mind crazy. And again it's little pieces.

You mean by little pieces that this intense competition is here and there as opposed to something more broad-based?

Right. And I'm sure that no -- there are no reininsurers who will acknowledge they are writing business without seeing loss runs. But I promise you at least on a few occasions we have told when we asked questions that we were nervy to even ask for loss runs and they don't need us. So I can tell you that there are certain parts the business that are behaving foolishly. Where we have a lot of new entrants and people who operate from islands and things who are anxious to get business. And by the way, the established people from all over are behaving for the most part in a rational way.

So it's the new players?

For the most part the new players are those who are ultra expansive in their feelings about the business.

Thank you.

Next question, Jay Cohen with Merrill Lynch.

Yes, a couple of questions. First maybe Gene. Can you quantify what you think the drag from that nonrenewed reinsurance contract will be in the third quarter?

Yeah, it's a little bit less than it was in the second quarter; in the contract is probably 40 million a year ago and nothing this year.

Okay, what was it in the second quarter, I'm sorry?

The second quarter was 25 million.

So, the third -- third quarter is going to be a little more then?

Yeah, a little more, sorry.

Okay, next, do you guys have any exposure to the flooding in the U.K.?

We shouldn't have anything of consequence but we might have a little bit. We might have a little bit through Kiln or through MAP, where we have participations. We might have some miscellaneous item that is in our business over there but not of consequence.

Okay, and then lastly, can you quantify some of these I guess, unrecognized gains that you see in the Alternative portfolio that had you talked about, Bill?

You know, it's not only in the Alternative portfolio, it's just that I think that we have lots of different places where we have value imbedded in the company. The simplest one being our home office building. As well, we have some buildings in Washington, D.C. where the numbers are in the hundreds of millions of dollars of unrealized gains. In addition, we have a number of gains we believe in our portfolio that are, in this, certainly in tens if not hundreds of millions of dollars in the aggregate. But what I was trying to get across the message is that these are being reported on our financial statement as losses of $2 million or $3 million a quarter on an operating basis and in fact those losses are being -- only bookkeeping losses and they are gains being built in the portfolio from these assets.

That's helpful. Thanks.

Go ahead, any other questions?

Yes, we will take our next question, Michael Phillips, Stifel Nicolaus.

Yes, thanks. Good morning everybody, two quick numbers questions if I could, could you talk about, I guess, the change in retention levels you are seeing this quarter? I guess specifically in the Specialty, just kind of some kind of numbers around that. Retention levels on Specialty and how its changes over time?

For us we haven't really changed our retentions of any consequence. But I think that what we are seeing is a number of our customers, in the Facultative area are electing to buy less Facultative reinsurance and they are making a decision to retain much more and in principal we think the next step will be -- hello?

Hello, sir.

Okay. There was a beep. That was all. The next step will be in all likelihood companies will start to eliminate treaty protection and then go back to buying more Facultative. So we think though at this point -- we have not changed our retentions but the people who by Facultative have stopped buying Facultative and at year end my guess is they will by less treaty and they will come back into the Facultative market.

Okay, thanks. And could you break down your 32 million reserve development by segment for us?

We really just generally do not do that. If you want to --

I mean primarily Specialty and Alternative markets but we will have the break down in the queue by year and by segment.

Okay. perfect. Thanks a lot.

Our next question comes from Mike Grasher with Piper Jaffray.

Good morning. Gene, just real quickly, as we look at the other income and the operating -- other operating expense line items, it looks -- is it going to become more difficult for us to sort of predict or model that or how should we think about those line items?

No, I don't think it will get harder. There will be a little more information in the queue that will allow to you dig a little deeper. It's mostly just investments that I talked about before and they pretty much offset one another, that other income and other expense. I don't think it will disrupt you.

Mike, I think what we are trying to do is do some of the things that I used to do privately we are going to do a few of those kind of things here where there are investment opportunities that we are doing now. So we are buying businesses and we will either sell them or go public with them. But if it begins to be a significant number as to net income we will break it out clearly for everyone.

And Bill, just to follow up on that, selling or going public with them, is that something in the short run or medium term or how would you characterize the time frame?

Hard to prognosticate. It's not something we can -- I'm not being cute. I can't -- I just can't give you the answer. I think it's something we look at everyone of our investments on a continuing basis to try to make a decision.

Fair enough. And then in terms of your comments I think in the press release you spoke about the underwriting profitability coming in. With your, you've got five different operating segments so you're fairly diversified. If you think about sort of a rate of decline in terms of your underwriting profitability, this quarter, again, 87, 88% type of combined ratio, very good, what should we expect or can you give us a little bit more perspective in terms of the deterioration or the rate of decline in that combined ratio?

We a really think that it's the accident year business that we are currently writing that's going to have -- is going to continually deteriorate with prices down 5% and inflation, we think we may have chosen loss picks for the current year that are conservative, but you do have price deterioration and inflation, so that conservatism is going to get used up. But I don't think you are going to see it go away and there will be plenty of signs when you look at the accident year development. So it's not going to happen overnight and I think that our calendar year numbers will continue to show as we review various companies in past years and so forth. So our financial statements I think, may show better than our accident year just as they probably showed somewhat worse than our accident year in prior periods.

Okay, so should investors take the approach that there would be a deterioration of tens of basis points or are we looking at sort of 100 basis points over the next year?

If I could be such a brilliant prognosticator I would be going to Las Vegas not being in the insurance business.

But you have all that experience.

I know, but I played cards my whole life and I still lose.

Okay, thank you.

