W R Berkley Corp (WRB) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your W.R. Berkley first quarter 2010 earnings conference call. At this time, all participants under a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions) I would now like to introduce Mr. William R. Berkley. Mr. Berkley, you may begin.

Hi. Our general counsel will now read our statement.

Safe Harbor statement. The speakers' remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of forward-looking words including without limitations believes, expects or estimates. We caution you that such forward-looking statements should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will in fact be achieved. Please refer to our annual report on the Form 10-K for the year ended December 31, 2009 and our other filings made with the SEC for a description of the business environment in which we operate and these 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 all or any of the statements whether as a result of new information, future events or otherwise.

Welcome to our call. We're going to start by having Rob talk a little bit about our operations and Gene will talk about the financials. Then I'll pick up and talk a little bit about anything they left out and then talk a bit about the industry and where we see our business going. We were pleased with our quarter and generally happy with our results. So now I'll turn it over to Rob. Go ahead, Rob.

Thank you. Good morning. In the aggregate, the quarter was in line with our expectations. Certainly by most measures, the environment remains competitive. And some might describe the market as two steps back one stop forward but more recently, we are encouraged to see a growing number of isolated situations where perhaps it could be described as two steps forward and one step back.

Some of the areas that are offering the greatest level of competition continue to be as in past quarters commercial transportation, construction, and products liability. And a bit disappointing but a reality, one could add some of the professional lines over the past quarter to that list. Particularly large account D&O. The Company had a good quarter, particularly given the environment. The gross premium was down a mere 2%, coming in at $1.126 billion. Our price monitoring indicated that our pricing was flat and our renewal retention ratio was in the 80s. We ended up delivering a combined ratio of a 94%. This is made up of a loss ratio of 59% and an expense ratio of 35%. It's worth noting the 59% includes $23 million of both storms as well as tax and the expense ratio was predominantly driven by lower earned premiums as well as start-up expenses with some of our younger organizations.

When you cut through all of the moving pieces as far as reserves and storms and tax, our best estimate is that our current accident year is running, give or take, around 100% combined. If you take a step back and look at our history and our approach to reserving there is certainly evidence that could suggest that it's possible that that number could improve as the year develops out. A couple of sound bites on the five different segments, maybe cutting right to the chase as far as the one particularly noteworthy outlier, that would be our international segment, that came in with a combined ratio of a 111%. This was, in part, driven by an expense ratio of 44%, and this was really due to the fact that we have a significant number of start-ups in that segment, including our new Lloyd's Syndicate, our operations in Australia, our effort to build our business in Brazil, as well as a few branches that we have created in western Europe as part of W.R. Berkley Europe, our FSA company. Having said that, we also did encounter some CAT losses related to the Chilean earthquake to the tune of $4 million which hit our Lloyd's Syndicate.

Our regional segment had a very strong quarter, coming in at a 92.7%. They incurred $15 million of storms. It's worth noting that this marketplace continues to be exceptionally competitive and there is a fierce tug-of-war that seems to be going on amongst a few national carriers and we are doing our best to stay out of the way of that battle. Berkley North Pacific, our newest regional company in the Northwest, is getting the traction that we would have hoped for and our surety business is enjoying the early signs of improving US economy.

Moving on to the regional segment. Continues to be a challenging environment for our reinsurance companies, perhaps the greatest challenge comes from our ceding partners or the companies that cede business to us. In an effort to support their top line, they seem to continue to buy less reinsurance. As a result of this, and this reality over the past several quarters, our expense ratio has been ticking up. This is also driven by our underwriting discipline. It's worth noting that we clearly recognize that there are two types of partners. There are those that try and cede business to us in an effort to try and arbitrage our capital and there are some that are true partners throughout the cycle. We recognize these two different groups and approach them accordingly. It's also worth mentioning that the reinsurance group encountered $4 million of CAT losses through a relationship that they had in Lloyd's. These cats stem from also the earthquake in Chile.

