Everest Group Ltd (EG) 2003 Q4 法說會逐字稿

Good day, everyone.

Welcome to the fourth quarter 2003 earnings release conference call for Everest 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, SVP of IR.

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 view of the numbers and then Joe for some opening comments, I will preface our comments by noting our S.E.C. filings include extensive exclosure with regard to forward-looking statements.

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

As you know actual results could differ materially from from current projections or expectations.

Our S.E.C. 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, good morning.

I will briefly highlight our results and turn the session over to Joe.

The fourth quarter was a solid finish to a strong year with operating earnings of $118.6 million or $2.09 per diluted share, up 96% from the $60.6 million or $1.17 per share earned in the fourth quarter of 2002.

Net income, which includes realized capital gains and losses, was was $121.8 million or $15.02 per diluted share.

That's up 119% from the $55.6 million or $1.08 per share earned in the fourth quarter last year.

For the full year, operating earnings were $456 million or $8.29 per diluted share, reflecting a 74% increase from the $262.8 million or $5.14 per share earned in 2002.

Net income for the full year was $426 million, up 84% from 2002's $231.3 million.

These are excellent result and are against the back drop of a market which continues to offer solid opportunities.

Worldwide gross written premiums for the full year are up 61% to $4.6 billion.

Within this are worldwide reinsurance operations grew by 73% to $3.5 billion, and our insurance operations grew by 30% to $1.1 billion.

Our U.S. reinsurance operations are up 96% to $1.75 billion, with the increase reflecting strong growth across our property and casualty operations, particularly casualty.

Our U.S. specialty reinsurance operations are up 3% for the year with modest growth in our R and H businesses overcoming modest declines in our marine and aviation insurity units.

Our international reinsurance operations are up 78%, reflecting solid growth in all locations, but particularly London.

Just to note here, we have not yet received approval for the sale of Everest RE UK branch to Everest Reinsurance Bermuda.

We expect this transaction will conclude in the fourth quarter and will be shifting operations to our Bermuda operations segment at that point.

Our Bermuda operation wrote $285 million of premium, up 182% from 2002, with growth across treaty and individual risk businesses.

The 30% growth in our insurance operations reflects continued moderation of growth in the workers' compensation line, with stronger growth and E and S and other program business markets.

Our combined ratio for the quarter was 96.4% compared to 101.6% for the fourth quarter of 2002.

Catastrophe losses for the quarter were negligible and the combined ratio improvement would have been greater but for approximately 81 million of net loss pre-tax reserve strengthening in the quarter.

This included approximately 40 million on our reinsurance book, 24 million on asbestos and 16 million on our insurance book.

In each case, the actions reflect our active analysis of loss reports and the reserving implications, together with our orientation to maintaining the strength of our balance sheet.

Associated with these actions were additional net premium charges of 13 million.

Our full-year combined ratio for 2003 is 95.2%, compared to 2002's 99%.

The improvement reflects the improving rates, terms and conditions we have seen in the 2003 underwriting year, partially offset by strengthened provisions for prior period reserves.

On a full-year basis, net pre-tax strengthening totaled approximately 224 million with additional pre-tax premium charges of approximately 26 million.

Reflecting these actions and our continuing commitment to prudent reserving, net loss reserves increased 485 million for the quarter and 1.28 billion for the year.

Overall, we are pleased that the underlying strength of our current business allowed us to absorb these reserve actions and yet close 2003 in line with our earnings guidance.

Pre-tax investment income at 106.4 million for the quarter is up 21.1% from 2002's 87.8 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 91.6 million, up 24.3% from 2002, reflecting the greater asset growth in our Bermuda operations.

The embedded pre-tax and after tax yields of the year-end portfolio are a 4.8% and 4.1% respectively, down from 5.3% and 4.6% at December 2002.

Basically reflecting the lower interest rate environment.

The duration of our fixed income portfolio at year end is 4.2 years, down 1.2 years from the end of 2002, reflecting actions taken over the last two quarters to mitigate the effect of interest rate changes on our fixed income investments in future periods.

The quarter included after tax realized capital gains of 3.2 million.

Cash from operations for the quarter was 480.7 million, continuing the trend with have seen over the last few quarters.

This is up 71% compared to the 281.2 million seen in the fourth quarter of 2002, and year-to-date operations, cash flow from operations was up 1.654 billion, up 125% from the 736 million recorded in 2002.

Cash and invested assets stand at 9.3 billion billion or up 1.2 billion from December 2002 with the change mainly reflecting our 1.654 billion of cash flow from operations and 317 million of net proceeds from our April secondary offering.

Total assets stand at $12.7 billion with approximately $3 billion of these held in the investment portfolios of our Bermuda operations.

