Everest Group Ltd (EG) 2002 Q2 法說會逐字稿

Good day, everyone. Welcome

to 2002 second quarter earnings release call of Everest

Reinsurance. Today's conference is being recorded.

At this time, for opening remarks, I would like

to turn to James Foster, senior vice president of

investor relations. Go ahead, sir.

Good morning and welcome

to the call. With me are Joe Taranto, our CEO

and Steve Limauro our CFO. Before I turn over

to Steve for review of the numbers I will note our

SEC filings include extensive disclosures to forward-loo

king statements. I note statements made during today's

call which are forward-looking in nature, as to expectations

and the like are subject to various risks. Actual

results could differ materially from current predictions

or expectations. Our SEC filings have a full list

of risks to consider with such statements. Turn over

to Steve.

Thanks and good

morning. I will highlight results and Joe and I

will take questions. We are pleased to report our

strong quarter of earnings with operating (inaudible)

per diluted share, up 27% over the 54.9 million or

$1.17 per share in the second quarter of twoth one.

On a dollar basis, these operating earnings are highest

ever. Net income, including realized capital gains

and losses was 53.4 million or $1.02 per diluted share,

down from 57.3 million in the second quarter of 2001

reflecting Worldcom writedowns. The Worldcom impact

was 4.9 on operating earnings and (inaudible) on

net income. On a year to date basis, operating earnings

were 135.7 million or $2.68 per diluted share, up

25.3% from the 108.3 million ore $2.30 cents earned

in 2001. Net income at 114.5 million was up 6.6%

from 2001. Overall, these are excellent results and

they reflect continued execution of our business plan

in a strong market which continues to harden. It

remains variability by segment, business class and

market. Underwriting is key. All of our operations

are seeing more and better opportunities than in many

years.

Our focus remains on profitability over volume, as

emphasized in growth areas where pricing is strongest

and most improved. As a result, worldwide written

premiums on year to date basis are up 35.7% to 1.226

billion. Worldwide reinsurance operations are up

to 806 million, while the insurance operationss

are up 67.0% to 420 million. Our U.S. reinsurance

operations are up 17.9% with increase reflecting strong

pricing across the property and casualty spectrum.

Our U.S. specialty reinsurance (inaudible) continued

growth in medical loss for insurance business, as well

as improving markets from marine, aviation and maturity.

International reinsurance operations are up 33.9%,

reflecting improving conditions in most markets in

particular for Latin America, London and Canadian

operations. Our Bermuda operation produced 13.6

million of premium, which we noted before will vary

over time depending upon the hit ratio for larger deals.

Still, we are pleased with increase in deal flow in

this operation and expect solid growth moving through

the second half. The 67% growth on insurance operations

reflects continued strong growth in our California

workers compensation writings with growing contribution

from circle lines business and workers compensation

business outside of California. It is important

to avoid putting emphasis on one quarter and our view

tends to focus on the full year, which we expect to

be up 35% on gross written premium basis t. is important

to note changes in our retrosessional program, driven

by market improvements, have year to date, net written

premium up 44.7%, a trend that should persist through

the year. Our combined ratio for the quarter was

97.6%, compared to 102.7% for the second quarter

of 2001, impacted by 13.9 million of catastrophe losses.

Excluding catastrophe losses negligible in 2002,

improved from 99.1 in 2001 to 97.8 in 2002.

Our combined ratio for the first half of 2002 is 98.4%,

compared to 102.8% in the first half of 2001, which

again, was impacted more by catastrophe losses.

The improvement excluding catastrophe losses reflects

improving rates, terms and continues we are seeing

as we get further into the 2002 underwriting year.

