W R Berkley Corp (WRB) 2009 Q3 法說會逐字稿

Good day and welcome to the W.R. Berkley third quarter 2009 earnings conference call.

Today's call is being recorded. The speakers' remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words including, without limitation, believes, expects or estimates. We caution you that such forward-looking statements should not be regarded as representation by us of the future plans, estimates or expectations contemplated by us will, in fact, be achieved.

Please refer to our annual report Form 10K 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 effect 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.

For opening remarks and introductions I would like to turn the conference over to Mr. William R. Berkley, Chairman and Chief Executive Officer. Please go ahead.

Thank you very much.

We were pleased with our quarter. The year continues to unfold reasonably as we expected. I would say that the government's involvement in our industry has probably been more than we anticipated. However, not much of the market has been impacted in a way that we didn't anticipate. Obviously the--overall the world moves along as the cycle is beginning to change, but we are optimistic. We are going to now do again a review of our operating units by Rob; and then we are going to have Gene do the financials, and then I'm going to talk about the industry as a whole and then take questions.

So why don't I hand it over to Rob now.

Thank you. Good morning.

We were generally satisfied with the quarter. I should mention though that market does remain quite competitive. Additionally, the state of the economy continues to provide a noteworthy headwind.

The lines of businesses that remain under the greatest pressure, continue to be commercial auto and construction. However, there are a few bright spots at least relatively speaking, one being professional liability, another one being wind exposed property business. I should mention, we are not a significant participant in the wind exposed property business and where we do participate it is in a selective manner. This is because of our sensitivity to the volatility that comes along with this line of business; and as we've mentioned in the past, we manage our business based on the concept of risk adjusted return.

We often pause and scratch our head, quite frankly, how the industry as a whole seems to be willing to ignore this volatility to a certain extent; and when we come through a benign wind season, the industry congratulates itself on its brilliance. All this being said, we were pleased with the results for the quarter coming in with a net premium of $969 million. Once again on a net basis. This being down a modest 2.7% for the quarter.

I should also mention we were particularly pleased with the month of September, which was the first time in quite a while where we were in positive territory on the top line. We attribute this improving trend to our ability to find niche opportunities in the marketplace. Our relatively strong renewal retention and our younger operations, otherwise known as startups, making an increasingly significant contribution.

It's important to note that most of our startups remain relatively modest in size. The exceptions being where there's been dislocation in the market or the team that has joined us has such a strong following, it is not purely pricing that they need to compete on. In other words, we do not burn our way into the market with our startups.

Pricing, as I mentioned, remains competitive. It's astonishing actually how competitive it is for new business for the most part. Our rate monitoring, however, for the quarter showed a modest decrease of approximately 0.4%. For the month of September our rate monitoring indicated that our rates were down 0.1%.

It's important to keep in mind that rate monitoring is not a perfect science and that it is important when trying to compare rate results of one organization to another, to recognize it is relevant the starting point that being the adequacy of the rates at the starting point. On the topic of rates, I should also mention the areas where we are giving up rate as an organization is exclusively in the lines of business where we feel as though we have more than the required margin needed. Additionally, we are also finding everyday an increasing number of lines of business where we are able to get rate increases. For the most part, this is coming about as a result of us fighting tooth and nail but we are getting traction.

Our ability to achieve these rate increases, in our opinion, is driven by our service standards, our security; and quite frankly, our willingness to ask for them. Our loss ratio for the quarter was 62%. While some might suggest this is us being conservative, we prefer to think of it as a prudent approach. We continue to book our current year cautiously and remain reluctant to recognize prior year development prematurely.

We continue to--we continue to be amazed by the industry's lack of sensitivity to the potential issues around frequency that may be on the horizon, and also inflation that may be coming the industry's way in the not too distant future. A few other comments about the quarter.

As we have mentioned in the past, we continue to look for new opportunities where we are able to align ourselves with parts of the economy that we think offer the greatest long-term promise, and a most recent example of that would be the formation of Berkley Oil & Gas. This is an ongoing effort of ours to try and increase our presence in the energy space, and we think this operation dove tails very nicely with our existing presence in the energy arena.