Shareholders equity at 3.16 billion or $56.84 per outstanding shares is up 796 million from 2.37 billion and $46.55 per share at December, 2002.

Our full-year ROE is 18.1%, up from 14.1% for the year ended December 31, 2002.

Overall, these results position us for a great year in 2004.

With ratings among the highest of our peer group, a strong balance sheet, and continuing solid market conditions, we remain focused on growing our business and profitability.

As a result, we are reaffirming our guidance that absent unusual loss activity, we expect 2004 operating earnings in a range of between $10 and $11 per share.

Turning lastly to capital, I want to comment that although the $975 million universal shelf registration we filed in June 2003 became effective in December we remain committed to an efficient capital structure.

In determining this, we must balance our business opportunities and plans against the value of our shareholders, customers and rating agencies.

In particular, the ability to achieve many of our objectives is predicated on our maintaining our strong ratings.

We do review the balance of our capital and business needs continuously.

And as we have said before, we will raise capital only when and only if we believe we need it.

Overall, we see excellent opportunities in 2004, and believe we are superbly positioned to pursue them.

I will now turn the session over to Joe Taranto.

Thank you, Steve.

Good morning, everyone.

January is a very important time in our business, particularly for the reinsurance side.

So I would like to give you some information as to what we saw in the marketplace and what we achieved.

First of all, let me state that overall, I was very pleased with what we did achieve January 1.

I think it really makes for a very good foundation that we will build on for the rest of 2004, and I expect us to have an excellent year in 2004, and pretty much every way.

But in the marketplace, we did see some rate decline, in some pockets.

That was mostly the shorter tail pockets like property and aviation.

Whereas in other pockets, we did see some continued rate improvement, most notably the longer tail or casualty areas.

Trying to put it all together, I think when you look at the starting point, and the rate changes that took place, what really settled out is a market that overall business was well rated.

Certainly, you couldn't do all business that came in, but still the environment was quite, quite good.

We continued to see on top of all of that the flight to security, and that just served us very well with our ratings.

We saw more submissions, I think we got the better quality business.

We enjoyed better terms than most, and, frankly, enjoyed more of the shares that we wanted to get on the quality programs.

So we were pleased overall with the trends in the marketplace.

Getting into some specifics on the U.S. reinsurance side, which is our property and casualty book of business.

For the property business, and the property cat, rates were down, I would say modestly down, more in the 5 to 10% area.

I think the cat business held up as well as I expected it would.

Particularly in the areas that there is the largest concentrations, California, Florida business.

So my sense is that this stage of the game, treaty property business will probably write roughly the same amount in '04 as we did in '03.

We did see on the property side for individual large accounts that rates were off.

Probably on the order of 15%, obviously some more, and some less.

This will affect our individual risk operations, so our fact operation, I believe, for 2004 will be more cautious, and the individual risk property operation that we have in Bermuda, again, I expect we will be more cautious when it comes to underwriting, rates still being good but off of their peak from 2003.

Our mission will be conservative to really maintain the high quality loss ratios that we produced in 2003 into 2004.

On the casualty side, we have seen rates continuing to improve in early 2004, more so in the tougher areas, like D&O and medical malpractice.

The rate, the rate increases, were less than what we have seen in the last two or three-years, but I, for the most part, they still look as if they are ahead of claim costs, claim cost trends, and keep in mind, these rate increases are multiplicative and and on top of the last two or three-years of rate increases, so that market is in pretty good shape.

This is an area where we are a market leader, and this is an area where the flight security serves us best, really when it comes to casualty business and you are looking at reinsurers that is have to pay 5 to 10 years from now, rating is extremely important.

So we continue to see good growth opportunities this area, and we expect reasonable growth in 2004 both on a treaty and facultative business for our casualty operation.

Turning to the specialty operation, specialty reinsurance which is marine, aviation and health reinsurance, mostly medical stop loss, some personal accident.

Here again for these shorter tail classes, we do see rates at this point off the peaks that they achieved in 2003, but rates still being in a pretty good place.

Once again, we will take a cautious approach in these classes.

We are not looking for growth in this area for '04.

What we are looking to do again is achieve high quality underwriting ratios.

On the insurance side, roughly half our book in 2003 was California workers comp.

We remain pleased with the results for 2003.

On the agency side, which is really the bulk of our business, that's our small account business, you may recall that last year in 2003 we took several rate increases.

The last one that we took in July, we got to the point where we were seeing less business coming in July '03 versus July '02 and we found ourselves pretty much with the highest rates in the marketplace.

We probably were about 10% off July '03 to July 2002.

We did see that trend of about 10% less continue for the second half of 2003, and we saw that trend continue into January of 2004.