Turning to nonproduction portion of the financials

I want to comment first on Worldcom losses. 4.9

operating income impact arose from credit default derivative

in 2000. We wrote three such transactions in 2000

before discontinuing this business line and with the

Worldcom loss our exposure under these transaction

system extinguished. The $24 million realized

capital loss on Worldcom reflects impairment of the

$33 million of securities we owned across

our operations. These securities were purchased by

outside investment manager when they were solid investment

grade. Their and our view up until the day of the

Worldcom announcement was these securities should

be money good. Pretax investment income at 90.8 million

is up 4.3% from 2001 87.1 million, reflecting impact

of lower interest rate environment partially offset

by strengthening cash flow from operations and the

additional capital raised in the first quarter. After

tax investment income was 75.9 million, up 8.2% from

2001, reflecting greater asset growth in our Bermuda

operations. The embedded pretax and after-tax yields

of the quarter end portfolio are 5.8% and 4.9%, down

from 6% even and 5% even at December of 2001. Basically

reflecting the lower interest rate environment.

The quarter's realized capital losses are 34.9 million

pretax and 21.3 million after-tax reflect the Worldcom

write down, as well as 21.2 million of after-tax impairments

on other securities, partially offset by net realized

after tax gains arising from various trading programs.

At the end of the day, unrealized depreciation recorded

equity during the quarter was double the reported realized

loss. Cash from operations for the quarter was 169.6

million, compared to 80.3 million for the second quarter

of 2001.

Cash from operations for the first half was 275.1

million, almost double the 143.8 million for the first

half of 2001. Cash invested assets stand at 6.4 million,

up 635 million or 11% f December of 2001. With

the change mainly reflecting 346 million dollar secondary

offering together with the 275 million dollars of cash

flow from operations. Total asset standard 8.6 billion

(inaudible) on the investment portfolio of the Bermuda

entities, Everest regroup limited. Shareholders

equity at 2.164 billion (inaudible) share is up from

1.72 billion and 37 dollars and 19 cents per share

at December of 2001. Our annualized year to date

roe stands at 14.9 percent, up from seven.3% for the

year ended December 31, 2001.

No shares were repurchased during the quarter, leaving

2.2 million shares under the existing authorization.

I will note after the close of the quarter and before

the black-out period, we did purchase 100,000 shares

at average price of 5252. We believe our shares

represent compelling value. Going forward, we will

continue to balance this carefully against the capital

needs of our business. As respects capital, I want

to go further and comment we have no immediate need

for our plans to issue capital. We will, however,

soon replace the existing common equity shelf registration

statement with expanding shelf registration statement

giving us more flexibility to consider financing issues.

We had an excellent first half, reenforcing expectations

reflecting business, markets and opportunities.

We had unusual loss activity and continue to track

with the $five.50 to $6 earnings range we have commented

upon earlier. Beyond that, we believe the strong

markets we see should persist through 2003. As a

result, we expect 2003 operating earnings in the range

of $6.6 to 7.20, again, absent unusual loss activity.

Overall, we are pleased with the way 2002 is shaping

up and in particular the opportunity it gives us to

fully use our capabilities and infrastructure. Frankly

the fundamentals underlining our franchise are compelling

and fixed upon disciplined execution of our strategies. 00:17:45 Joe and I will take questions you may have.

Thank you. Your question

and answer session will be conducted electronically.

To ask a question press the * key, followed by digit

1 on your touchtone phone. We will proceed in the

order you signal us and take as many questions as time

permits. * 1 to ask a question. Pause a moment

to assemble the roster.

We will take the first question from Tom (inaudible)

of Goldman Sachs.

Good morning, Joe and Steve.

Two part question. Number one, Joe, yesterday

Safeco in their occurrence call indicated it was deemphasizing

or continuing to deemphasize California workers'

comp because of problems in the marketplace. I guess

if you could, review strategically what you are doing

differently or where you see opportunities differently

than Safeco. The second part of the question is

asbestos obviously has been a topic in the marketplace.

Have you seen any changes in terms of your asbestos

exposure need for reserves or any sort of developments

that would impact positively or negatively?

Good morning, Tom.

Let me start with the California workers comp.

I don't know where Safeco is coming from. With

regard to us this is a market we entered in late 2000.

