Everest Group Ltd (EG) 2002 Q4 法說會逐字稿

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  • Operator

  • Good day, everyone.

  • Welcome to the fourth quarter 2002 earnings release call after everestEverest reinsurance. today's conference is being recorded.

  • At this time, for opening remarks and introductions, I would like to turn the call over to Mr. James Foster, senior vice president of investor relations.

  • Please go ahead, sir

  • James Foster - SVP of IR

  • Thank you.

  • Good morning, everyone.

  • Welcome to the call.

  • With me this morning are Tom Gallagher, the company president and Steve Limauro, CFO.

  • Joe Taranto's traveling today and would not be able to join us.

  • Before I turn over the call to Steve for review of the numbers and Tom for some comments on the markets, I will preface our comments by noting that our SEC filings include extensive disclosures with respect to forward looking statements.

  • In that regard I know statements made for today's call which are forward looking in nature such as statements about projections, estimates, expectations, and the like are subject to various risks.

  • As you know, actual results could differ materially from current projections or expectations. our SEC filings have a full listing of the risks that investors should consider in connection with such statements.

  • I will turn the call over to Steve Limauro.

  • Steve Limauro - EVP and CFO

  • Thanks, Jim good morning.

  • I will briefly highlight our financial results and Tom will briefly summarize an operations perspective.

  • Tom and I will take questions you may have.

  • We hare pleased to report another quarter of solid earnings, operating earnings of $60.6m approximately $1.17 per diluted share up from $45.3m or 96 cent per diluted share for the fourth quarter of 2001.

  • Net income which includes realized capital gains and losses was $55.6 m or $1.08 per diluted share compared to $35.4m or 75 cents per share for the fourth quarter of 2001.

  • Operating earnings year to date was $262.8m or $5.14 per diluted share, up

  • from $115.8m or $2.46 per diluted share earned in 2001, an increase of 127%.

  • Net income at $231.3m or $4.52 per diluted share is up 134% from the $99m or $2.10 per diluted share for 2001.

  • These are strong results. the dollars of operating earnings best ever for a year and third best for a quarter and reflect exceptionally strong current marketplace together with adjustments which position us for even better results in 2003.

  • Capitalizing on extraordinary market opportunities we grew our full year wired grows written premiums by 51.8% to $2.847b. full year worldwide premiums up 69.1% to 2.638b. worldwide gross written premiums from our reinsurance operations are up 47.6% to $2.025b while our insurance operations up 63.5% to $821m.

  • Please note our focus on full year gross written premium which as we've regularly pointed out smoothes over much every time variability which act impacts any and particularly this quarter's result.

  • Highlighting gross written premium for our segments our US reinsurance operations up 46.5% with the increase reflecting strong demand and pricing across the property and casualty spectrum on both facultative and treaty basis.

  • We are particularly encouraged by the recent improvements in casualty losses.

  • Our US specialty operations are up 18% reflecting improving markets for marine, aviation, and surety(ph) as well as slowing growth in our medical stock loss business. international reinsurance operations are up 67.6% reflecting improved conditions in virtually all markets but particularly for Latin America and London and Canadian operations.

  • Our Bermuda operation is up 304% to $101m of premium in part reflecting the roll out of more tradition product capabilities in that operation. 63.5% growth in your insurance operation reflects continued but moderating growth in California workers compensation writings and growing contribution from our excess and circle volumes business.

  • Our combined ratio for the quarter was 101.6 compared to 108.7 for the fourth quarter of 2001.

  • This year's fourth quarter reflects the emergence of very favorable core underwriting year result which has been impacted this quarter.

  • First, we recorded an asbestos and environmental so-called A&E losses of $65m gross and $16m net of reinsurance mainly as a result of the Mount McKinley coverage provided by true fact.

  • The increase was entirely asbestos then.

  • In fact, the asbestos increase was higher but partially off set by favorable reserve adjustments on environmental exposure.

  • Basically, industry and company's specific developments over the last few months ranged in the context of continued enhancement our internal and analytical processes indicated the need for these adjustments.

  • As we have regularly noted, we closely monitor A&E exposure on an ongoing basis and adjust reserves as necessary.