Additionally as we've also mentioned in these calls in the past, we continue to reexamine our operations to make sure that we are structured in the most effective way to meet the needs of our distribution and our insurers. In the quarter, we announced the formation of a new regional company which is focused on the northwest. This is Berkley North Pacific. Berkley North Pacific originally was a division of one of our existing regional companies; but our view when it comes to a regional business, a territory can only be so large in order to truly focus on the region.

Finally, last comment would be and I truly mean this sincerely, my colleagues and I particularly the 5,500 that are in the field running the operations day to day, remain determined to make the choices and decisions today that we will be proud of when we look back on them in the future. Our focus remains on managing our business with the appropriate level of discipline, while simultaneously positioning ourselves for what we believe is an inevitable change in the market, which is growing closer every day.

Thanks Rob.

Gene, do you want to go through the financials?

Okay.

Thank you, Bill. Well, Rob already discussed some of the segment highlights so I'll just mention a couple additional items on the segment, under item result that he didn't cover. First, regarding premiums. Three of our five business segments reported a decrease in net premiums written compared with the prior year quarter. Specialty was down 10%, regional down 8%, and alternative markets 5%. And as Rob said, for all three of those the declines were primarily a result of very aggressive price competition for new business.

The other two business segments, on the other hand, reported strong growth. Reinsurance was up 24% primarily as a result of several new treaty accounts; and our international segment grew 20% as a result of business written by our new company in Australia, and our new syndicate at Lloyds. Also a few more details on the startups. There's actually 17 of our companies that were started since 2006; and in the third quarter, those companies rose a total gross premiums of $152 million, which is about 14% of our overall gross premium for the period. In total, the startups are making a positive contribution to earnings. However, a few of the more recent startups that are not yet profitable added about 1 point to our combined ratio for the quarter.

Our overall combined ratio was 95.0% for the quarter and 94.7% year-to-date. Weather related losses were $23 million and represented 2.4 loss ratio of points. That is a big improvement from last year's third quarter which had storm losses including Hurricane Ike of $62 million.

The impact of prior year reserve releases, net of related premium adjustments was $47 million or 5.0 loss ratio points in the quarter. Our reserve releases were nearly the same in last year's third quarter at $49 million. And the expense ratio increased 2.5 points from a year ago to 32.9 primarily as a result of an 11% decline in our overall earned premiums. Based on our prior year experience, after adjustment for inflation and other trends, we've estimated our initial loss ratio for accident year 2009 to be just over 67%.

That gives us 2009 accident year combine ratio for the year-to-date period of 99.5%. From what we've seen, that's higher than the accident year combined ratios being reported by a number of companies so far this quarter; and as Rob commented on, that difference is a reflection of our cautious view of current price levels as well as our view of the risk of future inflation.

Moving to investments, net investment income for the quarter was up 15% from a year ago to $141 million. The overall annualized yield was up ten basis points to 4.5%, and the average duration of the fixed income portfolio was 3.4 years. The core portfolio, excluding the Arbitrage account, totaled $12.7 billion at September 30; with 46% of that invested in municipal securities, 45% in other non-municipal fixed income securities, 6% in cash and just 3% in equity securities. The equities include our investments in Verisk Analytic, which was formerly known as ISO, and which we carried at a value of approximately $90 million at quarter end.

We sold 20% of our shares in Verisk in their October IPO, and the proceeds from the shares we sold and the value of the shares we still own at their current price is approximately $114 million. The Arbitrage account totaled $700 million at September 30th, up from $300 million at the beginning of the year and the annualized yield on the Arbitrage account was 7.5% for the quarter and 8.1% year-to-date.

Losses from investment funds, which we report on a one quarter lag were $26 million in the quarter down significantly from the first and second quarter of this year. The operation for those funds continued to stabilize since June 30th, and we do not expect the income or loss from those funds to be at all consequential in our fourth quarter.

Net investment gains were 4 million in the quarter, that compares with net losses of $220 million in last year's third quarter, which included the write-down of Fannie and Freddy preferred stock. Investment impairment losses in this year's third quarter were not significant.

