Everest Group Ltd (EG) 2004 Q3 法說會逐字稿

Good day, everyone.

Welcome to the third-quarter 2004 earnings release call of Everest Reinsurance.

Today's conference i being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Ms. Beth Farrell, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good morning and welcome to the call.

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

Before I turn it 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 investors should consider in connection with such statements.

Now let me turn the call over to Steve Limauro.

Thanks, Beth, and good morning.

The catastrophe events of the third quarter, as we have previously announced, had a significant impact for the quarter, $190 million net of tax or $3.35 per diluted share, leading to an after-tax operating income of 4.8 million or 8 cents per diluted share, a 96 percent decrease from 2003's 126.2 million or $2.23 per diluted share.

Net income, which includes realized capital gains and losses, was 11.5 million or 20 cents per diluted share, an 89 percent decrease from 2003's 100.3 million or $1.77 per diluted share.

On a year-to-date basis, operating income is 330.7 million or $5.82 per diluted share, a 2 percent decline from 2003's 337.4 million or $6.20 per diluted share.

Net income year-to-date is 401.5 million or $7.07 per diluted share, reflecting an increase of 32 percent over 2003's 304.2 million or $5.59 per diluted share.

We believe these are strong results in the context of our and the industry's capacity experience, and our results, excluding hurricanes, combined with still solid and very possibly stabilizing market conditions indicate that the outlook for the remainder of 2004 and 2005 remains quite positive.

On a year-to-date basis, we have written 3.5 billion of gross premiums, an increase of 7 percent over 2003.

This includes a 4 percent increase in our reinsurance operations and a 14 percent increase in our insurance operation.

Worldwide total net written premiums at 3.4 billion and total earning premiums at 3.2 billion rose by 9 percent and 21 percent respectively.

Focusing on year-to-date gross written premium, which minimize the quarter-to-quarter variability inherent in our writings, I will highlight our segment writings.

Our U.S. reinsurance operations are down 17 percent to 1.049 billion, reflecting modest softening across U.S. markets, most particularly for facultative and property business, although casualty has also been impacted.

Our U.S. specialty operations are down 11 percent to 353 million, reflecting growth in marine insurity, flat aviation writings and a reduction in our accident and health medical stop loss business.

International reinsurance operations, which have been restated to shift the results of the UK operations to the Bermuda segment, are up 59 percent to 512 million, reflecting continuing still favorable conditions in Latin America, Canadian and Asian markets.

Our Bermuda operation, including the UK operations for both years, is up 32 percent to 695 million, mainly reflecting the strength in the UK and European markets.

Our insurance operation is up 14 percent to 918 million, reflecting a decline in workers compensation offset by growing diversification into excess and surplus lines and selective direct brokerage writings.

Our workers compensation production relationship with AARIS in California ended in mid-October, but as we have discussed previously, we will remain in that market writing business out of our Western regional office.

Across all of our segments, market conditions were somewhat variable, but generally reflect pricing which remains at or above adequacy.

On balance we have become more wary, but are still focused on taking advantage of the opportunities the markets still present.

Turning to underwriting results.

The quarter reflected a combined ratio of 108.5 percent during our year-to-date combined ratio to 97.3 percent.

These are up 13.5 points and 2.6 points from the 95.0 percent and 94.7 percent recorded in the respective periods of 2003.

The Florida hurricanes and Pacific typhoons impacted underwriting results by $255 million or 22 loss ratio points, the largest series of quarterly events in our post-IPO history and certainly the main driver of the quarter's results, although we know that the exposure was consistent with our expectations given the book that we write.

Otherwise, the quarter's loss activity was fairly benign with net reserve strengthening of approximately 13 million reflecting modest adjustments affecting a handful of classes.

Reserve strength remains an ongoing focus with net loss reserves increasing 543 million for the quarter and 1.2 billion year-to-date.

The hurricane losses account for only about 235 million of this growth.

Pretax investment income at 123.8 million for the quarter is up 23 percent from 2003's 100.4 million, principally reflecting our growing asset portfolio.

