Everest Group Ltd (EG) 2004 Q4 法說會逐字稿

Good day, everyone.

Welcome to the fourth quarter 2004 earnings release call of 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 Ms. Beth Farrell, Vice President of Investor Relations.

Please go ahead.

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'll 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.

Thank you, Beth.

And good morning.

I'll briefly summarize our results, then turn the call over to Joe who will highlight the renewal season.

Then we'll take questions you may have.

As we announced previously, our fourth quarter has been significantly impacted by 2004 year catastrophe losses which I'll -- which I will cover in more detail in a few minutes.

We also announced early last week that our estimated fourth quarter tax benefit was less than initially estimated.

Despite these issues, we had what we considered a strong quarter, with operating earnings of 94.7 million or $1.66 per diluted share.

Down 20 percent from 118.6 million, or $2.09 in the fourth quarter of $2 -- of 2003.

Net income which includes realized capital gains and losses was 93.3 million, or $1.64 per diluted share.

A 23 percent decrease from 121.8 million, or $2.15 per diluted share in 2003.

The 2004 results include 133 million, or $2.32 per diluted share of after-tax catastrophe losses, compared to a 600,000 or $0.01 benefit in 2003's fourth quarter.

On a year to date basis, operating income was 425.3 million, or $7.48 per diluted share.

Down 7 percent from 456 million, or $8.29 per diluted share in 2003.

Net income year to date was 494.9 million or $8.71 per diluted share.

A 16 percent increase from 426 million or $7.74 per diluted share last year.

The 2004 results include 311 million or 548 -- I'm sorry, $5.48 per diluted share of after-tax catastrophe losses, compared to 25 million, or $0.46 per diluted share last year.

We believe that these are strong results including our return on equity of 13.5 percent.

Particularly in the context of the year's unusual catastrophe experience.

As important, they reflect strong underlying fundamentals which should persist through 2005 despite the modest softening we see in market conditions.

As we use the softening word we want to be clear that we continue to see opportunities to write business at attractive rates and have every intention of continuing to pursue these opportunities.

Still, the narrowing of these opportunities due to the increase in competitive pressures in many markets and classes coupled with our orientation to profitability suggests we're unlikely to grow volume in 2005.

2004 was a year of continued volume growth despite our becoming wary about market conditions at mid-year.

Gross written premiums at 4.7 billion were up 3 percent from 2003, including a 9 percent increase in our insurance operation and a 1 percent increase in our worldwide reinsurance operations.

Worldwide net written and net earned premiums at 4.5 billion and 4.4 billion were as 5 percent and 18 percent respectively.

Our U.S. reinsurance operations are down 15.6 percent to 1.478 billion, reflecting the modest U.S. softening we've been commenting on since July, with facultated in general casual treaty being the main contributors.

Our U.S. specialty operations are down 3.1 percent to 487 million, reflecting reductions in our accident and health, medical stop loss business, which were partially offset by growth in our surety and marine and aviation businesses.

International reinsurance operations which have been restated to ship the results of the U.K. operations to the Bermuda segment are up 32 percent to 688 million, reflecting strong growth in Asia, combined with still favorable conditions in our Latin American and other markets.

Our Bermuda operation, including the U.K. operation for both years, is up 21 percent to 883 million, reflecting continued strength in the U.K., European, and Bermuda treaty markets.

Our insurance operation is up 9.2 percent to 1.167 billion, reflecting continued moderation in our California comp writings, which have been successfully transitioned to what we believe is a better production platform, offset by growth across both admitted and ENF classes.

Across all of our operations, we continue to decline business which doesn't meet our standards.

Turning to underwriting result, the fourth quarter reflected a combined ratio of 102.8 percent, bringing our full year combined ratio to 98.8 percent, increases of 6.4 points and 3.6 points respectively.

Catastrophe losses including pre-tax losses of 138 million for the Florida hurricanes, 14 million for typhoon Songda and 16 million for the East station -- Asian tsunami, accounted for 14 loss and combined ratio points in the quarter and a 133 million after-tax or $2.32 per diluted share charge.

These effects were partially mitigated on a composite basis by normal year-end reserve adjustments, including exposure period IDNR releases on catastrophe exposed business, accident year premium, and loss adjustments included in our comprehensive end of year reserve analysis and our asbestos analysis update.