At September 30th, net unrealized gains before taxes totaled $385 million, which is an increase in the unrealized gain position of $334 million in the quarter and $606 million from the beginning of the year. Our operating ROE was 14.7% on an annualized basis for the quarter and 14.4% for the first nine months and that gives us an increase in book value per share of 9% for the quarter and 19% from the beginning of the year.

Thank you, Gene.

We are pleased with our quarter. I think a couple of high points I would like to talk about and then a little about the industry and then take your questions.

First of all, it's clear with price changes and volume actually up in September, that we are in the throws of this market changing, but one month doesn't make a market change. The trends are all there, and they are not there because we wish them to be there, although we certainly do. They are there because of the current state of the market.

And the current state of the market is, in our view, the industry as a whole is probably at 108 or 110 accident year combined ratio for 2009. Looking at something like 110 to 112 for accident year 2010. This is an industry with wide spreads, the best companies do substantially better than those averages, and the worst companies do significantly worse.

So with low investment income, those combined ratios create net losses for the industry. That is going to bring about a change in the cycle. I anticipated the AIG problems, which were public and a number of other companies that had issues to accelerate the trend.

Almost 18 months ago, actually a little more than 18 months ago I said that I expected the turn in the cycle to be in the first quarter of 2010 on a call similar to this. My view hasn't changed much. With the AIG problems, I accelerated my view to maybe it would in the fourth quarter of 2009. Now I'm back to sort of 2010 because the government has put off the issues at AIG, although if you read The New York Times maybe we'll have AIG problems again.

The fact is that the world is still competitive but it's competitive mainly on larger risks, and a number of the people who are most competitive will not have the resources to successfully withstand their own current pricing. They haven't had the experience to understand what mispricing does to them, and they will find out and it will be at a cost. So we still expect these prices to change. The cycle is gradually coming under less pressure, but the most aggressive companies are still out there. If you see people growing dramatically, especially in large risks or the specialty areas, you can count on the fact that their prices are low and it's pay me now or pay me later.

Our own view is at the end of the year, their auditors, their actuaries will require them to face up to some of those issues. I can't tell you it will happen dramatically. As I've said on the past several calls, we would expect price increases sort of 8% to 10%. That will be the least required in 2010. Probably beginning to be visible in the second quarter and carrying through, with the turn actually taking place, though, at the end of the first quarter. Still our view there are those that think I'm optimistic.

I think that looking ahead, we still believe that there are lots of opportunities internationally. We are still seeing them. We've had growth in the Pacific Rim area and Australia, we have a great team of people there. They've done just wonderful job for us.

In Latin America the same thing as we expand in Brazil and we continue to see opportunities. We have over $500 million of liquidity at the holding company, and we believe there continues to be things to do and we will use that liquidity appropriately whether it's buying back our own stock or using it to acquire other companies and expand.

Looking ahead, we continue to believe this is a great business with offering great returns. Here we are in the difficult economic time. We still are able to generate returns approaching 15% at what is approaching the bottom of the insurance cycle. So we are pretty pleased with that, and we think that those returns will bounce up dramatically as the cycle turns, which is where we see things happening.

So with that, Angel, I'll be happy to open the call up for questions.

Thank you. (Operator Instructions)

We'll go first to Michael Phillips with Stifel Nicolaus.

Thanks. Good morning.

First, on your last comments there, Bill, about the capital position of the holding company, given where it is, it's improved recently. Why not buy back shares now?

We may well do that but we first of all, wouldn't tell everybody on the call. We think people who tell you they're going to buy back stock only tend to make their stock go up and there are some companies whose goal is to make their stock go up in the short term, so they tell everybody they're going to buy back stock. Our goal is to do best for the people who continue own the stock, so we wouldn't want to tell that you even if that was our plan. We have continued to buy back stock when we think it's appropriate. The stock is now about 110% of book value and at the right moment we have no problem buying back stock.

Okay. Good.

So you didn't buy back this quarter because it wasn't appropriate?

I didn't say that. What I said is we didn't buy back stock because we didn't think it was the right moment to do so.

Fair enough.

Anything on the horizon that causes you to have a bit of a concern that might stall improving pricing trends that you've been talking about?

