Good day and welcome to the W.R. Berkley Corporation second quarter 2008 earnings conference call. Today's conference is being recorded. Before we begin, we would like to note that the speaker's remarks may contain forward-looking statements. Some of the forward-looking statements can be identified by the use of the forward-looking words including without limitation believes, expects or estimates. We caution you that the forward-looking statements should not be regarded as a representation by us as to 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 31st 2007 and our other filings made with the SEC for a description of the business environment in which we operate and the important factors that may materially affect our results. W.R. Berkley Corporation is not under any obligation and expressly disclaims any such obligation to update or alter its forward-looking statements whether as a result of new information future events or otherwise. At this time, I'd like to turn the conference over to William Berkley. Please go ahead, sir.

Thanks, Steve. Welcome to our call. We had an all right second quarter. We were pleased with our underwriting results. Our storm losses, given the magnitude of the storms, were certainly well within reason. Across the board, the competitive environment continues to be difficult. We see pricing levels basically continuing to be down roughly 5%, 5.5% year-over-year. It's been at that level for most of the year. We test not only our renewable, we're now testing new business, which is approximately in that same area. I think that from our perspective what that really means is pricing, adjusting for inflation, is probably down between 9% and 10%. We're trying to offset that by being more selective in our underwriting results and we think we're able to do that somewhat and moving out of the most competitive areas of the business. We think our business is still operating at a very comfortable underwriting margin, and if you take away the storm activity, we would expect that we're probably running in the area of a 90 today, maybe slightly better than that. So, we're satisfied with our business. It's not as wonderful as it was two years ago, but such things can't continue. I'm going to talk about various segments of the business and how we're doing in a little more detail and answer questions, but right now I'm going to let Gene Ballard go through our financials.

Okay. Thank you, Bill. To begin with the second quarter operating income was $134 million or $0.77 per share and that compares with $187 million or $0.92 per share in the second quarter of '07. While our operating income was down almost 29% compared with a year ago, income per share was down much less by just 16% as the per share earnings are reflecting increasing benefits from the share repurchase program. We repurchased another 7.1 million shares in the second quarter for an aggregate cost of $190 million, and with that the average shares outstanding during the quarter were down $30 million or 15% from a year ago. On a pre-tax basis our operating income decreased by $87 million when compared with the prior year quarter. Underwriting profits were down by $70 million, investment income was down by $15 million and all other income expense items combined were up by $2 million. Looking first at the underwriting profits, there are four main differences in the year-over-year underwriting results. First, as Bill mentioned storm losses, primarily storms in the Midwest were $31 million in the second quarter, which is $15 million more than they were in last year's second quarter. Storm losses added 2.9 percentage points to our overall combined ratio. Second, the decline in earned premium resulted in a decrease in underwriting profits compared with last year's quarter of about $12 million. Third and most significantly, the profit margins for the current accident year, disregarding the impact of storms, were down about six points from last year. That's due to the general price declines that Bill referred to as well as lost cost trans in inflation and that represents a decrease in underwriting profits compared with the prior year of $63 million. And finally, the fourth item which partially…

Well, let me just talk about a couple of things and then I'll talk about each of our operations. First of all, in anticipation of a question, our reserves overall went up by just shy of $250 million. It's an interesting thing with our earned premium down and written premium down that our reserves still went up. And in fact, if you go back in 2005, same quarter we had roughly the same reserves, same written premium and earned premium, rather. So, one would think with that matching our duration, our reserves wouldn't have gone up at all, they would have roughly been unchanged with the duration of loss reserves and the unearned premium adjusting for inflation, you might have expected things go up by $30 million or $40 million, maybe $50 million. It really is our conservative nature that still is in place which is anticipating higher levels of inflation and concern with directional trends we see in loss settlements. It is a conservative posture, that while we are bringing down some past redundancies, we continue to be conservative in the reserves we establish. And the best example, I can give you is, look back same quarter three years ago, earned premium, written premium roughly the same yet our reserves are up by in round numbers $250 million. I think that tells the story about our conservatism. A couple of other items before I talk about the operating. This impairment charge is a non-issue but a big issue. Impairments or market carrying at market value was always how we carried virtually all of our securities. Some companies in fact didn't carry everything at market value. We now have a non-standard because the accounting rules are vague and uncertain and no one has given us any kind of defined way…

Thank you. (Operator Instructions) We'll go to Michael Phillips with Stifel Nicolaus.

Hi, thanks. Good morning, everybody. Two questions, Bill. First, on the International segment, a lot of growth there, I guess just trying to have a hard time understanding the expense ratio increase and kind of what's driving that and how would you think about that going forward?

Two things. The growth was mainly from Australia and the expenses were mainly the startup expenses of our new operation in Australia.