After-tax investment income was 104.9 million, up 21 percent from 2003's 86.8 million.

The embedded pretax and after-tax yields of the quarter-end portfolio are 4.7 and 4.0 percent respectively, down from 4.8 percent and 4.1 percent respectively at year-end 2003, and they reflect the interest rate environment and still elevated proportion of cash and short-term holdings.

Duration at quarter-end was 5.4 years, up from 4.2 years at year-end, mainly reflecting the sale of the I/O portfolio in the second quarter.

The quarter reflected realized capital gains of 10.1 million pretax and 6.7 million after-tax, as well as an increase in unrealized depreciation on the Company's investment portfolio of 212 million pretax and 160 million after-tax.

Cash from operations was a strong 498 million for the quarter compared to 492 million in the third quarter of 2003.

On a year-to-date basis, cash from operations was 1.3 billion, up 10 percent from 2003's 1.2 billion.

These inflows position us well for continued growth in our asset and investment income basis.

Cash and invested assets stand at 11 billion and are up 1.7 billion or 18 percent from December 2003, with the increase mainly reflecting our 1.3 billion of cash flow from operations and 320 million proceeds of our April trust preferred offering, partly offset by a $53 million decline in year-to-date unrealized depreciation on our investment portfolio.

Shareholders equity at 3.534 billion or $62.98 per outstanding share is up 11.7 percent from 3.165 billion and 56 spot 84 per share at December 2003.

Our hurricane impacted annualized ROE stands at 14.2 percent, down from 18.4 percent for the year ended December 2003.

You will have noted that our Board increased our authority to repurchase shares to 5 million shares at its September meeting.

No shares were repurchase during the quarter.

We remain sensitive to capital utilization and have the tools to deal with any excess capital we generate, but frankly the quarter's hurricane experience made consideration this quarter a moot point.

Excluding the hurricane losses, our underlying fundamentals were strong and position us well for the fourth quarter and 2005.

We expect a more normal fourth quarter, but consistent with past practices do not provide estimates for individual quarters.

Still fourth quarter without appreciable unusual losses should yield a strong full-year 2004, and our financial strength and sound fundamentals provide an excellent base for 2005.

Ours is a risk business as has been reemphasized by the third-quarter events, and we are confident that our orientation to profitability as opposed to volume, together with our financial strength and broad franchise capabilities, should allow us to continue to build shareholder value.

I will now turn the call over to Joe Taranto.

Thanks, Steve.

Good morning.

I would just like to make a brief comment with regard to the recent action taken by the New York Attorney General.

Everest is not involved in this New York action in anyway, and we don't expect to be.

Even so we kind of took it upon ourselves to review our operations and have found that we are in no way, shape or form involved with any sort of bid rigging or any other wrongdoing.

Now I know there is quite a bit of attention on this issue and it has significant for other companies, but this morning we are not here to be industry spokesman.

So I ask that with regard to your questions, that you just focus on those issues that are of importance to Everest.

Okay.

Steve and I will now take any questions that you might have.

(OPERATOR INSTRUCTIONS).

Tom Cholnoky, Goldman Sachs.

Good morning, Joe and Steve.

Joe, with all due respect, I am not going to ask you to comment directly on the investigations as they stand now, but just from a forward-looking perspective, do you see any meaning (technical difficulty) -- Joe?

We are still here.

We are still here.

My question with respect to Spitzer is more from a forward-looking perspective in terms of, do you sense that this will lead to any meaningful changes in the pricing environment as we look forward?

That is my only question on that, and then I have a couple of others.

It is really hard for me to see how that would ultimately affect pricing.

Tom, it may, but you could speculate about that as well as I could.

I don't see any of the activity here ultimately affecting Everest or the reinsurance world or the agency insurance world in any meaningful way.

Okay.

So can I read that into that either way I mean if prices were going to go down, they are going to go down.

They are not going to go down any faster or any slower based on this?

Yes, I don't see where this is going to have any material effect on the cycle.

Okay, that is fine.

Did you folks get any reinstatement premiums in terms of your reinsurance based on the hurricanes?