  • Our asbestos exposure are unique and limited in comparison to most other insurers, because one, they are made for very limited period, mid '70's to mid '80's, two, generally higher [inaudible] aggravate limits and include virtually no first dollar exposure which is the area most exposed to non-products liability and, three, they were effectively acquired with protection whereby reserve additions should be largely reinsured.

  • Asbestos is a complex issue and one which is very company specific, toward the end I will provide you with additional information we have added a page in our supplemental package which summarizes our asbestos exposures and what we believe is a minimal framework.

  • Secondly for the quarter we

  • booked additional non A&E reserves to prior periods reflecting reserve strength in several select areas most notably D&O, [inaudible] dirty, and primary insurance.

  • These adjustments net a favorable performance for the emerging 2002 year and sessions to our accident year coverage and adversely impacted underwriting results by $25m.

  • This included $10m of primary insurance reserve strength and specifically to move our workers compensation reserves higher in our range for 2000 and 2001 even though our continuous monitoring has not shown substantial deterioration.

  • Thirdly, catastrophe losses for the quarter with $18m relating to hurricanes [inaudible] and kena.

  • Such losses are not atypical on book of our size and character but added to the burden of the asbestos and non-A&E reserve strengthening actions in the quarter.

  • Our full year combined ratio for 2002 at 99 reflected solid improvement over the world trade center and Enron impacted 113.5 reported in 2001.

  • But as affected by the fourth quarter impacts of previously mentioned it still doesn't reflect the pricing improvements we've achieved, that said, prudent reserving has worked well for us over time and confident that emphasizing balance sheet strength as we move into 2003 positions are strong.

  • Pre-tax investment income at $87.8m for the quarter is up 5.6% from 2001's $83.2m, generally reflecting strong and improving cash flow from operations as well as investment earnings on additional capital partially offset by the impact of the lower interest rates.

  • After tax investment income at $73.7m is up 8.5%.

  • The embedded pre-tax and after tax yields of the quarter and portfolio are 5.3%and 4.6% respectively, down from 6%, and 5% at December 2001.

  • Basically reflecting the lower interest rate environment together with our portfolio actions.

  • The quarter includes realized capital losses of $7. 5m pre-tax and $5m after tax.

  • Unrealized depreciation increased by $16.6m after tax driven by the fixed income element of our investment portfolio. cash from operations for the quarter was $281.2m compared to $190.6m for the fourth quarter of 2001. cash from operations for the full year was $736.1m, up 81% above the $406m in 2001.

  • Both of these results are the highest we have ever experienced for their respective periods and should be an important driver of future profitability.

  • Cash and invested assets stand at $7.3b and up $1.476b or 25.5% from December 2001 with the change mainly reflecting our $736m cash flow from operations, February, $346m secondary equity offering in our November $203m trust preferred offering together with $136m of unrealized depreciation.

  • Total assets stand at $9.9b with $2.1b of these bill of these held in our investment portfolios of our Bermuda based entities [inaudible]Bermuda and [inaudible] group limited.

  • Shareholders equity at $2.369b or 46.55 cents per outstanding share is up from $1.721b and $37.19 per share at December 2001.

  • Our analyzed year to date [inaudible] stands at 14.1%, up from 7.5% for the year ended December 31, 2001.

  • Total capital including borrowings through our just holdings company is approximately $3.1b.

  • During the quarter, we did not repurchase shares operating to keep our capital deployed in the business leaving us 1.7 million shares under our existing authorization.

  • As we go forward we will continue to carefully balance repurchase opportunities against capital needs of our business.

  • Current prices we believe our shares offering compelling value but so to due the returns available to us from the use of the capital in our business.

  • As respects capital, we issued 210 million of trust preferred securities in November net proceeds of which were used just capital of our US operating subsidiaries.

  • We also used our borrow under our credit facility by $55m in the quarter.

  • We believe that through the February secondary offering in November trust preferred issuance we're proactively positioned ourselves to take full advantage of the opportunities we see in this market.

  • Overall, we had an excellent year, one which continues to re-enforce our view of our business, our markets, and the opportunities they present.

  • We believe that the strong markets we now see should persist through 2003 and beyond and as a result our increasing our guidance for 2003 earnings to a range of $6.70 to $7.30 loss activity absent(ph) the unusual loss activity.

  • Our results for 2002 position us with excellent momentum and potential in 2003 we're making opportunistic use of expertise capital and infrastructure remains the focus.

  • I will turn the call over to Tom.

