Everest Group Ltd (EG) 2003 Q3 法說會逐字稿

Good day, everyone, and welcome to the third-quarter 2003 earnings release conference call of Everest Reinsurance.

Today's conference is being recorded.

At this time for opening remarks and introductions I would now like to turn this conference over to Mr. James Foster, Senior Vice President of Investor Relations.

Please go ahead, sir.

Thank you.

Good morning everyone, and welcome to the call.

With me this morning as usual are Joe Taranto, our CEO and Steve Limauro our CFO.

Before I turn the call over to Steve for a review of the numbers I will preface our comments by noting that our SEC filings include extensive disclosures with respect to forward-looking statements.

In that regard I note that statements made during 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 should be considered in connection with such statements.

Now I will turn the call over to Steve Limauro.

Thanks, Jim, and good morning.

I will briefly highlight our results and Joe and I will take questions you may have.

The third-quarter was another very strong quarter with operating earnings of 126.2 million or $2.23 per diluted share, up 90 percent over the 66.5 million or $1.29 per share earned in the third-quarter of 2002.

Net income which includes realized capital gains and losses was 100.3 million or $1.77 per diluted share, up 64 percent from the 61.3 million of net income reported in last year's third-quarter.

On a year-to-date basis operating earnings were 337.4 million or $6.20 per diluted share, up 67 percent from the 202 million or $3.97 per share earned in the first nine months of 2002.

Net income at 304.2 million was up 73 percent from 2002.

These results derived from our continuing focus on bringing our full capabilities to bear on continuing strong market opportunities.

Worldwide gross written premiums on a year-to-date basis are up 71 percent to 3.3 billion, within this our worldwide reinsurance operations are up 90 percent to 2.5 billion, while our insurance operations are up 31 percent to 808 million.

On a year-to-date basis, our U.S. reinsurance operations are up 113 percent with the increase reflecting strong growth across the property and casualty spectrum with a particular emphasis on casualty lines.

Our U.S. specialty reinsurance operations are up 13.8 percent reflecting a more moderate growth in new opportunities we've seen in our medical stopwatch reinsurance, marine, aviation and surety businesses.

International reinsurance operations are up 83 percent reflecting continuing strong market conditions in our Asian, Latin American and Canadian operations and in particular our London and European operations.

Our Bermuda operation produced 208 million of premium which is almost seven times the comparable period of 2002 and reflects a significant shift toward more traditional business resulting from our continuing rollout of treaty, facultative and excess insurance capabilities.

With thirty-one percent growth in our insurance operations reflects moderating growth in our California Worker's Compensation writings with a growing contribution from excess and surplus lines business and other program business markets.

Our combined ratio for the quarter was 95.0 compared to 96.7 for the third-quarter of 2002.

Excluding catastrophe losses which were 10 million in 2002 and 9 million in 2003, the third-quarter combined ratio improved 1.7 points from 95.8 in 2002 to 94.1 in 2003.

The improvement would have been more but for approximately $60 million of net reserve strengthening we reported in the quarter.

This included approximately 15 million on asbestos, 36 million on our reinsurance book and 8 million on our insurance book and reflects our continuing orientation to maintaining balance sheet strength.

Our year-to-date combined ratio for 2003 is 94.7 compared to 97.8 percent in 2002 despite the $25 million greater catastrophe losses in 2003.

The improvement reflects the improving rates terms and conditions we are seeing in the 2003 underwriting year partially offset by adjustments to prior periods.

Reflecting these results, net loss reserves increased 337 million for the quarter and are up 800 million from the December 31, 2002.

Pretax investment income at 100.3 million for the quarter is up 16.1 percent from 2002's 86.4 million, reflecting strong cash flow from operations and our first-quarter capital raise partially offset by the impact of the lower interest rate environment.

After-tax investment income was 86.6 million up 20.8 percent from 2002 reflecting the greater asset growth in our Bermuda operations.

The embedded pretax and after-tax yields of our quarter end portfolio are 4.8 percent and 4.2 percent respectively down from 5.3 percent and 4.6 percent at December 2002, basically reflecting the lower interest rate environment.

The duration of our fixed income portfolio at quarter end is 4.4 years down a full year from the end of 2002, and down 1.1 years from June 2003.