And if so, what was the impact?

Very modest impact, Tom, and it is included in our $190 million after-tax announcement earlier.

Okay.

Could you talk also about the swing in your derivative expense because you had a wash there?

I did not think the markets were that volatile -- I mean they were volatile -- but what caused that?

And then I just have one last question.

At this early stage in their extended period of exposure, it is basically driven by interest rates and how the interest rates play through the Black-Scholes model we do for evaluation.

And so the practical matter is this is really just a reflection of the interest rates coming down again in the past quarter.

And then obviously one topic, the last topic, asbestos.

If you could just talk a little bit about what has transpired in the quarter.

I know you gave us a schedule, but if you could just add a little bit more color to it in terms of where you see potential settlements going.

Are we going to get some more clarity?

How comfortable do you feel with the reserves right now?

Well, during the quarter we did make a $20 million gross $18 million net adjustment with respect to the reinsurance operations where we have continued to see and develop information coming in the door.

And we felt we needed to reset some IBNR for the losses that we actually recorded, both some as reported, but more as additional case reserves, which is our assessment of what has been reported to us as opposed to the actual report.

You know we continue to look at the reserves on a quarter by quarter basis and try and respond to the information that is received or developed or the analysis completed in that quarter.

I can say with respect to the primary insurance exposures through Mt. McKinley that there was really no change this quarter.

We did have two additional settlements.

We continue to work on a couple of additional settlements as we have spoken about before.

We are pleased to lay to rest the appropriate reserving for these cases that we are able to move into a settlement in place, so that was we think a very favorable development during the quarter.

But we continue to look as we have every quarter at the underlying reserves, what information we have, what developments have taken place, and we make the adjustment that is required.

We have in the package this quarter revised our asbestos disclosure to try and make it more clear.

I won't get into that now, but if anyone does have questions on that revised disclosure, don't hesitate to call me or Beth Farrell over the course of the day and we will try and respond to those.

I should let some others -- thank you.

Michael Lewis, UBS Warburg.

I think Tom did a good job of getting a lot of the questions in, but just a little further clarification.

Can you give me a little bit better breakdown on the reserving action per se?

Which was added to; which was taken back?

I know the net was not a major factor, but just a little clarity over there.

And also again, just as Tom said, I am not going to really address anything on the Spitzer investigation, but can you give me any idea what tying and investigations of that could lead to as far as the fallout and how it can affect Everest Re or reinsurers in general?

I'm just try to get a better understanding on the issue and if there is any fallout to the underlying underwriters per se.

I will tackle the second part of that, Michael.

We will double back to Steve on the first part in a second.

But again I have -- I don't really see how it kind of changes the world for Everest and really for reinsurers on a going forward basis.

As far as all the actions and what is going on, frankly you know as much as I do.

All I know is what I have read in the papers.

You can again speculate as well as I could.

But trying to figure out if the changes the universe or the future for us and our company, I just don't see a significant change.

Steve will doubleback to the first part.

Michael, as we look at prior period development, there's a couple of things going on there.

There certainly are prior period catastrophes where we have seen some favorable development.

Perhaps the biggest piece of that was a release of event IBNR we have been holding on, the World Trade Center, where we have now got three years seasoning under our belts, and we have seen fairly stable results.

So we did adjust the World Trade Center.

Offsetting some of that favorable development was what I already spoke about on asbestos.

And then some minor adjustments made on basically a couple of quite old casualty contracts.

And when I say old, the bulk of this actually goes back to pre-1995, so it does involve the stop loss that remains in place between our U.S. company and our Bermuda facility.

But that particular situation was one where after an extended period of no loss reporting, we have gotten new loss reporting in on a very old contract that we think is still questionable and we are analyzing it, but we felt we wanted to be moving in the direction that has our reserves strong as opposed to placing it a bet going forward.

We saw a significant amount of reserve growth over the quarter.

A strong balance sheet is exactly where we want to be, and I think we're very pleased that the fundamentals coming off the current and immediately preceding underwritings/accident years will look very good.

We continue to see very strong diagnostics in terms of how well our reserves are running off.

