Everest Group Ltd (EG) 2005 Q1 法說會逐字稿

Good day everyone.

Welcome to the first quarter 2005 earnings release call of Everest Re Insurance.

Today’s conference is being recorded.

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

Please go ahead, Ma’am.

Thank you 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, expectative, and the like are subject to various risks.

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

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.

I’ll briefly summarize our results and then turn the call over to Joe for an overview of market conditions.

We’ll then take questions you may have.

I’m pleased to report that our first quarter produced strong results with operating earnings of $165.2 million, or $2.90 per diluted share, up 9 percent from 2004’s $151.5 million, or $2.67 per share.

Net income, which includes realized capital gains and losses, was $167.1 million, or $2.93 per share, a 32-percent increase over 2004’s $126.1 million, or $2.22 per share.

We believe these are excellent results, reflecting still strong fundamentals operating against the backdrop of modest continued softening of the market conditions.

Again, when we use the ‘S’ word, it’s important to note that we continue to see and pursue opportunities and our disciplined commitment to profitability over volume, financial strength and underwriting expertise, combine to position us well in this environment, albeit perhaps with modestly lower volume.

This was the case in the first quarter where gross written premiums at $1.05 billion were down 14.5 percent, including an 11-percent decrease in our Insurance businesses and a 22-percent decline in our Insurance operations.

Worldwide net written and net earned premiums at $1.01 billion each were down 14 percent and 5 percent respectively.

Highlighting gross written premium for our segments, our U.S.

Reinsurance operations were down 5 percent, mainly reflecting our wariness with respect to Casualty business.

Our Property business, but purely on a treaty basis, was actually up slightly.

Our U.S.

Specialty operations were down 16 percent, reflecting continuing soft conditions in our Accident and Health and Treaty businesses, partially offset by growth in Marine and Aviation.

International Reinsurance operations were up 3 percent, mainly reflecting strength in Asia with modest declines elsewhere.

Our Bermuda operations were down 28 percent, principally reflecting lower per-risk property business in Bermuda and reduced Motor business in the UK, partially offset by growth in the European Treaty business.

Our U.S.

Insurance operations were down 22 percent, mainly reflecting the expected reductions in our California Worker’s Comp business, which good growth in non-Comp lines wasn’t able to offset.

Our transition to an enhanced platform in California anticipated a first-quarter volume reduction.

However, that market, frankly, has seen competition heat up significantly, a situation we are monitoring carefully.

Across all of our operations we continue to emphasize discipline, but we also recognize that existing market conditions continue to off attractive business in many lines and classes.

I’ll also note that although we don’t expect year-over-year volume increases, it is important not to read too much into any individual quarter’s production result.

Our underwriting results for the quarter were a bright spot with our 91.4 percent combined ratio right on top of 2004’s 90.8 percent combined ratio.

We did see $27 million of catastrophe losses in the quarter, mainly on 2004 catastrophes, but also including Canadian Energy risk loss and a Middle East industrial fire loss.

Additionally, we recorded $18 million of asbestos reserve strengthening, although this was partially offset by modest favorable development on comparably age reserves, getting back to the early to mid-1990s.

Overall, our focus on balance sheet strength served us well and that focus continues with net loss reserves up by $153 million to $6.9 billion, despite $90 million in catastrophe loss payouts.

Pre-tax investment income at $133 million for the quarter was up 32 percent from 2004’s $101 million, mainly reflecting our growing investment portfolio.

The embedded end-of-period investment portfolio yields at 4.6 percent pre-tax and 4.0 percent after-tax, hasn’t changed appreciably since yearend 2004.

Likewise, duration for the fixed income portfolio at 5.2 years hasn’t changed appreciably.

It’s worth noting that our build-out of non-fixed income investments, mainly public and private equity exposures, continued in the quarter with $176 million of additional investments and that ultimately such investments dilute to fixed income-oriented yields and duration measures I just noted.

The quarter included $1.8 million of after-tax realized capital gains as well $126 million of after-tax unrealized depreciation.

The latter included $113 million on our fixed income portfolio and $13 million on our equity exposures.

And it remains important to note that these valuation adjustments don’t capture the offsetting economic value increase in our equity and our loss reserves.

With discounted loss reserves of $5.4 billion, the revaluation of our equity in those reserves mitigates about 70 percent of the quarter’s unrealized depreciation.