At that point, there were a lot of companies that

were impaired because of writing at poor rates in '98

and '99. The market was starting to change and we

were able to go in and charge rates higher than what

was previously charged. Since then, 2001 and 2002,

we have only continued to raise rates. I see the

market today, as perhaps the best it has been in many

years and maybe the best it has ever been. We implemented

more rate increases in January and put through another

rate increase for this July.

The state fund and all the other carriers out there

have put through rate increases, as well. And most

of the companies are beginning to book better numbers,

certainly in 2001 and then again, in 2002. We have

been in the market a couple of years and continue to

look at the experience, the data on a monthly basis.

It is tracking very well with our expectation. We

are pleased about the book we had in 2001. We expect

the book in 2002 to be even better.

So, from my point of view, the California workers

comp market has never been better. We tend to be

in the low hazards groups, small premium items, item

that is we tend to not to compete with the bigger and

major carriers. But, both with regard to the experience

and the environment, we are pleased with where the

current market is at.

Asbestos, I will ask Steve to comment on.

On the asbestos

exposures, ours and the industries have gotten a lot

of attention recently. We think a good bit of the

analysis has been flawed. General rules of thumb,

market share analysis, equity exposure, they really

just don't cut it given settlement, management history

reserving approaches, exposures are unique to each

company.

You know, we did take a opportunity this quarter to

strengthen our gross asbestos reserves for nonproducts

expenses and settlements by $20 million because of

adjustments in Reinsurance program that result indeed

us taking $4 million of net exposure and another $4

million being sent under the Prupack(phonetic)

cover. We are reserved on asbestos and continue to

monitor it carefully. Our exposure, both insurance

and Reinsurance were from a limited period in the

'70s and '80s and excess in nature. A lot of aggregate

limits. They are managed. Look at the way they

break down between the Reinsurance portfolio and Insurance

portfolio. Reinsurance was covered by the IPO

stock loss. As Joe commented on, never was anybody

more motivated in the history of Reinsurance to get

the reserves right and up

If you look at our insurance exposures they mainly

came from the acquisition of Gibralter, which was

completed in 2000, after significant strengthening

had been done by the seller on that business. Frankly,

we continue to have Reinsurance protection. So,

we are very comfortable with the asbestos exposure

we have. There is a lot of activity out there with

Jim Foster in particular probably the one closest

to the developments, but I think it is safe to say

overall, we haven't seen anything that unsettles us.

Jim, do you want to add to that?

couple of comments on the general environment. We

do not think there have been material changes in the

environment. The issues that are posed in these various

bankruptcies are the same as they have been for the

past couple of years. Yes, these bankruptcies mature,

there may be announcements of settlement. I don't

think anybody outside the context of the bankruptcy

can make judgment of how big they are, including us.

The fact ppg announced something on the order of $2.7

billion doesn't imply anything for the other cases.

Something we watch carefully, but fundamentally have

not seen anything new out of the woodwork.

Okay. Terrific. Thank you.

And we will take the next

question from Hugh Warrens of J.P. Morgan.

Good morning. Couple of questions

I would like to hit on first. I think we knot the

workers comp and asbestos issues out of the way. Can

you kind of walk us through what your - you said a

$20 million re-asbestos reserve you added during the

quarter. What did your year results look like in

the quarter versus calendar?

The accident

year results for '97 to '99 saw approximately 13 or

14 million dollars of development. Beyond that, all

the accident years are tracking pretty well. Enough

said.

Okay. The other piece is

on the - can you walk us through - it seems like

a fine balancing act between capital from deploying

it at the rates on the roe basis, versus repurchase.

Can you give us color on that, Joe, going forward?

It is not a simple one.

We weren't planning on a substantial amount of buyback.

Of course, that is when the stock was at a very different

price. Of course, the reason we weren't planning

on it and why we raised capital was to capitalize on

the current, good market conditions, which we are doing

with net premium up 45%. We do have a little bit

of juggling to do in the sense we certainly are more

keen to buyback in a more significant way.