So we are pretty pleased with where we are.

One quick follow-up.

Again on the primary book of business, can you give us some idea how your ongoing program business is going?

How many programs there are?

Which are the more dynamic ones?

What kind of growth you're seeing there?

Just a little understanding.

I think one of the concerns here was after the worker's comp situation that you were subject to potential loss of some program business.

Maybe you can clarify that a little bit.

Yes, let me -- I am going to broaden your question, Michael, and I will get back to specifically giving you some answers.

But it is an opportunity from me to talk a little bit about the program business in general and maybe the market in general with regard to this sector.

In the last few years, we kind of went into some NPA arrangements on a very selective basis.

Frankly, we're in the main very pleased with the arrangements that we constructed in the last few years and the results that we have achieved under those arrangements.

We had very little competition, and if I go back three and four years ago, it was just after 2001, September 11th, the market in general was dynamic.

The rates were going up.

A lot of our competition was certainly writing all that they could in the broker market and not particularly focused on the MGA market.

Just about the only competition we did have were couple of companies that were into fronting a system that we have never endorsed, and we had much better ratings than they did.

So we had a pretty good landscape within to work, and we went in and did a handful of MGA arrangements.

And the way that we did them was to one, emphasize control in a very very big way.

To emphasize adequate rates.

To emphasize a model that was driven by profit and not volume, although that was rather easy three years ago with rates very much on the rise in kind of an across the board way.

And we emphasize reasonable commission costs.

Now again all this worked out very well for us, and we are pleased with the results that we have had.

But more recently we have seen the other companies, in some cases some highly rated companies, coming into the MGA space.

I think to a degree it is because they are not getting the growth that they once were getting in the broker PNC side of things.

Some of those companies certainly don't emphasize control the way that we do.

In fact, some of them are very very limited in terms of how much control they can even bring to bear.

Some of them are going in with rates lower than us.

Some of them are seeking volume.

Most are paying commission more than we are.

Some are getting back to the old model if you will, which is something that we don't endorse and we never will.

Certainly you have heard about that with regard to our California comp book of business, and there was one other program that we had an agency agreement that we have now moved on beyond the agency agreement.

Both the comp program and this other program were California programs.

We have been building a Western regional office in California for the last few years.

We were very well-positioned to move into doing that business on a direct basis.

Really what the agent brought to the table is something that we have been able to duplicate in the last couple of years.

And frankly we are very happy to move on to a new distribution system that at the end of the day is a better distribution system.

So I think we will continue to be a very important part of the California comp market.

The other program I referred to was a contracting program.

We will continue to be a very important part of the contracting business out in California.

And in fact we're just happy to move onto a better distribution system.

But that does not change the fact that competition in these areas is heating up to some degree.

We have new entrants.

Some are charging less and paying more commission, and that is something that is part of the cycle and that we will have to deal with the rest of this year and next year and into the future.

So it gets a little difficult in terms of just how to project the business.

We have a number of other arrangements that continue to be through MGAs.

We find those on very steady ground.

In many cases, the agent brings a lot to the table that we would not think of duplicating it but we have excellent relationships.

We have done a general liabilities security guard program that we are very happy with.

A restaurant program that we are very happy with.

A credit program that has become a meaningful part of our overall book of business.

So we have some nice diversification and good spread, and not only in the sense that it is MGA, but now we have a direct operation does growing as well within our insurance operation.

Put it altogether and we still see that we will be doing a very goodly amount of business on the insurance side into 2005.

We expect to have very good margins on our business, and we expect to have more diversification than we have in the past.

So we are evolving.

We are moving on, and to a degree we're changing as the market changes.

A little long-winded there, but I wanted to get the big picture in as well.

Thank you so much.

Dave Sheusi, J.P. Morgan.

I just wanted to follow-up on your commentary here.

Clearly you are quite positive on the outlook.

I just wanted to drill down or look at it on more of a portfolio basis.

I don't want to tamper your commentary I guess in terms of the revenue outlook, but it seems like you're more focused on the underwriting profitability.