  • Tom Gallagher - President and COO

  • Thanks, Steve good morning.

  • As Steve said 2002 was a great year fir us, and the stage is set for 2003 to be even better, base on early indications of our January renewals.

  • Looking back at 2002 it was heavily impacted by the World Trade Center which greatly accelerated the market change that was in progress

  • It caused great disruption and dislocation in the market based on capital loss, which put a crunch and capacity in all lines on worldwide basis.

  • Initially, the most dramatic and quickest changes occurred those lines most affected by 9/11, aviation, property, excess worker's comp, life, personal accidents.

  • Adding to that mix throughout 2002 there seem to be a bad string of news being reported by companies.

  • Both primary and reinsurers, reserve increases, getting out of lines of business, closing operations, lay-offs, changing strategies and direction, overall creating a very, very unstable environment.

  • Even with new markets with fresh capital, these time to establish with people and markets.

  • Overriding all of this was simply a plight to quality, and security.

  • Everyone was searching for a company that was stable, secure, clearly focused.

  • With the appetite and capacity take risk.

  • We stood out and we continue to stand out.

  • This provided us wonderful opportunity in the best market we've seen in 15 years.

  • Over the years we kept our powder dry waiting for this time.

  • While we build a broad platform for both reinsurance and insurance which gave us a very distinct advantage during these unsettled times we brought a well established company, with broad capabilities to the marketplace, strong, financials, excellent ratings, a seasoned staff with expertise in many lines of business.

  • And a consistency in approaching commitment.

  • In 2002 we focused our production efforts where we felt the best terms and the greatest need. on the domestic side the individual risk area, the backup operation both property and casualty and treated property, internationally it was Latin America, Canada, London, which mostly probably a motor oriented markets [inaudible] in nature.

  • And especially in line aviation, marine and personal accident.

  • And the insurance side we were able to diverse file our portfolio.

  • California's a large part of that portfolio continuously we've extended into the [inaudible] area on a selected basis including some professional liability area.

  • Generally you know some malpractice and some large risk business.

  • As respects the domestic treaty casualty area, this is a market from our point of view, at least, still lag behind the others initially but that that changed mid year.

  • Much more dramatic changes started taking hold, more so far isn't it specialty areas, access, umbrella, D&O, malpractice which allowed us to greatly enhance our position.

  • As respects Bermuda, initially we had focused more on a non-traditional coverage but as the local market started to grow much more activity locally we've expanded our capabilities there to do more traditional underwriting, establishing an individual risk property operation that summer which proved to be very effective.

  • And we're looking expand into other lines in the future.

  • Let me give you quick capsule of January renewals. as we entered the renewal(ph) season we are in excellent position building on momentum from last year in the market which we viewed to be very healthy much more stable than last year and, generally, a more sensible competitive environment. we continue to see great flow of submission activity in all areas of our operation.

  • We continued to see applied to security and quality with the top tier end insurers like ourselves see more opportunities first being lead market getting better signings.

  • From a price terms and conditions point of view in capacity, let me add this, from a capacity area and most cases capacity was available if the price was right usually at a high point.

  • And it got down to the best security which served us well. [inaudible] lines were much tougher as well as pro rata property in the just.

  • Terms and conditions we remain tight.

  • As [inaudible] it pricing, across the board and almost every market the rates continue to go up, they range anywhere from 10% to 50% based on the line, territory, and experience.

  • And most dramatic in US casualty.

  • We did note some leveling off on certain lines at high levels which had taken major increases over the last few years, property cat, aviation, excess comp.

  • In summary, we are real please with our January activity.

  • We are really excited to watch items we're presently working on and expect to see a great variety of opportunities coming our way for both reinsurance and insurance in the future.

  • All in all, a great store for 2002.

  • Now we'll open up for questions.

  • James Foster - SVP of IR

  • operator, we'll take questions now.

  • Operator

  • Thank you the question and answer session will proceed electronically.

  • If you would like an ask question press the star key followed by the 1 on your touchtone telephone.

  • If you are on a speaker phone please make sure your mute function is off to allow your signal to reach our equipment.

  • Once again if you would like to ask a question press star one at this time.

  • Our first question comes from Tom Cholnoky with Goldman Sachs.

  • Tom Cholnoky - Analyst

  • good morning, everyone.