Okay. So I mean, over the next couple of quarters we should expect to see that come down a bit then, I assume?

Yes, I would expect so. But we basically had six months of expenses plus special expenses and starting up which involved a lot of stuff, but yes, that ought to come down.

Okay, great. Thanks. And second question kind of centers around I guess this -- the overall topic of growth and then your comments on a $250 million increase in reserves. With, I think, Gene said reserve development was about $53 million, so your accident period results are just under 100%, about 98% now. I guess, the question kind of is, your increase in reserves being conservative at a time when growth is tough, your margins are just under 100% here on combined ratio basis accident year. How much business do you think that's still profitable that you probably don't get a chance to see it because you're being sort of conservative on the reserves here?

Well, we go through, first of all, we don't tell our Company's reserve set and we are on the side of what I think are the gods telling everybody you're too conservative. So, you should understand that we tell every one of our operating units when we think they're redundant, we tell them they're redundant, they ought to be writing more business. And every one of the Senior Vice Presidents here pounded the table and said, it's great to be conservative, but if you're conservative and missing good, profitable business, it's a bad decision. On the other hand, having been through the bad parts of the cycle, everyone here is experienced. If you ever get with one of them and you ask to take their shirts off, you'll see all the scars from this. So, they're cautious because you don't direct people to be more aggressive at this moment in the cycle. I have to tell you intuitively, I agree with you. I think you're right. I think we are not getting all the business we ought to get and I tell the people in the field that we need to be out there. But my guess is this, at this exact moment we probably shouldn't push too hard. And I think if you look at our more cautious reserving, it's probably also a reflection of what happens in the business climate when business is moving into a recession and pricing is going down, you tend to lose those audit premiums, you lose the kind of extra volume you get from operations. Your premiums which are based on the scale of a business are really covering larger scale businesses because you're covering things they did a year ago when they were bigger businesses. So, I think that at this moment in time it's probably frustrating as it is in your comment and it is a lot more frustrating to me. I think that that's a painful issue that we face all the time. And I think that we are being a little more conservative than we should be, but I think this is the moment in the cycle where you don't want to push them too hard.

Okay, great. I appreciate it. Thanks.

And we'll go next to Marc Serafin with Citadel Investment Group.

Thanks. One quick one and then a follow-up. How much reinsurance business did you do with Kiln?

We just had -- basically we had a consortium of about $35 million. But most of our decline in reinsurance premium was not from Kiln.

And $35 million was a full year '07 number?

Yes.

And then, could you talk a little bit more about the workers' comp loss cost inflation trends that you're seeing and what you're assuming in your pricing or your reserving at this point?

I don't think, I would get specific in workers' comp. I would simply say that our general view is medical cost, inflation is sort of between 7% and 9% and base rate inflation that we're using is 4.5%. So, I think what we're sort of saying for our own purposes, we think that based on premium mix, we're seeing effective cost deterioration between 9% and 11%. But it depends on the state, it depends on coverage changes. It's very, very specific by state, by tax we employed by retention. There's lot of things you try and do to compete, not just on our loss cost estimates and so forth but detachment point. It's coverage, it's our own preferred provider network which we think in some places reduces our medical cost by as much as 12%. So, I think we're putting a lot of effort on things like that. So for example, we have a preferred fire network now almost every place.

Thank you.

We'll go next to Josh Shanker with Citi.

Good morning to you all.

Good morning, Josh.

The first question I had regards some comments you made during the last conference call and just how this conference call fits in. Where's the velocity of the rate trend going? If things worsened in pricing, (inaudible) able to talk?

No, I don't think things have worsened, but in fact I was really surprised when I got our last loss cost trend. They're astonishingly flat, i.e. the rate of loss cost trend continues roughly at exactly the same thing. I think what I see happening that I'm interested, I think the decline in business activity is causing a few things to happen. I'll give you an example, Josh. Construction, people have exposures on past operations when they're aggressively writing contractors business. You're really picking up exposures when businesses were much more active, so you're cutting your prices, in this case contractors go up more than 5%, I might add, a lot more. But not only are you cutting your prices, you're getting an exposure of insurance exposure that's far greater than the current rate of business operations, thus, the rate base that's used to calculate your premium. So, I think that you're seeing in certain lines of business people not, not experienced enough to understand that their risks are greater than the rate calculation generates in premium. So, we think that that is creating a greater adverse impact on some of the most aggressive carriers, but I think that we've had no change…

Okay.

We've had no change at this point in time, but it continues. So, I think the consequential results are that the combined ratio for the industry will get worse. I would think the combined ratio for the industry on the average in 2009 will be certainly well over 108 on an actual year basis, could well, could be 110.

You're getting more sour than me, I think…

No. That's an actual year basis. I think the reported combined ratio will be a lot better than that.

