W R Berkley Corp (WRB) 2008 Q1 法說會逐字稿

Good day, and welcome to the W.R. Berkley Corporation First Quarter 2008 earnings conference call. Today's conference is being recorded. Before we begin, we would like to note 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 a representation by us that the future plans, estimates or expectations contemplated by us will in fact be achieved. Please refer to the Annual Report in on Form 10-K for the year-ended December 31, 2007, and our other filings made with 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.

I would now like to turn the call over to William Berkley. Please go ahead, sir.

Good morning. It was an unusual quarter in some ways and an outstanding quarter in others. I think from our point of view, the business continues in general how we expected it to be. Our operating results from an underwriting point of view and from a premium volume point of view were generally in line with our expectations. We're pleased with how things are going. As the cycle changes -- and it has continued to change -- things get lumpier and things get somewhat less predictable unit to unit and month to month. Basically, we're pretty pleased with how things have gone. Some of our start ups are starting to generate premium volume, others have not. But we have seen all the progress we have expected. Our pricing levels overall year-over-year are still down roughly 5%.

The biggest price declines have come in the excess and surplus lines area -- non-admitted excess and surplus lines area. The smallest have really come in our standard market regional business. When we look out, we see continued price deterioration; we think the industry as a whole on an actual year basis is probably not making any underwriting profits at this point in time. We think we have some underwriting profits that we're still booking on an accident year basis so we feel comfortable, and we're reasonably consistent in our views that next year will be a bad year for the industry while we think we'll continue to do okay. In looking at our various segments, our specialty business and most areas within it was the most competitive and they maintained that discipline and continue to have excellent operating margins. Our retail business was able to hold their volume pretty much. It was impacted by storm activity more than anything else. Otherwise, their profitability would have been relatively flat. That continues to be an area that's doing surprisingly well; and other than in larger risk areas, we've been able to hold on to our business without much price deterioration.

The alternative market business has been doing quite well. California Worker's Comp very competitive, volume is down. While we still think the business is profitable, we think that a number of our competitors that -- see a higher level of profitability than we do because they're certainly charging a lot less money. Reinsurance area was our biggest decline in volume -- roughly 30% decline in volume, really across-the-board. I think that from our point of view, that's where we would expect that challenging market to be felt most. It's where the most leverage is, and therefore when the underlying companies cut prices and when you're forced to cut prices, it's a very quick turn in underwriting results. So it's where discipline is required; and fortunately for us, we really have a terrific group of people who have in fact used that discipline. Our international business continues to grow. We're very pleased with our UK Operations, where they continue to show the discipline and work towards achieving increased penetration in the right areas that give us opportunities and letting business go to competitors where there's no margin. Our business in Latin America continues to do well, and we've gotten to the reinsurance business in our Hong Kong operation; and it is a challenging environment, as is Australia, but we're quite confident that these opportunities will result in good results for us. But overall, we're pleased with where we are.

We continue to see new opportunities with outstanding people who are looking towards places to be where there isn't pressure to write business that's not profitable and they feel there's a long term home with people who understand the economics of the insurance business. So we continue to see teams of people, individuals, who offer us opportunities in all areas of the industry, and then we continue to take advantage of that. Gene is now going to talk a bit about our financials, and we'll come back and go back to questions.

Thanks, Bill. First Quarter net income per share was up 11% to $1.03 compared with $0.93 in the First Quarter 2007. The main reason for the increase in our per share earnings is that our share repurchase program resulted in a 9% reduction in the number of shares used in our EPS calculation. The actual number of shares repurchased in the past 12 months is a total of 25.5 million or about 14% of our outstanding shares, and that was purchased at an aggregate cost of about 751 million. Those shares include 10 million -- 10.4 million shares repurchased in the First Quarter of 2008 but do not include an additional 1.5 million shares that we purchased so far in the month of April.