  • Steve two questions number one can you give us a little bit more inside as to what drove the more conservative view on the California comp business and then secondly if you could just check my math here it seems as though the three charges or the three kind of unusual items cost you close to 74 cent a share in the quarter which would apply about $1.91 of underlying earnings and if you were to annualize that you would get to 764 which would appear as though you're kind of low balling us for '03 and I would just wondering if you would make comments there.

  • Steve Limauro - EVP and CFO

  • Sure, with respect to the California comp, you know, this is certainly been an area where we have focused significant amount of energy taking significant private price increases over the years.

  • We certainly have seen in the marketplace some other folks worrying about severity and actually recording reserves relating to severity in 2000, 2001, we continue to monitor very carefully those years which really were the early years where we have the least impact from the rate increase increases we've taken and, frankly, 2000 was quite small, 2001 was larger but still small in comparison to 2002 and what looks to be 2003.

  • Having said that, we did have, you know, our auditing team from PWC come in and do an extensive review of our California comp arrangements and, frankly, they came in and found that operation to look very good.

  • As we got down and looked at where we are in our own range and where we are in the range that they provided, we felt that strengthening 2000 and 2001 was the prudent thing to do and, as a result, we continued to book what we believe our very credible, solid numbers for that business which is a significant opportunity for us and one that we think will play out pay off very nicely.

  • In terms of the charges, Tom, you know, I won't work through the individual pieces but certainly we had a confluence of events in this quarter.

  • The A&E, the non-A&E, and the cat exposure.

  • I would say that the cat exposure really was not unusual for us.

  • It's hard to say what exactly a norm is but certainly in our projection we do provide for some normal level of attritional cat so I think I would focus nor more on the impacts arising from the A&E and the non-A&E reserve strengthen as being a differential if you would?

  • Tom Cholnoky - Analyst

  • Okay thank you.

  • Operator

  • Next we'll go to Michael Lewis with UBS Warburg.

  • Michael Lewis.

  • Good morning, can you give me also a background here on where you stand now on our asbestos reserves and the survival ratio, again, have you done a ground up study like some of the others have done or just kind of get some background there?

  • Also, where do you stand on the equity derivatives mark to market.

  • I know the fourth quarter wasn't a quarter where you have to do anything but how the market's going this year does that factor into your equation that you may have to adjust this?

  • And lastly if you have gone through the California worker's comp and wrote it aggressively in prior years now when things getting more rate adequate why are you slowing at this point in time?

  • Tom Gallagher - President and COO

  • let me take those one at a time.

  • With respect to asbestos, we basically have had a ground up process and we roll it forward on a current basis quarter by quarter.

  • There certainly are developments that take place in the industry and in our own view and management of the data in-house and, basically, that's what was driving us to make these adjustments and, certainly, you know, there has been a pattern over the course of the latter part of this year of asbestos exposed public companies using pre-packaged bankruptcy trusts to essentially put the asbestos issue behind them.

  • We're not unmindful of that and the pressure that puts on the trusts and the insurance coverage that might be available to us.

  • We also, you know, look at the individual insured that we have mainly on the mountain McKinley book of business and in that respect we provided you in the form of page 7 of our supplement a pretty comprehensive lay of the land with respect to our asbestos exposure.

  • This is certainly a first step which will build on as we get to the company's 10k but, frankly, we think some of the actions in the industry that have been taken have raised the bar for disclosure and we're more than comfortable providing additional information to help people better understand what our exposure are.

  • Having said that, the company's exposure is very much related to their unique circumstances and, as I mentioned in my earlier comments, there are a lot of unique next week characteristics to our asbestos exposure.

  • Having said that, the supplemental page 7 does give you some survivor ratios. we've attempted to show what the survival ratio looks like in a raw data form and then go on to carve out pieces that relate to the coverage in place settlements we have and the managed accounts that we have and then also for the reinsurance protection we have we continue to have $80m, or $81 m of protection with respect to the mountain McKinley operations.

  • We feel very comfortable this is a process that s really run by season claim professionals our management team on the claim unit, and in the executive areas have been consistent we've looked at this overtime the way we should and we've adjusted on a quarter by quarter basis too get to the numbers we believe are appropriate.

  • So we're very comfortable that as we articulate our story and provide more information that, hopefully, you folks will be able to see the same things that we see.