The alternative markets was not insulated from the challenges of the environment altogether. Having said that, they have fared particularly well given what they're dealing with. Obviously, as traditional risk transfer solutions have, quite frankly, evolved to very much a buyer's market, people are less interested in trying to find ways to self-insure. Workers compensation remains a competitive line. This level of competition though varies greatly depending on the territory. Our Accident and Health business is getting great traction and we're particularly pleased with the progress that's being made in the medical stop-loss case.

Finally, our specialty segment, which arguably is facing amongst the greatest challenges throughout the industry. The specialty market has been under a great deal of pressure over the past several quarters, mainly driven by the admitted market or the standard market increasing its share of the overall marketplace. We have seen business migrating from the specialty lines into the standard market, and as that has happened, we have seen an eroding of terms and conditions. Unfortunately, in the past 90 days for the first time, we have been seeing terms and conditions eroding within the specialty market. More specifically, we are seeing specialty players who have gotten to the point that they can't find a way to give any more on price so unfortunately, what they have decided to do is cave on terms and conditions. Historically, this has been a sign of the last shoe to drop or the final straw. So while it is certainly disappointing and challenging in the short run, it is encouraging and leading us to believe that it means a change in behavior is not in the too distant far.

To make a long story short, our sense is that the pressure in the marketplace is building every day. We remain focused on maintaining the appropriate level of underwriting discipline and we wait patiently for this inevitable change.

Thank you, Rob. Gene, you want to pick up the financials?

Thanks, Bill. As Rob said, in spite of the level of catastrophe losses and storm activity in the insurance marketplace this quarter, it was another solid quarter for us in terms of both our underwriting results and our investment performance. Our net premiums were $984 million, which is a decrease of 4% from a year ago. Although premiums were down slightly in the quarter, the rate of decline was about 3 points lower than it was in the preceding quarter, so we are seeing an improving trend there. Premiums for our start up companies on a gross basis were up 39% to $166 million and accounted for about 15% of our overall gross premium volume. While our domestic business declined by 5%, premiums for the international segment which has a higher proportion of new businesses increased by 9%. The overall loss ratio was 59.1% down 3 points from the first quarter of 2009. Favorable reserve development increased from $54 million a year ago to $62 million in the current quarter and represented about 7 loss ratio points. Reserve developed favorably in all five business segments with the majority of the favorable development in the specialty and regional segments.

Weather-related losses for the regional segment were $15 million, up slightly from $9 million in the prior period, and losses from the earthquake in Chile were $8 million including $4 million in the reinsurance segment and $4 million in the international segment. Our paid losses decreased by $3 million from a year ago. Our accident year combined ratio was just over 100% if you include the CAT and storm losses, and about 98% without the CAT and storm losses. Again, as Rob said, the loss estimates embedded in these combined ratios reflect our conservative approach to reserving, especially for recent years that have greater uncertainty and higher risk of inflation.

The expense ratio was 35.0%, that's up 3.5 points from the first quarter of 2009 and 0.6 of a point from the fourth quarter of 2009. The current quarter expense ratio includes approximately 1 full point of incremental expenses for start-up companies that have yet to reach sufficient scale to cover their expenses and it also includes another point related to several large reinsurance treaties with above average commission rates that are fully offset by lower loss ratios. The overall combined ratio was 94.1% compared with 93.7% a year ago and the combined ratio was below 95% for all four of our domestic segments. The international segment combined ratio of 111.5% included 4 points from the earthquake and 5 points for expenses related to three new companies in that segment.

Net investment income was $139 million. That's up about $0.5 million from a year ago. The portfolio mix is basically unchanged from year end with 89% invested in fixed income securities, 5% in our arbitrage account, 3% in equity securities and 3% in investment funds. The average duration of the fixed income portfolio was 3.7 years at March 31, up slightly from 3.6 years at the beginning of the year. The annualized yield on a portfolio was 4.3%, down slightly from 4.5% in the first quarter of '09. Earnings from the arbitrage account were basically unchanged from a year ago.

Unrealized investment gains increased $62 million to $400 million at year end and income from investment funds was $5 million and unrealized investment gains were $6 million. That gives us an operating earnings of $0.70 per share and an operating return on equity of 12.4% for the quarter. After the impact of share buybacks, we bought back 3.8 million shares for about $95 million in the quarter. After the impact of those repurchases as well as dividends, our book value per share increased 3.6% to $23.80 at March 31.