Should we view your commentary in the context of a flat gross topline outlook and increasingly robust underwriting profitability driver going forward?

And then just secondly on the asset portfolio side, how should we think about the reallocation of asset classes as we head into '05 and what that means for the investment assumptions in your modeling?

Yes, with regard to production and underwriting, you should view it I think very much as you described.

Our mission at this point is to continue to produce very good underwriting margins on the business that we write.

If a pocket of our business marginalizes, then frankly we are going to do less or perhaps no business in that particular sector.

So our focus is very much keep it an underwriting profit and that will lead to a very nice ROE.

I think the Company continues to grow stronger.

I think our ratings are great.

You know we have distribution throughout the world, but yes, at the same time we are battling a market where pockets are certainly weakening and coming off the peak rates that we had a year ago.

So one is kind of counterbalancing the other.

I do not -- and I would not instigate to you topline growth for next year.

I mean it is a little hard to see right now.

The visibility is not that great.

But yes, our prime mission is underwriting margins that are very good, and with that being the case and the changes in the marketplace, I am not going to forecast topline growth.

Steve, do you want to tackle the other part?

David, getting to your question on the asset portfolio and any reallocation, frankly there is not a lot going on in our asset portfolio.

We have seen it grow dramatically over the last couple of years.

It remains predominantly bonds, something in the mid-90s from a percent perspective.

We have over the last year or so developed a very modest equity exposure.

I think we have at the end of the quarter about 450 million.

We will continue to build that in a very prudent fashion.

We also have roundly between 130 and 140 million in other assets.

We do look for alternative instruments or opportunities there, but in a very small way.

We are predominantly a bond investor.

Yield is very important to us, always has been.

We look carefully at the mix between taxable and tax preference securities.

We look very carefully at the credit spreads to try and figure out where we want to play, but the portfolio is a little bit of an aircraft carrier and maneuvering it is a reasonably slow process and one that we undertake very prudently.

Great.

Thank you.

Stephan Petersen, Cochran Caronia Securities.

Good morning.

A quick question for Steve.

Is there a simple explanation to the tax benefit this quarter, and if there, then I can follow-up with you off-line?

Joe, I was wondering if you might comment on the European environment, specifically maybe any fallout that benefits Everest on Converium and concerns about some of the other competitors in Europe?

Yes, I will start.

There is nothing extraordinary going to the tax benefit this quarter.

The practical matter is the biggest driver is the losses associated with the hurricanes and typhoons.

The practical matter is most of those originated out of the U.S. operation as opposed to Bermuda, but through our quota share 25 percent of those losses actually ends up going to Bermuda, and the differential in terms of taxes there is important.

In addition, there continues to be noise going through the underlying effective tax rate.

But I think the statements I made earlier in terms of effective tax rate is that we certainly are looking for it over time to drift a bit lower.

We have not really seen that this year, in part because of the development that we have seen and the cap losses and how they have played through our intercompany agreements effectively, causing our Bermuda operations to shift its weighting, if you will, within the group.

Again, it gets kind of complicated, but perhaps you and I could talk about details off-line.

Terrific.

The European market, doubling back to that, continues to be a good market for us.

We are able to do a substantial amount of business both on the continent and London.

For that matter, the international markets -- Latin America, Asia -- again we are seeing rate to exposure the best that it has been in some time and consequently have been able to grow our international operations.

As far as Converium, yes, there has been some shakeout.

And truly not just Converium, but people more and more going onto wanting better ratings and better securities.

The Converium shakeout has not just been Europe.

Of course, it has been the U.S. where they shut down their U.S. operations.

And so a lot of that business was looking for a home, and again people very much look to us because of our ratings.

Some of that business is people look for a home on a mid-term basis.

So we got a fair number of calls with regard to replacing on U.S. business.

And going forward in Europe, again security, like the rest of the world, is becoming of paramount importance.

We stack up very well.

We do very well because of our ratings.

So it sounds like, compared to maybe six months ago, you are a little bit more optimistic about opportunities in Europe?

Yes, well I think that I have been fairly upbeat about Europe for probably the last six or nine months.

