W R Berkley Corp (WRB) 2009 Q2 法說會逐字稿

Good day, and welcome to the W.R. Berkley Corporation second quarter 2009 earnings 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 words, including without limitation, believes, expects or estimates. We caution you that such forward-looking statements should not be regarded as a representation by us that 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, 2008, 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 new -- whether as a result of new information, future events or otherwise.

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

Thank you very much, Laurie. Well, we had what I view as a satisfactory quarter. Our combined ratio when you take away storms and all of the various adjustments, releases and so forth, what we think is about the bottom of the cycle was approximately a 95 combined ratio. We were satisfied with that result. Satisfied because, in fact, the basic tenant we have had, which is discipline, manage your expenses, keep an underwriting profit, is what we have been able to do. We're pleased with how we're going. We continued to see the market bottoming out in June, actually. There were price increases over all for our Company, and we're quite positive. We're going to do our call a little differently. Rob is going to now talk about a summary of our segments, and then Gene will talk about the financials, and then I'll come back and talk about the overall industry, where we are, and then answer questions. So now I'm going to hand it over to Rob.

Thank you. Good morning. While market conditions do remain competitive, we continue to see a growing number of early signs of an improving market environment. It's important to note that while directionally, lines, classes, and classes of business moved together, they do not necessarily move in lock step.

In addition to that, as mentioned in our press release yesterday, while we are seeing improving number of indicators as to where the market is going and we are experiencing price increases, we do continue to see some competition coming from certain corners of the marketplace. Certainly -- certain large carriers seem to be focused on market share, and this seems to be coming through in their appetite, particularly around large accounts. Additionally, we are see some entrants into the specialty lines, seeming to try and find a seat at the table. Having said this, we do not believe that these two factors will derail the process of an improving market. A couple of comments about the different segments. The regional segment, the quarter could probably be characterized as bittersweet. Certainly the storm activity that we experienced in the center of the country was unusually severe compared to historic results.

Having said that, we are seeing significant change in the pricing environment across multiple lines. We're also finding opportunities to expand our business in certain niche areas that offer us reasonable margin. Our surety lines of business, while they are not completely insulated from the economy, our focus on commercial surety as well as our positioning for what we envision to be significant infrastructure spending will put us in a good position for the future. The specialty segments certainly feel the challenges of the marketplace. They are, from an underwriting perspective, one of the more cyclical parts of our business. Property rates, GL rates -- particularly around contractors and commercial auto -- all continued to face challenges; but we are seeing a reduction in the level of competition. Having said that, we feel as though professional liability is one of the brighter spots today.

The alternative markets business is also competitive, but we continued to see an improving market. The assigned risk plans across the country we are seeing begin to see slow the depopulation, and we are also seeing California Worker's Compensation -- while it has been a challenging time, the competition is reducing there. Some of the realities are coming home to roost for those who have been operating in the California Worker's Comp market for some time now; and as a result, their behavior is changing dramatically. The reinsurance business is also a cyclical part of our business from a topline perspective. The biggest driver there these days would be seating companies and their desire to bolster their topline and increasing their retentions, or continuing to increase their retentions. We are very focused on those that we do business with or partner with; obviously, given our proximity to the risk, we need to have a great deal of confidence in those management teams. Our international business, we are pleased with our entrance into Lloyd's as of June 1.

This operation will be focusing primarily on property business as well as accidents. Our UK business/European business, which focuses predominantly on professional liability, it's been very competitive market for them; but we are seeing signs of improvement there. Our business in South America continues to do well. Our -- specifically, the operations in Argentina have remained very profitable, and we are pleased with the progress that we are making in Brazil. And finally, our business Australia and Asia is developing nicely, and we are optimistic as to how that will continue, particularly as we see the earned premium begin to come through. Our startup operations in general are performing as we would have expected. They are making a meaningful contribution to the organization. Their underwriting discipline has been very much the case, and we are pleased with their performance. We would expect that in the hard market, their contribution will grow in a significant way.

Clearly, it has been a challenging couple of years for the industry, but we feel as though we are very well-positioned going forward, as the light at the end of the tunnel is growing. Gene?

Okay. Thanks, Rob. Well, beginning with our underwriting results, you'll see that our net premiums written were $909 million for the quarter -- that's down 8% from a year ago. That rate of decline was a slight improvement compared with decreases of 12% for the full year 2008, as well as for the first quarter of 2009, as our price changes have moderated and some of our new businesses are beginning to make more of a contribution. By segment, premiums were down 12% for regional, 10% for both specialty and reinsurance, and 1% for alternative markets, while international premiums were up 7%.

Before we look at the rest of the underwriting numbers, I want to point out just one particular transaction in the reinsurance segment that has affected some of the ratios this quarter. Our reinsurance premiums in the quarter are net of a $17 million return premium for a -- for one retrospectively rated reinsurance agreement. That return premium was fully offset by a $17 million reduction in incurred losses, so there was no impact on either profits or the combined ratio. However, even though it's profit neutral, the impact of decreasing earned premiums by $17 million and corresponding decrease in incurred losses causes the segment's expense ratio to be 7 points higher -- excuse me, 7 points higher, and its loss ratio to be 7 points lower. So no effect on the combined, but a significant affect on the loss ratio and expense ratio. This will come up again, but for now let me just go back to the underwriting results.

The overall combined ratio was 95.3%, up two percentage points from the year ago, and 1.6 points from the first quarter. Three key drivers of the second quarter combined ratio were storms, as Rob mentioned, and also reserve releases and expenses. Storm losses were $28 million in the quarter and added 2.9 percentage points to the overall loss ratio. Although that's the same number of loss ratio points as the second quarter of '08, it's twice our average historical second quarter storm loss ratio for the preceding five years. With respect to reserve development -- and this excludes the reinsurance reserve change I mentioned before -- prior year loss reserves decreased by $33 million in the quarter. The decrease is primarily the result of continued favorable development for both the specialty and alternative market segments. Reserve releases represented 3.5 loss ratio points in the quarter compared to 4.8 percentage points a year ago.