This duration reduction was accomplished over the course of the quarter mainly through the acquisition of interest only mortgage strip securities, the value of which generally rises as interest rates rise and should have help mitigate the effect of interest rate changes on our bond portfolio in future quarters.

The quarter included after-tax realized capital losses of 25.9 million, the quarter also included a 122.2 million reduction in after-tax on realized depreciation on our bond portfolio, reflecting the quarter's extraordinary interest rate direction change and volatility.

Cash from operations for the quarter was a record 492 million continuing the trend we've seen over the last few quarters.

This is up 174 percent compared to the 180 million for the third-quarter of 2002.

Year-to-date cash from operations was 1.173 billion up 158 percent from the 455 million reported in 2002.

Cash and invested assets stand at 8.9 billion and are up 1.7 billion or 23 percent from December 2002 with the change mainly reflecting our 1.173 billion cash flow from operations and the 317 million net proceeds from our April secondary offering.

Total assets stand at 12.1 billion with 2.9 billion of these held in the investment portfolios of our Bermuda operations.

Shareholders equity at 3.03 billion or $54.47 per outstanding share is up 659 million from the 2.37 billion and $46.55 per share at December 2002.

Our annualized year-to-date ROE stands at 18.4 up from 14.1 percent for the year ended December 31, 2002.

With ratings which position us among the highest-rated companies and continuing strong market conditions, our focus is growing on using our expertise and capacity to grow our business and profitability.

I want to mention two issues reflective of this continuing build out of our platform.

First, Everest Reinsurance Bermuda Ltd. has agreed subject to regulatory approval, to acquire the UK branch of Everest Reinsurance Company.

Upon approval, this will have the effect of attaching our UK and European businesses to our Bermuda capital rather than our U.S. capital.

Secondly, Everest National has opened a regional office in California; this is an evolutionary step in servicing and overseeing our California business as well as developing a more diversified product mix in this market.

Overall our strong results for nine-months reinforce our view of our markets and opportunities, we are in fact tracking toward the high end of the 2003 earnings guidance we provided previously.

We are not comfortable providing specific guidance for individual quarters but as the trends underlying our strong results should persist through 2004, we are increasing our guidance for 2004 operating earnings to a range of $10 to $11 per share absent unusual loss activity.

Turning lastly to capital I want to comment that although we filed in July, a 975 million universal shelf registration, which is not yet effective, we remain committed to an efficient capital structure.

We do not anticipate a need for additional capital at this point as we expect 2004 volume growth to moderate but this is subject to continual review.

Overall we are very pleased with the way 2003 is shaping up, and in particular the opportunities we continue to see.

Our fundamentals remain compelling and our focus is firmly fixed on executing our strategies.

Joe and I will now take any questions you may have.

(OPERATOR INSTRUCTIONS) Dave Sheusi with J.P. Morgan.

Good morning, everybody.

A couple of quick questions here.

A little surprised by the level of growth, better-than-expected, maybe can give some additional commentary on what you are seeing, what has changed in the market from the last time we caught up in the prior quarter.

And secondly, if you could give some perspective on a couple of things from a number side; one on the allocation to capital, we were thinking about the current position on the debt side as were coming into the quarter increasing or replacing existing deposition as well as on the tax rate side, what's some of the changes with the recent announcement with the regulatory and U. S. or UK and Bermuda restructuring there and how that is going to impact things going forward on tax rate.

I will comment on the growth and then turn the other questions over to Steve.

I don't see any real dramatic shifts in the marketplace since we spoke three months ago.

It still remains a very, very good marketplace for us.

But what we have seen is that the U.S. casualty market certainly the reinsurance market, continues to look quite good.

Some of the seeds we started planting three and six and nine months ago are really blossoming in this past quarter as you see us doing more U.S. reinsurance.

And that's driven primarily by the casualty side.

We've also commented in the past couple of quarters that the international markets we are continuing to look quite good to us.

We were experiencing growth and really kind of believe we would continue to see growth, particularly in the UK market, in the Latin America market and in the Canadian market.

More recently we started seeing a bit more firming in the continental European market, in the Asian markets; these are areas that are still quite small for us but looking a bit better.