Although our net income of of 188.4 million was virtually unchanged from the prior year quarter, there were several key differences in how we earned it. First, our investment income declined by 21 million. We're going to go through those details later, but it was mostly due to lower returns on our arbitrage accounts and to a lesser extent to the use of cash to repurchase stock. Second, slightly higher loss and expense ratios resulted in 33 million less in underwriting profits. That's in line with our expectations with the exception of storm losses, as Bill mentioned, that were slightly higher than we expected. And third, we reported after-tax realized gains of 54 million and that's primarily from the sale of our interest in Kiln. On an overall basis, our written premiums declined 7.7% to 1.158 billion in the First Quarter.

More than half of that decline again this quarter was attributable to the reinsurance segment and that was primarily as a reduced participation in Lloyd's business and lower writings in our facultative units. Regional premiums were virtually flat. The rest of the U.S. business was down between 5-8% and international premiums were up 27%. Our overall loss ratio increased 1.5 percentage points to 60.8% in the First Quarter compared to 59.3 in last year's First Quarter. We booked the current accident year at a 65.6% loss ratio, which is four percentage points higher than the First Quarter of '07 and three percentage points over the full year 2007. The increase reflects our estimate of the impact of price changes and loss cost trends, as well as the higher storm activity in the First Quarter. Storm losses were 14 million in the First Quarter of '08 compared to 6 million in the same period in '07. The accident year loss ratio was offset by favorable reserve development of $54 million this quarter, and that compares with 22 million in the prior year quarter.

Paid losses are still well below our incurred losses, even though this is the second year of declining premiums -- our paid loss ratio was 46.5% and our paid incurred loss ratio was just 76%. Net loss reserves also continued to increase in spite of the lower premiums, with loss reserves increasing 160 million or 2% in the quarter to approximately 8 billion at March 31. The expense ratio was up 1.2 percentage points to 29.4, as a result of lower premium volume as well as the continuation of some start up cost in our new business. That gives us an overall combined ratio of 90.2% for the quarter compared with 87.5% a year ago. Our investment income was 144 million in the First Quarter. That's down from 165 million in the prior year quarter, and that's due to lower earnings from our alternative investment portfolio. We have about 850 million invested in three arbitrage funds and over 500 million invested in various partnerships and affiliates.

And in times like these, those investments may have more volatility from quarter to quarter. We see this in several areas. We see it in some new investment funds where management fees are sometimes incurred before the money is invested. We see it in our aviation business, which we consolidate for financial reporting purposes, where revenues and profits can vary significantly based on the number of claims sold from one month to the next. In this quarter, it was the arbitrage trading account where we were particularly impacted by the severe disruption in the financial markets. Arbitrage earnings were down 18 million from 22 million in the First Quarter '07 to 4 million this year; and although all three arbitrage accounts were profitable in the quarter, the annualized yield was just 2% compared to 11% in the prior period. In addition, income from equity investments including affiliates was down 5 million and the expenditure per share repurchases impacted our investment income by another 7 million. The investment earnings in the rest of the portfolio were actually up 9% in the quarter.

Our annualized yield on the overall portfolio was 4.4% compared with 5.5% in the First Quarter of '07. As we previously announced, we sold our interest in Kiln in the First Quarter. We received 174 million for our shares and reported a realized gain on the sale of 70 million. We had bought our interest in Kiln in 2002, and have booked about 50 million since then as our share of their earnings, so that brings our total pre-tax return on an original investment of 55 million to approximately 120 million. This gain was partially offset by an $18 million writedown in the value of certain securities because we considered a decline in their market value to be other than temporary. At the end of the quarter, the investment portfolio totaled 13 billion and we still have net unrealized gains of 65 million before tax. Our overall income tax rate was 29%. That gives us net income of 188 million and annualized return on equity of 21.1% and a book value per share at March 31 of $20.23.