Reserve strengthening was centered around a $30 million increase in asbestos mainly reflecting continued heavy settlement on Mount McKinley exposures, which heavily impacted asbestos paid losses this quarter. 111 million in total for the quarter.

Lesser increases were also recorded in casualty classes across the U.S., insurance and reinsurance in Bermuda segments, in part mitigated by premium development.

Our year -- our full-year combined ratio of 98.8 percent reflects very strong fundamentals given a $366 million increase, 8.1 ratio points, in catastrophe losses.

Prior period reserve strengthening on 2003 and prior period reserves over the course of the full year, net of related premium development, was approximately 229 million, 159 million of which was on asbestos where our aggressive settlement activities continued to build over the year.

Regarding asbestos, I'll note that Mount McKinley settled several additional high profile claims and completed coverage and placed payments on two others in the quarter bringing the total to 9 for the year and 12 over the past 15 months.

While such settlements, particularly in the quarter, generated paid losses which impact our survival ratios, our normal disclosure update, including the adjustments we've consistently explained, reflects continued strength in these ratios.

The 70 million of net full year non-asbestos strengthening reflected modest adjustments between lines in the quarter and over the year, which added strength to both program business and casualty reserves in the U.S. and the U.K.

With offsets elsewhere including the third quarter are World Trade Center adjustments.

Frankly, on our 6.7 billion net loss reserve base we view such moments as nominal.

As important. we are pleased with what this means for an underwriting year perspective where 2004 is in the upper 80s assuming normalized cat losses and bit better than 2003.

While this improving trend is not expected to continue in 2005, it does provide the foundation what -- for what should be another excellent year.

These results were achieved without shifts in our focus on a strong balance sheet, and in particular, prudent loss reserving.

Net loss reserves increased 423 million for the quarter, despite catastrophe and mass action settlement payments totaling 272 million.

Net reserves are up over 1.6 billion for the full year.

Pre-tax investment income for the quarter at 134.4 million is up 26.2 percent from 2003s106.5 million.

Principally reflecting our growing asset portfolio.

After tax investment income at 114.2 million is up 24.5 percent.

The embedded pre-tax and after-tax yields of the quarter on portfolio are 4.7 percent and 4.1 percent respectively, with the latter right where it was at the end of 2003.

Duration stands at 5.2 years compared to 4.2 years a year ago.

Which was influenced by the interest-only strip portfolio we held at that point.

And composite credit quality remains at AA.

The quarter included modest realized capital losses of 1.3 million after-tax, and unrealized after-tax appreciation of 61 million, roughly 40 million of which was on our portfolio of index equity investments.

We continue to build our equity exposures which stand at 651 million, and see such investments together with the equity embedded in our loss reserves as somewhat of a hedge against potential interest rate rises.

Related as well is our changing view of the balance between yield and total return investing as we seek to enhance value and returns.

With our present view clearly oriented to additional total return investment.

Cash flow from operations at 197 million for the quarter compared to 480 million in 2003, was impacted by 161 million of catastrophe loss payouts and 111 million in asbestos payouts.

With the latter mainly reflecting significant high profile claim settlements in our Mount McKinley operation.

On a year to date basis, cash from operations was 1.49 billion, down only 166 million from 2003s record 1.5 -- 1.65 billion, despite including 373 million of combined catastrophe and asbestos payments.

These flows reflect strong continuing trends which position us for further growth in our asset and income bases for 2005.

Cash and invested assets stand at 11.5 billion, up 2.2 billion from year-end 2003.

With the increase principally reflecting our 1.5 billion of cash flow from operations, a 320 million April trust preferred offering, our $250 million dollar November bond offering, a $71 million increase in unrealized depreciation on our equity investments, partly offset by 32 million of unrealized depreciation on our fixed income investments, as well as a fourth quarter $70 million pay-down of our credit facility in the U.S.

You'll note as well that short-term investments are up reflecting the $250 million borrowed in November to pay off the $250 million of senior debt maturing in March 2005.

Shareholder's equity at 3.71 billion or $66.09 per outstanding share is up $9.25 from December 2003.

And $3.11 from -- from September 30.

Our return on equity for the year is 13.5 percent, down only 4.6 points from 2003, despite the unusual level of catastrophe losses.