We may be able to do a bit more there.

Our main markets UK, Latin America going very strong for us.

We also have continued to see the Bermuda market become more and more of a marketplace and the operation that we started in Bermuda coming into its own, so our volume is up quite nicely in that area.

And when you layer on top of all of this the continued flight to security, where people just about always include us in their reinsurance placements, all of this of course is just combined to give us some excellent opportunities.

So it really is those factors that I think have contributed to the growth that you see in the quarter.

All of that was underway for the last three or six months just hit a little bit stronger in this last quarter.

Dave, I'll pick up on your other questions.

As respects capital, we continue to look at capital very carefully.

As you know our ratings are very important particularly in the current environment.

Having said that as we kind of look out to the end of the year, earlier in the year we may have been thinking about doing a trust preferred to allow us to build the capital of the U.S. operation; we are now thinking that between the earnings growth we are seeing which will contribute substantially to capital between the UK transaction, the sale of the branch to Everest Reinsurance Bermuda, that our stand-alone U.S. operation should look very strong, continue to look very strong.

And certainly we will continue to monitor that.

But at this point we really don't see that transaction as being necessary.

As Joe indicated or as I indicated earlier we will certainly continue to monitor our capital position.

But we are, as I stated, oriented to try and be as efficient as we can.

In terms of the sale of the UK branch from Everest Re to Everest Reinsurance Bermuda, there is really not a tax motivation oriented to that.

Our UK business, because it's done out of a UK branch in Everest Reinsurance Company is subject to tax using the normal rules applicable to UK operations.

That will continue to be the case when the branch is owned by Bermuda.

So there is really not a tax motivation driving this rather what is driving it is really re-rationalizing, if you will, the deployment of our capital.

It's always been clear to us that in Bermuda, we have plenty of capital and we have a better access, if you will, to capital growth.

So what we have done is realigned our operations so that the UK branch and the European business will really draw off the Bermuda capital rather than the U.S. capital.

This gives us a better balance, and it also relieves some of the strain that we saw emerging previously on the stand-alone U.S. operation.

But no real (indiscernible) to it and no substantive effect on the tax rates.

Just quickly getting into the tax rate change for this quarter, basically as we said before, our effective tax rate is very sensitive to the balance of results between our U.S. operation which is a U.S. tax payor and our Bermuda operation which is not.

What we are saying this quarter is the effect on the U.S. side of the dampening coming from the reserve development that I mentioned, and as a result that pushes our effective tax rate lower.

Thanks for your thoughts.

Michael Lewis with UBS Warburg.

I have a few questions.

Number one, on the reserve development, I know you gave us the pieces, can you go into a little more detail exactly what's behind that?

And also again this is not a serious question, but what ends up happening is if you raise your guidance by 50 cents, every one point in the combined is about 60 cents a share, so it's a very minor but good directional guidance.

I'm just wondering if this point in time it's not really a significant change in the operating environment, so what are you really trying to signal?

It doesn't seem to be an underwriting improvement it is simply that you are seeing more business to write?

Because if you are seeing more business and underwriting more profitably, we can talk in terms of 1.50 to 2 dollars a share not 50 cents, so I am just trying to get an understanding what you are signaling here, I am a little confused.

Let me tackle that part.

I don't think you should be that confused, Michael.

The premium you can see is coming along quite nicely.

The cash flow is at record highs.

So you could expect in that sense more investment income next year.

Business, as we report, continues to be good with no shortage of opportunities.

So yes, if you want to call it directional we feel a bit better about next year at this point in time than we did three months ago.

And that's what it all boils down to as far as we are concerned.

(indiscernible) interrupt a minute, I mean again what you are mentioning, production is distinctly better than I think most analysts were carrying -- your cash flow is extraordinarily good, your investment income looks good and if you look at the number of shares you have -- what are we talking 56 million shares?

There is a lot of leverage here.

Is this just an early guidance and a directional move that can significantly improve?

I mean obviously the follow-up is that as the casualty rating pricing remains very firm in 2004 is it your peak year, there is some very considerable earnings ramifications here that you just -- I mean you are just showing us the tip of the iceberg, am I right?

Michael, you are certainly allowed to build your own models.