Thank you, Gene. We continue to see signs of the market reaching its bottom, but clearly the psychology that's required for a turn in the cycle of any dramatic proportion is not yet here. Certainly in certain lines of business, prices are not just firming but prices are increasing. In general, though, as Rob said, prices are flat. The decline in prices, while it still exists in some areas, has generally stopped. Competition is continuing, however, for the largest risks, and we see it sporadically, especially in the closing periods of every quarter where people are trying to make budgets and getting aggressive. The other thing we see is people occasionally are starting to have to pay the piper for their prior year's poor judgment. So we're starting to see some people not only not have any redundancies to release but have deficiencies that they have to deal with. We expect that that's going to continue.

The overall environment is still not positive. People haven't faced up to the fact that today, the industry is probably in general at 110% combined ratio on an accident year basis. We think the best companies in the industry are at 98% to 100% on an accident year basis. There are a number of good companies that still have significant redundancies, but you still have to look at that 110% best company, just under 100%, and the current level of investment income which is delivering for the average company a zero rate of return and for good companies, 10% at best. We're optimistic that the cycle is still going to turn. We expect it to turn by the end of the year. We think you'll start to see price increases as people approach the end of the year, do their budgets for next year, and have to look realistically at where things are, and our general view is unchanged about price increases of a substantial amount in the fourth quarter.

We believe that there continue to be opportunities to write business where customers recognize they buy insurance in order to get claims paid. What's been unsaid here is a number of the most aggressive competitors are behaving in ways that historically this industry has found unacceptable and they're being more difficult in payments and claims and more aggressive in resisting their claims responsibilities. We think both agents, brokers and ultimate customers are going to migrate towards those companies to take their responsibilities more seriously and who understand people buy insurance to pay claims and get them paid. So we're optimistic that we'll continue to be able to hold our own, expand our position. There continue to be people talking to us because we find that our opportunistic approach to being willing to expand even in this difficult environment offers attraction to people who are experienced and like our disciplined style. With that I'd turn this over to questions, Mary?

(Operator Instructions) Our first question comes from Mike Grasher from Piper Jaffray.

Thank you, good morning, everyone. First question, just following up on your comments there at the end about the opportunities you're finding, can you talk to despite the environment that we're in, how is it that you are able to find these new opportunities and really grow the start-ups?

This is still a people business, Mike. Relationships still exist. Knowledge and expertise is really the grounding of this business, and while it's not easy to build a large business, there's a core of relationships that go with people who have expertise and knowledge. If you can attract those people, you are always able to build the starting point of a good business. We haven't been able to make a number of those businesses grow as much as we'd like, but we think by getting the outstanding people we're able to get traction pretty quickly. Not always as quickly as we'd like, though. But it's still, as I said, a people business and that represents the reason we've been able to do this.

How much does the idea of joining team Berkley sort of incentivize those people on the outside?

I guess the person who they usually talk to first is Rob. Why don't I let Rob talk and then -- he's more modest than I am, so after he talks, then I'll probably tell you my less modest point of view.

I think that certainly for many people we offer an attractive alternative to perhaps where they currently are or other alternatives because of our general approach to the business that is reasonably decentralized and we are great believers that the folks that are closest to the front line are the ones that are in a position to make the best decisions so consequently, we empower them and give them authority. So I guess long story short, I think people find our organization attractive yes, because of our financial strength, but the real reason is because we have a track record that would suggest that people are given the authority and the autonomy to run their business as opposed to being micromanaged by some giant centralized home office.

I think a good example is our budgeting process. We don't direct goals as to volume or anything else. Our budgets come from each operating unit who then tells us what they think they can do and we have a dialogue about it as opposed to us telling them what we expect. Many people who come here for the first time are shocked that we actually do what we say. But our segments are manageable. There's one person between Rob and I and the operating units, that's the Senior Vice President. There's not a long line to get through. There's not lots of ways that you are prevented from talking to anyone in this organization. So it's very few tiers of people and easy to work in and focused on getting the job done. We like to say we are outcome-focused not process-focused and there aren't many companies that have our resources that are still able to do that.