Capital management considerations were colored in the quarter by among other issues our catastrophe losses.

And no shares were repurchased, so our authorization remains at 5 million shares.

Still, our commitment to effective capital utilization is unchanged and we continue to monitor our position and our alternatives actively.

Frankly, we were disappointed to see our catastrophe losses rise in the quarter, but we understand clearly that ours is a risk business.

More important, we've maintained our focus on disciplined underwriting and profitability as opposed to volume.

And this has yielded strong underlying fundamentals.

This together with our financial strength and broad franchise capability positions us for an excellent year in 2005.

I will now turn the flow over -- the floor over to Joe Taranto.

Thanks, Steve.

Good morning.

I'd like to offer some comments on the marketplace.

With regard to January 1st renewals, the insurance market and the reinsurance market continued to normalize from the peaks achieved in 2003.

At this point, we see the market as reasonable, still offering many opportunities for Everest.

Having said that, disciplined underwriting has become increasingly important as there are pockets to be avoided, and areas where margins have reduced.

We see the market as one where Everest can continue to do well, given our superior existing portfolio, our ratings, our diversified platform, our people and our culture.

We expect to deliver quality earnings in 2005 as we remain focused on underwriting profit, and not volume.

Specifically, going through some of the underwriting segments, I'll start with the U.S. reinsurance, and here, I'll start with treaty property.

On the catastrophe reinsurance side, what we saw here was companies where Florida was not a significant part of their exposure and accordingly had little in the way of hurricane losses, experienced modest rate decreases.

Something on the order of about 5 percent.

Companies that have had -- that have heavy Florida exposure and consequently heavy losses experienced rate increases.

Four hurricanes in one year have in -- have created a greater respect for the volatility in these Florida exposures.

Overall, we saw pricing as reasonable in the property tax side.

This is an area where increased usage of computer models has created a more rational underwriting climate.

Going on to the prorata property treaties and property per risk and individual property fact, these are areas that are much more affected by changes in original property insurance rates, certainly more affected than catastrophe reinsurance.

With regard to original rates, we see continued competition and rate reduction for risks not exposed to hurricane.

Up until recently, even wind exposed business was increasingly competed for.

Most recently, we've seen a delayed reaction to storm losses, companies re-examining their exposures to wind, and result, we have seen some bounce in rates for this pocket of the business.

Whereas the general rate decline has made commercial pro rata per risk, in fact less attractive, corrections in -- in the pockets of business that are more volatile should offer some opportunities going forward.

On the personal line side, homeowners rates in Florida will rise probably something along the order of 10 to 15 percent in response to the hurricanes.

Most pro rata treaties that experienced heavy losses come up later in the year for renewal and I'm sure there'll be considerable discussion as reinsurers no doubt will look to tighten terms and there may be a reduction in this area of ra -- with regard to reinsurance capacity.

Moving on to U.S. treaty casualty, original insurance rates for -- for most commercial segments are showing modest rate reduction from the peak rates achieved in 2004.

Overall, this leaves the market in a good place for 2005.

Some areas such as large account D&O have experienced more than modest rate decline, without justification with regard to losses declining.

Other areas like umbrella remain borderline.

Still, many areas offer opportunities if professionally done by disciplined underwriters at responsible rates and terms.

Opportunities remain in classes such as arisonal (ph) missions, selectively in medical malpractice.

Here with regard to malpractice, we've seen more competition for hospital business, modest rate increases with regard to physicians' liability.

We also see some opportunities in environmental business, commercial auto, worker's compensation, contracting business, again let me repeat, if properly done.

Candidly the reinsurance sector was more disciplined and professional on the casualty business than I had expected.

There are only a few casualty lead reinsurers with quality ratings that set terms and take major share.

We are one.

In the main, those leads were reasonably responsible and we were satisfied with what we achieved January 1 in this area.

While on casualty I'll jump over to our insurance operation.

Which is largely a specialized casualty book.

The largest segment in 2004 was California worker's comp.

Which is about 40 percent of our insurance premium.

But that had been steadily reducing throughout 2004 as we had seen increased competition.

By the fourth quarter of 2004, that segment represented about 30 percent of our insurance operation.

In January, the market offered rate decreases on the order of about 20 percent.

That's comparing January '05 to January '04.