You know we have been growing in that area for the last six or nine months.

If you go back a couple of years ago, I wasn't too thrilled about the European market because it was kind of lagging the U.S. market.

But it's in a good spot right now.

Peter Wade, SAC Capital.

I just -- you may have addressed this question in some manner or another, but I would think in a changed brokerage environment there would be sort of an enhanced value to a company such as yourselves with high ratings on the balance sheet.

Maybe you can address to the extent that you think your hard line on commissions may have hurt you in the U.S. reinsurance market that could possibly change going forward?

Well, I will take your question in two parts.

As far as the changes that I believe you're talking about on the broking side, a lot of what is under the microscope right now gets into large accounts, insurance, brokerage operations insurance.

And again that is not a world that we are in in any significant way.

Most of our business is reinsurance, and when you get to our rime insurance operation, most of that is small retail agency produced business.

So changes to that end of the universe just won't have a -- and we don't know exactly what they will be -- but they will not have a material impact on us going forward that I can see.

As far as commissions, you know you may as well lump rates in with commissions.

It is a difficult issue.

We liken a market that is hardening raising rates and getting expenses under control.

When the market starts to go the other way, you are faced with the dilemma of do you lower rates and do you increase commission.

And, of course, it is always, yeah, right.

It is part of our business that you have to pay more for business that it is less adequate.

This is an age-old issue, and yes, there is never a simple answer to it.

Maybe sometimes the best math is to pay more commission, and I think we have to take that on a case-by-case basis.

But what I think you will find with Everest is we're more keen to make sure that we earn a profit at the end of the day than we generate volume.

So we may be a little bit tougher in this area.

Are we always right?

Probably not.

But we do the best we can.

Okay.

Thank you very much.

Ron Bodman (ph), Capital Returns.

Thanks for taking my question.

I may have missed Steve's coverage of this, but I was curious to know in the California worker's comp program, particularly the AARIS book and its runoff, are the claim counts, the claim activity, the loss payments still tracking with what you expected them to be in the most recent I guess period? (multiple speakers)

They generally are.

We track these pretty closely.

We are certainly getting more data every month.

But generally speaking I would tell you that looking at the book we have accumulated, it is all told running off pretty much as we expected and hoped because frankly we think that this is going to be a very lucrative book over time, and we see nothing that suggests to us that we have got issues there.

Thanks.

Don't take this as asking you to be a prognosticator, but I am curious to know, and I do assign some weight to your view of this, were you shocked, Joe, by the call them allegations included in the suit referencing Marsh's actions?

Well, you know I should avoid this question.

But all I can say is when it came to the issue of bid rigging, probably like yourself I read about it a couple of days ago for the first time.

And yes, that is just something that I think was a surprise to many people throughout the industry.

I will leave it at that.

Thanks and continued good luck.

Bill Wilt, Morgan Stanley.

A couple of questions.

The only segments of the business that I do not believe we have touched on is the U.S. reinsurance segment where premiums were down a little over 30 percent.

Any comments or color that you can add to that segment of the market?

Sure, I would be pleased to.

Right now if you look at our business, it is a bit of a mixed bag.

We talked about the international side where we are still seeing opportunities in growing.

I would probably add to the growing side Bermuda.

We continue to expand the product lines that we will entertain in Bermuda.

And the Bermuda market itself continues to expand.

On the insurance side, we talked about some of the diversification that we are achieving, so obviously we have some very good growth opportunities.

Now offsetting that, you mentioned the reinsurance side.

We have in the last few months seen less opportunity or cutback to some degree relative to a year ago some pockets of the casualty business.

That has been true.

Excess D&O is a good example.

Umbrella to a degree.

And probably even more so in the last six to nine months we have cut back on the property side, both the reinsurance, the facultative reinsurance, and the insurance that we write right on the property side.

We would also cut back in areas like medical stop loss because we've done very well in that market.

We have achieved some great results, but the market is sliding to some degree.

Having said that, the biggest slide that we have probably seen in the last six or nine months was in the property world where we saw insurance rates going down relatively quickly, more quickly than we would like to have seen.