But we are giving you our best estimate at this stage.

Thanks so match.

And then the reserve question.

Let me tackle the reserve question.

There really are three elements, the first element I would comment on is asbestos where we have net asbestos reserves being strengthened about 15 million, that's on a gross incurred of about 60 million.

We did, in fact seed about 21 million to Prudential under the Mount McKinley stop loss agreement.

There is three elements driving this; one is certainly in Mount McKinley, we have continued to manage the claims very carefully and as we've done that, we have fine-tuned some of the estimates we associate with some of our larger claimants.

Moving on to reinsurance, we continue to see anecdotal information flows from seeding companies, not with respect to formal claim reports but with respect to the possibilities of future claim reports, and our feeling there was that we needed to strengthen ACR's, what we call additional case reserves which are reserves that stem from our evaluation of something that hasn't been reported to us, as well as IBNR.

And then thirdly, we did feel in both Mount McKinley and on the reinsurance side that we wanted to adjust our loss adjustment expense reserves with respect to asbestos, so that we are really picking up appropriately what we see as potential impacts on settlement expenses going forward.

If you look at the disclosure that we have in our analyst supplement, our survival ratios have improved, paids haven't been a significant problem, these actions continue to come from really just our day-to-day management of the actual claims process.

That tackles the asbestos.

On the reinsurance side its basically coming from our longer tail casualty lines including D&O, (ph) the bulk of the strengthening there is in our U.S. casualty operation, although there are smaller pieces in the international area, in particular London and our home office international business.

Where again it's in the casualty lines.

This really just reflects our constant monitoring of what's coming in the door and making sure that we've got the correct provision in place.

Lastly, we did increase reserves in our California Workers Comp book by $8 million.

A minor adjustment on the reserve base we have there but again just want to attenuate to what is coming in the door and what we anticipate as the implications of that.

There is not some huge acceleration or pickup in frequency and severity, it is more normal noise around the number that has caused us to want to make an adjustment to make sure that our reserves reflects the strength that we try to carry them in.

And this is a pretax number right?

These are all pre-tax numbers.

Thank you.

Tom Cholnoky with Goldman Sachs.

Just two questions, one just going back to asbestos, maybe if Jim could give us a little bit more following up on what Allstate was saying about what's going on with excess claims, they have obviously strengthened their reserves a lot and attributed more because of the excess business.

And then secondly, Joe, maybe in the wake of XL (ph) nacree (ph) and not to target them specifically which I don't think you will do, but could you just give us a little bit more detail, the process that you go through in assessing what's going on in primary companies with respect to claims?

Either on a case basis or what you do to prevent these kinds of occurrences happening at Everest Re sometime in the future?

I will tackle the second part and then we will come back to Jim on the first part.

Obviously there has been a lot of discussion in the last couple of days about our business, the reinsurance business U.S. reinsurance basically from the 98 through 2000 period.

Let me first start by saying that we, at Everest, realized that that was a difficult period.

And I think took a much more conservative position during the course of that period then many, many others.

And when I say we realized it was a difficult, tough market I don't mean now, I mean in 98, 99 and 2000 we realized it was a tough and difficult market.

We may look back at it now as if it was tougher than we thought, but we didn't think it was a walk in the park even at that point in time.

As a result of that focus and attitude, we decreased our casualty volume in going 99 versus 98, once again we decreased our casualty volume going into 2000 versus 99.

Instead, we looked for growth in other areas such as accident and health and medical stop loss.

Many of you may recall we went into those lines and did very well starting in that period.

Some pockets of the casualty business that we thought were particularly problematic we just said we would not do 10 cents worth of business in.

So we exited the Workers Comp excess business altogether.

We did not write any of it in those years.

This is a line that has caused a lot of reinsurance particularly the direct reinsurers tons of problems as this line has run off very, very poorly, where many of the directs were trying to compete with the unit covers of the world through those years that actually has proved to be a very, very poor strategy.

We exited the umbrella general liability clashes, we did not think that umbrella was priced anywhere near what it should have been in those years.

Candidly there are still many pockets of umbrella business today that we won't touch.

We exited the trucking business altogether; again, a class that was in very, very poor shape.

We limited our medical malpractice writes.