Whereas some of this was in reaction to legislative changes designed to reduce claim costs, much of it was insurer's recognizing that recent year results will be very good, and those results are bringing in new players, and having some of the existing players looking for increased market share.

We look back at our entry in this market four years ago with great pride.

Pleased we had the fortitude to follow our instincts, despite many questioning what we were doing.

We helped improve the market for insurers and achieved excellent results.

In recent years, we've written roughly $2 billion worth of business in the comp market and that business will prove to be quite profitable.

Now that the past good results are there to look at, it's attracting more players.

Which of course takes some of the profit out of the market.

We expect that 2005 California worker's comp market to be an okay market. again, with diligent underwriting, but not as good as 2003 and 2004.

We'll remain in the market for our western regional office writing the business directly, a better business model for us.

California worker's comp premiums will continue to reduce for us.

I still expect our insurance operation to have modest growth overall despite comp declining in California in 2005.

As many of the programs we built in the last 2 and 3 years continue to be highly successful and growing quite nicely.

Here are some of the programs included in architectcy (ph).

An old program, a security guard program, a highly specialized credit program, a worker's comp program for a few selected states other than California.

I expect overall volume and underwriting margins to be modestly better than in -- in 2005 than 2004.

Meanwhile, 2004 was quite a good year.

Further, the book should be stronger in the sense that it's more diversified.

Going on to our specialty reinsurance segment, for our marine book of business, what we saw in the marine market was actually some rate increase in January 1, particularly on the energy sector.

The firmness in this area was largely driven by year-end losses from Hurricane Ivan.

With regard to the aviation market, we saw modest rate decreases, largely driven by excellent results in 2004. 2004 was certainly a very quiet year in terms of losses.

With regard to our accident and health book of business, the medical stop loss business continues to experience increased competition, and in re -- and in response, we continue to pare back our book.

Here again we're quite proud of the profits that we've achieved in this area.

Another area where our entry was once questioned.

In the last few years, we've written over $1.5 billion worth of business in this area and achieved very good results on the medical stop-loss business.

The surety market, renewals were stable.

Generally similar rates and terms as to what we experienced in 2004.

On the international side, our book is mainly property.

Results have been quite good.

And we saw modest rate decline both in insurance rates and reinsurance terms in response to these results.

The exception was in the Caribbean where Ivan lost his surf to push 2005 rates up.

Overall the market is still offering good underwriting profit potential.

With regard to our Bermuda operation, we saw a good flow of business in January, where as we expect to do less property business in 2005, that should be more than offset by growth in our treaty casualty operation which began in 2004.

In summary, the market was rational.

Reinsurance buyers continue to desire the highest rated, most professional reinsurers.

Our platform continued to service very well.

Accordingly, we expect to maintain quality underwriting margins in 2005 and produce a quality -- quality ROE.

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

Thank you.

The question-and-answer session will be conducted electronically today.

If you would like to ask a question, you may do so by pressing the star key followed by the digit 1 on your touchtone telephone.

If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again that is star 1 if do you have a question.

Our first question comes from Tom Cholnoky with Goldman Sachs.

Good morning.

I guess I had just a couple of quick questions.

First of all, Steve, in terms of cash flow, obviously you've decided to become more aggressive in settling some of your asbestos claims.

Is there any sort of guidance you can give us in terms of what we should expect for operating cash flow in 2005?

And then I've got two other questions.

Just to get on that one first, Tom, I -- I would say that, you know, as we looked at -- at '04, it certainly was an improvement in -- in -- from '03 when you exclude the cats and the asbestos, we think '05 will probably be pretty much like '04.

It may begin to -- to fade just a bit, as our volume decreases kind of engage, but we still believe that from a paid loss ratio perspective, on the fundamental business, underlying the results, we're in great shape.

But does -- does that mean that you're -- you're -- you don't think you're going to settle more asbestos claims or you think the offset will be is that it -- with a normal -- more normal cat year, the difference will be increased asbestos settlement?

I -- I -- I think we will continue to settle asbestos claims.

We -- we certainly have gotten to those that we could make fall early on in the process, we continue to work the rest of them very diligently, and would anticipate that there will be settlements.

Having said that, without the added burden of the catastrophe loss payments, I -- I think that, you know, a more normalized run rate would be something approximating a normalized run rate for -- for '04.