That's helpful. Thanks for the insight there. One final question just around your comments with the industry accident year, probably somewhere around 110. Can you talk to more specific lines of business that maybe are above that 110 and those that are maybe below? I guess more importantly those that are above?

As you know, having listened to our calls before, we don't get into discussions about individual lines of business on these calls.

Not within your own company but just within the industry?

It's just as dangerous for me to do that and then start [uncle], so I'm going to pass, Mike.

Fair enough. Thank you.

Our next question comes from Doug Mewhirter from RBC Capital Markets.

Good morning, just a couple quick questions. First, I guess maybe Gene, was there any Forex impact, adverse or favorable, on your international business? Or your Lloyd's business?

Yes, a modest amount is about $5 million in the quarter, favorable gain.

$5 million favorable that would be on premiums mainly?

No, its normally when we will have an overseas operation that has invested in a currency other than its own functional currency.

Okay. That makes sense. I guess the second question would be more of an overall capital management question. Obviously, you're pretty aggressive with your buyback this quarter. You indicated a general appetite for buybacks given the current conditions. Could you remind me first of all what your current authorization is, I guess a dollar share amount?

It's about 11.5 million shares. It's not stated in a dollar amount.

And I would assume that should --.

It's 11.5 million shares.

I would assume that you'd still have the appetite to buy back as current conditions would hold?

We don't ever tell people when and how and where we determine what to buy our stock back. That's just not something we lay out. We bought back shares. There are times we do and times we don't. We are interested in buying back stock when we think it's good for our shareholders and that may be today or it may not be today, but it's not something we just sort of blare out that gives us less of an advantage for our shareholders if we tell the people who are on the other side of the transaction what our plans are.

Fair enough. Thanks. That's all my questions.

Thank you.

Our next question comes from Michael Nannizzi from Oppenheimer.

Thank you. Just a question on investment income. Is that number a little light relative to last quarter as a result of the buybacks which look like occurred mostly in the early part of the quarter?

I think the buybacks did occur in the very early part of the quarter. I think the investment income is basically flat. It is not [wide]. I think that in part being wide is a function of you're always running a race, especially when we have older, higher yielding paper coming off, and investing in that current interest rate. So it's a foot race to maintain our yield.

Right. Thank you. And then on the net investment funds, can you talk a little bit about, I think it was $4.7 million there, that includes the mortgages and a few other items. Can you just talk about that line relative to last quarter?

Net investment funds? I'm sorry, you mean what makes up them?

Yes. What's the number relative kind of where we were last quarter there? Just want to understand that.

It's basically not much change, really. It's valuation changes. It's some oil and gas funds that we have in Canada, which is probably the biggest single piece. And I think then we have two real estate funds.

The balance is basically unchanged from where it's been, it's about a $400 million total investment in affiliates and funds.

Great. Great. One broad question if I could. You mentioned other qualitative matters as far as your service profile, claims paying and these other aspects of your business that differentiate you from others. Are you seeing that get equal footing or more footing now relative to just pricing? Could you talk about whether or not that behavioral or psychological change happened prior to the last cycle turn?

I think that one of the things I tried to talk to people about is it's the state of mind that really drives the cycle change because it's not just the reported numbers. It's when the fear of the business doing badly and the real results ending up being much worse than the reported results that cause people to act. And as people start to see those adverse trends, there are some companies that choose to tighten up their claims-paying procedures, and their behavior in the field gets more difficult. Those companies always end up suffering. So I think that the independent agent recognizes that, and the independent agent then starts to move away from those companies that they see behaving in an arbitrary way. So we have benefited in general in the cyclical turns as large companies, and small also, but primarily large companies get in the mode of being tougher with clients and agents decide that that's not something they can deal with. We have benefited by that, and the last cycle the same thing happened.

Thank you very much for answering all of my questions.

Our next question comes from Meyer Shields with Stifel Nicolaus.