And finally, the expense ratio was 32.5%, up 2.4 percentage points from last year's second quarter. That retro reinsurance agreement I mentioned added 7/10th of a point to the overall loss expense ratio, and the remaining increase was due primarily to a 12% decline in our earned premiums. Combined ratios by segment were 90% for the specialty, 92 for alternative markets, 99 for reinsurance, 101 for regional -- and that includes 10 points for storms -- and also 101 for international. Our net reserves increased to 8.18 billion at quarter end. That continues a long term trend of reserve increases in spite of declines in earned premiums. In fact, since the end of 2006, our loss reserves have increased $1.2 billion or 18%, while our rolling 12-month earned premiums have declined by $700 million or 14%. The second quarter paid loss ratio of 59.7 is still comfortably below our incurred loss ratio, in spite of the impact of payments for storm losses in the quarter.

Turning to investments, you'll see that in conjunction with our adoption of FAS 115-2, we have expended our investment disclosures on our income statement. But although there is a number of new lines there, we still have three main categories to discuss -- investment income, results for investment funds, and then net realized gains and losses from sales and impairments. So first with respect to investment income, our investment income was $132 million in the quarter, compared with $162 million a year ago. Two components to that; the arbitrage account, and then the remaining portfolio. Starting with the arbitrage account, the investment income from the arbitrage trading account was $7 million in this year's quarter, down about 50% from a year ago. The average amount invested in arbitrage trading was down $350 million, and the annualized yield on the arbitrage account declined to 5.7% from 7.3% a year ago.

Investment income for the remaining portfolio was $125 million. That's down 15% from $147 million in the second quarter of 2008; but it's actually right in line with our investment income for that portion of the portfolio in the last three quarters. It was 125 in Q3 '08, 124 in Q4 '08 and 128 in Q1 of this year. The annualized yield was 4.3% in the second quarter, which was also in line with the past three quarters. However, compared with the prior-year quarter -- the second quarter of the prior year -- investment income was impacted by a more than 200 basis point decline in short-term interest rates, as well as by sales and impairments of securities, including a number of higher dividend-paying REITs over the past 12 months. Losses from investment funds, the second category, which are reported on a one-quarter lag, were $38 million. Most of that -- $34 million -- was related to two funds that focused on commercial mortgages and real estate.

You'll also notice that beginning the second quarter, we're reporting investment fund results as a non-operating item. We think this is appropriate given some of the recent FAS-B accounting changes, as well as our expectation that this type of investment will be a declining portion of our portfolio in the future. And the third item, net investment gains, were $34 million in the second quarter. Gains from investment sales were $49 million, and a good portion of that is due to the sale of investments that had previously been written down, and were now sold at a gain; and that was partially offset by other than temporary impairments, which were 15 million in the quarter, and that included further declines in prices of securities that had previously been written down to fair value in earlier periods.

The market pricing for the overall portfolio improved dramatically in the second quarter, in the first six months of this year. During the year, pre-tax unrealized losses improved from 200 -- unrealized gains and losses improved by $270 million, from an unrealized loss of 220 at the beginning of the year to an unrealized gain of $50 million at June 30th. So after taxes and the impact of foreign currency rates, that represents an increase of $1.27 per share. At the end of the quarter, 92% of our portfolio was invested in fixed income securities, with about half of that invested in state municipal bonds, and the average duration was 3.3 years.

Finally, our annualized ROE was 12.8%, our operating ROE was 13.1%, and the increase in our book value for the quarter was 7%.

Thanks, Gene. We're pretty pleased with where things are going. 18 months ago, I was on this call and told people we thought that in the first quarter of 2010, the cycle would probably start on its way upward. We suddenly got optimistic, maybe six months or eight months ago, that things might turn sooner because of all of the issues with AIG and the financial markets. I'm not sure whether that, or how that's going to happen. We think clearly, if you looked at any of the cyclical turns in this marketplace -- the prior 3 -- '74, '86, '85, or 2,000 -- all of the economic trends are there; that is, capital accounts are surplus negative down, earnings down -- all those changes take place. We still continue to have all of those kinds of problems.

I believe on an accident-year basis, the industry as a whole is operating at significant underwriting loss overall. That's not brilliance. That's not insight. All that is is taking the industry accident year numbers, and adjusting for effective price changes. And when you do that, you come out to where 2009, got to be at something like for the industry, 110. I can't talk about what people are printing, where numbers are coming from. I'm only using aggregate numbers to do that; and when you do that, you are at negative returns for most of the industry. It doesn't really matter what happens. Our pricing overall for the quarter is now down.6%. However, in June, prices were up .2% overall -- the first plus month for the Company we have had going back probably since 2006, maybe even 2005.

Some of our segments have had plus pricing months for a few months now, but overall for the Company it's that. The comment Rob made about depopulation of assigned risk plans, very important. It's another telltale sign when those plans start depopulating, that means companies are beginning for the worst risks to get underwriting discipline. So pricing is the first sign companies want to get enough money to have an underwriting profit, or at least approach there. The second sign is underwriting discipline, that they are turning down the worst risk. So they are going to assigned risk plans. That's exactly what one would have thought. The reason you are seeing volume go down is, for the most disciplined companies, they are refusing to cut prices and terms and conditions aggressively, and volume is going to other people.

It's not they are stupid, necessarily; they may have a belief that the volume will stick with them. They may have whatever theories it is. It's not that they don't understand. They just have a different economic scenario for how they run the business in some cases. In some cases, they may be stupid. However, that only continues for so long when Boards of Directors say, "What is happening? What is the accident year?" You can't live on limited release of prior-year's reserves. There are many companies that are still disciplined, that are, in fact, doing the right thing; that are looking at reality and behaving appropriately. Unfortunately, there are many that are still not.