Although current accounting guidance doesn’t recognize this value, it remains an important consideration in our view of values.

Cash from operations was $325 million, down from $400 million in 2004, with the decrease principally relating to $90 million of catastrophe loss payments and $37 million of tax payments in 2005’s first quarter.

Cash in invested assets at $11.5 billion are flat against yearend, mainly reflecting the payoff of the $250 million of March 2005 senior notes and the change in unrealized depreciation noted earlier, partially offset by strong cash flow from operations.

Our balance sheet remains strong with shareholders’ equity at $3.756 billion, or $66.65 per diluted share, which is up $43 million, or 56 cents per share for the quarter.

Our annualized ROE through 3 months is running at 18.9 percent.

Capital and capital management considerations continue to be a focus.

Having said that, we very much see that this is an issue, which must be considered over time to appropriate balance to all considerations.

In this context our share repurchase authorization remains at 5 million shares.

In summary, Everest had an excellent quarter, retaining its focus on disciplined underwriting and using its staff and mentor (ph) resources and its franchise strengths to focus on profitability.

I’ll now turn the call over to Joe Taranto for his comments on market conditions.

Thank you Steve.

Good morning everyone.

Basically in the first quarter we continued to see rates drifting down across most product lines and in most countries.

Our plan is to pursue profit, not chase volume.

We are happy that we achieved quality underwriting profits in all of our sectors in the first quarter and that we generated a 19-percent ROE overall.

By sector, U.S.

Reinsurance premium was off approximately 5 percent, mainly driven by a reduction in the U.S.

Casualty Treaty area as we withdrew from large account D&O treaties, where rates have continued to decline despite increases in the claim activity.

We continue to see good opportunities in most other Casualty classes and in Treaty Property.

Our security and our expertise is highly sought after in this sector.

Turning to the U.S.

Insurance operation, we were off approximately 22 percent.

This was just about entirely driven by less California Worker’s Comp business.

As previously reported, the California Worker’s Comp sector has become more competitive as carriers have looked back and realized the excellent results that have been achieved in recent years.

We remain in the market but we are not looking to write the amount of business we have in the past.

Rather, we’ll proceed on some more fertile ground elsewhere.

Our other programs are running quite nicely.

And I expect for the next 3 quarters our Insurance operation should achieve modest growth overall, despite a shrinking California Worker’s Comp book.

Specialty Underwriting was off about 15 percent as we continue to reduce our book of Medical Stop Loss business.

We are most pleased with the results we achieved in this area in this last few years.

But as insurance rates decline in this area, we’ll leave the business for others.

We instead have turned to other classes of business in the Health Reinsurance world to review for possible future opportunity.

On the Marine and Aviation front, we’ve witnessed some continued softening.

Our International book increased roughly 3 percent.

This book is largely a Property book.

Prices generally remain good, but off the peak levels from 2004.

We did find some additional opportunities in Asia, which generally offset the modest price decline that we’ve seen elsewhere.

In Bermuda, written premium was off about 28 percent.

As noted by Steve, the drivers were less Individual risk Property business and less UK Motor. (Indiscernible) the UK Motor, again this is a market that in the past we were very pleased to participate in, but at this point we don’t see it offering any meaningful underwriting profit.

We’ve been building a Casualty operation in Bermuda, which I expect will kick in for the remainder of the year, so I expect future quarterly comparisons from Bermuda to be level relative to 2004.

In summary, we continue to (indiscernible) and go where the opportunities exist.

We continue to make use of our quality ratings, superior underwriting, low expense ratio, focused and disciplined culture, extensive product knowledge and extensive distribution system.

We’ll now take any questions that you might have.

(OPERATOR INSTRUCTIONS) Tom Cholnoky with Goldman Sachs.

Joe, just on your comments about the growth.

Let me make sure I understand what you’re saying in terms of the U.S.

Insurance and in the Bermuda operation.

Are you saying in U.S.

Insurance if we just simply look at the year starting at the end of the first quarter, so, in other words, the next 3 quarters when we think about premium volume over the next 3 quarters, over the last quarters of ’04, on a comparative basis we should have modest -- we should be able to see the modest growth?

That is the current expectation, Tom, correct.

California Comp book, the biggest quarter we had by far last year was the first quarter.

As you know, the book started shrinking in 2004.

We did less and less business as the year went on.