Bill, I was hoping you could give us some insight into the margin appreciation within the wholly owned investees. Is that something that we should expect along with an economic recovery?

The answer, that's all [Greenwich Arrow]. I think Greenwich Arrow continues to do better. It's a business -- I don't think the margins are going to get better, it's an industrial company, if you will, they're doing better, and I don't think that'll continue to have a significant increase in [their] margins. It's a little more volatile quarter to quarter. I think they're doing fine and it's giving us a good return on our investment, but I think you'd have to start to see a significantly better economy before they'd be really benefiting, and I don't think you're seeing that yet.

You talked a little bit about [your] professional liability line seeing price softening. Do you expect the recent Goldman Sachs news to change that?

Sorry, could you repeat the question, please?

I'm sorry. I was asking whether the recent Goldman Sachs news or charges is likely to impact pricing for professional lines D&O?

Unfortunately not. We don't think that the Goldman situation is all of a sudden going to dramatically change the appetite or the environment for large cap D&O. I think that you're going to need to see a series of significant SEC claims that will provide the required wake-up call. I think what we're seeing right now is the greatest level of competition, particularly on some of the lower layers. Some of the folks that have been in the marketplace for some period of time buying in some of the higher access layers are looking for ways over the past, call it 12 months, to elbow their way up to the table and perhaps become the next AIG. So we will see with time whether that works out. But no, to your specific question, it is unlikely in our opinion, that the Goldman situation on its own will drive a change in market behavior.

And some of those people actually may become the next AIG without the government's assistance. That's wishful thinking unfortunately I'm afraid. But I think that the only loss that we see that could change a particular segment might be the drilling rig loss in the Gulf where the loss is going to be a very large loss, the kind of loss that no one anticipated, very high quality partners operating it in every way, technologically advanced rig, big loss, not storm related, not the kind of loss you'd expect in a market that wasn't at the peak of competitiveness, but was certainly competitive. That's the kind of loss that might have an impact on the market. But generally speaking, one loss or one issue like Goldman Sachs would not have an impact on the market.

Okay. Thank you.

Our next question comes from Jay Cohen from Banc of America Merrill Lynch.

Good morning. I have three questions. The first is, can you discuss the amount of shares you've bought back to date in the second quarter?

In the second? First of all, no, of course I can't discuss what I've done in the second quarter because then I would be saying something that I have little enough to say, Jay. What would I say in the second quarter call if I told you now?

Just kind of quarter to date just to give us a taste for it.

No, I don't. I can't do -- my lawyer is sitting here waving his finger at me saying, shh. No, I can't talk about it. I'm sorry.

One other company did mention it this morning, but let's go to the other questions.

I have a lawyer who's bigger than me, what can I tell you?

Rob, you had mentioned you're seeing some signs of terms and conditions loosening up. I'm wondering how widespread that is?

How to articulate that. You know, Jay, I think as we discussed in the past on these calls and, and I think, on other occasions as well, we have seen terms and conditions loosening for an extended period of time as I suggested as business migrated from the nonstandard or nonadmitted/specialty market into the standard or admitted market. That just happens naturally. But what we're seeing now, and it seems to be becoming more widespread, is an erosion of terms and conditions that are being offered within the specialty market, and I guess our only conclusion as to why -- or speculation as to why folks are doing it is because they finally realized that they hit the wall with pricing, so in an effort to attract business, well, what they're doing is since they can't give anything more up on the price front, they're just giving it up on terms and conditions.

How widespread is it? I don't have a metric that I can share with you, but certainly it is not something that we saw significantly during -- in a significant way in 2009 or prior. It is something that has come somewhat out of the blue in Q1 of 2010, and I think that you would find that if you went back to sort of 1999/2000 it is perhaps a page out of that playbook. As I also suggested earlier, the good news is that when you get aggressive with pricing that takes a little bit of time to come home to roost. Oftentimes when you start playing with terms and conditions, as it has been suggested in the past, that's one way to take long-tail business and make it short-tail business.

Thanks, Rob. Last question. On the claims side, can you give us some flavor for what newly arising claims are looking like from a frequency standpoint? Ex the weather of course.