We find in the places where we have been most aggressive in raising prices we're losing the most business, our volume is down the most. And that's just how life is, we're perfectly prepared to have that happen. There will be events that slowly turn the market. The market was turning, albeit slowly, in 2000 before, in fact, Reliance and Frontier went bankrupt. When Reliance and Frontier went bankrupt, that accelerated the market; and then 9/11, which dramatically even accelerated it more. Some event will come along -- be it the bankruptcy of a company, the dramatically downgrading from one of the rating agencies -- some of those things will happen. And clearly, the rating agencies are going to have to be more sensitive as time goes by. They don't want to happen in the insurance industry what happened in the mortgage-backed securities and so forth. They are going to have to at least look a little more toughly at marginal players.

As far as our portfolio goes, our municipal portfolio is still average rating AA, duration 4.4 years, book yield fine. The vast amount of our securities still represents that high quality fixed-income portfolio. California, very small percentage are GOs -- I think $30 million are California GOs. The rest are either pre-refunded or revenue bonds. Same in general is true of virtually all of our bonds. We just aren't exposed to those GO risks. We haven't invested particularly in municipals at the moment, because in fact the underwriting cycle is moving, so we're focused now on more corporate. In the first six months, we have invested a little over $1.1 billion in bonds, with a roughly 5.6 year duration with an average yield of 5.5%.

That's brought our duration of our bond portfolio to about 3.3 years, up from 3.1 years. Recognize, the duration of our portfolio is always going down as time goes by; and as that happens, we have to invest out a little longer to offset that. So our portfolio is still roughly one year shorter than the duration of our liabilities, and that's where we want to keep it. At the moment, we think that the current environment gives us concern to be investing out any further, because we think long-term there is inflation risks. And number two, we have concern that the quality -- which is for us reinvestment has been in an (inaudible) rating or better, the quality of a bond is really important, even if the economy has basically bottomed out, which is our view. The pain for bondholders usually takes place subsequent to the turn, because it's those companies -- those institutions that can't survive the bottom, that hope and think they can make it, that don't make it. So we think that the exposure to problem securities will extend beyond the turn in the cycle.

We're very positive as to the cyclical turn. The end of the cycle is always bloody and difficult, and there will be some companies that in fact won't survive in their present form. That we're seeing. Some will be acquired, some will go out of business; and those who survive will in fact prosper more than ever before. So we're quite optimistic. Cycle turn forecast unchanged. Fourth quarter this year, first quarter of next year, people are going to run out of -- or some people at least will run out of reserve-release capacity as they carefully look and reevaluate the reserves because they have to be cautious. We continue to reassess our reserves on a quarterly basis, and we're pleased with the development; and the longer this period of no inflation or virtually no inflation continues, the more satisfied we'll be that our reserves are conservative and allow us some cushion. With that, Laurie, I would be glad to answer any questions.

Thank you. (Operator instructions). We'll go first to Mike Grasher with Piper Jaffray. Please go ahead, sir.

Thank you. Good morning, everyone.

Good morning, Mike.

Bill, first question, just to follow-up here on your comments about the economy maybe having bottomed here, and I'm wondering what gives you -- or what are you seeing in terms of just generating that sort of optimism?

Well, I think one has to be sure -- you noted that I didn't say we're seeing a dramatic upturn.

Okay.

My own is talking to many people who I know who own businesses all over from hotels, restaurants, office supply businesses all over the country that I make it a point to talk to, all of whom said things are getting better. A friend of mine who has a hotel who mentioned to me that June was off 28%, July was off 17%, and August, in fact, is only off only 11%. That would be an example of improving demand, and his bookings for September are flat with last year. But I've talked a lot to people. I also look at the numbers -- the number of bids -- contract bids for our surety division for business coming in that we're coming in in the fall, were the highest level we have ever seen them. So just lots of that kind of information. I spend a lot of time talking to people, and I think there are just many, many signs. Again, no boom -- but that we have hit the bottom.

Okay. Fair enough. And then also a follow-up, just a couple of comments there in terms of inflation. It seems short-term it maybe is non-existent, but I don't have the sense that that's your outlook for inflation. What is your outlook, and how is that impacting your reserves and your reserve philosophy going forward?

We continue to reserve with building in inflation of roughly a 6% level. One of the problems with that is, it has lead to what looks like substantial redundancies, and redundancies are built into that because of those numbers of a very substantial nature. The problem is, if you look at historic or classical economics, the issue of inflation based on money supply and so forth would tell you we're going to have inflation. On the other hand, there certainly -- the drivers of inflation are unemployment, i.e., wage-driven inflation, or price-driven inflation with demand, neither of which seem to be problems we're going to be facing in the near term. As I said, even my optimistic view that the bottom has been hit, I don't see any booming times coming up for a while. So I don't think there will be any short-term inflation. I think that we can easily by 2011 start having those worries, and we'll assess our reserves, as we do quarter by quarter, and we may find that our reserves are overly cautious, because we don't say -- and we can't say, because we can't device a payment pattern, that we don't need inflation for the next three or six or nine months. We have to -- we build that 6% in; and as we go through periods of time, it allows redundancies to be reduced -- released -- if in fact we don't have that inflation.

Okay, and then just a follow-up on the reserves. Gene, can you share with us the reserve releases by segment?

I don't think we do it by segment. We can give it to you in the aggregate. It was (Overlapping Speakers). 33 million.

The majority of that is specialty, and then right behind that is alternative market. We'll have all of the details in the Q --

Okay, fair enough. Thanks very much.

We'll go next to Larry Greenberg with Langen McAlenney. Please go ahead, sir.

Good morning, thank you. Bill, could either you or Rob maybe elaborate a little bit more on the ENS market, and why that remains as competitive as it is at this point in the cycle. Is it the economy? Is it some of the new start-ups that we hear mentioned by a number of companies?