At the same time, we do want to capitalize on conditions

and make sure all the rating agencies are happy with

our financials, as they have been. We want to keep

it that way. Outside of that, I don't think I can

give you more of an answer. It will be kind of week-to-we

ek, months-to-month situation. It is good news-good

news, as far as I am concerned. We have the capital

to buyback and we have a good market and wind to our

back we want to capitalize on, as well. So, the mix

is to be determined. Again, I look at it as good

news.

If you look at operating ratios,

one to one, still. Where can you comfortably write

that and keep rating agencies happy in your mind?

We are actually over

one to one for surplus, which is what the rating agencies

look at. It is not just a matter of premium to surplus,

there are a lot of other factors that need to be discussed.

If you have seen, we have built our ratings up recently

with S and P we went through positive outlook. We

are hopeful with continuing to build that rating up,

as well as the others, higher ratings count in terms

of more business and better quality business. We

are selling security. There is no simple rule of

thumb the rating agency use anymore, not just premium

to surplus.

We will be looking

at kind of refining what we fully expect for this year

and what we expect for next year and looking very hard

at how that plays through models of our exposure-based

capital requirements, if you will. I think we have

commented that we will take the existing common equity

only shelf and replace with universal shelf giving

us more flexibility and adds the capability to depth.

We will look at capital structure in terms of -

there are products out there where you get rating agency

credit for debt, trust preferred is a particular possibility

there.

I think frankly, we want to take a hard look day-to-day

and in terms of planning for the future to make sure

that we have the capital we need to take advantage

of the opportunities. Having said that, when you

look at where the spot is trading, it is in our mind,

represents compelling value. It is going to be a

juggling act.

One last question on - can

you comment on the world trade center and how that

is developing from your loss? It is not a big loss

for you, but a lot of pressure in the industry and

changes going around with the estimate with fairly

large increase taking. Can you comment on that from

Everest Re Group standpoint?

We are comfortable with

the reserves set aside. Our estimates have not changed

from the very first estimate we put out. It may be

a little bit easier for us to get our arms around it

than other carriers. Most of our exposure was property

with fixed limits. But, we continue to be comfortable

with the reserves we put up for the world trade center.

No change this is quarter.

Great. Thank you.

We will move on to Mike

Lewis, of UBS Warburg.

Good morning. One clarification

question and another question. You (inaudible)

on sequential and year over year basis. I am uncertain

why that took place. Am I right with that statement?

You are right, Mike.

That kind of relates back to on the treaty casualty

business. We had a couple of large accounts booked

last year and really didn't have that this year. I

think we expect going forward that you really won't

see that. You will see growth both in the treaty

casualty and in the U.S. reinsurance component.

Steve gets into don't look at one quarter all that

much. Sometimes it can be lumpy in one regard or

another.

But, for the year and on going forward basis, we expect

to see meaningful growth in the property and casualty

U.S. Reinsurance and worldwide.

Okay. My broader-based question

is you made a statement when you started out, on balance

rates are hardening and varies by product to da, to

da. Maybe you can give us more detail. You are

a casualty reinsurance company. Give us an idea what

you are seeing in July renewals, how rates are going,

how you are shifting your mix of business, where you

are seeing softening. In other words, I think it

is important with stocks depressed as they are, to

see your feel about how this cycle plays out and what

you are seeing in July renewals and where the surprises

were and flavor we haven't gotten so far?

I will give you flavor.

Generally speaking, I remain quite pleased as to

where the market is at and how I see it playing out

on a going-forward basis. Certainly we do a lot of

casualty business, but are marine, surety, property,

a number of other lines of business. We are truly

a multi-line company. But, at the insurance level,

I see rates continuing to go up in most areas. Might

be topping out in property areas. It had gotten high

to begin with. Casualty insurance rates continue

to climb both in specialty (inaudible). Not just

in California, but other parts of the U.S., as well.

At the reinsurance level, again, I see casualty

reinsurance rates going up, again, in July, which

gives you that compounding effect. Should reinsurance

rates might be flattening out, but at good levels for

July. July business, we were very pleased with.

Virtually and across the board fashion, both property,

casualty, domestic and international, we really had

a good showing of business. We felt we had a good

hit ratio. We thought rates continued to climb.