Perhaps more importantly, the other programs that we started in the last couple of years are growing quite nicely.

It grew quite nicely in the first quarter and we expect them to continue to grow quite nicely for the remainder of the year.

So, yes, I am saying that my expectation for the next 9 months is that you see modest growth in the Insurance sector.

OK.

And then, is that true for Bermuda as well, or was your comment more with the entire year?

Well, it was really more the next 9 months that I’m referring to.

Bermuda, the Property Individual risk is off as we’ve seen rates in that sector come down more significantly than many other sectors, but we are building a Casualty operation and we do expect to do more business in the next 9 months in that pocket of the business.

So, I think, again, looking out for the remainder of the year, I’d expect the Bermuda premiums to roughly be level.

With the fourth quarter of last year, or --?

No, over the 3 quarters.

Over the last 3 quarters, so it’s the same comment.

OK.

And then, Steve, just one last question and then I’ll come back.

You mentioned favorable development.

Is that roughly the $18 million that you basically offset the asbestos?

And where has that occurred?

Well, we certainly had favorable development in the very early 1990s, which was for us is important because of the continuing inter-affiliate reinsurance between us and Bermuda, where effectively the $18 million of asbestos really isn’t impacting Bermuda because of that offsetting development.

Overall, we actually had approximately $20 million of adverse development, mainly on the 2004 storms, together with a little bit of holdover from the asbestos.

Oh, OK, when you add in the asbestos plus the storms and then offsetting the favorable.

Yes, and frankly, there is a lot of noise.

I mean, this isn’t something where we’ve got some significant action taking place anywhere.

It basically is just in the normal revaluation we do at the end of the quarter, and as we adjust the year we see net/net a little bit of 2004 and prior.

Having said that, it’s scattered across 4 of the 5 segments and it’s relatively modest amounts.

And frankly, we’re very pleased that we continued to see the 2002–2004 period look very strong and all of our indications are that our reserves remain very strong, and so we really don’t see the development issue as anything but noise.

Stephen Petersen with Citadel.

I just have a follow-up on Tom’s question here.

I need to drill down a little more on asbestos.

So, there wasn’t -- there wasn’t anything in particular going on in that particular (indiscernible) in terms of settlements or anything close to being resolved that may have driven that $80 million?

No, frankly, asbestos activity was very quiet this quarter, notwithstanding that we recorded the $18 million.

That basically related to a couple of exposures we saw in (indiscernible) McKinley and reinsurance where there was enough noise to warrant some action.

But more broadly, we saw relative quiet and we did have 1 settlement in the quarter, but the practical matter is it was fairly quiet.

And interestingly, on the litigation front affecting insurers in general, we were actually, I think, pleased with some of the developments we saw in various cases.

So, asbestos continues to be an issue that we watch very carefully and this quarter, in the scheme of things, was fairly quiet.

If you would indulge me quickly, you kind of touched upon it in your prepared remarks.

Could you walk through the math again in the ‘all other’ comprehensive income account under shareholders’ equity in terms of the reduction there from the end of the year to the end of the first quarter?

Well, basically we saw -- we saw our underlying depreciation in our fixed income portfolio, about $113 million, and we saw about another $13 million on our equity portfolio.

The practical matter is, as I commented upon, current accounting guidelines really don’t focus on equity and loss reserves related to loss reserves being booked at ultimate value as opposed to discounted values.

We do track that.

We understand the differential and frankly, as our assets depreciate, the equity in our loss reserves, which effectively reflect a revaluation of the liabilities, moves in the opposite and offsetting direction.

So, it’s worth considering when you look at the overall scheme of our balance sheet.

Michael Lewis with UBS Financial.

Steve, can you clarify this thing with the reserves?

I got a little mixed up.

It’s $18 million for asbestos.

You had some storms that you had to basically upwardly adjust your reserves.

We’re talking about a $20 million?

Was that the 2 items together and that was partially offset by some favorable development in the early ‘90s book of business?

And right, what’s the net/net number then?

Yes, you are right and that the net number is around $20 million.

Oh, it all -- counting and favorable and unfavorable is $20 million adverse development in the quarter?

Yes, and again, I wouldn’t fixate on any one element, the storms or the asbestos.

It really is, you go through, at the end of a quarter, an adjustment of all of our reserve bases, and at the end of the day a number falls out.

Right.

I understand.

I just wanted to have a clarification.