I think, being candid, the only thing on the horizon that gives me concern is the government's involvement in business especially in the insurance business means that there isn't the predictability we are used to. So I'm not sure what happens when the inevitability of price increases start to take place. Do we suddenly see the government stepping forward and getting involved?

So my concern is we have a government's attitude of really stepping in whether they are needed or not. So that's--my only concern is I could easily hear rhetoric in Washington if prices in the insurance business go up with lots of consumer complaints, even if we are barely getting a decent return.

Okay. Thanks.

If you can talk about what you did release in the quarter for reserves by segment?

By segments? We don't really do that on the conference call. If you want to call and talk to Gene and Karen, I'm sure they'll be happy to.

Thanks, Bill.

We'll go next to Michael Grasher of Piper Jaffray.

Good morning, everyone.

A couple of questions around the pricing dynamics that you are speaking to. Is it more based on the impact of inflation? How much is that impacting pricing versus say the balance sheet destruction that is currently occurring and they just don't realize it yet because of the price decreases over the past three, four, five years?

Well, I think one of the things that is hard to understand about the insurance industry is pricing is not derived from the broad based economics of their behavior. It's derived from the extremes. The industry historically has not had a good precise measure of its returns.

Because of the lag in its accuracy of knowing its profitability of an accident year, you seem not to be able to respond, of many companies don't respond immediately. So what generally happens is people don't raise prices quickly enough when their profitability declines below their cost of capital and they keep prices up higher and longer than they need to, which is what creates the cyclical business.

It's happened in good businesses, it's the investment cycle, and the insurance business it's is the lack of really (inaudible) knowledge or understanding with precision what your profitability is. So, for example, in 2006 when returns were great, people could have cut prices by let's just say 8%, but they didn't. They cut prices by let's just say 5%, and then they--and it played out and got spread out over a period of time.

So right now in the current accident year, people don't realize that their accident year loss ratio was so bad, and they haven't seen the full impact of lower interest rates. So there are some fairly sophisticated companies that are, in fact, looking at that accident year loss fix and saying, yes, we are probably not doing so well and if we reevaluate our investment portfolio at current yields, we wouldn't be making any money but a lot of companies don't do that, are not that sophisticated, or just choose not to have that kind of strategy.

So I think it's a whole lot of things, and it's also the optimism that exists in people that run businesses for the most part. So I think people are pretty optimistic things will get better. But I think it's just--it's not repricing both to yield and to accident year loss ratio saying, how does that mean, my returns are, my current book of business at this moment in time.

And I think there are more people--the reason prices are stopping going down is more and more people are realizing that, and you are seeing people in a number of cases start to put the current accident year loss ratio at higher loss fix; and I think as you start to see that happen, and I think the reason I think the change is going to come in the first quarter is because I think actuaries and accountants are going to focus on the current accident year as you get to year end and say, wait a minute, these things don't make sense.

And we have heard a lot of people talk positively about frequency, which is frankly somewhat contrary to what our own feelings are about frequency. So overall, we also think the inevitability of the deficits that we see and we are a little more optimistic about the economy beginning to get better gives us pause about inflation. So when you put all those things together, we are more cautious than our competitors.

Okay. Fair enough.

Just a follow-up from a couple of comments around September; and I guess, maybe even the last part of the quarter overall. Are you suggesting that submissions for new business was actually increasing?

Actually the reality is September was the first month in 34 months where our volume was up.

Okay.

And no one should read that as saying it's a new trend. But it was a lot nicer than the 33 prior months where volume was down.

Understood.

And we were really pleased by it. It was all kinds of different things going on. And the message I'm saying to you is if you look back at every other historic turn in the cycle, the things we are seeing now are all the signs of the turn in the cycle.

You have a month where you suddenly have a little up in volume. You see price declines going away. You see some pricelines increasing and others going down much less. You see volume changes. You see all these things start to change.

It is nice if you could turn a switch and everything changes, but that's not how it is. So all I'm trying to say is September, with volume being very modestly up and I mean modestly, a couple of percent, was just a good sign; and the first one of up volume in 33 months I think or 34 months.

Okay.

By the way, I wouldn't read that to be every month after that being up. That's not what I would suggest.

Understood.

Thank you.

We'll go next to Michael Nannizzi of Oppenheimer.

Thank you.