Certainly, certainly.

By the way, I think that's great because I think the end is going to come with difficult investment results and that combined ratio, I think that that's going to mean the cycle turns in the first quarter, maybe the second quarter of 2010. So, from my point of view, that's how -- I'm much more optimistic about the turn in the cycle than I was six months ago.

Okay, very good. The second question is, I'm not seeing too many headlines in the newspapers and I'm wondering if you have any comments about your tax status lobbying efforts in Washington, whether you think either of the preferable candidates will have any impact on offshoring premiums to avoid taxation?

Well, I think both presidential candidates would like to have people who don't vote pay taxes and these are companies that are offshore that they ought to pay taxes and if they do pay taxes, that would be good and if they vote here, then they certainly should pay taxes because they should have to pay for the freedoms they get just as they structured their lives offshore. So, if they complain that they do vote here then they should pay taxes for that reason. So I'm optimistic. I think we're making headway but as I said before, this is not something that's going to be won or lost on the public stage. It's going to be won or lost in Congress and we've had excellent responses from people. But as everyone had seen with getting things done in Congress, Congress is not anxious to get anything done at the moment, they're busy fighting with each other.

Okay. And finally, on your real estate problems, I just want to make a comment…

We have not a real estate problems.

I understand, I understand.

But the…

Conundrum, I guess we're seeing, why you can't realize these profits.

Well, we realized cash but not profits.

Right. Now, I'm fairly certain that you as well as most of your peers company have significant real estate gains that are not appreciated on your balance sheets. And I understand that you don't intend to tell people look there's obviously the balance sheet is understated but it tends to me, when companies are selling their real estate in the insurance category, it tends to me either they're trying to beef up their balance sheet in terms of appearances, they need cash or they're afraid real estate prices are going to come down in valuation. I'm trying to see your motivation for desiring to show those profits. I know you have them but why do you need to show them?

The difference is most of my property casualty competitors don't own whole buildings in their investment account. Their real estate is their operating real estate. We bought buildings as investments, just part of our portfolio. We were the developers. We bought them to sell. So, I don't think it's like most of our competitors. I don't think…

I understand the difference. And as you desire to sell right now, are you concerned about real estate pricing?

No. This has been going on for a year and a half. We refinanced this building with non-recourse at the peak of the market, we worked it. I mean on an economic basis it worked out fine. It's just that I'm trying to point out the absurd, I'm not complaining other than to say the absurdity of the accounting that if we had sold the business it would have reflected one way. We on an economic basis sold the business although not on a financial statement basis. What I'm really raising the issue is the inconsistency of the rules which make various transactions appear different ways on different company's financial statements. I'm talking less about the real estate than I am about the accounting rules.

I understand. When we're done with W.R. Berkley, then you can come and do our jobs and show us our accounting rules too.

Yeah. It's the most aggravating part of my job is fighting with the accountants.

I can imagine. Take care and thank you, Bill. Thank you.

And we will go next to Jay Cohen with Merrill Lynch.

Boy Jay, you've gotten older, your fingers are much slower than usual.

That is true actually. In the last, I guess, month or so we've had two Specialty insurance companies sell themselves at pretty high multiples, two times book, 2.8 times book. You guys are treading at 1.2 times book. It seems that the private market is putting a higher value on this Company, a much higher value than the public market. Any thought of finding some sort of partnership where the value of your Company can be recognized more quickly than in the public market?

We've talked to people. We've had discussions with people. And if somebody wanted to buy this Company, I'm sure they could find management who would run it without myself and my son. But we are not in any mode to work for anybody else and we have talked to people about doing things in partnership and we continue to buy back stock. So, if the environment and the pricing of our stock continues low enough, we'll be private because everybody will sell but me. We've bought back about 22% of the Company so far and I think we'll buy back basically 10% every six months. So, if we continue to do that, we're going to -- for those shareholders who remain, they'll be part of a elite group who get to own this Company at a much lower value than we think the intrinsic value. But we're certainly willing to talk to anybody about anything that creates shareholder value. I own right now in round numbers 19% of the Company and the only caveat is I'm not prepared to work for anybody else. But other than that, I'll do anything that helps create value for the shareholders at any point in time. So, if somebody out there wants to call me and have a discussion about it, it's okay with me.

All right. Thanks.

(Operator Instructions) We'll go next to [Scott Heleniak] with RBC Capital Markets.

Hi, good morning. Just two quick questions. First you cited excess workers' comp is an area where people were being pretty irresponsible. Can you think of-- is there any others that sort of stick out? I know you kind of went out of your way to mention that one. Any others that come to mind, especially longer tail?