Number 2, on the -- on those 15 remaining high profile asbestos cases, I guess prior to this quarter you settled 12 over the prior 15 months.

What is the timeline on the 15 remaining?

Is it going to make any significant progress this year?

And my last question goes to Joe, what’s the fallout from all this Finite reinvestigations in (indiscernible) and everything else and Channel Re.

What at the end of the day does it mean to companies like you as far as production going forward?

Thanks.

Sure, I’ll go ahead and tackle both.

On the asbestos side, yes, we still think we’ll be able to settle a few more this year and probably a few next year.

So, we expect that 15 number to be whittled down pretty meaningfully in the next 18 months.

And as you noted, Michael, we’ve made very good progress in that area in the last 18 months, so we continue to pursue that strategy.

With regard to Finite, I mean, I would tell you, first of all, that we have seen very little impact in terms of us and the way we do business.

And that’s primarily is because we have not been in as buyers or sellers the, I guess what’s often referred to as the alternate risk market, or the non-traditional market.

I would imagine that many of those products buyers would be less interested in pursuing them.

Certainly people are going to make certain that if they do pursue a product that it certainly has the appropriate risk transfer, only the appropriate accounting has taken place, et cetera, et cetera.

But, since we really in the traditional side of the world, we really have not seen it influence our operation whatsoever.

Clearly, some companies have become a bit internally focused, thus they’re in the thick of things with regard to these issues.

We’re really not involved, and all happily so, and so we’ve just kind of stayed focused with regard to doing our business.

Joshua Shanker with Smith Barney.

A few questions for you.

The first question would be regarding the share repurchase authorization.

I’m wondering if there is any principal that you give us that would cause you to deploy or slow that authorization in terms of when you repurchase shares?

Well, at the end of the day we’ve had that authorization since September and the smaller authorization prior to that.

We continue to look at our capital base and capital management very quickly.

Joe and I were chatting this morning and one of the comments we kind of concluded was a good one is that at the end of the day, this is not a sprint.

There are a number of factors that we need to consider.

As we look at our capital base and our various constituencies, we also have to look at what the opportunities in the marketplace are, and more generally, across our environment.

And we think having the capital we have is a good thing at the moment and it positions us with maximum flexibility going forward.

We don’t have a price target that I can tell you we’re going to start buying at.

We assess share repurchase as well as dividend actions on an ongoing basis and at this point in time we feel very comfortable that we’re working the capital pretty well.

We generated 19 percent ROE on an annualized basis this quarter and we’re going to continue to watch the opportunities available to us.

And frankly, capital has a value over time.

We have always been opportunistic in our approach to our markets and to our environment generally.

And capital affords us the luxury to do that.

And additionally, as the portfolio changes over time, obviously, you’re investing more in equities than fixed income instruments.

Is there an allegation decision behind that?

Is there a trajectory in terms of asset mix?

Well, there’s no question that as we look at a portfolio yield of after-tax at 4 percent and see $200-ish million of unrealized depreciation still on our balance sheet, as we look at the interest rate environment, at the end of the day we think we’re going to be lucky to make that yield.

And frankly, as we look at equity, both public and private, and other types of investments we think, over the long term, it reflects a better economic return for us and we’re at a stage where we’re comfortable in (indiscernible) in that direction.

We don’t have a particular target, but certainly we’re only at about 25-ish percent of capital at the moment and we continue to build that out.

As we get later on in the year I’m sure we’ll hit the 50-percent level at a point that we’ll continue to re-assess.

We’ll also have to look at what we do from a capital management perspective.

But, at the end of the day, the risk associated with our underwriting activities is stabilizing and our capital base allows us the ability to consider taking a bit more risks on the investment side.

And again, we don’t move in a way that’s going to unsettle the balance of our dynamics, but we certainly do appreciate that we’re looking to maximize the economic returns from our very significant asset base.

And we think right now, while there is absolutely a need and a use for bonds underlying our Insurance liabilities, at the end of the day we think the long-term economic returns for our capital base looks better on the equity side.

And finally, considering the (Indiscernible) and the intrinsic value of the loss reserves and (indiscernible) environment, is there any way that you can make any general statements comparing the durations of your portfolio reserves in comparison to your asset portfolio duration?

Yes, well, we’ve disclosed the rough position in our 10-K.