Just a quick question on the portfolio. Can you talk a little bit about any developments on the commercial loan book, amortized cost or value since the end of the second quarter, any developments just in that book?

First of all, recognize that the commercial loan book is basically $300 odd million. We carry it at cost. We have a reserve that we put up separately and apart from that, we rate them all. If one were to become a problem, we would review it and be sure we have an adequate reserve. So we treat them as bank loans, if you will. I think that at this point we think that the ultimate value for us in all of them is okay. And if not, we would elect to put up a reserve. But we don't see any problem at the moment that would cause them to be impaired.

Thank you.

Just a question about the specialty business. So I think a lot of the new ventures--recent ventures have been in that segment. Just wanted to ask how is the legacy book doing? If you back out these ventures, can you talk a little about how that apples-to-apples book has done over the last say maybe year?

The answer is the specialty book is down substantially. This is Rob.

That's really led by the specialty companies that participate particularly in the ENS space and the commercial transportation space. But certainly--Gene is pulling up the number, I think, for the segment; but certainly it's down materially more than we have here because it's getting somewhat subsidized by some of the new startups.

Yes, I think commercial transportation is down the most of every part of the group.

Followed by ENS casualty lines, particularly general liability as it relates to construction.

Okay. Thank you.

And is--the question, I guess, is if you have startups and I know you had mentioned, Bill, in your commentary that--or I'm sorry, Rob, that you are not just competing on price, that in some cases you have folks coming over which is mitigating the pricing aspect of that competition; but just want to understand how the loss ratio went down even though there's a larger proportion of new business from those startups?

The loss ratios for the startups, the loss ratios are higher than--

The issue with the startups, quite frankly, as far as them being accretive and as far as the combined ratio goes, has more to do with the expense ratio. So on the loss ratio side, we insist that they operate with the appropriate level of underwriting discipline. Our view is whether it would be for startups or for that matter, existing more mature businesses. If the combine ratio is going to erode, it sure as heck better be because of the expense ratio not because of the loss ratio.

That's what I referring to earlier when I said some of the start-ups are unprofitable. That is an expense load not a loan ratio load.

Got it. Great.

And one last if I could. In reinsurance, is that business--you mentioned some new treaties, is that primarily on the casualty or the property side?

There were two non-catastrophic treaties that were written for companies, which had a quite high expense ratio and had a variable expense ratio that floated; but the initial expense ratio was quite high, and it was non-cat property exposures on a quarter share basis. And that's the reason the expense ratio for the reinsurance looks so high for the quarter.

Last one, I promise.

I know you are not going to mention on the call the reserve releases; but can you just talk in, let's say, in the regional line, do you see more releases net on the long tail casualty lines or more on the short tail kind of property lines?

Since you know we are not going to talk about it, why did you ask the question? Feel free to have a discussion with--

Fair enough. Okay. I'm sorry. Thank you very much.

We'll go next to Brian Meredith of UBS.

Good morning. A couple questions here.

First one, Rob, you talked about renewal pricing getting a little better but new business still very competitive. What would you say the difference is between new pricing and renewal pricing right now?

Brian, I would tell you that it very much depends on the line of business and the part of the market. I would suggest to you that it's certainly a couple of percent. I would say give or take 4% or 5%; and quite frankly, there are many lines of business where it's significantly different than that.

The bigger the risks, Brian, the more difference there is because for large risks you always have people more willing to be very aggressive.

But what we track is the business that we end up writing. So new business we may be prepared to write at a couple of percent less than a renewal exposure in some cases; but I don't think necessarily what we have coming into our organization and we are writing, given what we decline or don't have the opportunity to write; I don't think what we are doing is representative of what is going on in the market.

Great.

And then, Bill, you talked a little bit about the 800 pound gorilla out there, AIG. I guess the question I have for you is what is the risk--

There are only 700 pounds. They were 800 before, they are only 700 now.

Well, that goes to my question. What do you think the risk here is that they tried to put that weight back on as far as gaining market share and professional liability and umbrella certain areas that they've definitely lost some market share going forward? I'm hearing certain stuff about that.