We thought our ratings and our franchise continued

to serve us very, very well. So, we kind of sensed

for the second part of 2002 and my own belief is into

2003, it will continue to overall, be a good insurance

and reinsurance market. That is one of the reasons

that we feel good about the earnings for this year

and the earnings for next year.

Excellent. Thank

you so much.

Moving to John Paul Newsome

of Lehman Brothers.

Thanks. Just a quick couple

of questions. First, I would like your response

to looking at the numbers, I was noticing that year

over year basis, earnings per share didn't grow that

much ex-catastrophe losses. You know, what does that

say, if anything, about what is happening with your

earnings going on a year-over-year basis? It appears

to be due to good weather this quarter and maybe bad

weather last quarter?

Let me start

on that one. Certainly we have seen solid improvement

in rates, terms and conditions as we get into the latter

part of 2001 and into 2002. Practical matter is we

continue to see mainly 2001 accounts in the first two

quarters of the year. Going through the year and

we have more of a crack at the premium earnings, if

you will, for 2002, we would continue to expect to

see improving loss ratios driven by market changes.

You know, having said that, you know, this quarter

we were affected by Worldcom. We were affected by

foreign exchange, where the dollar is beginning to

weaken and that is the reversal of the pattern in place

for a significant amount of time. That probably cost

us two million in change on after-tax basis.

in addition, we saw tick up in tax rate, which basically

is reflecting the fact that the U.S. operations profitability

is growing faster relatively faster than the profitability

growth in our Bermuda operation. That is a temporary

phenomenon. There are structural things we have done

over time that will change that around as we get into

the next 12 to 18 months. But, it certainly cost

us 2 and a half million dollars this quarter. We

did, as I mentioned earlier, see reserve strengthening

on select groups. They were generally speaking, you

know, kind of 3, 4, 5 million in two or three areas

kind of numbers. We continue to want to very much

maintain the balance sheet strength that has been our

trademark over time.

So, put all of that together and the fact there we

are six months into 2002. We tend to be conservative.

Our writing business at levels that are much improved,

having said that, we want to make sure we fully understand

and get the reserves right so that in the future there

isn't the kind of development we have seen so many

other folks book in the last couple of quarters.

Excellent. That is helpful.

Second question is can you expand on the credit derivative

exposure and you know, just explain one more time

if we truly eliminated what you had in that book -

still derivative and transactions outstanding, you

could give us a sense of what the exposure is?

Sure. We wrote

(inaudible) credit default derivative transactions.

We were using an approach that developed from underwriting

methodologies. They were providing low level protection

to baskets and baskets might include 70 or 80 companies

at 10 or 15 million dollars a name. The structure

of the basket would take the first 15 or 20 million

of exposure and then challenge out the exposure. The

equity and lower mesanine (phonetic). We took in

23 million dollars worth of premium for total exposure

of (inaudible) .8 million. Significant amount of

revenue associated, but certainly the exposure has

caught up to us and bitten us. At this point in time,

with the reserving for the credit default event of

Worldcom, we have just under $2 million of exposure

left on an after-tax basis from all of those credit

default derivatives.

We booked roundly 47 and a half million dollars of

the total 49.8 million dollar hit that we could take

under the derivatives. Again, we got a premium of

$23 million, partly in 2000 and then, you know, extending

into 2001 and earlier this year. Frankly this has

been a credit market scenario that is a nightmare.

Who would have expected Ron Goldman and Worldcom

18 months ago to go into the tank? It is not just

those companies, a number of others, some related to

the asbestos side. We made certain we have been careful

on evaluations there. The practical matter is the

credit default book of business is bad.

So, if I understand what you

are saying is that worse comes to worse, you could

have another $2 million worth of losses from the credit

derivative business? And then you are done?

That is correct.

Great. Thank you very much.

Susan (inaudible) of Wachovia

Securities has the next question.