And at the end of the day what we’re seeing is that our duration on the investment portfolio side is 5.2-ish.

Our liability durations are in the high 4s, and that’s a situation that we’re not uncomfortable with.

This is a long-term business and that analogy of “it’s not a sprint” is something that applies in a lot of different way to us.

I’d like to add to what Steve had to say on the equity side.

We’ve probably put a half-a-billion into the equity side, Steve?

More than that.

OK.

In recent quarters.

And obviously, that’s not going into bonds.

You don’t get the interest kickoff that goes into operating income.

Rather, future gains would come through the realized capital gains line.

So, again, just for all of those people that are building models, we are really looking to building long-term book value and as a result a lot of the money and good cash flow we’ve had recently we put it to work in a way where it won’t necessarily come through the operating income.

Susan Spivak with Wachovia Securities.

Actually, my question was also really on capital management and we’re getting towards the levels where you stepped up and bought stock back in the past.

And I guess I was just wondering if there -- are you likely to say that in the next quarter when we’re talking you will have bought back stock or not?

That’s number 1.

And then number 2, could you give us what your outlook on the M&A environment is?

Yes, Susan, I think what Steve was saying is, we intend to maintain flexibility.

We’re not going to give a specific formula to the world that we are going to be bound to adhere to.

As you noted, probably no one bought back more stock in the last soft end of the market than we did, so we’ve already shown that we’re inclined to do it.

We’re up, we’re ready to do it, ready to do it in a big way.

In fact, we’d rather do it that way than to too little.

So, our point of view is that we know what this is all about.

It’s not something we feel like we’re going to have to do tomorrow.

It’s something that we kind of look at through the course of the next 3, 6, 9 months, and beyond.

The second part of your question, Susan, what was that?

What’s your outlook on the M&A environment?

Well, I think we’re getting the feeling that there is -- there’s more interest certainly than there was a couple of years ago.

I’d probably say it was zero interest in the P&C universe a couple of years ago, but at this stage where the landscape is changing, and I think the better business is going to the better-rated companies and the more seasoned companies.

And some other companies I guess are having to make decisions as to whether or not they want to openly become one of the more seasoned companies or have their investors cash in at this point.

There certainly is a lot more discussions with the P&C universe about M&A.

So there probably will be -- there probably will be some activity in the next 12–24 months.

We’re involved with always looking to see something make sense.

We know our standards are awfully high.

That’s why in the past we’ve done very, very little in the way of acquisition.

Most of what we have done has been internal building and I expect that will continue to be the case.

Having said that, we will examine some of the opportunities in the M&A world.

Steve Shapiro with (Indiscernible) Insurance.

I have 2 questions.

The first is, with respect to your Casualty reserves for the years 1997–2001 it would appear that you didn’t add to those reserves this quarter.

And I wonder, do you look at that on a quarterly basis, or is that part of an annual review?

I think we look at it -- or we do look at it on a quarterly basis to get a sense of what’s going on.

We continue to look very carefully at those older years on the Casualty side or the 1997–2001 years.

But we also more broadly look at everything prior.

So, as we look at everything prior we think we had a pretty clean quarter.

We continue to look at ‘97–’01 Casualty, and while adjustments are being made, they’re not consequential and we continue to get messages from our quarterly metrics that all of our reserves are generally performing pretty well.

We do certainly spend a lot more time on accident year identification, if you will, as we complete our comprehensive reserve studies, but we have a pretty robust set of metrics on a quarterly basis that tell us what’s going on, if not by actual accident years, certainly by blocks of periods.

And we continue to watch ‘97–’01, but we continue to watch all of our reserves.

And frankly, there’s nothing from my perspective that we really ought to be commenting on in terms of significant events going on by year.

My next question was, you mentioned some bright spots in your domestic Insurance programs.

Can you elaborate a little further on where those might be and talk about the kinds of volumes that you might expect to produce there and would those mitigate some of the volume declines that you’ve been pretty candid about, being willing to assume?

Yes, we have, I guess, maybe 4 or 5 programs that are really coming along quite nicely in the Insurance sector.

We have a Security Guard program that we’ve mentioned in the past that’s performing quite nicely, and an Architects’ and Engineers’ program that’s performing quite nicely.

A specialized credit program that’s also doing quite well, and a couple of others.

So, those areas are really growing nicely for us.