This is Rob. A couple of comments from me. I think that there are a few drivers. First of all, you are suggesting that the economy is having an impact -- I think that that is certainly very real. Receipts being down, a lot of the business in the ENS space is priced off of receipts. In addition to that, we're seeing businesses go out of business. A great deal of the ENS space has been populated -- at least over the past several years -- by the construction market, particularly in certain pockets of the country that are under the greatest strain right now from a construction perspective. In addition to the economic factors, one of the things that we have -- we see happen religiously in a soft market -- or almost what drives the industry into a soft market -- is the standard market expanding its appetite and eating into the non-standard or ENS market; and that has been a severe issue for the specialty or ENS market over the past several years, and it continues to be the case, while it seems to be dulling somewhat.

Yes, I guess that's the rest of my point. If we are approaching an inflection point in the cycle, wouldn't you expect the standard market to be pulling back in a pretty meaningful way?

And typically, as it was suggested earlier, it doesn't necessarily happen overnight. But we are seeing what would appear to be a quenching of their thirst for what we would define as typical ENS business. So they -- I would not suggest that they are wrong, but I would suggest that they are not trying to push farther in to the ENS marketplace. And then the third factor, as I mentioned earlier, is the new entrants in to the specialty lines, typically related or a division of either new operations or an arm of an existing operation that is trying to find ways to deploy capital. And they have looked back at history, that the ENS business has provided good returns; and unfortunately, they are fighting tooth and nail to find a seat at the table, and in the process of that, you are finding additional disruption to the marketplace. Having said all of this, as I suggested earlier, we do not think that these three factors will necessarily stem the tide of what is going to need to be -- or what we are seeing as a change in the market environment. We're just seeing a slowly-growing ground swell.

I think the other point that Rob mentioned is that in some of these cases where standard-line companies are getting in to write these ENS lines, they're -- to write them, they are really not classifying the risks appropriately; and in doing that, they are charging not a 10 or 20% discount from the ENS rate, but 20 or 30% of the ENS rate. And when you cut the price that much, the payout becomes much shorter. So I think you are going to find that the people who have stepped in to this business will discover that it's not quite as attractive as it looked.

So just to understand -- to be sure that I understand what you are saying, are you saying that standard companies are moving into the ENS market today less aggressively than they were? Pr they are actually starting to pull out, but at a very gradual basis?

I think that the -- to put such a fine point on it, we could talk about any particular line, any particular category, in any particular standard market, and we give you that level of specificity --

Yes, but I'm just asking for a general --

Yes. But the general sentiment is that it's at a moment of transition where they are shifting away from this growing appetite of pushing farther into the market, and we see it on the cusp, or beginning to transition into where we will see them withdrawn. And in part, that is a result of what was being suggested earlier, that -- even long-tail lines of business, if you write it at a cheap enough price with foolish terms and conditions, becomes short-tail business. And what we are seeing driving this change in behavior is the reality of misclassification, mispricing and inappropriate terms and conditions by the standard markets, and we expect it will be a similar reality for those recent -- and some of the recent entrants into the specialty space that have been absurdly aggressive.

Great. Thank you very much.

Our next question is from Josh Shanker with Citi.

Hey, Josh.

Thank you. How are you doing this morning?

Alright. Josh, just so you know, 18 months ago was in response to your question that I made comment about the cycle turning in the first quarter of 2010, and you responded that I was even more pessimistic than you.

Well, now you are more optimistic than I am. But you are smarter than me, so we'll take that at face value. What I would ask first is you made the comment about 110% combined ratio for 2009 --

No, I think I said the accident year for the industry was running at least 110%.

Yes, but -- I agree with you there. Is that just casualty, or is that property and casualty as a whole?

I'm really just doing industry aggregate when I look a price-wise. What I did is I took the industry combined ratio in 2006, and then I just said, okay -- I didn't use market scout or anything, I used what I assessed was the best of the price change indices, and adjusted those at that developed accident year for the industry, and moved it up accordingly and came up with that 110 to 113 as a combined ratio. I just -- in the aggregate.

What does that mean for 2008?

For 2008?

Yes, I mean -- obviously 2008 loss picks have to come up for the industry then?

Yes.

And how far -- how different is '09 than '08?

Well, you have to keep in mind the earned premiums lag, so the earned premium for '09 is half of -- is actually half from '08. So you have got to back up. So '09 is half of '08. And half of '09, I would say prices were probably flat to modestly down in '09; but half of '08 was there, so I would guess that '09 will be probably a little worse than '08, but '08 probably -- I'd guess the accident year '08 was probably going to 108, and '09, probably 110, 112.

Okay. But -- that's sensible.

I think you also have some loss cost trend in there, and you do have modest, but some inflation.

Okay. Considering -- I have tried to track -- you have seen my research. How much do you think your exposure volume is from where it was two or three years ago?

Yes I -- go ahead Rob.

Our expo -- Josh, are you suggesting our exposure, how has it gone down in relation to as our premiums have gone down?

Right, because we have this -- so your thoughts on -- I'm sorry.

So effectively how our rate has changed? Is that --

Well, rate -- you gave us rate information. We have your premium information. Premium has been developing faster than rate, which I would say that's sort of a way to back in to exposure, but more I was trying -- maybe you have some different thoughts on that.

I think the answer is that we feel as though our rates are down; but I would caution you with the information that we provide you, given that it is possible that there are shifts of mix of businesses and changes in exposure, particularly as a result of the economy having an impact, that I would suggest to you that yes, our rates are down, and we reconcile our rate calculations in many different ways and are pretty comfortable that it is capturing it. But I would once again caution you that based on the information that we give you beyond the rate change, it's hard to reconcile that with the public info.