Thanks, Gene. I might add that the book value per share would have been roughly $0.50 higher if we hadn't repurchased those shares, so we think it was attractive to repurchase our shares and that made sense for us, but it did dilute our reported book value per share. We continue to be quite optimistic that we'll still be able to maintain high double digit turns. We expect that even in next year's more difficult market we'll be able to be above our 15% target. Certainly the market is getting more difficult and inflation is more and more of a concern. We do believe, however, that the competitive marketplace is acting a bit differently than it has in the past. A couple of things that give us hope -- first of all, in some areas, where standard markets have jumped into ENS areas, they've already gotten out of those areas because they found out very quickly how mispriced business can result in losses. And we've seen intelligent decision-making by some of the large standard markets where they thought they had opportunities and realized that was an error.

In addition to that, we think that people are going to be focused much more on their income streams than on their balance sheets. They're going to continue to manage their balance sheets with repurchases, possibly mergers and other things. We think their Income statements are going to start to sharply deteriorate next year. The people are using off redundancies fairly quickly and therefore, we continue to be optimistic that the downward spiral in the cycle should be at an end in 2010. With that, I'd be happy to answer questions. Lynn?

Thank you. (OPERATOR INSTRUCTIONS) We'll go first to Josh Shanker with Citi.

Good morning. I don't doubt that you might be correct, Bill, that the industry is underwriting at an underwriting breakeven level and heading into a loss for next year but you're the only one saying so. What do you think you're seeing that everyone else is denying or maybe they're just talking their own books? And two, do you see this cycle going into the trenches of a 99- 2000 type period?

First, no, I don't think it's a 99-2000 type period.

Not that but do you think we can head that direction?

No. I don't really think so. I think that that was in a period of self-deception, and there was a lot of things going on then. I think the cycle has been prolonged because Andrew came along and caused people to not take action when they should have. I think that people have a lot of accumulated reserve redundancies from the past. I think people are being optimistic. They aren't trending in the increased impact of inflation going forward. It was backwards in inflation factors, not forward in inflation factors; they're relying on mathematical model s that predict the future by looking backward instead of saying well, we need to think about what's going on ahead of time. I just think that people are being more optimistic than they should. And maybe, in fact, that I'm just mistaken and we've gotten to be less good underwriters and they've gotten to be better underwriters -- that would surprise me, however. I just, you know, I think that if you look historically going back over a very long period of time, we've written p a book of business with results that have been between 5-10 points better than the industry, and I look at what I think our accident year results are on new business and that would tell me that the industry is certainly at best approaching breakeven on an accident year basis.

And in terms of the modifications in your investment strategy, what sort of timeline are you using to judge the success of making these changes?

Well first of all, understand where we're making it in modest amounts and we're continuing to do things that we think will give us multiple returns in different ways; so we're looking at things that are potential opportunities that will benefit us in our insurance business, in our investment returns, and potentially in our income statement. So we're trying to look at total returns. So just as -- we had an extraordinarily good relationship with the Kiln people. We learned a lot from them. They were just fabulous people, and we couldn't have been happier with our investment there and we are relationship with what was an outstanding management team. And we gained in lots of ways from participating in reinsurance with them, from ownership and from getting a much more in depth understanding of the London market. We like that kind of thing, so we came up with a great capital gain. We came up with earnings, we came with increased knowledge and insights. So we're looking for all kinds of things that fit that criteria and we're continuing to do that. We wouldn't invest in an ostrich farm, but we would invest in insurance brokerage business where we thought the people were talented. We would invest in other kinds of things that we thought brought insight to our business model and greater knowledge and leverage on things we do. So we're looking at that all over.

Okay, thanks. Don't count off the ostrich farm yet, but thank you very much, Bill.

We'll go next to Ken Billingsly with Signal Hill.

Good morning. First off just a quick question on reserve releases. Did you say it was 54 million for the quarter?

That's right.

Versus 22 in the First Quarter of '07?

That's right.