I think the question is really a more complex question. I think--the question really goes back to: is there really anyway the government gets their money out? What is the government's strategy going to be? Are the people who work there the best people really going to want to stay there given all that is going on? Would anyone want to work in that environment if they really have good alternatives?

We've hired some people from there. I've had many other people. I think it's going to be--it's going to be a story that is yet to be written, but I think that AIG will never regain, in my opinion, its prior position.

I don't believe they'll be able to buy the reinsurance to offer what they once offered. I think you are going to start to see that at the end of the year when they just don't have that capacity. They don't have the excess capital that they once had. I don't think people are going to be willing to bet their financial well being on AIG any longer.

I just--I don't see them as the same viable enterprise; and frankly, it's being run by a guy whose expertise is in the life insurance business. So I think that' it's a real question. So from my view, though, the 750 pound formally 800 pound gorilla is more likely to become a 400 pound gorilla.

Great.

And then the last question I want to ask you is you talked a little bit about lost picks and lost cost inflation and some of your competitors actually experiencing some increases in loss text. Actually, we've actually seen the other thing this quarter with a couple of companies where they were actually reducing lost picks for prior quarters. It sounds like the loss cost inflation situation is still favorable out there; and doesn't that cause companies to get more competitive from a pricing perspective, give them more room?

I think that you have to decide how--how optimistic you want to be when you look at trends. This is a marathon business. Not a sprint business. And I think that we look out at what's going on from healthcare costs to all the various other things that are going on, and we are just a bit more cautious than some of our competitors. The money isn't going away, and we've told people our goal is through the cycle is to maintain at least a 15% return. We're hopefully, going to be able to do that this year and continue to do that or better, and it's a pretty straightforward goal. And I think we want to be cautious.

If things get worse and uglier that we are still able to deliver on that. There's a lot of uncertainty out there with inflation, and we find it hard when we extrapolate from years that we have a better handle on like 2006 to think that the loss costs aren't going to be deteriorating somewhat. If you look at our book of business over a very long period of time, we've run between 5 and 10 points better than the industry in loss ratio, and that's been over a very long period of time. It's unusual that we've gone from being significantly better than the industry to being worse than the industry. So, obviously, the quality of our underwriters has deteriorated or the quality of their underwriters has gotten a lot better.

Thanks, Bill and Rob.

We'll go next to Vinay Misquith of Credit Suisse.

Good morning. Two questions.

The first one was on the accident loss ratio. This quarter and last quarter seem to be flat versus the year-ago quarters despite pricing being down slightly. Was it because of favorable loss cost trends you are seeing or because of business trends?

The old years, I guess quite frankly, as time goes by and we revisit the old years and we become more confident in the improvement that we are seeing in them and we are recognizing that.

Fair enough.

Second question is on the cash. Last quarter I believe or the quarter before that you put more cash to work. Do you have any more cash that you can put to work in higher yielding assets that could take out the investment income?

We have some more cash, but it's not a huge amount. I think we probably have--in the insurance company, I think we have $600 million or $700 million, some of which we put to work in October; but I think it's $600 million or $700 million of short-term money in addition to what we have in the holding company. What we have in the holding company we are keeping very short-term.

Fair enough. One last question if I may.

On the share repurchases you mentioned that you might be willing to buy some stock back this quarter or in the near term.

I don't think I said that. I don't think I said that. I think I said we are always interested in buying back stock at the opportune time.

Fair enough.

The question is if you believe that the market is going to turn hard very solidly in the first quarter of next year and second quarter of next year, if things take a longer time to happen, would you be more willing to buy back a lot more stock earlier next year?

First, I think I said I thought we'd see sort of 8% to 10% price increases which is a good turn, and I think the cycle is going to turn. I think that I'm always willing to buy back stock. It depends on the price. It depends on the options to use the resources of the Company, and it depends on how well I'll be rewarded for keeping flexibility. I was probably more aggressive in buying back stock 18 months ago than I might have been, but I was more aggressive because I knew I had no use for the money. So I probably paid a higher price than I should have, although it was still less than one and a half times book. Now the stock is only at 1.1 times book, obviously a more attractive price.