I think that I would tell you that our policy count for all intents and purposes over the past four years is virtually unchanged. But the mix has changed, and that's why it gets very complicated, Josh; and that is, our biggest high-risk accounts have all gone away because they represent what everybody else is fighting to get, and our smaller, low-risk accounts have grown somewhat because that is a less competitive segment of the market. So it's reasonably hard, I think, to say, when you look at it, it's just -- it's not a clear and easy thing to make that absolute a statement. But I would say in general, our risk has gone down -- our risk profile -- certainly pretty significantly because we have lost virtually all our very largest accounts.

Yes. All right. And finally, I'm sorry, if I am dominating the phone call, but I'll get off after this. When do you expect to return to underwriting profitability? Do we expect to be over 100% through the end of this year, and then 2010 probably back to the low 100s?

We are at underwriting profitability now. Take away all releases, take away everything, we're at a 95 now. My number was not for us. My number was an industry number. Make no mistake about it. We are operating at 95 combined right now, with no reserve releases, no nothing. And I expect to continue to be at an underwriting profit through the entire cycle. That is why our volume is down, unfortunately.

Maybe I'm just doing some a mistake, and I have you at 102 with 3.5% of favorable development -- 101.

I don't believe that's correct.

I think what Bill is doing is adjusting out for 3.5 --

But he said he is at 102 --

Right.

101.2.

And then adjusting --

And I don't think that's correct. Because --

Or maybe my math is wrong, I'll own up.

Why don't you -- because you are starting, Josh, with a 95.3 in the quarter, right?

Yes, I have to put it together and see. But I have you higher. But it might be me. I'm wrong. It's possible.

We have got about 3 points of storms, and about 3 points of reserve releases. So --

It's -- in other words, 95.3 if you add in the reserve releases, even then it's a 98.4 -- I think 98.5 -- and then you take out the storms, it brings you back to 95. So as an ongoing basis, 95 even with the storms -- it's 98.

Okay. Well, thank you very much for all of the disclosure.

Okay, and feel free to talk to Gene about the number because they ought to be able -- it should -- the one thing we ought to be able to do is reconcile the numbers.

Yes, yes, of course.

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

Thanks, good morning, everybody. One big picture question, then a few smaller details. Bill, should we expect this -- the hard market that should be given by the end of this year to last for less time than recent hard markets because we have had a shorter soft market?

The answer is that the soft market we have had is actually the same as the soft market we have had in every other cycle, other than the one we just went through. And the reason the soft market was extended in the one we just went through was because Andrew gave everyone the delusion that things were okay, and people kept cutting casualty prices, which is why '98, '99, 2000 were so terrible. So if you take out this one market which sort of was extended by Andrew, historically the insurance cycles have effectively been seven-day years; and I would expect this will be the same. So I would expect that the turn year will be 2010; 2011, 2012 will be very good years -- really strong. 2012 will be the turn down year, but still a great year. Then 2013, 2014 will be the down years, and then the turn year again in 2015. So I think you ought to look at these things as seven, eight year cycles, which historically is what they've been.

Okay. Thanks, that's helpful. And then digging in to the segments, I guess Rob, you talked about (Inaudible) raising their premium retentions. Is there any change at all on casually reinsurance rates?

As far as casualty -- reinsurance rates, I think it -- at this stage, I think the market is -- it really is -- I guess it is really distinguished by the quality of the security, if you will. I think for those participates in the reinsurance market that have not -- the same strong ratings, they are not able to command the same rates; and quite frankly, are a bit more aggressive. As far as our book of business goes and what we're willing to entertain, our rates are flat to moving in a positive direction.

Okay. And in the reinsurance segment, it looks like you bought more reinsurance than you had historically, and I'm wondering if there is anything driving that?

I think part of that has to do with some of the businesses that we started more recently. Some of our startups, particularly at this stage, are a little bit more reinsurance-intensive, given the nature of their product offering; having said that, as they get more critical mass in a different market environment, we might reduce our buying. But that's really driven more by the startups than anything else.

Yes, I think that there is sort of a slight differential in the reinsurance for all of our new ventures -- well, first of all, some of them are buying actually quota share reinsurance, because of the nature of the business they write. So all of these startups which we operate from a reinsurance purchasing point of view in a virtually independent way have, in fact, bought a lot more reinsurance and then bought different types of reinsurance until they get up and on their own. So I think that that's the particular reason you are seeing that.

Okay. And lastly, is the entire -- pardon me -- $17 million retrospective reinsurance program, that all goes through net and earned premium this quarter? Is that right?

That's right, that's correct.

Yes, it did.

Okay. Thanks so much.

So that was a reduction in net and earned, and a reduction in losses.

Great. Thanks so much.

We'll go next to Michael Nannizzi with Oppenheimer. Please go ahead.

Thanks. Just a couple of questions here. So generally speaking, which lines are -- primary lines are you seeing rates rise the most in? And kind of related question, in which lines are you increasing rates the most?

Well, I think generally speaking, the areas that we are seeing the greatest opportunity at this stage would fall under the general umbrella of professional. We are reluctant, as you know from past conversations, to get more granular than that, because the places that we can find opportunity to make margin we're not really interested in advertising to the world.

Okay.

But quite frankly, as far as where we are getting rate, we are getting it wherever we can achieve rate increase, and those places that we're not able to achieve rate increase, we are either satisfied with the available margin or we are not in the business -- or we are writing business. We are there every day, but we are not writing much business. But I would suggest to you that the professional space is attractive. There are certain parts of the property market there that are attractive, and then obviously there are certain niche lines and certain territories within the country that the other lines of business may offer other opportunity.

There's no question, though, that for the first time, we are seeing increases in prices in more areas than not, and that's really the reflection of the overall price increases in June; and there's little doubt in our mind that as we forecast, overall prices will be up, certainly before the end of the year -- very likely in the third quarter.

Great. Thanks. And just a quick follow-up on seated premiums, in the specialty line is that the same kind of phenomenon that is taking place in the reinsurance segment, so that retention is a little bit higher because --

It's -- throughout the Company, it's wherever we have a particular unit.