Having said that, we are unwilling to lower rates.

We will remain some of the highest rates out in California.

But, of course, we are some of the best security in California, so we will have people pay for getting the better security.

We did open an operation last year, in Orange County, to write large account business.

Most of that is comp, although writing other lines of business as well.

I do believe that the growth from our operation in Orange County will pretty much offset the decline in our small account agency book.

So I would expect to be flat on the California workers comp business in 2004, but I expect to write that as very good rate and achieve some very, very good results.

As far as the other part of our insurance operation, we continued to be pleased with the medical malpractice business that we have been putting on the books.

We continued to be pleased with the specialty, general liability.

Recently, we have added a couple of new programs, which includes a country-wide national restaurant book of business, and also includes another comp book of business for Midwest states.

We do expect the nonCalifornia comp part of the book to grow in 2004, and so I think when you put our insurance operation numbers together, we will enjoy some pretty reasonable growth in 2004 over 2003.

With regard to our international book of business, we have just been very, very pleased with what we have seen in the international market.

We continue to grow very strong in the U.K..

Our Latin American book again continues to build quite nicely.

We are doing very well in Canada.

We are extremely strong in those parts of the operation.

We did see in continental Europe and in Asia an improved marketplace January 1, and where that has been pretty small for us, it will grow in 2004 over what we had written in 2003.

So we expect good growth overall to come out of our international operation.

With regard to our Bermuda operation, we grew quite a bit in 2003.

Most of that growth came in the property area.

There was a small amount of finite business that we had written, but most of the book was property.

As I noted earlier, we are probably due a little bit less in the property side in 2004, but offsetting, or more than offsetting that, we began in 2003 to establish casualty capabilities in Bermuda.

And, frankly, the Bermuda marketplace was more and more seeing casualty opportunities coming to it, as some of the other operations down there were also building casualty capabilities.

We do expect to write some casualty treaties this year, and do some casualty fact business this year, and I see that more than offsetting any decline in the property side.

With regard to finite business, we didn't do much last year.

We are still in the market.

It is very hard to predict just how much you might do in that area.

That tends to be very few deals that come in all shapes and sizes.

In summary, it is a changing marketplace, and we have to recognize and adjust to those changes.

But overall, I still see it as a very good marketplace, especially with our security, people and infrastructure.

We have never been so well positioned.

We expect continued top line growth in '04.

And I am going to give you my best guess at this stage of the game as to what that will be.

I think it will be somewhere between 10 and 15%.

There is a lot of variability in that, in that estimate.

It is early in the year, and there is a lot going on in the marketplace.

We are staying with our guidance with regard to earnings, and using the midpoint of that guidance, we are expecting operating income to be up 31%.

We are expecting earnings per share to be up 27%, and we are expecting the ROE to be 19%.

So clearly we are looking forward to a very good 2004, and everything I have seen so far this year continues to point me in that direction.

Okay we will now open it up to any questions you may have.

Thank you.

Today's question and answer session will be conducted electronically.

If you would like to ask a question you can do so by simply press the star key followed by digit 1on your touch tone phone.

Once again, that is star 1.

If you are using a speakerphone, please insure your mute function has been turned off to allow your signal to reach our equipment.

We will take our first question from Tom Cholnoky with Goldman Sachs.

Good morning, everyone, I have two questions.

First on the issue of capital.

How much growth, Steve, do you think, or Joe, can you support with your capital base?

Let's say the 10 to 15% proves to be conservative.

At what point of growth would you need to go back and tap the capital markets, and this is not my second question, but just as an add on, would you consider other forms other than straight equity if you were to come back to the capital markets?

Sure.

Let me take that one.

With respect to capital, you know, we look at our position at the end of the year, and I think we feel quite comfortable that your very well positioned, where we are, and for growth in 2004.

Having said that, you know, this is something that we need to watch on a month-to-month kind of basis, and factor into it, in particular, the issues we see in particular with rating agencies.

Our ratings are of paramount importance to us, and the practical matter is, it remains for us to go through our end of the year construction, if you will, of the complete picture, and then to have and continue the dialogue with each of the rating agencies, you know, as to their view of the world.

We certainly will do that over the course of the next month or so, and we will balance that against the opportunities as Joe indicated continue to emerge.

We are not wedded to any particular plan or product at this point in time, or construction from a capital perspective.

I think what is important to us is that we maintain the ratings that we have, and maintain the kind of flexibility that we want to be able to flex with the market opportunities that are presented.

Okay.

I guess the second question comes down to your earnings guidance.

Maybe I am just being a little bit simplistic here.

But if I exclude all of the reserve strengthening in the fourth quarter, you are basically at about a $3 run rate, which would imply about $12 of earnings this year, with absolutely no growth in investment income or earned premium.