Our next question comes from Scott Heleniak with Ferris, Baker Watts.

Hi, good morning, just have one quick question about your -- one of your start ups this quarter, the Select Specialty Managers Division, I was just curious which side of -- what areas of E&S you are seeing the opportunity and what kind of account sizes that you are targeting there, I wonder if you could talk more about that?

I think it's primarily professional but I think the corner stone for that operation is they have very special relationships with a small group of distributors. It's not going to be a broad based do business with everybody. It's going to be at most 15 wholesalers and that's offices, that's not firms, that they are going to be doing business with. So it's a different distribution model which is really more important than the product that's going to be focusing on service, it's going to be focusing on particular types of customers that these distributors specialize in. It's not going to be across the board.

Okay. Then I had a quick question on the Alternative markets, the loss ratio was up pretty significantly. I'm just wondering if there was -- do you have any large losses in there or --

No, I think part of it was down significantly the last quarter because of reserve issues that we had reserves coming down from preferred employers in California Comp.

So that's kind of just -- I guess, more normalized then for the quarter.

Yes.

Okay, and then for your international business, I was just wondering you mentioned Argentina and Europe. Is there any other places that you are targeting for growth or any kind of areas over the next 12 to 18 months that you are kind of looking at?

We are currently in Spain, we were in Brazil. We have a reinsurance office in Hong Kong. We have a couple of other things we are working on but they are not here and now ready to announce. But none of them are going to be these blockbuster huge things at least at this moment in time. We are constantly talking to people but there always seems to be a gap between the price we will pay or the investment we are willing to make and the request on the other side, so.

Okay.

I don't want to get overly optimistic.

Okay. So for the most part still keep focusing on the areas we are already in, and then expand a little bit?

Yes.

Okay. Thanks a lot.

At this time we have one question remaining in the queue. Once again, (OPERATOR INSTRUCTIONS). And we will take our next question from Charles Gates with Credit Suisse.

As I recall in the 70s you had several companies that were effectively leading the market down. I guess one, people thought was the then Commercial Union, the second was the home. Is this the type of market that we have today, sir?

You mean are there leaders doing stupid things?

Yes, sir.

There probably a few, Charlie, yeah.

Okay. That was the first question. I guess the second question, you've got this enormous asset sitting up on the hill in Greenwich, that beautiful building. To what extent -- or have you ever considered the sale and lease-back of that building and putting the monies into share repurchase?

Well, you know, the thing is, Greenwich is an unusual community in that you can't build any new buildings more than 7500 square feet. So the diminishing -- the likelihood of a diminishment of value in the building is small. I think that it would be more likely that we would effectively sublet some space or lease some space in the building and then do something else that's more interesting. But we are actively looking at our real estate portfolio because it's not just Greenwich, we have very large gains in locations in Washington and Arizona and a couple of others. I mean, we took a mortgage on a building in Washington and we took cash out of roughly $75 million or $80 million more than our cost basis. So we don't show a gain but we have $75 million or $80 million cash and it's a very low mortgage to value. So it's not just here. But there are ways that one does it and we are always thinking about it, Charlie.

Thank you.

And we do have another question. We will take a question from Steve Tabb with Tocqueville.

Thank you, I don't know whether you realize it, but the overall impression you are leaving from this telephone conference is that business is weak and then on the other hand you say you expect good results this year. It's hard to reconcile. I would like your better review of the overall situation for this current year we are in. You say prices are down 3.5% last year, on top of that they are down 5% this year and this year therefore profitability of business written this year will be poorer but overall you say you expect to have a good year. Could you describe the major forces that will effect this year's operations and result in it being a good year.

Sure. I think first of all asset base is increasing so our investment income is increasing at 15 or 20% more a quarter. So our investment income is growing and more than offsetting any deterioration that might occur from underwriting profits. So that's the base level of what's changing.

Number two, our underwriting profits are very conservatively stated. So we think that we will be able to continue having excellent underwriting profits but we are trying to be sure people know that, in fact, the business will not continue to generate increasing underwriting profitability, that underwriting profitability will stay the same or modestly deteriorate over the next 36 months. And the message I'm trying to get across is with increasing investment income and even a modest deterioration of underwriting profits we are going to still be able to deliver that kind of 20% plus return on capital for some extended period of time.

So we are quite optimistic about our business and the majority of the insurance marketplace is behaving rationally. But there are occasional competitors that have gone from being aggressive to being irrational. So you will see people doing stupid things and that's always a bad sign. It isn't yet something that's converted into what I believe will be our financial results which I think will continue to be excellent.

Thank you.

(OPERATOR INSTRUCTIONS). And it appears there are no further questions at this time. And Mr. Berkley, I would like to turn the conference back over to you, sir, for any additional or closing remarks.

I think the only couple of comments I would add, first of all, as to the sub-prime mortgage issue we have virtually no sub-prime mortgages. If you take the total amount I would say our gross exposure is less than $10 million. Most of that has been incurred after the sub-prime market decline. Some of the funds, a couple of funds we invested in where we decided to by some at deep discounts we think there's virtually no exposure for us. We have about $1.5 billion of various kinds of mortgage securities none of which participate in the sub-prime area at all. Overall very happy with our balance sheet and very optimistic that we will be able to maintain that 20% plus return, certainly for the foreseeable future being certainly the next 12 months. Okay. Thank you very much. We are in spite of this quite optimistic. I think that ultimately delivering a return on capital is what our business is all about and we think that will continue. Thank you all very much. Have a great day.

This does conclude today's teleconference. We thank you for your participation. Have an excellent day.