Got it. And then just a quick one on the commercial loan book -- the loans receivable book -- is that -- can you just talk a little bit about how that book is performing? Any change from last quarter?

No. It's -- they are all performing well. They are all well secured, and they are all performing well. There's no issues at all.

Okay. And that's still a -- primarily it's a DC-based office?

No that's basically, oh, loan to values in the 50% area, give or take -- we haven't appraised them as of today, but we have appraised them as of -- within a manner of six months, and those -- those -- DCs we own real estate. These are just a portfolio of probably eight, maybe 10, 20 or $25 million, or $30 million first mortgages.

I see.

First mortgages are mezzanine, but in that same category.

Okay. Great. And -- oh, just one question on the assigned risk pools. Did you say that they were populating or depopulating?

We said they are no longer depopulating.

Okay. Got it.

So effectively, the insurance marketplace or insurance carriers are no longer being so aggressive they are providing -- they are no longer providing an alternative to the assigned risk plan.

I understand. Okay. Great. Thank you very much.

And just as a follow-up to that last bit, you might take note, that's another one of those all-way signs that the market is beginning to turn, because those in general are the worst risks.

Great. Thank you very much.

We'll go to Vinay Misquith with Credit Suisse. Please go ahead.

Hi, good morning. On the comments about these standard markets not wanting to move in the ENS space, I just wanted to clarify whether that's your expectation or that you have already started to see that happen?

Maybe this too, I want to make sure that I'm understanding, or that we don't have a misunderstanding. Our comments for many, many quarters now has been that the standard market has moved in to the ENS market, or it depopulated the ENS market, as they, being the standard market, has broadened their appetite. What we are suggesting is occurring now, is that their appetite or their thirst is being reduced, and we are observing a kind of transition where the standard market is no longer eating further in to the ENS market, and it is perhaps taking stock of what they have done, which historically would be an early signal to a change in their appetite, and the pendulum will swing back in the other direction, where they will begin to withdraw from some of these classes of business that they had expanded into.

Fair enough.

It has not really started to move, other than small at the moment; but we're start -- they are seeming to be less aggressive.

That's great. Second question was on the combined ratio (inaudible,) you said that it was about 95 points on an accident-year basis, ex-cats.

Ex-cats, ex-reserve releases.

So fair enough. Just thinking in terms of the first quarter that was about 98.4, and for last year it was about 95 points. So curious as to why we had a sequential decline in that number this quarter versus last quarter, since pricing I thought was still a little soft?

I think that you have got seasonality, you have got earned premium issues, you have got lots of things happening, including expenses from startups that had virtually no earned premium. There's just a lot of things going on for a couple of points in a quarter. You've just got a lot of those various things happening. I don't think anything in particular. Just -- I'm just trying to think about the numbers. There's nothing I can think of, particularly. I would have to look at the individual companies, and I can't tell you anything in particular about that first quarter. I don't have an answer other than the fact that we did have some unusual expenses in a number of startups with very little earned premium.

Fair enough. The last question, if I may, is on the net investment concern. I believe last quarter you mentioned that you might be able to put in more money into longer duration assets? Has that already occurred in the second quarter, or are you planning on doing something more in the third quarter and over the next six to 12 months?

I think that I said in the first six months we put in $1.1 billion -- just one second, I'll get my sheet -- at an average duration of 5.6 years at a 5.5% yield. So that we have done. A fair amount of that wasn't until the second quarter. I think that the -- of that, $600 million was done in the second quarter, $500 million in the first quarter, and our cash is still such that we would like to try to -- you got 25 basis points to 50 basis points on your cash, so the fact is we will still try to continue to invest out with a somewhere between 4 and 6 year duration, which is where we need to be in order to maintain our overall portfolio duration at roughly 3.3, 3.4 years, which is where we would like to be, which is just a year shorter than our liability duration.

That's great. Thank you.

We'll go next to Beth Malone with [Wonderly]. Please go ahead.

Thank you, good morning. A question on the economy. Do you believe the pricing cycle won't -- do we need a recovery in the economy in order to see a pricing cycle recovery?

No, I think that an improving economy would accelerate and expand on the pricing change; but, no, it's like saying you can't raise prices, so you'll continue to sell at a loss. I think the fact is that the industry pricing is such that they have no choice. You can't keep losing money and the price you are selling your product. So I think that the accident combined ratio for the industry as a whole, I think prices have to go up, so I think the cycle will start to turn.

Okay, and then as you talk about some of these other companies becoming more challenged in this environment, does that create the opportunity for acquisitions for you? Do you see these as opportunities, or are they too damaged to be something you want to get involved with?

I think that's always a one-off decision. We see most things that are available. We look at them. We consider them. We believe that most companies that are damaged have already damaged their balance sheets in such a way that you don't want to take on their problem reserves. There are some, I'm sure, that are exceptional that have the integrity not to short their reserves before they get desperate. But most companies have been aggressive in their reserving techniques before they got so desperate to sell. So I would say most companies that are for sale -- not all, but most -- have issues with their reserves that would cause us not to be interested going forward with them.

So I guess the strategy is then just to take market share as these other players become weaker?

That is why we have all of these startups. Hopefully, we'll be in a position (inaudible) market share. I think there are probably half a dozen companies that are very well-positioned financially and capital-wise to take market share, and we think we are amongst them.

And would you care to comment on when you see the rating agencies becoming more aggressive about their rates on these companies? Would -- do you think it's going to happen this year that they will start to be a little bit more discerning in their rating?

Well, I think that ultimately, the rating agencies' issues are going to be when do they see a lack of conclusion that -- the lack of solutions for some these companies, and I think that it's not a clear certainty. I don't know when and I don't know what will dive that concern. But I think that ultimately, the rating agencies are in many ways de facto regulators, and I think they have been more responsible of late than they have been in the past; but I think that clearly, they have a tough road to hoe at the moment. And I think that what we've learned with the disasters at AIG is that size in and of itself is not any assurance that you can't get into difficulty, and I think everybody has to understand that. That used to be the protection rating agencies could deal with, that if you were big enough, they felt very comfortable.