Okay, great. On the investment accounts, specifically the arbitrage funds, given the definition of what arbitrage is supposed to be, was this a timing issue or was it --

It's first, a couple of things. First of all, less deals -- so our biggest arbitrage account is only half invested. So therefore not as fully invested, so a big part of that is cash at the moment. Second of all, we made money in our arbitrage accounts. We didn't get stuck in lots of these broken deals, but because we have these more conservative investor accounts, there isn't as much to do at the moment. In addition to which the spreads on the more conservative deals have not been as wide because there are fewer deals, more people looking at fewer deals now with the spread. So it's the combination of those two -- but the biggest one is there just weren't as many deals being done because financing wasn't available.

And on stock buybacks, obviously I'm assuming you're going to continue with, I guess, kind of a robust focus there, given the lack of opportunities right now?

Our view has been the same and that is we would not basically reduce our capital levels flow to where they were. New earnings would be used to buyback stock if we didn't find opportunities to expand, but there are opportunities. It's just the ones we found don't require much capital, but I shouldn't leave you to believe there aren't opportunities. The there are not opportunities to buy things nor a lot that we see them grow significantly but there are still opportunities; and given that they would give us returns higher than buying back our own stock, we would pursue them.

And then loss cost trends you mentioned that being up and you're not the only one that's mentioned an increase in loss cost trends in general. Can you talk to what you're seeing, where the change is occurring? Is it a change in the policies and the way they 're being written that is making it look as if loss cost trends are increasing or are terms and conditions unchanged and this is actually a fundamental change in the marketplace in general?

No fundamental change. No lost cost increasing. It's our perception of what's going on with inflation and looking out. It's not a change in average losses or anything like that. It's just simply an examination of where things are going. Actually, settlements have been reasonably good, so it's not, hey, we have this issue that's changing. It's this is a business that you have to look ahead and what we're seeing is ultimately loss cost trend follows inflation -- medical inflation as well as primary inflation. Medical costs are increasing and they've been continuing to increase, therefore we have to look at what we're going to eventually pay, not what we're currently paying so it's our estimate when we look ahead that lost cost trends will be higher. It isn't based on what's happening today.

So then it's an expectation, not an experience?

It's an expectation; but unfortunately, that's the nature of our business. We have to make those expectations when we establish our prices and when we establish our reserves.

And based on your history and maybe the market's history in general, when companies start setting those expectations do they tend to be true in this environment -- as people see it that there's money up there, do the claims tend to follow that?

No.

Okay.

And the answer is that claims do not necessarily follow reserves. The claims do tend to follow inflation, however.

Last question here. Heard from a few -- a broker and another underwriter -- that mentioned that in particular regions and on specific lines of businesses that underwriters are beginning to pay boosted commissions to place the business and get some of the business, so they can grow certain lines and books of their business. Are you experiencing that in competition and are you guys doing that maybe in particular lines as well?

I don't believe we're doing it any place, not to say that there isn't one line and one company that we might be doing it. I don't think we are. As far as I know it doesn't happen. I think that probably a couple small companies that are extremely aggressive, but they probably don't need to because their prices are so low they get the business anyway.

Very good. Thank you.

We'll go next to Charles Gates with Credit Suisse.

Hi, good morning. Could you elaborate on the competitive environment in excess and surplus lines? In your initial remarks, you indicated that you saw some standard markets withdrawals. To the extent that you can, would you also speak to that?

I think first of all, the excess in surplus lines' best business is business that leads the standard market as the market gets hard because the standard market starts to get a sharper pencil and do more analytics about what's good in their business and what's not so good. So they say -- in health spas, health spas that have tanning salons are bringing us 85% of our losses and getting us 15% of our premiums so we aren't going to write that. Well, you know, you have four or five years of good business and all of a sudden you say, how can we expand this business? So you decide, why do we have this exclusion for tanning salons? So you start to write tanning salons when you're writing your health spa business; and all of a sudden, in a year you start to get your losses. So I've now answered both questions at once. They started to write all of the tanning salons included in health spas at a quarter of the price we charged. They got the business back, and they instantly realized people got sunburns and there were all kinds of claims and they got out of the business very quickly, because the truth is most of the big companies have better information systems. They know what they're doing and that's really why I'm more optimistic about the cycle turning somewhat more quickly than I think some of my competitors think. I think -- so I think that's an example, Charlie, of bot . But I think that the ENS -- most of the people in the ENS business are being reasonably disciplined. I think that you do have some new Bermuda people who are getting into the long tail lines of business, and the ENS areas being one of them, and I think that that's also impacting it a little bit. So I think that those are the two areas -- but I think that the business certainly that we're writing, our retention rates are down a little bit but the business is still pretty good and I think we're still writing at a substantial underwriting