Many of you may recall if you were on the calls with us during those years, that we would repeatedly say we are just not in these long tail classes of casualty business.

Basically we restricted our books to a few select treaties and partners, and with those partners we were very close.

We audited constantly, continue to audit through today, in many cases we were 100 percent to the deal.

But it was treaties that we thought were somewhat insulated from the difficult marketplace.

We did not support or reinsure MGA (ph) driven deals, these are deals that in our opinion had (indiscernible)companies that were taking no risk, weren't watching the underwriting, many reinsurers were all over these deals, we were not at all.

We did not acquire a new book of business.

Many companies came to us and frankly many of our peers were running around saying this is the way we need to increase market share which is to buy more business.

We saw that as something that made no sense.

Why in a difficult market would we add to our book of business with business that was written by others, not written by us?

We did not buy anybody's renewal rights, we did not buy a new underwriting team that we brought over to write a block of business for us.

We did not buy a Lloyd syndicate.

We had scores of people coming over from across the pond looking to for us to put corporate capital into their syndicate; it was very commonplace at the time.

Again we had the same strategy; why do we need more of this market especially pieces that were not underwritten by us.

We bought stop loss to protect the overall book for every one of these years.

I think when you put it all together, we took a very, very different approach through those years and that served us well.

Not saying we were perfect, frankly some of what we wrote in those years turned out to be worse than what we had planned.

We booked some reserves on that in the past as Steve just noted; we topped up once again in this particular quarter, so again, we certainly did not get everything right.

But when you go back and take a look at the approach that we took during those years, you can kind of understand why we had a different outcome than others.

Now go over to Jim on asbestos.

Picking up on your question about Allstate's comment about seeing more development on excess policies which is I gather the point of your question.

As you know our book of business insofar as it had asbestos exposure is almost exclusively an excess book.

Especially under the McKinley side.

We are and have always been very attuned to this question of potential development in excess layers.

And frankly the overwhelming majority of the reserves that we have are on excess layers that haven't even been approached yet.

The kind of phenomenon that Allstate was talking about is something that we are aware of and has been actively considered in all of our reserving.

Okay.

And you do not see anything on the margin that is developing right now that would cause you to concern about the level of reserves that you have up on these policies?

No, as Steve said broadly, we would all say with respect to asbestos, and that is there is nothing unique in terms of what has been happening recently.

There is some development on the margins but there is no systemic change in terms of what the underlying liabilities are.

Great.

Thanks.

Wayne Mortar (ph) with Seminal Capital Partners.

Steve, can you give us a sense of the cost of your efforts to reduce duration, the impact of the I/O strips, and what is your sense for the rest of the year into '04, how you position the portfolio?

Do you expect a yield pickup next quarter?

I would save the cost looking at it from the perspective of what did we give up through investment income is probably $3-sh million of pre-tax income.

So not a substantial cost.

As we look at the IO's it's very important to note that we were getting into them during a very difficult environment; we are pretty pleased that the duration of 4.4 takes away some element of risk from our unrealized depreciation account.

As we've looked at the performance of the IO's over September and October we are very comfortable that we get some reasonable mitigation.

Having said that, we are not placing huge interest rate bets here, what we are really doing is trying to be prudent with respect to the unrealized depreciation we've got on the books.

I don't see an appreciable impact on yield going forward.

Thanks a lot.

Marco Pinzon with Smith Barney.

A follow-up on the reserve strengthening question.

If I look back to the business mix back in 98, 99 it looks like casualty reinsurance was 30 to 40 percent of your overall writings back then.

And then, Joe I heard your comments that you were not writing any I guess Workers Comp, umbrella or trucking in those years and you wrote very little med mal, and clearly you wrote some D&O.

But what were you writing back then?

You are right.

D&O was certainly one of the classes that we are into and that didn't fare all that well.

But the bigger deals that we had were kind of down low general liability, not umbrella business but down low general liability.

We did write some automobile business as well, private passenger automobile, which we thought was a bit more insulated from the marketplace.

That worked out to be frankly not particularly profitable but not terrible if you will.

Some of the classes and some of the deals we went into kind of had either a finite edge to them or floating premium side to them.