Okay.

And then, Joe, you mentioned a lot about -- talked a lot about rates and what you were getting, can you talk a little bit about terms and conditions in some of the major lines as to whether there have been any significant changes there?

I would say in the main this hasn't been, Tom.

I'm -- I think most of the change that we've seen in the marketplace has been along the -- with regard to -- to rates.

A lot of the changes that took place in terms and conditions when the market hardened after September 11th, 2001, most of those have stayed in place.

So I -- I think most of what I've seen in terms of change in the marketplace in the last few months has been on the rate side.

Okay.

And then sorry, my final question has to do with your premiums to surplus ratio which I guess is right around 1.2.

I haven't gone through all the numbers yet.

But it seems to me with -- with, you know, essentially no growth, you're going to be get -- you know, driving that leverage ratio continually downward.

You mentioned capital management.

But it seems to me that this will give you a good opportunity to get more aggressive in share buybacks this year.

Well, let -- let me talk about capital management kind of in general.

Certainly, you know, as we came through this quarter, we concluded with our catastrophe losses among other issues that it wasn't the appropriate time to be -- to be buying shares back and/or taking other actions.

Basically, the end of the year balance sheet is a focus for all of our constituencies for the next 12 or so months.

And so we want to -- to be as strong at the end of the year for our -- our viewing public, if you will, as we could be.

At the end of the day, though, clearly we are seeing our operating leverages, certainly against premium decline.

Having said that, we continue to be very prudent on the reserves and we're seeing an offset in the reserves to capital kind of measure.

No question, we are strongly capitalized.

No question that our year-end capital strength and financial strength is greater than it was a year ago.

You know, as we look forward to the discussions with the rating agencies, we certainly are very oriented to maintain the kind of security we offer the marketplace today.

And -- and frankly, we -- we continue to -- to push for -- for increases.

We did see S&P reaffirm us after our catastrophe loss pre-announcement.

Again, we think at the end of the year, that we look extraordinarily well capitalized.

As we move through 2005, and generate the earnings that -- that certainly should be there, absent unusual losses, we will have to make decisions along the way.

And share repurchases, dividend policy, other -- other considerations are all things that we have to consider.

Sorry.

One last quick one.

Are you stopping giving us earnings guidance at all?

Or is that something you'd want to talk about today?

We -- we are, Tom.

We've -- we've chosen not to provide it.

Basically, we don't want to to get into a situation where, you know, we feel we're constrained from a strategic or tactical perspective.

We basically have seen what the group of analysts have considered for 2005, as we look at the range of those estimates, we're not uncomfortable, although certainly to get up to the -- the upper end of the range would take an extraordinarily light loss year.

But at the end of the day, it isn't clear to us that we add a lot of value by -- by trying to put out annual numbers, then reconcile to them on a quarterly basis.

Again, we think that the analyst community does a pretty sound job of -- of getting the numbers right.

But, you know, we would-- would caution that again, the high end of the range is something that would only be achievable with extraordinarily light catastrophe losses.

Great.

Thank you.

Next we will go to Cochran Corona Securities' Stephan Petersen.

Good morning.

I was wondering as -- as -- as sort of an observer of the industry, if you could kind of comment a little bit about the hub-bub surrounding finite covers, both as sort of a -- a user of -- of -- of such products as well as a seller of such products and -- and the possible impact on-- on both the industry and -- and on Everest?

Yeah, well, first let me say that, you know, in terms of I think what is generally talked about in this area, we're -- we're really not much of a seller or a user of these products.

But, a couple of things.

First of all, I think the term finite is -- is -- is -- is -- is misused on many occasions.

Most of what we do, most of what the world does, most of what all industry does is finite.

There's not too many people that issue infinite contracts on -- on what they write.

It's usually not a good practice.

I think what is -- is perhaps coming under additional scrutiny today is contracts that probably have little to no risk transfer.

That -- that may have changed the results dramatically.

Particularly for public companies, where there may not have been proper disclosure.

If you start going down that line, then there may be some issues for those that were involved with that kind of scenario.

In the main, I think that is a terribly small portion of -- of what this industry typically refers to as finite or financial transactions.

So I don't think for most companies this will be an issue.