Why set a bar so low.

I mean, the only way I can come back mathematically to your range is if a assume another $200 million plus of reserve strengthening.

I am sensing that is not something that you would be contemplating?

No, Tom, that is not something that we are contemplating.

A couple of things.

First of all, I would say when we look back at 2003, in terms of losses, we really look at it as a particularly benign year.

There really were no major losses.

I mean, certainly not on the property side, but not on the aviation side, not on the marine side.

Frankly, for most classes of business, there just wasn't that big pop.

You know, we just look at 2003 loss wise as an unusual year.

So that colors our thinking.

We kind of expect more in 2004 than we had in 2003.

After that, I would kind of just tell you what we have told others, that this is our model, this is what we estimate.

Everyone is entitled to their own estimates.

I will keep working the computer.

Okay.

Thank you.

You are welcome.

We will now move to Michael Lewis with UBS.

Good morning.

Maybe you can give me a little more color on the reserving.

Going back to the prior quarter, I mean, it seems to me each quarter seems to have the same amount of reserve strengthening, maybe even a little bit more.

Last time you had in the reinsurance, it was D&O, 1998 to 2000, the insurance was California workers comp related and you had an asbestos hit.

I guess my questions are twofold.

Can you again give me what the components were this time and what seems to be happening on a quarter to quarter basis that causes you to keep coming back addressing the same issues and was it a more incentive review of your reserves year end than we saw in the third quarter?

Thank you.

Well, Michael, basically, I think we have continued to see development in the casualty classes.

Both in our reinsurance operation and in the insurance operation, where it is principally workers compensation and principally California compensation.

But we have seen it, you know, move, if you will, in terms of the diagnostics that we apply, and we apply those diagnostics pretty religiously.

What we do do is an annual reserve study that can result in some of the reapportionment that are flowing through this particular fourth quarter.

As we look at it, it continues to be the casualty classes in general.

Reinsurance and the workers's comp on the other side.

Asbestos and the other issue that we continue to monitor very carefully.

You know, these are situations where we do our best at the end of a given quarter to read and interpret the information and adjust our balances accordingly.

As we get to the end of the year, as I said earlier, there is some apportioning, if you will, that moves thing around by department and by segment.

But at the end of the day, it is, you know, just coming from the detailed analyses that we do well below the level of our 18 kind of internal business units.

We do them at about 200 different reserve groupings, and there are some pluses and some minuses, and, you know, we take our best shot at getting the reserves right.

And in that regard, do you go go into 2004 with the assumption that you should be reserve neutral, and, can you give us a little comment about how the more recent year casualty books of business have been redeveloping?

And one last thing on the ROE assumptions you are making for this year, is that without a capital raise?

Yes.

Yes, we do go into the year assuming that reserves are in, changes would be neutral, if you will, and, you know, we did put up, by the way, this year, 450 some odd million net in the fourth quarter, I think something like 1.2 or 3 billion for the year.

As far as the more recent years, frankly, they are looking looking quite good.

And, in fact, you know, '03 was looking so good that we absorbed them, the development, and still came out with a reasonable ROE.

So, clearly, the most recent years that we see should play out to be excellent years.

Okay, and then just lastly, the 10 to 15% top line growth you are talking about, that is growth written premiums, is that true?

That's right, Michael.

I don't think the net would be too much different.

Might be a little bit higher, but I am talking gross.

Thank you.

And Susan Spivak with Wachovia has our next question.

Thanks.

Joe and Steve, Joe I was just wondering with that 10 to 15% as a follow-up, how much of your business is typically written in January 1 to give you that idea?

Well, probably if I put it all together, insurance and reinsurance.

It is something like a third of the business is written January 1.

So, yes, there is still 2/3 to play out yet, which is a lot.

But I think some of the trends that we saw in January will continue.

And what are you assuming for that other -- so you are assuming the same trends for the other 2/3 of the business?

Yes, pretty much.

I told you the areas that I think we will be cautious in and that I still see some very good growth opportunities, casualty, we still see good growth opportunities, international we still see good growth opportunities.

We expect Bermuda to grow.

But some of the other areas, medical stop loss, aviation, property, we are going to be more cautious.

You know, we don't want to get caught up in looking to grow in an area where rates are declining.

Okay.

If I could just follow up.

You discussed discussed getting a bigger share of selected clients business because of the flight to quality.

Is there any way, without naming names, for example, just how much that means for your top line?

Well, you know, it's hard to kind of give you a precise number on that.

I think, really, the point that I am just trying to make, as you know, at least in the reinsurance side of things, when deals come together and they are syndicated, typically all the parties, reinsurers enjoy the same terms once a deal is finalized.