I don't think there's been a particular change in our claims, either frequency or severity. There is nothing [to tell us that]. I think in general we would say that we have been more conservative in our claims reserving for a number of years, having found ourselves short in 2001 to a greater extent than we ever anticipated. I think that embedded in our claims process is a much higher level of conservatism which continues and redundancies continue to develop. And the fact is, there's nothing that causes us to see inflation, trends or anything else that's directionally changing where claims are going. Pretty benign.

Thank you.

Our next question comes from Vinay Misquith with Credit Suisse.

Good morning. On the margins for the business, the accident (inaudible) loss ratio or ex-gas seems to be slightly better than the fourth quarter and significantly better than 2009. Could you help us understand what's driving the improvement? Is it business mix or is it your view that lost cost trends are not as high as you had anticipated originally?

I think it's a couple of things. There is some change in the business mix as Gene mentioned. For instance, the reinsurance area. Our expense ratio went up because we wrote some property business, non-CAT-related property business that we knew ahead of time ought to have a lower loss ratio with a higher expense ratio, so that accounted for part of it. I think another piece of it was we recognized that we were probably more conservative than we should have been in establishing our loss picks in a number of areas and we're trying to get a more precise handle as we look at it line by line. And I think then finally some of the areas in the business have proved to be -- have more positive results than we expected.

That's great. The second question is your exposure to the Transocean rig, if you could just give us a sense of whether you have any reinsurance on that and what your exposure would be?

The long and short of it is, our net, including everything, including reinstatement premium was something just below $5 million and we in fact will probably pay that claim this week and it is well within what we expect. In this business you have an anticipated loss ratio and it's well within the numbers we have.

Thank you.

Our next questions comes from Josh Shanker with Deutsche Bank.

Good morning.

Good morning, Josh, how are you?

Very good, thank you. How are you doing?

I'm excellent, thank you. It's always a pleasure to speak with you.

Thank you, Bill. I was curious about the composition of the favorable development by acts in Euro lines and if you can give any color on that?

You know we don't talk about that on the phone. You are welcome to talk to Gene.

Okay, let's talk about the industry in terms of 100% for the quality players, 110% for the industry. Usually I think of the markets as property versus casualty, casualty running at a higher combined. Are you talking about lines you're participating in or the industry broadly speaking?

Josh, I think what we're referring to is commercial lines ex property CAT.

Is property right around the same as casualty?

I think what we're doing is we're looking at commercial lines in the aggregate, ex-property CAT, we're not at this stage looking to break it out, the casualty or the property or the CMP versus this or that. I think that's a general view when we do our homework as to where we think the industry is running.

Okay. You spoke on the first conference call about potentially a 15% ROE for the year, do you still think that is achievable?

Yes. It's a really simple thing, if you would take out our unforeseen storm losses, our net income would have given us about a 14.8% return instead of 13.5% on net income. I wasn't talking about operating income, I was talking net income because we've moved our gains and a fair portion of that where it's not in our operating income. I still think we will do that. Yes.

Very good. Thank you.

(Operator Instructions) Our next question from comes from Larry Greenberg from Langen McAlenney.

Rob, you highlighted on the reinsurance side having partners and dealing with arbitrageurs. I am just curious, are you seeing anything unusual in that breakdown today?

No. I think quite frankly, just to make sure we're on the same page, what I suggested, [or certainly metrics suggest] there are two types of partners. There are those that are opportunistic and want to use us when it's convenient for them and there are those that are truly our partners throughout the cycle. And as far as the split between the two, obviously in a challenging market, those that are opportunistic we're not able to find ways to do as much with them as we can in a hard market. Those that are truly our partners throughout the cycle, we value those relationships greatly and we continue on with them through thick and thin. So I guess to answer your question, yes, it becomes more weighted in a soft market towards those that are our partners throughout the cycle as opposed to those that try and game us.

You're not seeing any of the more traditional relationship partnerships moving into the other camp of trying to game the system?