Again, the mindset that we had in many, many cases was rates seemed to be lower than what they should be, how can we design or redesign the deal to overcome that.

When was the last time that you strengthened the reserves on the U.S. casualty reinsurance book?

I would say our process is very attuned to monitoring all of our reserve books very carefully and adjusting as we need to adjust.

Frankly, we made some adjustments in the second quarter, we made some adjustments in the first quarter, we made some adjustments over the course of the last couple of years.

We are looking at the data that we have, our best analysis of the data and trying to make sure that we are staying on the development curve that we think is the appropriate one based upon the information we've got.

It is a continuous process.

It isn't one of these things where we want to find ourselves letting the reserves kind of slide along and then wake up some day and feel we need to do something large.

Our view is to stay on top of the information as it is emerging.

Joe and Steve, I just want to make sure I am hearing you clearly -- then there were not really any new significant changes in the data point that you are seeing, no real late reporting changes or anything along that line?

No.

We had a little more come in than we expected which is why we added to reserves for those periods.

But there was no shocking news.

No revelations.

And by the way, the '03 business is looking terrific and which is one of the reasons that earnings for the quarter are ahead of what we had forecast.

One other clarification, on the cat losses, did those all flow through the U.S. reinsurance or --.

Actually they did not, they are probably split half U.S. and then the other half international in the sense that we got pieces of Fabian coming through London, coming through Canada, and coming through Bermuda, but minor amounts.

At the end of the day the 10 million really relates to the two hurricanes, and I think as much as anything there is some uncertainty as to how much we will get, but the order of magnitude of 10 is pretty comfortable for us.

Thank you very much.

From Morgan Stanley, William Wilt (ph).

A different question, on asbestos did you ever seek (technical difficulty) for a reinsurance pool?

I am sorry, Bill, we didn't get that, could you repeat that please.

On asbestos, did Everest take part in the Ekra (ph) reinsurance pool?

No.

Great.

You mentioned, Steve, the California Workers Comp reserve base, do you know what that is even in just round numbers?

The California comp base reserve base in total for all for 2000 through 2003 is about 475 million.

Great.

Was there a part of your reserve charge any session to the -- I forgot what (indiscernible) some unused limit --.

There was no session to any of our aggregate coverage in this quarter.

Great.

Last question then for you.

On Amvest (ph) are you in the midst of a review process with them or when did they last totally affirm Everest rating?

I am wondering if you are going through a review or if anything is expected in the near term?

We are really not.

They reaffirmed I believe it was in the second quarter.

We continue to have conversations with them on a fairly regular basis.

I think our sense is that its business as normal, they seem to be comfortable with the capital position we have, and the plans we've outlined to them and what we are doing from a volume perspective.

We certainly continue to track capital models and in particular will take a hard look at where we are at the end of the year.

One of the things that I think of when I think about the leverages that we show in the analyst supplement is those are all nominal information without adjusting for rate change, if you will, and the implication of rate change on the premium leverage.

We continue to have regular conversations with Best, they reaffirmed us a quarter ago and things look to be going well.

In their most recent report, asbestos environmental report came out in, I think earlier this month, they made reference fairly explicit about the three metrics they use for assessing asbestos, funding ratio of 20 times, paid off market share, premium market share, is there any meaningful difference between the number that they derive for Everest asbestos liabilities versus what is carried?

One thing we need to keep in mind Bill, is their numbers are all based on statutory filings.

So in our case I think they would note that it is distorted because of the fact that our situation a significant portion of our reserves are held in our Bermuda affiliate.

The number they come up with for us I forget exactly what it is, but it is a number which is distorted because it's only looking at a portion of our book of business.

In addition, Bill, those numbers really trying to look at it from an industry perspective and we have spent considerable time and energy sharing information with AM Best and all of our rating agencies concerning how to differentiate us and our exposures from the industry view.

We have not got any feedback that suggest that they had issues with what we've been sharing with them.

We will continue to share.

I think there's a good amount of information that we've put out previously in terms of how we are different and I won't go through it now, but the practical matter is you really can't take industry level information and try and bring it down using a very broad approach to individual company.

Very good, thanks for the responses.

Ira Zuckerman (ph) with Nutmeg Securities.