And in answering one of the earlier questions, I think you replied that it was a different competitive environment than '99-2000?

Yes.

Could you elaborate on that?

Yeah, I think 99-2000 people weren't paying attention to the money, they were much more concerned about growth. We were in a mode in the world where growing was everything, getting bigger. It was an environment where growth took over profitability, and everybody wanted to grow and analysts on calls like this focused on top line more than they did on bottom line, more than they to on returns, and people got rewarded for growth without respect to disciplined profitability or even understanding what they were doing.

In your formal remarks, I think you made reference to the fact that larger accounts were more competitive. Roughly, where do you think larger accounts come in? What to you mean by a larger account?

I would say a year ago, where this started it was sort of 250,000. I'd say today, we're at 100 or 150,000, and that's one of the things that forments the movement of the cycle. Probably six or eight months or a year from now that number may start to dip down below 100,000 -- but that is the issue that's there. That's the desire to compete at a lower level and the reason big accounts are what people compete for is very simply, it's how you can get more premium volume easier, and it's one of the cornerstones you have to understand. Lots of these companies don't have the capacity to write a large volume of business, so they only can deal with a small volume of business and they want to get a lot of premium for that. therefore they have to have large accounts.

What is the principal reason why reinsurance writings are down so much?

I think that first of all, in our facultative area, we price on our own so we don't base it as a percentage of what they charge. We establish, if you will, a primary price for an excess layer of business, and we're finding some of our pricing is higher than the primary pricing is getting for their business; so it's hard for them to buy reinsurance at prices that are more expensive than they're getting for their primary layer, which is one of the reasons we're a little pessamistic about the results for the underlying industry. The second piece is in the TV area and a couple of other things that we're doing in other places, we're finding that the terms and conditions and abilities to deal with some of the larger companies in the industry and what they want to do for buying reinsurance cause us to elect not to participate on some of those treaties. And then there are just some people that are saying, hey, I don't want to give business away. I need the premium. Why should I buy reinsurance? I have enough capital. So I think it's those three things.

My final question, I realize SafeCo is largely a personal lines ompany. What do you think is the impact of the Liberty Mutual SafeCo acquisition on the commercial lines cycle?

I don't think it has much impact. I think it was a great deal Ted Kelly and a great deal for Liberty, and I think it was a great deal for Paula Reynolds and for SafeCo. I think it was -- Liberty Mutual wanted to get out of the West Coast and I think SafeCo was clearly the best company out there and they fit the strategy of Liberty. They have a lower hurdle rate for cost of capital because they're a mutual. And I think that -- I don't know whether it was the right price or the wrong price, but they got the premier participant available to them in the West Coast, so I think it was a great deal for Kelly and Liberty; and I think for Paula, she got her shareholders, given the environment and given where things are, a really excellent deal. So I think it was a good deal for everybody and I don't think it will have a big effect on the commercial lines of business.

Thank you.

We'll go next to Meyer Shields with Stifel Nicolaus.

Thanks, good morning. A couple questions on reserves. First of all, can we get the break down by segment?

We really generally don't do that by call; if you want to talk to Gene afterwards I'm sure he will provide that.

Okay, as a matter of strategy, are the reserve releases that you've been reporting in recent quarters a function of claims being settled for less than the reserves or is it reassessment of ultimate costs?