Now we have just had $25 billion worth of property losses.

So we will have to wait and see what that means for the industry.

I don't think it kind of changes the overall cycle to the point where it is headed north again across the board.

But I would expect some balance in the property area, the areas that have been most impacted.

A little bit early to make sure exactly what that is going to be just yet, but one would think that we will see a firming in the property cap side.

In insurance rates certainly on cap-related risks, (inaudible) other cap business.

Perhaps the homeowners market as well, and not just the U.S. but the Caribbean, Latin American (inaudible) that were impacted by these hurricanes as well.

A little tough to measure what that balance will be.

But we would expect to see some changes in that and the universe.

So again we kind of have a mix to add in terms of the marketplace, and we're trying to emphasize the areas that we can continue to earn a good margin and we will deemphasize those that we can.

Thanks.

Is there (inaudible) also highlighted excess worker's comp and trucking as two primary lines that are typically heavily reinsured.

Is there anything notable happening in those lines of business?

No, we have not seen in that end of the universe significant changes.

That I think has been relatively stable for the last couple of years.

So we are still participating in those markets.

Where we have seen changes is excess D&O umbrella on the casualty side.

Those are the areas that I would think are the biggest changes.

And frankly on the D&O beyond changes in terms of rate, I mean there is just -- it is just difficult to peg the lost side of that universe at this stage of the game.

So we're being a bit more cautious in that area.

That is helpful.

Thanks.

One more quick one if I could.

Any evidence as the pricing team underwriters go through the renewal submissions, any evidence yet of benefits of tort reform at the state level?

Any evidence that medical inflation is perhaps flattening or at least decelerating?

Not clear.

We are hopeful that that is the case in many states.

But a lot of the reform is too early to tell, and whereas you are right in some cases.

It looks as if some pockets there is a flattening with regard to claims -- (technical difficulty).

I would not count anything for you as specific that you could put your finger on right now.

JF Tremblay, Credit Suisse First Boston.

First of all, can you comment on the commissioning expense ratio in your specialty underwriting risk segment?

There was an increase there, about 260 basis points ago.

Does that reflect a change in market conditions where we should expect going forward higher commissions?

He is paging to that, but no, there has been no change.

And I would suspect the answer to that is just quarterly fluctuations in bookings.

But, Steve, do you have any more color on that?

Yes, I am guessing that there are some adjustments going on.

I know we adjust the estimated premium part of our revenue.

When we do that, we need to take into consideration any differential on commission rates.

I expect that is what is driving it in terms of the underlying business.

There is nothing extraordinary going on.

So it is just an adjustment being pushed through.

Then regarding your reserve adjustments, you mentioned that you took down part of your work trade center at the NR reserve.

What was the amount of the reserve takedown?

Well, we basically tracked that from month-to-month.

What we did in this quarter is the biggest element was a release of what we call event IBNR, which we have been monitoring over the past three years and increasingly over the last couple of quarters, and that turned out to be $30 million the actual event IBNR that we released.

Is it 30 -- 30?

30.

Okay.

That is pretax.

That is pretax.

And how much would be left on this event IBNR reserve?

Round numbers, it is in the 70-ish million territory, and that is off a gross of about 190 at this point.

Those are round numbers.

Thank you.

And then finally regarding your exposure to California workers compensation market, initially in 2003 I think high-risk growth for that 87 of your -- 87 percent of your $629 million is in California worker's comp.

So how much of that were your able to keep on your books?

As you look into 2005, do still think through your primary operations that premium volume could be as significant?

Well, first of all in '04 we have already written less than we had in '03.

We have been reporting on this for a few quarters that our rates were not selling as well in '04 as they had in '03.

So we're probably 30 percent off or something in '04 relative to '03.

As far as the changes in distribution, they are really taking place this month.

It is the end of our agency agreement this October 15, and we are moving into doing the business out of our office, Western regional office.

Now our office has been up and running for a couple of years.

It was doing business initially above $250,000 premium.

We dropped it down a while ago to above 100,000.