On the California Workmen's Comp book there has been significant change in the environment there with the reform laws and a provision for rate cut in 2004.

I was wondering what your view of the market is at this time?

We still see this as a really good opportunity in the marketplace.

The reform which we are pleased to see have taken place, it goes into effect January 1, is designed to really curtail medical costs and we think it really will do a fairly good job in that area.

Although more reform is probably needed.

You are correct that the Comp Bureau that was originally contemplating something like a 12 percent rate increase January 1, has now taken this new law into account and has come up with essentially a 3 percent reduction which is what it is recommending.

Again, this is based on an assessment of just how much lower loss costs are going to be.

So there is no question this will take down loss cost and there is no question that should be part of one's ratemaking.

We internally have not made a decision just yet as to what we will do with regard to our rates come January 1.

We still have to lend in that particular area.

We kind of view this reform as the right way to go in the comp situation in California, I think what they need to do is reign back in medical costs, perhaps reduce fraud.

It is certainly what Garamendi is looking to do and taken a good first with this process and does need to be factored into the rates that would be appropriate.

So we look at this as kind of a positive, it will affect past claims as well not just claims going forward.

And we really haven't factored into our claims analysis just what the impact of this is which can only be a favorable, partly because it's pretty difficult to get your arms around this at this point in time.

But net net we like the direction that the insurance commissioner and the Legislature is taking with regard to addressing the comp situation.

What are you doing in terms of either trying to write more business for next year or pulling back?

Or what are you viewing your marketing efforts as.

I would tell you for the last two or three months we've been pretty flat this year versus last year.

A lot of that is a function of the fact that we raised our rates pretty significantly this past July and found ourselves in no question the highest rates out in California.

Now if we are flat and our rates are up dramatically that kind of means our unit count is going down.

But we are not at this stage keen to adjust our rates downwards or pay more commission.

So the last two or three months have been flat, and my guess is we will be flat, up a little bit next year as well.

In other words basically you have sort of taking a back off -- if I can rephrase your answer on going after new business?

We are not looking to take our rates down, if that's what it takes to attract new business.

Thank you.

Stephan Petersen with Cochran, Caronia Securities.

My questions have been asked and answered.

Susan Spivak with Wachovia Securities.

Joe, I was hoping could you explore a little more of the growth.

Is it coming more from rate increase or increase in new business?

And is there any single factor that you can point to which would cause the business to come to you really?

Other than ratings.

Rating is awfully important;

I wouldn't want to leave that one out, Susan.

As you know many people have tightened up and taken it down to a small number of reinsurers and so it is very helpful if you are into that small number.

But rates are up for casualty.

Clearly U.S. casualty rates are up.

So it's a combination of rates being up, people more keen to use our security, and frankly more business meeting our standards because rates are up.

So it's a little bit of us doing more unit wise, combination more rate and then people looking for us to be on their program or have a bigger share of their program.

We are seeing this across the board, we are seeing it in the U.S., we are seeing a treaty, we are seeing it facultative, our property and casualty, we are seeing it outside of the U.S.

In Monte Carlo, that was a scene (ph) seemed to be the topic of the day security, so we are seeing it out of Europe as well, certainly in Latin America.

So it really is those three big items.

Joe, could you just give us like a magnitude of rate increases on casualty, and then if you could just touch on what you are seeing with property rates?

Casualty and you know you've got to get into, are you talking this month, this quarter, the year.

What we are seeing in most casualty classes we are still seeing rate increases and one has to understand in many cases this may be the second or third round of rate increases.

So it's rate increases on top of rate increases which is a good thing.

Some classes like D&O it still remains quite high, fortyish, fiftyish percent, medical malpractice certainly also some big numbers in selective pockets, the pockets that we are most interested in.

Other lines of business, you start getting into comp, general liability, auto liability it's less, you are seeing 10, 15-sh rate increases in the last quarter.

Again, that's an increase on top of past rate increases so it is still I think pretty powerful.

Property is flattening and in some cases declining.

We are seeing anywhere from flat to 15-ish percent down on property rates.

Again, they had gone to such a high that most of us believe that that kind of activity still puts the rates in good position.

But there is more competition for property, its certainly at the insurance level.