I think that the answer is in a soft market, there's enough pressure for everyone to go around. Having said that, we have partners that they're built on long standing relationships. We understand what their role is. They understand what our role is. There is a mutual understanding that the relationship needs to be rewarding for both parties. So, is there a bit of fraying around the edges and certainly there's some relationships that we sort of question a little bit here and there? Yes, but I would suggest that the core of that group is well intact and we are pleased to have the opportunity to support them and be their partner.

In many ways that relationship is no different than it is doing business with large insureds. We don't write very many, if any, Fortune 500 companies because they have plenty of capital and, again, there's a capital arbitrage. We're happy to write insurance where people want to buy protection from volatility, protection from loss. We're not interested in writing, if you will, risk arbitrage in the insurance business because frequently the insured knows more than we do about the frequency or likelihood of loss.

Does that answer your question?

Yes. I mean that's helpful. Just a second question, Bill, if I could summarize your position on the marketplace. It sounds like on the one hand, you think the industry is at a 110 accident year and that's clearly an impetus to change pricing. On the other end of the spectrum, there's still a lot of redundancies out there and that probably is going to mute things to some degree. Can you just elaborate on the issue of redundancies in the industry? Maybe you've got some historical perspective on this?

Why don't we start by saying pricing levels based on our analysis are roughly at the kind of levels they were in 2000.

Yes.

Inflation has driven costs higher than that, and investment income is substantially lower than that. So the industry is doing worse. So you have to put that in the context of what we're talking about. But the past five years have been extremely profitable years, and a number of companies not even intentionally but almost in spite of themselves have found themselves to be extremely conservative in prior years' reserving because business was much better than they anticipated. As those loss years develop, they are finding redundancies and the redundancies are proving to be far more than they had anticipated. The companies that are in that position are not evenly spread.

Companies that reported results in the low to mid-80s are unlikely to have great redundancies. Companies that reported high 80s, low 90s are likely to have more redundancies than companies that reported somewhat higher results will probably continue to have redundancies. So all companies are not going to be created equal with the amount of redundancies they have to bring down. And it varies by lines of business. The shorter the tail lines of business, the less redundancy you are likely to have because they will have emerged more quickly.

So companies that write private passenger automobile are not going to continue to have big redundancies in all likelihood. Companies that have property business are not going to have accumulated big redundancies. It's going to sort of wash out. Catastrophe business will have shown great results, virtually immediately after if you didn't have many cats. Companies that had significant casualty business will have longer or at least the possibility of a longer tail and accumulated longer redundancies that will take time to be released.

So it's going to be different for every company, but the turn in the cycle is going to come about when people start to recognize the reality of where pricing is, and that they need to do it and do something about it. And whether we're running at a 97, 99 or 100, I can't tell you, but I can tell you that our current accident year is not great and while compared to the world we're doing all right, we're not where we want to be. Historically, if you look at our chart, we do 8, 10 points better than our better competitors, and more than 10 points better than the industry as a whole. So we'll have to see how that comes out and when do people, major players, start to say we can't live with prices at this level, but to make that decision, you have to be willing to lose business. And that's a hard thing for an insurance company executive to say that we're prepared to have our insurance volume go down and either fire people or have a bad expense ratio.

So it's that state of mind that the long-term pain of more losses is something I just can't deal with. When Rob talked about terms and conditions, frequently changing terms and conditions changes how quickly losses get reported because you add coverages that allow people to report things that otherwise might not be reported. So it accelerates the reporting and thus reduces the tail on specialty business. So that's the best I can do to tell that you we're a bunch of irrational people in a huge marketplace that respond to our emotions more than the economic realities.

Thanks. I appreciate that.

I don't, but that's okay.

We all knew that anyway.

I am not showing any other questions at this time.

Okay. I thank you all very much. There are lots of signs that there are people who are recognizing this issue as they start to see things happening that surprise them. I would expect our prognostications, the timing is not going to be off much. If it's off, it'll be by a little, but we still anticipate fourth quarter people start to look at those changes and react. Thank you all very much. Have a great day.

Ladies and gentlemen, this does conclude today's program. You may now disconnect and have a wonderful day.