The that point in time, if you are a seating company and have a much higher rating than anybody else, you are going to want to give that higher-rated company a bigger share.

So if we wanted a bigger share, it just becomes easier for us to get that and take that.

That is not something that just started this past January, that was already going on for the last year or two.

But we continued to see that trend play through.

So I was just trying to make the point that having better ratings helps you in a variety of ways.

Great, Joe thank you.

You are welcome.

Now moving on to Bill Wilt with Morgan Stanley.

Good morning.

A few numbers questions for you.

I guess first on the reserves.

Is there any favorable development in the quarter?

Yes.

I would say that the numbers I have given you are really pretty much net of favorable development.

I mean, we don't do a strict accident year view as we try to run the business.

It's more looking at what our expectations and run rates are by units, our expected loss ratios and making adjustments.

So, there is a little bit of view that 2003 was better than our original loss picks were, and that's offset in the numbers that I provided, Bill.

Okay, thanks.

Do you have the amount, roughly, for 2003?

Well, for the quarter, it is kind of order of magnitude. $10ish million, for the full year it is probably on the order of magnitude of $35ish million.

Thanks.

Great.

Is there any room left on the stop loss that you had covered, I forget for the years, '00, '01?

No, this quarter we completed utilization of the 2000 accident year, which, at December '02 had 85 million left.

In addition, during this quarter, the $54 million, which was left at the end of the third quarter on the Prudential cover for mount McKinley, was, in fact, full used.

Okay, great.

Last numbers question, recognizing the, recognizing the difficulty.

I wonder if you could just offer any guidance on the loss cost trend assumptions that you use in the excess casualty area.

I know that it differs, you know, from class of business to class of business.

But is there an easy way to characterize roughly the amount of lost cost trend assumptions that you use?

No.

There is no easy way to characterize it.

It does go across classes, and it does depend how high excess versus how low or primary.

You know, I think we maybe just chat with you off line is the best way to do it.

Okay, I guess that's fair.

To add on to that, is there an expectation on your part and others, there's talk and studies suggesting that there is an inflection point in loss cost trends maybe in the 2000-2001 time frame.

Have you state -- tort reform is going on.

Have you begun yet seen anything in your numbers suggesting that severity is, perhaps, past an inflection point?

It -- anything that you could really point to and clearly confirm that that is the case, no.

A little bit too early.

But, again, that's a question that I really much prefer to break down by class, and, again, even break that down by, you know, how high up access.

Because to lump medical mal, and D&O, products liability and auto liability, and everything else all together, there are just different trends going on.

Overall, I do expect that there was a peak, my own sense of things, that hit a couple of three-years ago if you put it all together.

But there are some some pockets that we are watching cautiously.

So, again, we would just rather follow up with you in depth off line.

It's a very complicated question.

Fair point.

Thanks, very much.

And now we will take a question from Dave Sheusi with J.P. Morgan.

Yes, hey, good morning, everybody.

Good morning.

Good morning, Dave.

Just a couple of quick questions.

On the EPS guidance, could you give us some color in terms of the investment yield assumptions and tax rate assumptions you are looking at the in '04, was my first question?

Yes.

I don't think we see.

We have not assumed significant increases from kind of where we are in terms of new money rates.

We think the new money rates are approximating our portfolio rate.

We are kind of bumping along the bottom here.

I think, generally, we do expect that at some point they will turn up.

But that's not really built into the numbers in any consequential fashion.

Tax rates, we saw a little bit of a pick up in the fourth quarter to a 13.8 on a full-year basis.

That's down 200 basis points from 2002.

We would expect that the effective tax rate should continue to come down fairly modestly, perhaps, half a point, perhaps a point, as we move through 2004, and, really, even over the longer term.

Okay, great.

And turning on the balance sheet side, it looks like, I just wanted to get my arms around the reinsurance receivables a little bit better.

But on an industry-wide basis, as well as the company specifics on average, it looks like in the quarter, sequentially, we are up about 93 million.

I was looking for some sort of guidance in terms of, you know, how we should view that growth, I guess, relative to incurred, sequentially rises a little bit.

But could you add some color on that side of it?

Yes, I mean, basically what is going on there as I mentioned earlier, we did use the remainder of our 2000 year accident coverage.

We did use the remainder of the Prudential-provided coverage with respect to the mount Mckinley acquisition, and that is generally what is driving the reinsurance increase on the receivables.

On balance, you know, I think they account for maybe 40% of capital, and, in our case, are generally extraordinarily well secured, as well as with good companies.

So we feel very comfortable that we are in a great place on reinsurance recoverables have and to a large extent, the change this quarter is kind of completing off those two coverages.