I think it's a combination of how claims are settling out and how comfortable people are in the operating units. It's a constant dialogue that happens between our actuaries here, our financial people here, our Senior Vice President here, the people running the Company; and it sort of -- conclusion that there's a level of reserves that we're willing to tolerate being conservative, and at some point in time as things start to settle out and you start saying, well, you really need to justify not doing something. So it's a continuing dialogue as the environment changes, as claim settlement changes, and I think that we try not to push people too hard as to taking the reserves down. What we try and do is have that negotiation that takes place. Everybody who is running an operating company always wants to have a little extra there because that way, they aren't going to deliver a surprise to us. So it's sort of a combination. It's not, you know, this is it and here is how it is. It's this ongoing negotiation.

Okay. When you look down at the broader economy, do you think the conditions that limited the merger arbitrage opportunities in the First Quarter continue through the rest of the year?

You know, I'm inclined to think that in the short run, maybe in the Second Quarter you'll see some of that, but there are a lot of companies that are in good shape and that are looking to find companies that are not. So my inclination is there are going to be more industrial transactions as the year goes along so that gap is going to change; and candidly, I think the other piece is that big chunks of merger or arbitrage are done by investment banks and hedge funds who may not have as much liquidity an as much money focused on the merger of our business as they did a year ago, so spreads might in fact widen a little bit. But it's really hard to prognosticate that area of the business. My own inclination is the second half will be much more active than the first half as companies get a little bit more of a handle on what's going on and try to seize opportunities.

Okay, and one nit picking question, if I can. I guess the tax rate on net investment income went down either sequentially or year-over-year. Is that more a function of the fact that there were, there's less income from merger arbitrage?

No. It was municipal bonds. We have a bigger -- the differential between municipal bonds and corporate got much narrower, so we were bigger investors in municipals.

Great. Thanks so much.

We'll go next to Brian Meredith with UBS.

Yes, thanks. One quick question. Number of questions, the Kiln sale, what's the drag on it going forward on a quarterly earnings basis? Is it like a million or two million bucks is what I calculated? Is that right?

Kiln was up and down. I would guess it's probably more like 3 million, but it has a -- well, we didn't show the cash flow -- we also picked up $170 million of cash to invest.

Okay.

So even investing that at an okay rate would diminish that net differential to quite a bit less.

Great. And than Bill, my next question here if I look at your year-over-year increase in your loss picks excluding catastrophe loss this year, it's quite a bit higher than most of the other commercial lines carriers are reporting right now; and I guess the question is, is it one, your mix of business relative to some of the other commercial lines carriers; two, do you think you're just much more conservative of your loss picks; or three, is everybody else just lying about their loss picks?

Well, there's a lot of complexity in the question because we would never want to accuse any of our competitors of being anything other than 100% honest. I think that we are being cautious and pessimistic because we had a very painful '99 and 2000 and I was only two stories up before when I thought about jumping out the window. Now I'm four stories up. I actually might get hurt. So I don't want to have losses. We want to be able to continue to report reasonable results, and therefore being cautious in how you you establish your loss picks is a good thing. I think there may be some level of conservatism on our part and some level of optimism on our competitors' part but as I said, four stories I might not survive the jump. ,

Thanks, Bill.

We'll go next to [Laura Devoe] with Fontana Capital.

Good morning. Thanks for taking my call. Just had a question on the investment portfolio and related to 5 million [inaudible] head shares which I believe you own. Can you just confirm that that's in your portfolio and then if so, just talk about what the accounting treatment is and the impact to earnings and book value and whether or not you experienced any unrealized or realized losses on that stock? Was it part of the 18 million that you had mentioned earlier ?

We don't own any [inaudible] stock.

No, okay, that makes it easy. Thank you very much.

We'll go next to Jay Cohen with Merrill Lynch.

By the way, we never did own [inaudible] stock. Go ahead, Jay, I'm sorry.

