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.