Good morning. Most of my

questions have been answered, But, Steve, you eluded

to faulty analysis in regard to how your asbestos claims

were looked upon versus shareholders equity, I am

gathering and compared to other insurers. If you could,

accounted could you take us through why it has been

beneficial to add to those reserves and why it doesn't

necessarily mean you have additional exposure and you

could be in a stronger position? Then, second, Joe,

if you could comment on your competitive environment.

We have seen in the stock market, three deals almost

pulled. One was Reinsurance deal. What do you

think this slight to quality will continue and whether

the stronger players will be getting increasing shares

of business versus some of the others.

Let me start

with the asbestos. As we have seen the analysis that

have come out, none get to the company's specific kinds

of factor that is make the fundamental difference on

the reserve. You know, we are sitting here with asbestos

reserves on the Reinsurance side that we have lived

with for many years and watched very carefully and

done so in the context of an IPO stock loss, which

paid us a dollar of cash for every dollar of reserves

we put up. You know, on the insurance side, we purchased

Gibralter, now Mount McKinley, from the Prudential

in 2000. Over the course of the two years or so prior

to that, they strengthened reserves by $200 million

principally on the asbestos side and as a result of

ongoing negotiations we were having with them.

We also have a Reinsurance protection which still

has $127 million net of retention to go on it. As

a practical matter, on a quarterly basis, we are looking

at the individual companies, claimants, the exposures

themselves, trying to wrestle with whether or not any

changes are require indeed our viewing, but taking

a long term view on a detailed basis. Jim, perhaps

could comment more on that. The practical matter

is we are now looking at non-products and that is an

area that we feel we may have some expenses. Ultimately,

modest settlements, but we certainly want to make sure

we stay on top of it.

Let me add to the comment

on faulty study. The study basically translated as

far as I translated, the more reserves you have up,

the worse off you are. If you have no reserves, you

are in good shape. We have a history that allows

us to put substantial reserves up. Any study that

reserves (inaudible) worse off you are, doesn't make

much sense to me.

Moving on to the slight to quality issue. Susan,

there is no question that the stronger players are

really getting their due in terms of the credit quality

meaning something, something today more than it has

ever meant. So, if you are a plus with substantial

surplus, you just move to the top of the food chain.

I do believe the new companies that started, even

though a many started with a billion in capital and

had an A minus rating, are still finding without a

client base or A plus rating or without as much capital

as others have, some have found they have not done

as well as they would like to do.

You know, that is part of the reason that people are

starting to pull on some of the annuities and also

a function of stock market prices, as well. We are

pleased to see that more than ever top security is

really paying off and you can get on deals that others

won't get on. You can get bigger shares. Buyers

will favor higher ratings over lower ratings. More

so today than ever.

Thanks, Joe. And Steve.

We have a question from John

(inaudible) of Peterson Capital.

I just had one question. Could

you (inaudible) what was the unrealized investment

in gain, which I think you said was double the Worldcom

bond losses?

The unrealized

investment gain was 39 billion dollars on after-tax

basis, driving the change in other comprehensive income.

Thank you very much. I mean,

what would you say about the (inaudible) failure

position in response to the ongoing deterioration in

credit quality in the markets generally? What would

you say now would be - how compared now would you

say you are for as it were more fallen (inaudible)

problems. I am wondering whether or not the markets

unwillingness to value your stock at more than current

levels reflects concern with asset quality, rather

than (inaudible)?

John, our investment

portfolio is really quite conservative. You know

on a composite basis, our fixed income portfolio is

a double A-3. We have between 5 and 6% at a double

D and below area. Most of that as best we placed

over the years, to try in yield. We have another

just under 20% in the triple D territory. We have

market-to market, everything recognizing temporary

impairment, quite significantly in particular in our

telecom portfolio. We use a professional outside

manager and monitor the outside manager's actions very

carefully. We are a yield-oriented investor, which

means we are most focused on whether or not a security

is money good, as opposed to what it is rating is at

a point.

Certainly, we are looking to hold solid credit. Having

said that, over the course of this year so far, we

have taken pre-tax impairments of about 62 million

dollars, most of that was in the telecom portfolio,

which makes up about 4.3% of our overall portfolio.