Most recently, we dropped it down to doing business at $20,000 and above.

And, of course, we have got to add some people and resources to tackle the additional workload.

I think we're in a great position.

The submission activity that we have received so far is excellent and frankly beyond my expectations.

So in terms of the amount of business coming in, I think it is just terrific.

But when I get into kind of answering your question about what to expect in '05, it is not so much to my mind a function of the change in distribution.

It is really more a question of what will my competition be charging and what kind of commissions will they be paying.

And if they are charging a lot less than we are and paying a lot more than we are.

We're going to do a lot less business.

And that has been the trendline even before this conversion and distribution.

So all my instincts are we will do less business because that has been the trendline.

We did less in '04 than '03, and we will do less in '05 than '04.

Just how much is pretty hard to tell at this stage of the game.

But we have other programs and other opportunities where we will do more business in '05.

So to put it altogether, our insurance operation I think will do very well and make some nice margins and frankly be a more diversified operation.

But if the California comp market erodes to the point where it does not offer the opportunities in '05 that it did in '03, we will just be less of a participant in that market.

Great.

Thank you very much.

Brian Cantonlioni (ph), Citigroup.

Our risk-rated loss ratios for casualty liability lines of business through accident years '97 through '01 still look a little lower than some of your competitors who have taken the reserve charges for these lines.

How closely are you guys monitoring this, and are you guys still comfortable with your reserves for those accident years?

We continue to monitor it closely.

We have been watching it for several years now.

We had made adjustments a couple of years ago in those lines.

Frankly, our book of business from the late '90s was quite different, much more proportional in nature than access on the casualty lines.

And frankly, there were elements of the market that we avoided that caused dramatic problems for other folks, and worker's comp access, umbrellas access, trucking are all things we have talked about in the past.

We continue to look at that book of business.

We were actually quite pleased this quarter that as we look at our overall casualty reserve component runoff that that has actually swung to the favorable side and that is certainly something that pleases us as we go forward.

But at the end of the day we have been down the path of describing how we were different, if you would like to get closer to that, please don't hesitate to give Beth or I a call.

But quite different book of business.

Quite different playout.

We are not seeing any problems with those late '90s casualty reserves.

Tom Cholnoky.

Just a quick follow-up question regarding growth for '05.

Listening to your comments, I guess it seems to me that the wild-card for growth really comes down to the U.S. reinsurance business and what impact the storms may have on pricing going forward.

If, in fact, property pricing does improve or stop sliding and actually starts going up, which a couple of other competitors of yours have suggested may happen, is that the area that could generate the incremental growth for you relative to '04?

Is that kind of the wild-card?

Well, that is one of the wild-cards, but there is more than one, Tom.

Property obviously, at least in the U.S., is certainly a big part of our book of business.

So if there was an upswing, that would be helpful.

But we have the comp situation going on.

We did have the whole worldwide market, which is going on.

We have the casualty, which I do not think will get any downs from the 25 billion in storms.

I hope it does, but it probably won't.

So it is really a little tough to say.

But again I don't want to have people thinking that a significant top line growth is in the cards for 2005.

I just don't feel that.

More importantly what I want am thinking is that our focus is on significant bottom line growth and surplus growth and ROE and margins.

So we are not going to chase volume or chase profits.

Just a quick follow-up.

If the growth picture stays very moderate in '05, should we expect you to become more aggressive in terms of your share buyback in '05?

Well, I think there's a lot of elements there.

But the practical matter is we have made very clear that we are sensitive to capital utilization, and we have the tools to address excess capacity if it should emerge, having excess capital if it emerges.

But having said that, our view is always to try and put the capital to work in the business, and that is really a function of the opportunity we see.

So less opportunities means that we would be revisiting all the tools available to us, and repurchase is certainly one of those, Tom.

At this time, I will turn things back over for any additional or closing remarks.

Okay.

I would like to thank you everybody for participating, and if we did not get to your questions or if you have any follow-up questions, please feel free to call Steve or myself.

Thank you very much.

That does conclude today's teleconference.

Thank you and have a great day.