That's okay, thanks. Most of my questions have been answered. On the arbitrage accounts, how much flexibility do you have to take money out of that and redeploy it, when in fact the activity is pretty low?

We have [inaudible] that we can take out.

And is that something you've been contemplating or doing?

We haven't ever -- I shouldn't say ever -- in recent past we haven't. We actually have talked about in the biggest of the arbitrage accounts having more flexibility there, and we have discussed it, yes. And it's something we may well do, but we have lots of short-term cash, so I think that what we're more likely to do is just find a better way to invest the short-term cash. We still have well over a billion dollars, actually probably a billion and a half dollars of short-term investments that we own, so we would change the money from the arbitrage account to our own short-term account which might somewhat improve the results and it would make arbitrage look better, but it wouldn't change our overall income a lot.

Got it. All right, thanks.

We'll go next to Steve [Tabb] with [inaudible].

It's [inaudible], thank you. On your investments, did you have any writedowns in the overall investment that go through comprehensive income -- or because, I mean, you took realized gains but if you had, I just want to know if you had any valuations that went -- negative valuations that went through comprehensive income.

Hold on a minute -- I'm --

The net unrealized gains were 67 million at the beginning of the quarter after-tax, 52 million at the end of the quarter, so that change -- that's the change that went through.

So about 12 million?

15. There 15 million.

Thank you. Now next investments. Do you have all of your investments valued at market value where there's market values, or how much of your investments are valued at fair value that you determine?

Almost all of it. The only thing that wouldn't be at fair value would be a small amount of investments we have in Private Equity transactions.

I would say that we have 150 million that are at other than fair market value. And that's just those of private equity investment.

Okay. Now, with the reduced premiums written and your projection as I see it for further reduced premiums being written, is there going to be a corresponding reduction in the overhead expenses?

For first, I believe that the premium will go down modestly; but no, I would not expect overhead will go down very significantly. Because policy count doesn't go down, and in fact there's probably more stuff to do. Incentive compensation will probably go down, but that's the only thing.

So there isn't much room for reducing this area?

Not of great consequence.

On this lines of investees income and investsees expenses, which both went up about $20 million, like almost a match in the correlation, could you please review what that represents and why it moves like that?

It's one investment and a couple of aviation businesses we own and fixed base Operators and it's a somewhat cyclical business based on how we sell airplanes and a bunch of other things; and while it's predictable over a year it's not so predictable on a quarter to quarter basis.

That's in terms of the profit. In terms of the revenue change, that's because we got into the business.

Yeah, we bought another business.

I mean, so there is hope that you're going to be making money in this business. You mentioned then on the sale of this Kiln that you've got $ 175 million in cash.

There 172 million I think.

And that you realized in the past about $3 million quarterly -- I mean annual income from it?

Of quarterly earnings.

Quarterly? So that was $12 million? Is that right?

Well, the question wasn't that. The question was what would be a fair estimate of the average annual impact; and it was lumpy, and if you P back a couple of years it was higher. It was a variation -- the question was asked in a different context, and there were a lot of relationships with Kiln.

Well, what I'm trying to ascertain is whether there's going to be a net decrease in income in '08 because of the sale.

And that's what the fellow -- that's what he was trying to do and I said to him that the quarterly numbers were roughly $3 million, maybe four, and we had effectively $170 million that we would be able to invest that would give us investment income, which would probably give us a couple of million dollars after-tax at the current municipal bond rates so there would be some modest impact.

All right, well, thank you very much.

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

Hi, good morning. Just two quick questions. I noticed the service business revenue was up versus last year. I guess I was a little surprised at that, it had been down for several quarters. Anything to read into that, any major change?

No. American Mining has a contract where they have some service revenue that was due and Key Risk has been able to grow a bit and did quite well in the quarter. They did perform really well. I don't think you should read much into it, although we think American Mining has some real opportunities to expand in this business.