Then one last question, on -- do you think the environment for the tax situation in Bermuda has changed? Is there more momentum towards making that a change to that?

Well, I think if we could get it high enough that we could cover healthcare cost, it would be good. But other than that, as I have said, if I were in Bermuda, I'd think it was fair and good because it is the right for my shareholders. But in fact, I think most people in Congress are trying to ways to generate tax revenues that equalize balance, and all we're proposing is that if you generate revenue and income here, you shouldn't be able to use internal reinsurance to avoid tax; and I believe in the -- in most cases, we have been successful in talking to members of Congress that this is a reasoned proposal.

Okay. Thank you very much.

We're optimistic that this will happen this year.

Okay. Thank you.

We'll go next to [Teri Shoe] with Pioneer Investments. Please go ahead.

Yes, hi, Bill. I hate to keep on beating on this issue about the industry's numbers and the turn in the cycle, but what you talked about the -- 110, if I look at some industry data -- I'm just looking at the Dowling book, which coming from AM Best data, last year was -- 2008, around 105, and the forecast for '09 is somewhat better, because last year had higher cats. And when I look at the companies that we all follow, the results are all very good. We don't see any blood on the street. So who are these companies that are doing poorly, and really hiding poor underwriting results?

I don't think they are hiding poor underwriting results. I think that they're -- I'm talking about accident-year results --

Right.

-- as opposed to financial reporting results, and all I'm doing is taking the developed accident year results that AM Best prints back -- going back to 2005, 2006

Right.

And I'm adjusting those reported numbers for the forecasted rate changes, price changes --

Right.

-- for the industry. And so it's not complicated, and it's not delving into how someone is reporting and what they are doing. It is simply saying that price changes in the industry has been basically 15-plus points, and the industry had roughly a 93 combined on an accident year basis going back to 2005, 2006. And so you add that 15 points of adverse development plus something for inflation -- of adverse pricing, rather -- and that's where you come up with the number.

Okay. But what seems to have been happening over the last couple of years, the very favorable results that we're seeing from a number of companies is due to, perhaps disinflation -- or deflation of certain loss trends. Is it not true that it's really hard to see, but the -- all of the companies that we know -- the big public companies, both the US ones and the European ones -- there's the accident year results -- I'm not talking about with releases -- are still very favorable. So I'm not sure who these companies are that are deteriorating. So it's hard to see a turn when overall profitability still seems to be okay. Or am I reading it wrong?

Well, I think if you look at (Inaudible) was quite candid, what they said accident year results were, over -- for their insurance business, it was over 100 for (Inaudible).

Right.

And they reported 99.7. And they said this current year-- accident year -- it was well over 100.

Okay. Who is that, I'm sorry?

That was Arch.

Okay, Arch.

But I'm not here to debate what the industry is --

Right, right.

-- and I'm really -- I'm not going to get into that debate, Teri.

All right.

So I'm not really going to go any further.

Okay. Okay. That's fine. Then maybe just much more importantly, the question of about your results. You have very good results relative to the industry of -- in the mid-90s on an accident-year bases. That is, you would say, is due to your risk selection, and just because the -- your overall book is of a better quality through better underwriting and pricing discipline?

And lines of business we participate in. We don't participate in line all lines of business.

Right. Right.

So we're not an across-the-board writer of everything.

Right.

And there are other companies that will do well also.

Right. Right. Okay. Thanks so much.

Our next question is from Mark Dwelle with RBC Capital Markets. Please go ahead.

Yes, just a couple of quick points. You've commented regularly about all of the new business start ups over the last 18 months or so. What proportion of sort of 900 million of written premiums do those businesses collectively represent at this point?

I would guess that it's probably -- maybe 10 -- excuse me, maybe 10% for the quarter.

Okay. And then the other question I had was amongst your various -- you write Worker's Comp in a number of different segments. What is the total proportion that is California-based comp as compared to, let's say, the rest of the US?

Probably 5, 7%.

Okay. That's all my questions. Thank you.

We'll go next to Jay Cohen with Banc of America/Merrill Lynch. Please go ahead.

Thanks, good morning.

Good morning.

Your investment funds, obviously those were put on a one quarter lag; and in the past you have had some sense of what those numbers looked like for this most recent quarter. I'm wondering if you can give us any indication of what kind of returns have generated.

For next quarter you mean?

Yes, so it would be the second quarter which you will report in the third quarter?

I don't know yet. We knew when we were really worried. I don't know yet; and those funds are now going to be separated out of operating income because of this -- how we're -- how we change, because they are basically those -- primarily these mortgage-related things. It's going to be probably down somewhat, but I don't think down a lot. I would say significantly less than this quarter. I think this quarter was in the aggregate $37 million, and I would say it will be significant less -- maybe half, maybe even a little less than that. But that's my guess.

Okay. My other questions were answered, so thanks.

Thanks, Jay.

We have a follow-up question from Mike Grasher with Piper Jaffray. Please go ahead.

Bill, just to follow-up on Jay's question there, I think you had mentioned earlier in the quarter at a public appearance that you thought the remainder of the year might be losses of 45 to $50 million. Can you update us on those expectations around the investment funds overall?

I think that's what I just did. Is you add in 37, roughly half of that, that pretty much takes you where I think --

And then that would include the second half of the year, though?

Well, part of it is is the third quarter. What will be reported in the third quarter takes you to roughly 45 to 50, maybe 52.

Okay. Thank you. And then --

And we think that ought to be pretty close to the end.

Okay. Yes, okay. And then on California, with them thinking about selling this Worker's Comp fund, is there any opportunity there for you, either through the fund or just with all of the disruption?