  • With respect to the California comp, we have grown very dramatically over the last couple of years.

  • We've done so in part by taking significant rate increases, we've seen rate increases are cumulatively put our rates at January 1 some 165% above where they were when we started writing in 2000.

  • We like that, we are certainly seeing it slow a little bit as probably the growth as we move into 2003 is more oriented to rate as opposed to exposure.

  • We're very cognizant that that's the market where we want to running a underwriting strategy and we've been able to do that and achieve a good bit of business thus far. having said that, there's a limit to how much you're going to achieve with that very targeted underwriting strategy?

  • Steve Limauro - EVP and CFO

  • Let me add to that, as we've pushed the rate levels in California and we are expanded our position there, as the rate becomes much more adequate, so does the attention you get and bring in this in some more competition.

  • So we don't want to lower our standards.

  • We want to maintain that by underwriting profitability.

  • So we're just slowing down a little bit.

  • Tom Gallagher - President and COO

  • Michael, I am not sure.

  • Did I get all of your questions?

  • Michael Lewis - Analyst

  • No I had two. by the last part the equity derivatives and the way the market's performing this year do you think there's going to be any mark to market adjustment factored into your guidance and the bigger question really guidance is good but reserve additions, you know, you took at the end of the year also has to be factored and going forward.

  • I just want to know I wanting to give guidance.

  • You always said barring unusual events I am trying to get understanding how comfortable we should be with the reserve situation and the fact we know the industry in general is under reserved. again, the industry always seems to have this guidance and they seem to get hit at the end of the year with truing up reserves.

  • The real question how comfortable should we be? does this take care of our reserves strengthening and how factored in market to market adjustments for equity derivatives.

  • Steve Limauro - EVP and CFO

  • let's take equity derivatives first.

  • The practical matter is we took a $12.5m charge in the third quarter driven to extremes, if you will, with respect to interest rates and in the index which are the principal factors driving the valuation.

  • In the fourth quarter we recovered $3.1m of that $12.5m.

  • So we're still down about $9.5m for the year.

  • Frankly, what happened in the fourth quarter was the interest rates and index, you know, came back to us yielding us potential income but then at the very end of the year went back to fairly low points reducing the amount of recovery.

  • Frankly, we think there's very little down side risk.

  • There is a sensitivity analysis that we put out in our third quarter queue.

  • We continue to mark this thing to market based upon the movements and the factors using a black shoals valuation methodology because there really isn't a market for these kinds of exposure but we're pretty comfortable that, you know, unless interest rates should fall further which seems unlikely or the S&P index falls dramatically which also seems unlikely that we should have seen the worst of this? turning to reserves, you know, the practical matter is we try very hard to get our reserves right and, our view of where we are at the end of the year it is exactly the right place to be.

  • We've had conversations with our outside audit firm and we continue to track very well with their view of our reserves. we don't commission them to do a complete ground up study in every area but they do a number of ground up studies and, again, we track very well with them.

  • We think over time we've intended to be tended to be more conservative than most in the way that we construct our reserve positions and we found in the fourth quarter that we had seen development with respect to asbestos but as we interpreted it and applied it in the context of our individual claims, required some action, we took that action.

  • With respect to the non-A&E exposures, you know, we felt we wanted to be prudent with respect to California comp because of the attention that's been given it.

  • With respect to surety(ph) and D&A and D&O o and a couple of other minor areas these are really in the framework of very, very minor adjustments and at the end of the day we've seen, you know, some others take very large charges acknowledging how bad the market was for the longer tail lines in the late '90's.

  • As a practical matter we've been telling you for several years now that we thought that area of the market was going to be bad, it was inadequately priced and we avoided most of that market sector having said that I think that Tom would agree and Joe it would have been better if we had avoided it even more.

  • But we take our reserving very seriously.

  • We've always tried to be what we call prudently conservative and we've made the adjustments that we need to make sure we maintain that stance as we go into what will be a very exciting 2003.

  • Operator

  • in the interest of time we ask that you please limit yourself to one question.

  • Moving on we will go to Bill Wilt with Morgan Stanley.

  • Bill Wilt - Analyst

  • Good morning I want to turn to page 7, the asbestos supplement.

  • Which I appreciate your putting that in. a couple questions.

  • Definitions, if you could, just let's see, the terms remaining high profile insured and then definitions just description of the other direct exposures.