Yes, that being the case, the change this quarter is unusual, and I really wouldn't see the reinsurance recoverables growing much into the future.

But, as Steve noted, when you really get into the quality of those recoverables, it's outstanding.

I mean, most of it is backed, either funds withheld, or LOCs, you know, the remainder, largely, is from Prudential or from some very strong company.

So when you really get down into it, we are just very very strong in terms of the credit quality and overall backing of our reinsurance recoverables.

Generally, Dave, we don't.

We are not seeding a great deal of business, as a practical matter.

You know, 5, 6% is what we seed, and that, generally speaking, is on what we call specific reinsurance, you know, where there is some issue with respect to exposures we take on, where we feel we want to buy something specific.

Have not bought corporate level protections, like the accident-year coverage that we had used over the last couple of years, used in the sense of seeded to them.

It remains to be seen whether or not we will do that again.

It is something that we always continue to think about.

But at the end of the day, you know, our sessions approximate maybe 5, 7 of premium, and you are just not going to see substantive growth in reinsurance recoverables at that level.

Right.

I guess that would apply on a risk retention basis, we should expect your net to gross to remain, I guess, in line with '03?

That's correct.

Yes.

Sounds good, thanks.

Great quarter.

And now moving on to Stephen Petersen with Cochran, Caronia Securities.

Good morning, a couple of quick questions, first a couple of number questions.

Should we continue to expect to see the investment duration slide, sequentially it was down from 4.4 to 4.2.

And, secondly, looking at cash flow.

I mean, it's obviously been very robust the last couple of quarters.

When might we expect that to sort of slow down and maybe even reverse a bit as claims eventually get paid?

Do you want the to -- do you want to take the duration?

Sure.

With respect to duration, we basically are looking for duration to hold between, you know, 4 or 4.1 and 4.3 or so for a little bit in here.

We basically have brought it down, anticipating, and wanting to protect it, anticipating ultimately an interest rate rise without being willing to place any specific bets on it, and believing that that's a good range for us to settle in at.

At some point, we will unwind that, but, at this point, we just haven't determined where.

But I would not expect it to go substantively lower.

As respects cash flow, we are very pleased with, you know, the cash coming in the door.

We are putting that to work in the investment portfolio, practical matter is we would expect it generally to continue, as our growth slows, our growth in cash flow from operations driven by cash flow from underwriting, you know, may slow.

But driver, if you will, of ultimately the cash flow, is what's going on with our paid loss ratios, which are, for the quarter, about 30%.

For the year, about 37%.

That's down several points on each case from 2002.

We continue to be very pleased with that.

We think it's, you know, a significant driver of future earnings potential.

Yes.

We would expect 2004 cash flow to be very, very good.

I don't know that it will be necessarily the same as 2003.

As Steve noted, you know, we grew 65%, premium wise in 2003.

We are talking about 10 to15 in 2004.

So that's obviously a factor.

But it should continue to be very strong.

Okay, and one quick follow up.

Joe, I was wondering if you might be able to elaborate on your comments regarding continental Europe.

Is, sort of the still -- relatively slow growth that's taking place there still a function of price, or have you had just a bit of difficulty breaking the traditional bonds between the historical European players there?

Well, you know, it's probably more price as far as I am concerned, than anything.

Although there is something to some of the countries staying with the same reinsurers that they have been with for 150 years.

Price wise, it hasn't changed to the degree that other places around the world have.

I mean, when I look at potential profit margins, given the current prices, they just don't look as attractive to me there as parts of the U.K., parts of the U.S, Latin America, Canada.

So in large part, it's just that there are still pockets of business there that were not excited.

After that, there is a lot of competition there.

You know, even though there have been some reinsurers that have some trouble in Europe over the past couple of years, that gave us some opportunities, there are still a lot of reinsurers there and they are looking to hold on to business they had for the last 150 years.

So when you mix it all together, it just didn't have the same high quality than we have seen in other areas.

Better in 2004 than in 2003, so we will do more in 2004 than we did in 2003.

But, you know, it's not going to be something that we do many multiples in 2004, what we did in 2003.

It didn't improve to the point where I just look at it as a market that is as good as some of the other markets that we have around the world.

Okay, terrific.

Thank you.

And we will now take a question from Adam Star with CRN.

Hi.

Just a question on your premium growth.

If I annualize the fourth quarter, it looks like you are already up 10% from the full-year rate, and when I add that to the comments you made about January and what you expect happening in the various lines, am I missing something?

But it seems like that would be forecasting some kind of deterioration during the year, or you are being very, very conservative in your forecasting at this point?

I don't think you can just annualize the fourth quarter, Adam.

I mean, there are certain seasonality to our business, and I don't think you can go at it that way.