Unless, as I said, this are some deals that people are involved with that start to fall into that category of having changed results in a material way with no risk transfer without proper disclosure.

My opinion.

All right.

Okay.

Terrific.

And Steve, the -- the asbestos losses in the quarter, were those primarily in Bermuda?

Then again in terms -- I'm just trying to zero in on the -- on the tax offset if there was any.

Yes, the -- the -- the way our structure works essentially you may recall when we bought Mount McKinley, we -- we did a -- a -- a loss portfolio of Mount McKinley out to Bermuda, so effectively, the asbestos that the group incurs is principally in Bermuda.

Okay.

Terrific.

Thank you.

And once again, that is star 1 if you do have a question.

Next we'll hear from Joshua Shankar with Smith Barney.

Hi there.

A few questions.

First question is general one.

If you had to put your finger in the air which way does the wind tell you asbestos reform in Washington is headed?

Second to are more based on the fundamentals of the business.

While only fractionally greater, it looks like there was a clear uptick in premiums seated during the quarter, I'm wondering if there's a trend in terms of your purchasing of reinsurance or perhaps I'm just reading too much into it.

And finally there was also an uptick in paid losses during the quarter and I'm sure related to hurricane-related claims but I'm wondering how to consider that paid loss, kind of going forward through the first half of 2005.

Yeah, reform in Washington, I'll take that.

And hand the others over to Steve.

I think there's -- I really think there's a lot more juice in Washington looking to kind of accomplish some meaningful national tort reform this year, and -- and frankly, I -- I do think there will be some significant accomplishments in that area.

With regard to asbestos, I think legislation will be at least be put on the table.

That's got a better chance of something happening this year than ever before.

I don't know that that means that it has a good chance at the end of the day in the sense that still an awful lot of details to be worked out, and an awful lot of people to be brought into agreement.

But with regard to national tort reform, product liability, medical malpractice, class actions, I really do think you'll see some meaningful reform accomplished this year in Washington.

Josh, let me put -- pick up on your -- your other two questions.

With respects -- with respect to seated premium, yeah it -- it -- it's up a tick, it's, you know, 10 or 13 million dollars for the -- for the quarter but there's been no change in our retro-sessional buying as a practical matter, most of what we buy is is what we term specific reinsurance, rather than corporate level reinsurance.

And principally, at this point, that is used to contain risk elements on the insurance part of our book, and so to the extent that, you know, the sessions in the giving quarter move around a bit, it's simply coming from the -- the movement in the mix of business within our insurance space.

Our insurance segment.

So -- so really nothing going on there of -- of substance.

And would expect that, you know, as we look at reinsurance going forward, you know, our seated reinsurance generally is less than 5 percent of our overall, and certainly don't see that changing appreciably.

With respect to paid loss ratio, certainly you're picking up in this quarter's view a good bit of the asbestos payments, as well as a good bit of the catastrophe payments.

We don't think that our -- our paid loss ratio is going to sus -- stay at these elevated levels.

We think that the pattern kind of established through 2004 should continue into '05.

We certainly will have some variability on the asbestos side, but, you know, the -- that variability ought to be looked at more over a year or -- or a couple of years than -- than a particular quarter.

We'll also have some variability on the cat loss payments in the first quarter, probably the strongest, simply because we continue to pay out the hurricane losses at a fairly -- fairly hea -- heavy clip at this point.

But we would expect that would normalize over the course of the year.

And 2005 would look a lot like 2004 from a paid loss perspective.

We're not seeing substantive upward movement in the underlying non-asbestos, non-catastrophe paid loss ratios.

Very good.

Thank you very much.

I'd just like to add to, as Steve comments with regard to asbestos, you may note in the analyst supplement that the number of high profile cases for McKinley is -- it -- the number is down to 15 cases.

That's really the area that I certainly keep an eye on.

We've made great progress in that area, in recent times.

And we expect to continue to make some very good progress on that front.

So we're really taking that number down.

Moving on, we'l hear from Vinay Misquith with Morgan Stanley.

Thank you.

Could you add some more color on the prior year development for the current quarter?

We know that $30 million came from asbestos.

And second if you could also add some color on the investment income.

The fourth quarter I think had a slight uptick in terms of equity or securities income.

So I just wondering whether there were some -- some alternative investment income in that?