I think it's not clear what they are going to do at the moment. California is in disarray for a whole number of reasons. You have gotten a couple of people who are withdrawing from the state for comp. This certainly hasn't lead to a calming affect on the state's funds. So I think that like every opportunity, we're sitting, watching, waiting. Our premium surplus is basically one to one, and we would like to have an opportunity to use our capacity, but it -- getting there from here may be difficult, and dealing with governments as every financial institution as found out, is never an easy way to make money.

Okay. Thank you very much.

We'll go next to David Small with JPMorgan. Please go ahead.

Yes, good morning. Could you just give us a little bit of detail on what exactly -- on the startups, and in terms of the profitability outlook for those? Kind of the cost -- how much it is costing you to have those teams, and when you think they will be break even? Thank you?

We don't really break it out, but I will tell you that the startups basically at this point are break even in the aggregate. The new ones are losing money, the older ones are making money. The ones -- the syndicate which started June 1st has virtually no earned premiums, so it is losing a couple million dollars because it has got no earned premium. The ones that have been around for 18 months or so are making money. But I would say in the aggregate it's sort of a break even.

And just on the D&O group that you brought on, we have obviously heard on the FI side pricing is going up, but outside of that it doesn't seem like there's that much is going on there. Can you just describe what is group is doing right now in terms of the types of business that they are trying to attract?

I think the answer is that prices are better still. They are not zooming up, but prices are better. We're finding opportunities; people are concerned about quality of players, so they are anxious to have us participate. And pricing is okay, but not -- I would say up slightly, but not huge.

Okay. Thank you.

We're not currently writing any financial institutions of consequence. There may be some oddity that we do, but we're not writing financial institutions.

So even though the pricing is up in that segment, you still don't feel that the pricing is adequate?

I didn't say that. I said we're not writing at the moment. We may reconsider our view as we are getting in step, but you have to take on expenses, and get people, and it's something we're moving in to. You want to add to that, Rob?

No, I think you have covered it as to where our focus is and where we see the D&O market. FI is certainly part of the market that experiencing some significant change, much-needed change. Whether it will be enough, that's unclear; but for the moment, it is not a focus of that team that you are referring to.

And then just my last question on that topic. Are you writing primary or excess mostly?

Mainly excess. We will entertain some primary now and then. But for the moment, it is excess. Part that has to do with where our new entrants into the market, and part of that has to do with that it is easier for us to be opportunistic and find the parts of a deal that we think the rates are most attractive. But we will see as the market turns, as we expect it to, whether you see us more in the lead position.

Okay. Great. Thank you.

And we do have a follow-up question from Meyer Shields with Stifel Nicolaus. Please go ahead.

Thanks. Gene, could you clarify how you account for foreign exchange changes on a year over year basis?

Well, the foreign exchange gains and losses, we -- which are never very significant for us -- or usually not very significant -- are reported in other expenses or operating expenses on the income statement.

Okay.

And how much were they, Gene?

They were -- we had a $5 million foreign exchange expense in this quarter.

Okay. And last question, Bill, given your optimism about rates, should we assume that share repurchases are basically done for the time being?

No, I think we're still -- we have got to a lot to excess capital. We're opportunistic. And -- no, and we have an authorization. And we're -- we have to look at where we are; and sometimes there are big opportunities we're looking at which would cause us to back up a little bit and save our capital if we think something is going to happen. Or sometimes we say, "Geez, stock is really attractive here, and we're sitting here and nothing is due." So no, I wouldn't say that at moment, but it's a moment to moment thing. We sit and look and try to find opportunities. We definitely have capacity and interest at the right price and at the right moment. Although I would tell you that if anything, we're more certain -- and that's why we mentioned that -- the end of depopulation of assigned risk plans -- we are more certain each day about the turn in the cycle and price increases, and the changes we see are definitely more certain. And if you look at the accident year combined ratio for everyone taking out the prior-year releases, I think you'll find that the industry isn't adding much to its surplus.

Okay. Thanks so much.

And we have a follow-up from Beth Malone from Wonderly. Please go ahead.

Thank you. Could you just comment on the -- and maybe you have, and I missed it. The excess Worker's Comp market? What does it look like today compared to a year ago?

The excess Worker's Comp market, or specifically the part of the excess Worker's Comp market that we compete with has been competitive, and it continues to be competitive. We are seeing a stabilization there. It's been challenging over the past couple of years -- or certainly several quarters -- because we've had some entrants into the space that it would appear as though they have been lured in by the size of the premium without much appreciation for the complexity of the line of business; and I would suggest that these folks seem to be more focused on the premium, less focused on things such as attachment points, and it would also appear as though these folks that have entered that market place may be learning their lesson as we speak. So we are optimistic that the underwriting leverage is going toi swing more in our favor in the foreseeable future.

Accidents comp has a very long tail line of business and requires real financial security; and a number of the newer players in the area don't really provide that; so we're quite astonished by people willing to buy excess comp with some people with questionable security.

And that's an understatement.

Okay, thank you.

That being our final question, Mr. Berkley, I'd like to turn the conference back over to you for any additional or closing comments.

Thank you. If you wonder why I'm so optimistic, it's a checklist -- a checklist of the signs the market is turning. And every month, there are more items in that checklist that confirm all these things are happening. It's the view we have that that change is going to happen by the end of the year or the first quarter. It's going to happen when big companies decide this business is not as good as they want, and they've put on underwriting constraints. It's when companies decide that the total value of a customer after they have so many retentions doesn't make sense. It's when brokers decide, "I'd better be doing business with companies that are going to be here and offer me capacity in market over the long run." It's when smaller companies can't by reinsurance and then can't really put out the side lines they need to compete. It's when those kinds of things happen that the market starts to turn in a harder and harder way. All the signs are there; and in fact, more than half the check marks have already occurred. There's no issue about will it happen. There's clearly an issue about will it be in the fourth quarter or the first quarter, but we're quite optimistic it's there and it's happening. As I said, June -- price increases for the first time. So thank you all very much. Have a great day.