We have just completed comprehensive review of what

is left there and frankly, we have the valuations right

at the end of the quarter. Again, Worldcom is in

a difficult situation when you have a company that

goes down that fast and that hard. But, as practical

matter, our review suggests to us that we have the

right mechanism necessary place with respect to the

portfolio and the portfolio is solid.

There is a tendency in today's

markets, given the magnitude of the declines, for investors

to fear (inaudible) equals (inaudible) and that

all triple B credits equal fallen angels. Could

you comment?

Well, I think

we have always looked at our portfolio as wanting to

reflect solid credits overall, but wanting to be sensitive

to yield. Frankly, we don't invest in real estate,

either directly or in the form of mortgages. We don't

have a private placement department or buy private

debt securities. We haven't been a big player in

common stock, which I am sure is going to hurt a number

of players. It has in the past quarter and will this

quarter. As a practical matter, we have taken some

limited and managed risks with respect to credits over

the years. It has worked very well for us. Having

said that, certainly I am not thrilled with the Worldcom

position. I am not thrilled with telecom in general.

But, we have been through the portfolio and are comfortable

with the valuations.

You know, I can't speak to what else is out there.

I hope not very much in the sense the credit markets

have been hurt pretty significantly over the past couple

of years. We have come through that very well. Our

yield still looks solid. Business, as usual.

Thanks very much.

Let me add to that,

John. One reason there may have been asset quality

issues, we were one of the first to go out there with

Worldcom. Then, we saw much later, some come out

with something. Having said that, as unusual a quarter

as this is or we hope with Worldcom and Quest, it

is interesting to note our bond portfolio, including

those still went up.

It absolutely is.

I think that says something.

Thank you very much.

We have a question from Michael

Smith of Bear Stearns.

The large casualty treaties

written last year you refer to, were they one-off deals

or nonrenewed for one reason or another?

They weren't particularly.

One was a long-standing deal where with reinsurance

rates and insurance rates going up, the buyer decided

to no longer purchase reinsurance. The other deal

was more of a one-off type of deal in the sense it

was a specific market player at that point in time.

We didn't really think we would renew. We ended

up not renewing.

Mike, there

were other things going on in the casualty portfolio.

I mean, basically we were moving towards some areas

and away from others. You know, part of the issue

underlying what you are seeing this year is dramatic

growth that the casualty saw last year. For the full

last year, full year 2001, casualty was up over 50%.

So, as a practical matter, there is some will fall

being driven by the strong year last year. Even contemplating

this turnover in the portfolio.

July looked quite strong

and expect to see stronger numbers on a going forward

basis. I wouldn't overreact to one quarter's worth

of numbers, Mike.

Appreciate that. As a follow-up,

Steve, the prior year numbers seem to have changed

a small amount with written premium, losses incurred

and other income. What were the accounting changes?

You know, if

you look at the last page of the analyst supplement,

we made minor adjustments with respect to how we were

classifying some derivative business we did in Bermuda

last year, in the sense at one point in time, we were

actually calling that premium because that was the

way it was being booked in Bermuda. We concluded

it should be coming through that new derivative line

we had put on the income statement.

Having said that, I will make very clear, we have

gone only a few other transactions on the derivative

side, none involving credit default. Basically what

we do have in the portfolio is long-term equity index

transaction that is we think are well valued and will

play out over a long period of time and that certainly

we are fairly heavy up front earners for us.

Okay. Perfect. Thank you

very much.

Next question will come from

Denise Ake of Morgan Stanley.

Good morning. Most of my

questions have been answered. Can you hear me?

Just a couple of accounting issues or some - to get

more information on the stop loss coverage. There

was development in prior years. Have you used stock

loss cover for the prior quarters?

We really had

not. I mean basically the development we saw during

the quarter was after the IPO stop loss and not

on the business necessarily subject to the Mount McKinley.

We actually had net retentions on that development.

We did use the Mount McKinley stop loss to the

tune of $4 million, leaving 127 million net of retention

on that cover .