Yes, Vinay, when -- when you look at development, I think it's hard to -- to pick out a given quarter.

Certainly the main event in the fourth quarter was the 30 million of asbestos development.

There were minor adjustments in our program business area, the insurance lines, casualty classes there, as well as casualty classes in the U.S. and the U.K.

And then there were offsets.

In the fourth quarter, we generally book our reserve studies and we've provided for those reserve studies in a lot of ways over the course of the year, but one of the things that takes place really only in the fourth quarter is a very formal slotting of premiums and losses between accident years.

And so there can be movement, you know, kind of that is -- is hard to get a handle on from the limited information available to the outside constituencies.

I -- I think we more look at, when you look at the full year, the 229 million of which 159 million is asbestos, that leaves the 70 million. 30-some-odd million of that has transpired over the course of the year in our insurance book, where as we've commented on, on a couple of occasions throughout the year, we continue to book at picks that are higher than our -- our required actuarial picks, if you will.

We also saw modest movements in our U.K. casualty exposures, U.S. casualty exposures as well, but all of that 's kind of fit within the 70 million of net non-asbestos development that we've got over the course of the year.

Moving on to your investment question, and in particular, the kind of small bubble in the -- the equity returns -- or the equity income in the fourth quarter, virtually all of our equity holdings are index equity funds, either mutual funds or exchange-traded funds.

And at the end of the day, what you're seeing this is just a normal end of year distributions from mutual funds.

Although you consider these kinds of funds to be tax advantaged, I don't think it is unusual to see 5-ish million dollars of -- of -- of dividends and distributions on a $650 million base.

That's great.

Do you have a total number for the premium development of -- of -- of purely for the fourth quarter?

I -- well, I -- I mean you can kind of do the math from -- from where we've been.

I would put it probably another 30-ish million, and again, it's split in a couple of different components.

Uh huh.

But there's offsets in there.

There also was significant premium development in the sense that as we got into our reserve studies, one of the things we did see is that the '03 year premium estimates developed and I think it's not an appropriate measure to kind of lay a -- a loss development number without also picking up the economics of premium development.

Right.

Okay.

Thank you very much.

And 1 final reminder, to press star 1 at this time if you have a question.

We'll take a follow-up from Stephan Petersen.

Good morning, Steve.

I was wondering if you could just guide us a little bit in terms of what you -- what -- what might be an appropriate way to think about taxes for 2005 in -- in -- in our own modeling, given the-- the net benefit that you've received in the last couple of quarters, it's -- it's a little difficult to kind of think about what we might expect in 2005.

Yes, there -- there -- there's no question that a couple of things have caused 2004 effective rates, if you will, to be pretty variable.

We did have some one-time items associated with the U.K. branch sale.

We certainly did see a good bit of sessions, particularly on the asbestos side and with respect to the catastrophe losses that made it into our Bermuda operations as a result of the inter-affiliate reinsurance.

And then the catastrophe losses themselves and the benefit associated there.

At -- at the end of the day, I kind of go back, to, you know, the general guidance we've given over the last couple of years, that our kind of run rate tax number is in the teens, and is really in the lower teens, and has shown drift downward over time, based upon the growing importance, and -- and as a result, the growing balance of -- of income, you know, in our Bermuda operation.

That is, our income is taxed where we earn it.

You know, when it is earned in Bermuda, there's a statutory rate of 0.

When it's earned in the U.S., there's a statutory rate of 35 percent.

When it's earned in the U.K., there's a statutory rate of 30 percent.

And -- and so at the end of the day as the mix changes, and in particular the Bermuda component grows you would expect our tax rate to drift down.

And certainly, you know, the last couple of year, we've kind of been in the teens and drifting lower each year. 2004 saw some aberrational things transfire, but -- transpire.

But we would expect 2005 to be back on that pattern of probably a -- a low teens kind of a tax rate.

Okay.

Terrific.

Thank you.

At this time, there are no further questions.

I'll turn the conference back over to our presenters for any additional or closing remarks.

Well, I just want to thank you you all for joining us this morning.

And we'll get back to making sure that 2005 is a -- is a great year for all of us.

Thank you.

If you have any further questions, feel free free to call Steve Limauro or myself.

Thank you again.

And that does conclude today's teleconference.

Thank you.

And have a great day.