But, you know, we do expect growth, of course it's going to be modest growth this year.

That's the point.

And will that be price based or unit based, or does it really vary by line?

Well, it really does vary by line.

But whereas in 2003 there was an awful lot of growth that was priced based, there's obviously going to be less that's price based.

You know, I kind of look at the landscape in 2004, when you put everything together, which is a tough thing to do, it's going to be similar to 2003, price to exposure, so I am not expecting any upswing in that.

So, you know, would probably be a bit more in the ways of units and opportunities, or opportunities and new units in 2004.

But if 2004 plays out to be collectively like 2003, that will be very, very good.

It was just that 2003 was the best year in many, many years.

And, with your guidance also, it looks like you are going to be generating surplus at a higher rate than the top line would be growing.

Is that the key thing to look at in determining capital needs or the reserve to surplus more important?

Well, one of the items, obviously, is just how much capital we produce.

And as you noted, at 19 ROE with the midpoint, that's obviously higher than the 10 to15.

But Steve noted, there are other issues that we have to, you know, we have to basically talk to rating agencies, we have to go through their models.

You know, we have to make sure that we keep an A plus rating and a AA minus S&P rating.

These are ratings that are very important to us, part of our franchise, the very reason we have been able to achieve some good results.

So, you know, we just have a lot of people we have to talk to.

We have a lot of different numbers that we have to run.

So it is not simple.

But, you are right, Adam, that at least in terms of, you know, most of the ratios, we should build capital pretty fast this year, and probably build it every bit as fast as top line premium.

Okay.

Thanks a lot, and good year, Joe.

Thank you, Adam.

We will now have a question from JF Trembly with Credit Suisse First Boston.

Good morning.

Good morning.

I was wondering if you could provide some comments on the potential for further reforms on California workers compensation insurance market, and the potential impact on change and cost trend?

The changes in laws out California?

That's right.

Governor Swarchenager asked legislature for a new reform plan by March, I believe.

Yes.

I believe you have been following that closely.

I don't know what your outlook is?

Well, we have been following that closely but it hasn't come to a head, yet.

You are right, Governor Swarchenager has asked the legislation to try to put together a plan to make changes in the California comp system, and the indication is that the changes they want to make are changes that would reduce again, claims, medical claims, severity, to reduce fraud, to take some of the abuses in the system out of the system.

And, of course, once they do that, then they would look to insurers to lower their costs because they should have less costs in terms of claims.

And so there would be savings for the business community.

Globally, where Swarchenager is coming from, but no specifics have been put together at this point.

He is looking to put something together by March 1.

We do have some people going out next week to be part of the discussions that are taking place of the so that's kind of just an update on where that stands.

There was some legislation passed last year, which Swarchenager looks at as insufficient.

But there was legislation that was passed to reduce medical costs.

And, indeed, that was passed and insurance commissioner [Garamende] did look for the insurance community to make some changes come this past January in terms of their rates to reflect some of those changes.

Most insurance carriers made little change in their rates.

We made very, very little change in our rate, January versus December.

Having said that, there was a benefit increase this past January, and that normally would have meant that you raise rates somewhat but most carriers did not raise rates because of the legislation that was passed last year pretty much, if you will looking at it like that did reduce costs, and kind of washed out the benefit increase.

But Swarchenager is talking about more sweeping changes, and we will see, that is yet to come.

Thank you.

We will now have a question from Ira Zuckerman with Nutmeg Securities.

Thank you.

Most questions have been answered.

Joe, in your projections for this year, what do you assume for a normal catalog, since it has been all over the lot for the past four or five-years?

Yes.

We will let Steve try that.

Sure.

That is tough to talk about.

It is tough to talk about what a normal cat load is, but we do have numbers.

Yes, our normalized cat load a few years ago was $15 million a quarter.

It certainly has drifted up from there.

We've grown pretty significantly, including on the property side, and we have in fact seen our accumulations on a catastrophe basis continue to rise.

So we probably have embedded in this year's, 2004 estimates, the largest normalized provision we have used to date, it is consistent with the growth we have seen in the property premium and in our catastrophe accumulations.

I am not going to throw a number out, but it is,certainly 20 plus million.

Okay.

And the fourth quarter negative cat log.

What was that an adjustment to?

Obviously it was an adjustment to previous reserves?

It was actually a very minor, very minor adjustment to the couple of 2002 hurricanes.

Okay.

So real old stuff?

Yes.

Okay, thank you very much, gentlemen.

You are welcome.

And now moving to Jennifer Norton with SAC Capital.

Jennifer.

Your line is open?

Hello?

Yes, your line is open.

Okay.