I think that's really the most egregious. And I tell the reason it's the most egregious is because it's such a very long tail line and people ought to have more sense than that. You ought to be selective in who you do business with. But I think that's the most egregious that stands out above all else. I mean, there are people who are charging less than 50% of the appropriate rate. But the good news is that makes the long tail line a short tail line.

Okay. And so, how does that 50% compare to some of the other weaker categories? Is there anything even close?

No, not that I can offhand think about, no.

Okay.

I mean I think California standard workers' comp has come down by more than 50% rate, but it's come down because the benefits have come down [incompetently]. So I think that that's not a comparable thing. So, I think that that's probably the greatest. I think there are other areas that are starting to come down, but excess workers' comp is the place. And by and large most people are still being responsible and the financially secure dependent, dependable companies still are pricing appropriately. It's people who write with these new fly by nights or people who have no capital that are getting this theoretical bargain. Most excess workers' comp is still being done rationally.

The only other question I had was last conference call you talked about sort of mid-market carriers getting into ENS. It really started about a year or so ago, and then they started getting out in the first quarter. Are you seeing any of that at all where the loss trends are starting to build and they're starting to get out or is this more coming in force and it's not really…?

I think it's a mixture still. So, I think that some are getting in, some are not. I think that, I would say that there is not the overall disregard of pricing that you saw the last soft market where people said how would it, whatever price it takes. I think there is in most lines of business there may be a disconnect as to what it takes to write at a profitable level but people aren't just saying whatever it takes to write the business. The most aggressive companies in most lines are only being modestly irrational.

But is it in your forecast that that will happen in 2009?

I think that what's going to happen in 2009 is the cumulative effect of a 5% and a 5% rate decline and inflation. You get to the third year where that's the case and you have still a modest decline, just starts to have a huge effect. You can't hide from that. So, the reality of loss costs starts to hit. So, when you're in the ENS business with the duration of three, four, five years, six years, you start to see those losses, so you no longer can hide from the reality of your inadequate pricing.

Okay, thanks.

And we'll go next to Mike Grasher with Piper Jaffray.

Hi, good morning, gentlemen. Bill just trying to tie your comments, your verbal comments with those in your press release in terms of your own expectations on returns over the course of the next 18 months. Do you feel like the balance sheet and the reserve position is strong enough that you can maintain at least the 15% including your outlook for the marketplace?

Yeah, at this point I still feel that way and there's nothing that has changed about that. But I think that you -- the farther you get into a difficult cycle, the more worry you have that greater levels of irrationality are there. I still am pretty confident we'll be able to deliver that 15% plus returns.

And does that make you apprehensive about looking at other properties that maybe out there in the market looking more attractive? And I guess, I'm speaking more to the public entities that we see trading at discounts to book, maybe a young balance sheet, smaller company that maybe is a tuck-in for you.

No. We're always looking at other opportunities. I mean, part of the problem, and we're trying to think what do we want to do and then as part of the problem is, we don't want to get something that isn't complimentary to what we have. So lots of the things we see today aren't particularly complimentary to what we have. We're thinking of, in fact, maybe making minority investments in some of these things that we see out there. But at the moment, no, we think there are great opportunities and we're looking at them on an everyday basis.

Okay. And then, final question would be just in terms of the elections coming up, the political landscape. Anything have you concerned or not?

I think that, I think that we actually have maybe lots to be concerned about. I think it's less about the candidates than it is about the state of our economy and where we are and the uncertainty about that. But I do think it just means that not much is going to get resolved to give people confidence until after the election. So, I think, we're going to continue being an uncertainty I think until after the election and I think that '09 will end up being a year of transition and a year where our industry certainly will be painful in its suffering.

Thank you.

And we have a follow-up question, Marc Serafin with Citadel Investment Group.

Thanks. Quick one on the International. How much of the growth was FX?

Hardly any.

And then, when you guys look at your cost base, I mean, what component -- how should we think about fixed versus variable components?

How do you mean?

Acquisition costs versus fixed salary and benefit type expenses.

We have a 30 point expense ratio. It's roughly $320 million a quarter and I think you could look at 20 points of that as being variable commissions and premium taxes and…

I think it's probably, it's just under $200 million is probably variable and probably $110 million, $120 million is fixed.

Thank you.

Having no further questions, I'd like to turn the conference back over to Mr. William Berkley for any additional or closing comments.

Okay. Well, I thank you all for being on the call. As I say, we think the end gets closer as the pain gets greater and we think the pain is going to get much more substantial as we get towards the end of the year. So, we're a lot more optimistic and we have done a lot of things to invest so we're well positioned, so our percentage increases in growth in the next upswing and the fact that it'll be at least as great if not greater than it was in the last. Thank you very much.

This does conclude today's conference. Thank you for your participation. You may now disconnect.