But the cornerstone issue is the relative opportunities to use the money and how rewarding that will be for my shareholders versus the benefits of buying back stock. This company, more than any, is not run with the ego gratification of anyone. It's run to make the most money for its shareholders, because I am the largest shareholder and all the employees here have major stakes. If you looked at the top 50 employees here, they own more than 8 times their salary in shares of our company on an average. So this is a group of people who make money because the stock does well, and they own it for the duration, until they retire.

So the fact is we have a different view, and that's how we deploy our capital with that different view. If we think that is the best use of the money, we are going to use it to buy back the stock. I would much prefer to use it to buy an expansion opportunity at the equivalent value because that gives me a lot more leverage on the upside. If I buy back my own stock, I don't increase my leverage on the upside.

Thank you.

(Operator Instructions)

We'll go next to Larry Greenberg of Langen McAlenney.

Good morning.

Good morning.

Bill, I was just wondering if it's possible to quantify the impact of the economy on demand, kind of looking at it sequentially. Where is it now versus last quarter, versus two quarters ago?

I think there's two pieces. The greater the uncertainty, the more people are hesitant to do things, taking activity for insurance purposes. So I think as homebuilding sort of lulls along and then starts to pick up, that would be a plus for some parts of the business, certainly our construction part.

Commercial construction has really come to a halt for the most part. So the commercial construction. On the other hand, roads, bridges, highways, both our surety business, and other opportunities are really gearing up because government spending is gearing up. So they all have their own pace. Commercial transportation not only the pricing is weak, demand is weak because the fact is you had high fuel costs. You had lower demand and marginal demand hits that business, which is a business that has thin profitability.

So I think as Rob commented, commercial transportation and construction have been hurt the most, and I think that overall those are the businesses that we've seen impacted the most. The surety business and the public construction businesses are starting to pick up now, and that will be a plus, it will be especially a plus for probably our facultative reinsurance business as we start to see larger risks being written. And it will also probably be a benefit to our regional companies.

Okay.

So in commercial transportation and construction, I mean we certainly haven't seen the bottom of the economic impact of those areas?

I think we are just now approaching it. Certainly in transportation I would say that we think we are probably there. And residential construction, we think we've seen the bottom and it's starting to pick up a bit. But in commercial construction, it's going away from office buildings and things like that and shopping centers to roads, bridges, highways.

Great. Thank you.

We'll take our next question from Scott Helleneck of RBC Capital Markets.

Thanks.

First question is I wonder if you can talk about the pricing environment for reinsurance and what drove the increased appetite there? The premiums were up pretty significantly. I know you talked about a couple of large contracts.

It was two opportunistic contracts. Because we have very low property exposure, and we still don't write any catastrophe exposure of any consequence, but we have a very low property exposure; therefore, we had the capacity to write these particular property risks non-cat property risks where many of our competitors had no capacity. So we were able to write them at attractive returns. Frankly, because we didn't write things before; we were the last guy in town to have capacity.

So if you take those out, it was sort of a similar run rate that you had seen in the past few quarters?

I would say it was slightly up but not as much.

Okay.

And you mentioned the 8% to 10% price increase expectation for 2010. If that plays out, what would that mean for 2011? Would that be sustainable, those type of price increases?

I would think prices would go up more than that in 2011.

To double digits?

Yes.

Okay.

I wonder if you had a--you mentioned a start up contribution number for this quarter. I wonder if you have it for Q3 '08 or full year of last year for comparison?

In terms of the premium?

Yes. The premium volume.

It was 152 third quarter this year and that compares to 82 in the third quarter of '08.

So round number 70 million more third quarter this year versus third quarter of last year.

Okay. That's all I had. Thanks.

There appears there are no further questions at this time.

Mr. Berkley, I would turn it back over to you for any closing statements or remarks.

Okay. I thank you all. As I said, I don't want to get too excited about a September that is up. I don't want to get too excited about prices that are positive, that there clearly are signs that people are recognizing where this world is, where the accident year is.

I think you'll hear more about it. I think you'll hear a lot about it as you get to year end when actuaries and accountants start to look at those numbers. It's not a complicated thought process. It is an unpleasant thought process.

So with that, I'll thank you all very much and have a very happy Halloween, the most important day of the year.

And that concludes today's conference. We thank you for your participation.