My question is, can we assume that, because you have written so much casualty business over the last year, that you are running at a much lower rate in terms of your proportionate cat exposure?

I'm sorry, could you repeat that?

Yes.

I am just looking at your catastrophe expose ratio, cat losses to premiums over the past couple of quarter have been pretty low.

I am wondering if that is sort of a permanent change since you have written so much more casualty business?

I would say, as Joe mentioned earlier, over the last year or even 18 months, has been a very benign period from the perspective of catastrophes that impacted us.

As a reinsurer operating globally, we have our own kind of profile that may differ from certainly primary companies other reinsurers who are more cat oriented.

But we have certainly increased our property writings in general, and including on the cat side, and seen a growth, if you will, in our catastrophe accumulations, and I think, you know, our normalized provision, it was, as I said, something over $20 million a quarter.

That normalized position, we think, will be definitely needed over the long term.

How it will come, we will wait and see.

Yeah.

We have not really lowered our profile.

We look at that as part of our good fortune.

That is what we talk about next year in getting to talking about normalized cats, you know, coming up with much bigger numbers than we had this year.

Okay.

Thank you very much.

I appreciate the response.

Now, moving to Ken Zuckerberg.

Yes, good morning.

Two question.

First for Steve, could you clarify what statutory net income was for 2003 and whether or not you can share with us dividend capacity for 2004?

I will be honest.

I don't have that number in front of me.

I can tell you that we saw just about a $200 million increase in the statutory surplus of Everest Reinsurance company in the U.S.

We would certainly anticipate that dividends would not be a problem from that company.

One of the things that ties back into our discussions of capital is, of course, not only looking at the group level but looking at the various entities, and, in particular, our U.S. statutory operations.

I commented in my remarks that we haven't yet closed on the sale of the U.K. branch of Everest RE to Everest Reinsurance Bermuda.

That certainly was a transaction that was very much intended from Everest RE's perspective to deleverage itself in the sense that that U.K. operation, which includes Europe, is growing pretty significantly.

It has a reserve base, and at the end of the day, the sale of it to Everest Reinsurance Bermuda frees up capital for the U.S. statutory company, and, in effect, helps Everest Reinsurance Bermuda develop the leverage it needs to run its business and produce a good return.

So a lot of factors like that have to be considered.

But as we look at the statutory situation around the end of the year, that will certainly be one element of our, our capital planning discussions.

Steve, that is very helpful.

Question number 2 for Joe.

Joe, obviously, we have seen a number of writers have some issues, negative issues, which obviously creates the supply/demand imbalance for med mal coverage.

When you look at the landscape, do you think there's better opportunities on the insurance, reinsurance side, or is it, you know, sort of specialty deals or, you know, any other sort of nontraditional-type programs that you can write?

Yes.

I would say that the opportunities are not particularly nontraditional, but we have seen opportunities med mal both insurance and reinsurance.

Having said that, it's very much of a cherry picking exercise in medical malpractice.

I mean, this is not a line of business that I would tell you that has made a sweeping change across the board where you could just write just about everything.

Quite the contrary, there may be 10% of that universe that we like.

There are certain states, as an example, that we still would not even think about writing $1 worth of business, either because there are literally government companies that write business in a subsidized way or mutuals that still have been caught up with changes that are necessary, or doctor reciprocal groups that we just don't want to compete with.

So there are some states that we are wholly out of on the doctors side and on the hospital side.

There are some states still that is need tort reform to the point where we just can't get involved.

So it is very, very much a cherry picking exercise.

But having said that, we do see some business that comes to us that looks quite good.

And we are prepared to do that, both insurance, most -- we have written a number of doctor groups on the insurance side, and reinsurance.

Although most of our reinsurance has been of hospital business.

And a lot of that has been facultative reinsurance.

So, the opportunities are there.

But as I said in that world, it is very, very much a cherry picking exercise.

Great, thanks very much.

And due to time constraints, that will be our last question.

At this time I will turn it back to Joe Taranto for closing remarks.

Thank you.

I have one last announcement I would like to make.

I would like to let all of you know that Jim Foster will be handing off his responsibilities on investor relations to Beth Farrel.

As you know, Jim has handled the IR for many years, and he has done an outstanding job, and I would like to thank him for it.

But we have some very, very important initiatives here at Everest that I need Jim for, and some of you have gotten to know Beth.

Those of you that don't, I think you will be very pleased once you do get to know her.

Please direct all of your inquiries to her.

Jim is still here for those that absolutely, absolutely need him.

But I would ask you to keep that to a minimum.

Thank you very much.

Have a good day, everyone.

Thanks.

And that does conclude today's program.

We do thank you for your participation, and you may disconnect at this time.

Have a wonderful day