  • Tom Gallagher - President and COO

  • Basically, as we look at the coverage in place settlements, the actively managed settlement and remaining high profile insured these are the folks that we see as representing the significant exposure based upon the information available to us and with respect to the claim. there just happens to be coincidentally 25 of them that but wasn't a desire to focus on the top 25. r\Rather, these are the accounts that fall out of our analysis that suggest that they need a significant amount of attention and required a significant amount of reserving.

  • The other direct exposure, the 117, are accounts that are less active, less supposed from our perspective and most likely to really develop into something significant.

  • They're still actively monitored.

  • We still do watch them but certainly we focus on the higher profile account.

  • I will note as well that, you know, there are 150 accounts that we've actually closed with a fair amount of settlements but as a practical matter put those behind us.

  • And I think as we look at the coverage in place and actively manage accounts those are ones where we think there's relative stability in the reserving in that we've certainly brought them to our ultimate view of the exposure and on the other direct exposures -- I'm sorry, the remaining high profile insuresers we've tried to get the ultimate as

  • well but we're very mindful of the fact there still is potential and that's what the IB&R is there to help us with?

  • Operator

  • Now we will go to Michael Smith from Bear Stearns.

  • Michael Smith - Analyst

  • Good morning. where was the adjust in your Bermuda operation that shot the loss ratio up?

  • Steve Limauro - EVP and CFO

  • Good morning you will recall that when we brought in the Mountain McKinley book we acquired it in Everest Everest (ph) reholdings the just company and then we seated all the reserves and the underlying funds to [inaudible] Bermuda.

  • To the extent there are there is development on that book of

  • business it will actually go to Bermuda so what you are seeing in Bermuda is about a $12m retention relating to the asbestos increase that we booked in the quarter?

  • Michael Smith - Analyst

  • Okay, this was really related, though, to the original book then.

  • Steve Limauro - EVP and CFO

  • To the mountain McKinley book, yeah?

  • Michael Smith - Analyst

  • Okay, Good, thank you.

  • Steve Limauro - EVP and CFO

  • Great, thanks, Michael?

  • Operator

  • Next we will go to Susan Spivak with Wachovia securities?

  • Susan Spivak - Analyst

  • Good morning, Steve.

  • I was hoping that you could address some of your capital position given that growth is so significant much more than we were expecting.

  • Steve Limauro - EVP and CFO

  • we're very mindful of wanting to stay out in front.

  • We've talked about our high ratings and security we offer.

  • Certainly we continue to try to maintain a capital base that is very solid and that will continue to get us consideration of a possible upgrade from S&P in particular that has a positive outlook.

  • On page 2 of 7 we provide some operating leverages.

  • Again, weigh don't really do this to statutory surplus because that concept doesn't really apply well to our on shore off shore operations.

  • The practical matter is we've certainly seen our share of net written premiums to capital go up but not all that much given that our capital has gone up rather dramatically, our loss reserves to equity has actually come down a tab.

  • If I adjust the loss and adjust expense reserves to equity ratios to include unearned premium reserves as well which is the biggest component of our other insurance liabilities, we're actually less leverage at the end of 2002 than we were at the end of 2001. so we think we're pretty well positioned. having said that, we'll continue to monitor, you know, how our capital plays and how the rating agencies look at it.

  • We certainly are very oriented to being a high quality reinsure and we'll make whatever adjustments we need to make?

  • Susan Spivak - Analyst

  • Okay Thank you, Steve.

  • Operator

  • As a reminder if you would like to ask a question you may dough so by pressing the star key followed by the digit one on your touchtone telephone.

  • Next we will go to Stephan Petersen from Cochran Caronia securities.

  • Stephan Petersen - Analyst

  • Good morning, I was wondering I believe you said you had about $10m in reserve strengthening in asbestos.

  • I was wondering, if you could help me in terms of what that means with the prudential cover and what's remaining on that treaty there?

  • Steve Limauro - EVP and CFO

  • We increased gross A&E reserves by $65m all of which and then some was asbestos.

  • Basically, you know, of the coverage provided to us in the context with Mountain Mc acquisition would apply to that so, basically, 80% of that was seated out the door.

  • The retention went principally to our Bermuda operation as I commented on to Mike Smith.