Your aggregate stop cover for

2000 was not used in the quarter?

I think we actually

had a minor change on one of the catastrophe events

for 2001 that might have moved it by under a million

dollars on the 2001 accident year. Essentially no

change.

Okay. The other question

is on earned premiums it seems the growth in earned

premiums was slower than in the first quarter. Is

currency contributing to that or other factors?

No, the biggest

factor is the primary business we write has a slower

earnings pattern in general than the reinsurance book,

in particular on the reinsurance side, we are also

seeing a little bit of a change in the earnings pattern

with respect to facultative business, which even over

in above the primary business is probably our fastest

growing area. That business also typically is written

on a basis that generates a slower earnings pattern

than does treaty reinsurance. So, those are both

phenomenon that are temporarily related to growth and

we will change going forward.

What specifically about the

contract is different? Longer terms or what causes

the pattern to be different?

No, it is basically

just different in the way that we earn with respect

to the treaty reinsurance versus the primary business.

Essentially the primary business is 12-month earnings

qualities. The facultative is 12-month earning policies.

On the treaty side on proportional accounts, we take

it in quarterly and earn over the quarter. So, you

get a change in the mix of the elements. You can

get a swing in the way that the earnings pattern accumulates.

Okay. Thank you very much.

That is helpful.

We will take our next question

from Art Winston of Pilot Advisors.

One comment. I want to thank

you for buying back stock, particularly with your prediction

it looked like book value 18 months from now would

be $51 or $52. I am glad you are considering that

and will perhaps continue. My question is, can you

make any generalization as to how the claims in the

cash out is going for the workmens' compensation policies

you wrote in 2000 and 2001 in relation to what you

might have hypothesized when you wrote these policies?

The cash or overall

results?

Claims statements being sent

to policyholders?

There is no particular

surprises for us on that front. I think the way we

thought claims would pay out, they are pretty much

paying out.

We are actually

not quite realtime, but almost realtime in terms of

our ability to analyze the claim experience both incurred

and paids arising from workers' comp business and the

practical matter is that continues to track with our

expectations. We continue to book on what we believe

is prudently conservative basis and there is no indication

that there are issues there.

Thank you very much.

Moving to Mark (inaudible)

of Salomon Smith Barney.

Yes. Good morning. Couple

of questions if I might. One, following up Joe

on your comments about the newer facilities maybe not

doing as well as they would have liked. Can you give

us more color on the competitive pressures you saw

in July? And specifically, maybe interested in

whether or not the newer players have been more aggressive?

Then, second, given that insurance book was responsible

for such a big piece of growth in the quarter, can

you give us more color on how that breaks out between

California workers comp versus non-California workers

comp and the ens business and what are you doing in

ENS?

Sure. On the newer

facilities, some have been disappointed and some have

done a better job than others. That will always be

the case. Some have gotten a bit more aggressive

on July business. But, once again, I think those

of us that have the ratings, the people, the infrastructure,

the clients and a lot of other good things going for

us are in a better position. So, I didn't see that

change the market particularly in July. I noted

overall, we still are pleased with July business.

Steve, on the insurance side do you have something?

Sure. On the

insurance side, California Comp continues to be the

driver up over 100% year over year. We are getting,

though, contributions on the non-California comp.

They are probably up low 20% kind of territory.

Then, on the non-compensation kind of business, on

the direct brokerage front, we are seeing significant

increases or direct brokerage in excess surplus lines

are up over 200% into the 60 or 60 million dollar

territory. Principally medical business -

Medical malpractice

the biggest component of the ens. We are starting

to see general liability business, as well. That

will add to the mix going forward.

That helps. Thank you.

Steven Gabia, with Drifus.

Thank you. You addressed

my question. Thank you.

That concludes the question-and-answer

session I will turn back to you for further or

closing remarks.

Once again, everyone,

we thank you for joining us. We are here if you have

follow-up questions and have a good day everyone.

Thanks.

That concludes today's conference. 01:00:40 Thank you for today's participation.