Okay. And I was wondering if you were able to talk about that acquisition as well. Is that performing kind of in line with your expectations or a little bit better? Since you --

We're very pleased with the people. We're very pleased with the company. It was a great opportunity for us and it put us in a position to get involved in the extractive industries, which is something we really felt was a long term global future and this was a way to get in and start to learn about the business in a way that gave us a good return with really outstanding people.

Okay, thanks.

We'll go next to Meyer Shields with Stifel Nicolaus.

Thanks, I appreciate your patience. How much of the growth in the international segment was from foreign exchange?

Not very much. Because there hasn't been this huge -- we don't have a lot of Euro-based transactions. Sterling is the biggest currency, and then you got to remember it goes the other way for Argentina, So the net wasn't very much. We grew by opening in Brazil. We expanded in Spain. We established a new division that's doing global construction, which is really engineering business. It's not like construction business in the U.S. So that's really what it is. So it's real growth in business, not exchange.

When you look at pricing for smaller deals, along the lines of American Mining, does the pricing kind of reflect what's going on for the publicly traded insurers?

There's no standard. I think that there are some companies that are smaller companies that have management that want a great future and they really go out and select the people that they want to do deals with just like teams of people do; and then there are other public companies that only are interested or primarily are interested finding the deal that's okay for the people that get the very best price. So I think there's a wide range of opportunities out there and I think we'll get it sorted through, and there isn't a rule of thumb that I could tell you what it is or how it is. It really depends on the alignment of management and ownership and all kinds of things, and hopefully you'll find the right mix. But we've always had a hard time buying a lot of stuff because we're cheap, and being cheap there aren't a lot of things that are the quality characteristics that we have in mind and the people in mind and the price in mind. So we hope we can find some people that we're able to do deals with but one never knows.

And I guess lastly, is the percentage of -- your premiums written that represents property business, is that shrinking more rapidly?

Maybe, yeah. I would say it's varied slightly. It's slightly more rapidly. I think in our facultative property has gone down more quickly than our casualty facultative business; so my guess is that it's happening but it's not an overwhelming thing, although as I say, in property facts, we've seen that happen substantially. And we also, we really had a consortium interest with Kiln in small way writing CAT business -- and it was a very small thing but it was property business and we're out of that now.

Okay, thank you very much.

We'll go next to Charles Gates with Credit Suisse.

Only one more question. You've had this dramatic increase in unemployment -- I guess there 200 thousand more people unemployed today as opposed to January 1. You've had this dramatic increase in the price of oil; and as you look at the coverages that Company writes, which lines do you think would be most impacted by this change in the economic environment? And that's my last question.

We don't limit questions, Charlie.

Thank you.

I think obviously, worker's comp is going to be impacted. Our construction business is going to be impacted. We have some people who are going to start building some divisions that they actually never started. Clearly, transportation business is impacted because the price of fuel is reducing the amount people drive, that long haul truckers drive; and, they're being more conscience of the speed limits because better fall economy starts to mean real dollars. So I think it's having impacts all across the board. I think that so far, we haven't seen any particular problems in worker's comp, although these things give rise. But employment is still pretty strong and I think the biggist impact I would guess is at this point in our long haul trucking business, and our trucking business in general.

And that's Carolina Casualty?

That's Carolina, but we have tricking in other places too.

How big is the construction book?

We don't go through that overall. I think it's basically promoted -- it's basically part of our ENS business and we write a little bit in the regional business.

Okay, thank you.

There are no other questions at this time. I'd like to turn the conference back to our speakers for any closing remarks.

Thank you, all. We -- astonishingly, in spite of what the environment is, we're really very optimistic about the year and about next year. We think we'll be able to continue to deliver good returns and take advantage of opportunities. We're continuing to see opportunities. We see new teams of people literally every week and we feel confident we'll be in a great position to take advantage of this when the market turns, and we think we'll be able to deliver those more than adequate returns through the balance of this cycle. Thank you all very much.

Thank you, everyone. That does conclude today's conference. You may now disconnect.