It's been a great run on property for the last 21 months, results have been absolutely terrific.

So more people are looking to do more business.

On the reinsurance side, especially the cat side security is still very important.

And when you start to get to Florida aggregates and California aggregates people are somewhat limited in that area.

So I think rates in those areas are holding up a bit barrier.

But generally we are seeing mild slope downward in the property side, the aviation side, but casualty continues to build.

Thanks, Joe.

Charles Gates with CS First Boston.

You answered my question.

Thank you.

City Group, Greg Lapin (ph).

What year was the 8 million reserve development from the worker's comp?

It was principally 2001 and 2002, Greg.

Is there any pattern in terms of when you lifted the retention for the reinsurance you purchased and the severity limiting you there?

I would say not, I'm not quite sure what the question is trying to get at.

We certainly had coverage up to a point but we continue to be very capital comfortable but as the coverage came off what we are seeing for results is pretty reasonable.

We tend to look principally on a gross basis, that's the better level to get the data quickly and do at lest the early analysis.

We are not seeing any appreciable change.

Thanks.

Arthur Winston with Pilot Advisors.

I was hoping that given you gave an estimate for earnings for 2004, you could give the associated investment income estimate for next year that leads you up to this range of earnings that you are talking about?

At this point in time I don't think we are willing to break the estimate down.

Certainly we continue to look very hard at what will develop over the course of 2004.

We are actually still in the midst of a very detailed planning process.

What we've assembled is what we think is a good view of the lay of the land where we are and one that will certainly be relooked at as we go forward.

Do you know if the rate of return in assets will continue to go down even though the amount of assets is up because of the roll off of higher yielding assets?

We don't expect the return on assets to go down appreciably further from where it is.

It does certainly occur to us that we've seen kind of a cyclical turn in interest rates.

As we look at the dynamics of that plank to the portfolio we wouldn't expect appreciable downward movement.

Thank you very much.

Follow up question from Wayne Mortar.

Joe, I just want to know how you are thinking about this business for next year?

It seems like every quarter you kind of push back the inflection point, if you will.

I just want to see how you are thinking about that into next year and using your capital and growing the top line, in general the capacity you have to underwrite more and more business?

There is a lot of pieces to it.

You kind of heard in California comp we are not particularly keen on lowering our rates.

And if that leads to flattish business then for that I haven't really pushed back the inflection point.

Other pockets of property or aviation start to languish then we would do the same there.

Casualty generally speaking is still behaving well.

The international markets are looking good.

The flights to security is kind of more meaningful than it’s ever been.

So we continue to be pleased over all with the marketplace.

Some of the latest things that we've seen in the casualty marketplace hopefully will be helpful in pushing out the market to be a better market for a longer period of time.

So we are enthused about '04, and that's kind of the reason we have raised estimates.

In terms of volume, Steve indicated we expect to moderate and it has to.

We can't keep up the pace that we've been at for the last couple of years.

We are very pleased with what we've done in response to a dramatic market change, but that rate can't keep up.

Capital is sufficient at reasonable growth rates for next year.

If for some reason we are presented with so many terrific opportunities that we grow beyond reasonable we will have to evaluate the capital issue.

But I would say to you on that the same thing I said six months ago, that would be good news.

That is not something to fear.

What is a reasonable growth rate?

You know, I think 20-ish percent growth rate in '04 is something that in all likelihood our capital base can handle that without any problem.

If you start getting north of that it becomes more of a question.

It's kind of difficult to figure out exactly what the growth rate will be, we certainly expect good growth but to pinpoint it in this sort of marketplace is difficult.

But again, I just don't see this as a bad problem to have, I see this as a very good problem to have.

And we certainly have the flexibility to raise money if we want to, not that we are looking to do right now, not something we see the need to do right now but we will continue to review this.

And hope that the market stays strong and that we continue to get some great opportunities.

Thanks.

That is all the time we have for our question-and-answer session today.

Mr. Foster, I will turn the conference back over to you for final and closing remarks.

We appreciate you all joining us.

As usual Steve and I are available for any follow-up calls you may have and we will look forward to talking to you.

Thank you.

That does conclude today's teleconference; we thank you for your participation.

At this time you may now disconnect.