  • But the actual increase was $65m gross, that netted down to about $16m.

  • We seated at about 43, 44 million to the true pack cover.

  • That cover continues to offer us $81m net, $101m gross of further protection.

  • Stephan Petersen - Analyst

  • And just a quick follow up.

  • Looking forward to your operations in California comp, what kinds of absolute rate increases do you anticipate being able to get as we kind of move forward in 2003?

  • If you might be able to comment on the competitive landscape out there.

  • It seems as though you may be sort of restraining yourself a bit and I'm wondering if you are seeing other participants come in to that market or kind of just give us a flavor of kind of what you're seeing going on out there.

  • Steve Limauro - EVP and CFO

  • Let me start that and then I'll turn it over to Tom. in terms of rate improvement, the rate increases we took over the course of 2002, net we'll have our effective rate for 2003 up over 20% already.

  • We did take an increase at January 1, we really haven't decided on any further adjustments at this point and I would comment that we will certainly continue to look and to make sure that we're implementing our underwriting strategy appropriately I don't know that we can really comment on anything we might do that we haven't decided upon.

  • SsoSo with that, let me turn it over to Tom.

  • Tom Gallagher - President and COO

  • Well, we moderate increases.

  • LlastLast year the average rate increase across was about 35%.

  • I suspect those rate percent.

  • I suspect those rate increases as they go through the system will produce plenty or better as Steve suggested.

  • As respects to the environment and just writing business the environment continues to be good out there. still heavily dominated by the state fund but they have taken a lot of corrective actions over the course of last few months which makes it a much better environment.

  • As it

  • stands right now, if the opportunities continue to be good and the rates continue to be substantial value we will continue to grow there as warranted.

  • There's always new interest coming in and out as people expand part of their market.

  • We'll just be monitoring as we go along?

  • Operator

  • and now we will go to with Cliff Gallant for KBW?

  • Cliff Gallant - Analyst

  • Good morning, going through page 7 on the supplement on the asbestos, could you talk a little bit about the line on reinsurance operations, the nature of the liabilities there and what was used in making you feel comfortable with the position there.

  • Tom Gallagher - President and COO

  • yeah, the reinsurance operations are a little bit more difficult to stratify in the sense that while we certainly have lots of statistics and claim counts and this kind of thing there really isn't a convenient -- convenient methodology, if you will, for us to package for the outside public in a way that you can really understand it.

  • So we've opted, really, just to go with the numbers.

  • Having said that on the reinsurance side, you know, we've had these exposure for many years.

  • We've got dedicated claim theme.

  • They typically are have less in the form of aggravate limits than what we have on the mount McKinley side and, frankly, there's much longer delays.

  • We think we've been pro active in trying to

  • identify and set up the appropriate reserves here.

  • We recognize that it's a little bit more difficult on the reinsurance side which is why we carry a greater percentage in the ID&R but beyond that, cliff, you know, perhaps we should go off line and chat a bit more about kind of how that plays?

  • Cliff Gallant - Analyst

  • thank you.

  • Operator

  • and now we will go to Marco Pinzon with Salomon smith barney.

  • Marco Pinzon - Analyst

  • Good morning, Steve.

  • Steve Limauro - EVP and CFO

  • Good morning.

  • Marco Pinzon - Analyst

  • Could you tell us what your reserves were for California worker's comp at year-end.

  • Steve Limauro - EVP and CFO

  • What our reserves were.

  • I'm going to say that on a net basis they're about $330ish million.

  • But that's a rough number.

  • I can double back to you on that with a more precise Marco?

  • Marco Pinzon - Analyst

  • OKAY Fine, just one quick clarification question.

  • Does the $25m reserve strengthening outside of

  • A&E was that on a grows net basis or both.

  • Steve Limauro - EVP and CFO

  • That $25m is on a net basis.

  • We did use our 2000 accident year coverage so net of reinsurance, it is also net of some adjustments we made on 2002 for event exposed ID&R groups, if you will, where, basically, you don't have the event you really ought not to be holding incremental ID&R at the end of the year so there's a lot of things netted in that but at the end of the day the driver really is the D&O and the surety operation?

  • Operator

  • Next we will go to David Sheusi from JP Morgan.

  • David Sheusi - Analyst

  • Good morning everybody, just couple clarifications, I hate to beat a dead hors but I just want to hit on the A&E charge.

  • It looked like $65m gross, we had the 80% seated off.

  • And then where is that fall out on the net side just because I heard a couple numbers.

  • I got in late.

  • Steve Limauro - EVP and CFO

  • Well, the $65m net gross nets down to about 16, about 12 of that 16 goes out to Bermuda, the other four is retained in the US, basically, as a result of some commutations of old reinsurance that had been in place?

  • David Sheusi - Analyst

  • Okay.

  • And then the second charge is $25m which was net and then the cat which was in the press release.

  • Steve Limauro - EVP and CFO

  • Right?

  • David Sheusi - Analyst

  • Just on the numbers side it looks like the other income line kind of bounces around a little bit.

  • Could you talk a little bit a little bit about that piece of it.

  • Steve Limauro - EVP and CFO

  • I did not.

  • The other income does include the $3.1m -- actually, no, I think it does when we separate that out.

  • The other income if I jump to the numbers basically what you've got going through other income is foreign exchange game loss with the weakening dollar we are seeing some reversal of the typical gains we have but this moves within a couple of million bucks and it's very hard to control.

  • On the net derivative expense just I'm not sure if you pick that up we did record a $3.1m income for the quarter?

  • David Sheusi - Analyst

  • Right, gain on that piece of it. and how are we thinking about the tax rate going forward?

  • It looks like we -- it looks like we got a little bit of a benefit here probably from the realized losses.

  • Steve Limauro - EVP and CFO

  • Well, what's happening is the tax rate really the tax rate is not so much being driven from the realized losses.

  • It varies considerably depending upon where the income falls between our Bermuda operation which isn't subject to tax and our US operation which is and so it moves around a good bit in the quarter.

  • From a guidance perspective I think what you see for the full year I think it's 15.8 is probably a good place to start.

  • That should drift down over time but the practical matter with the very positive results we're seeing in the US operation it could be that that didn't go down so far but that's a good starting point?

  • Operator

  • We will go to Dr. Larry Frieder (ph) with Frieder Brothers.

  • Larry Frieder - Analyst

  • Thank you, my question is more of a financial management question.

  • You -- the first question Mr. Cholnoky referred to the, quote, low ball dynamic of these earnings with the extra charges, I think you threw out numbers 764.

  • And in your opening statement you mentioned that you carefully measure buy back opportunity versus your rates of return prospects and if you would do a back of the envelope calculation you, basically, can get an after tax no risk return now of about 14.4% on the buy back proposition with no risks and, on the other hand, if you don't do that, you take risk higher.

  • ANdAnd then you -- your number, your guidance for next year if you work out the rate of return on tangible equity you're probably in the low 15% area.

  • I guess my question is I'm not fishing for number for the subsequent year but, you know, I know but, you know, I know you'll give guidance at the appropriate time but to my way of thinking with the renewal prices being as high as everybody's talking about and the premium growth being as strong as it's been and looks to continue, if there aren't unusual items, it appears that your rate of return on equity can blow through 16% and higher in '04 and I just wondered am I on the path that makes any sense at all to you guys from an earnings number but those kinds of rates of return?

  • Tom Gallagher - President and COO

  • I think you're on a very good path in the sense that we look at 2003 and then 2004 beyond it as just providing wonderful opportunities.

  • We're thrilled to be where we are. we look at the possibility of repurchasing shares and, yes, there are some good returns yes, there are some good returns there but having said that, we're in the reinsurance business.

  • This is the best time we've ever seen to be in the reinsurance business.

  • We're perfectly positioned.

  • We're very much oriented to making sure that we've got the capital to run the business the way we want to run it.

  • We have put guidance out there for 2003, as we move through 2003 we'll adjust that accordingly.

  • We have said this, you know, the things that would take us off that guidance are only the unusual kind of losses, not the attritional kinds of losses that you occasionally see on the cat side in more typical times.

  • We're very pleased to be where we are and, frankly, we think it's a great time to be [everestEverest re](ph) in this market and we will play it for what it's worth.

  • Operator

  • And it looks like we're out of time for questions.

  • I'll go ahead and turn the call over to Mr. Foster please go ahead, sir.

  • James Foster - SVP of IR

  • Thank you Brenda, as always we will be available for any follow ups or any more question details anyone may have otherwise have a good day everyone.

  • Thank you.