As I kind of mentioned to Tom Cholnoky in the beginning, I expect all of those programs to -- and they grew quite nicely in the first quarter.

It was masked by the decline in the California Worker’s Comp business.

But I see the growth in those areas continuing in the next 9 months and pretty much offsetting the reduction that we’ve seen -- that we’re seeing in the California Comp end of the business.

So, for the next 9 months I expect the Insurance platform to be level premium-wise, and frankly, to be much more diversified than it’s been in the past.

In 2004, Cal Comp was something like half of our business in this sector.

In the first quarter it was something like 25 percent of our business, and frankly, by the end of the year it will be a much lower percentage of the overall business.

We’re happy for what we achieved in 2003 and 2004 in the Cal Comp market.

That’s performing extremely well.

And we’re still in the market in 2005 as we see it as an OK market, (indiscernible) underwritten, not quite what it was last year and the year before.

So, the growth in these other areas in the Insurance side, we’re very pleased.

That’s really where we’re going to focus a lot of our resources and attention and so we should, in the next 9 months, basically offset the decline in the Cal Comp, and hopefully, going into the following year, grow in our Insurance operation.

Tom Cholnoky.

Joe, can you give us any sense at all how the Florida hurricane market, the renewals looked at this point in time and whether you feel as though there is going to be any significant growth opportunities there when those renewals come up?

Well, I think there will be some opportunities.

You kind of have to slice and dice it.

The Commercial business, Commercial Property rates did not respond as much as I think they should have, given the fact that there were 4 hurricanes and some pretty massive losses.

We have seen some uptick in Commercial Property rates, but not anything that has me all that enthused.

On the Homeowners’ side, we’re seeing 10, 15-ish percent rate increase and we are seeing certainly California revisiting the Catastrophe Reinsurance plan that they have.

I think there will be some selective opportunities on the Homeowners’ side.

There will be a few on the Commercial Property as well.

A lot of this business, as you know, Tom, really gets determined in June, so it will be in the next couple of months that many of these deals get put together.

Obviously 4 hurricanes, it’s an explosive date.

Reinsurance is very much needed by many of the companies there.

You would think that they’re going to have to pay more this year than they had to pay last year.

Credit quality for reinsurers is a big issue.

So, we have a lot of discussions that are underway right now and I think it may lead to some more opportunities for us in the Florida Property market in the next few months.

And then just one other kind of capital management-related question.

What is your view, Steve, in terms of your debt on the balance sheet?

Would you have any plans for potentially retiring some of that debt with any excess capital you have, or where does that come in terms of the pecking order of uses of capital?

I don’t really think at this point there’s a whole lot of opportunity to retire debt.

I think we’re very happy with having paid down the 2005 senior notes in March and where we are from a leverage perspective, the (indiscernible) leverage debt to cap.

And at the end of the day we certainly are cognizant that at some point we may take some action, which would change our equity.

We know what the thresholds are for our rating agencies and we certainly wouldn’t want some capital management activity to push them to an uncomfortable place from a financial leverage perspective.

So, again, a lot of complexities, but I don’t think there’s any immediate prospects for retiring debt.

For everyone’s edification, we did just retire last month $230 million of debt where we were paying 8.5 percent?

That’s correct.

Scott Fox with HSBC Investments.

I wanted to go over again your comments on the pricing environment.

You said that pricing was -- you had seen a modest softening, rates drifting down across product lines, across sector and countries.

Is it fair to say or would it be accurate to say that you believe that it’s -- pricing has moderated but has not become overly aggressive?

If I said that, would that be accurate?

No, I think that would be accurate.

Let’s go back for a moment to the last cycle, 1985–1986, and they really were at an extreme high at that point and then they started drifting down.

And probably you could look back at it like for 10 years the industry still made some pretty good money up until ’96 even though you had many cycles in-between.

But in ’97, obviously, through 2001 the market was pretty ugly.

So, we tend to announce cycles to either be going up or down in rate.

Hardly ever does it stay level.

Probably more years in going down than going up at the end of the day, but we peaked in many, many classes in 2003 and some classes in 2004.

It’s to be expected that we would see some drifting down from those highs.

I would say most pockets of the business are still adequately rated.

There are some that we’ve noted that we have taken considerable concern about and we’re addressing that.

I mentioned the large account D&O as an example.

We’ve mentioned the Medical Stop Loss business or the Motor UK business.

So, there are pockets that we’re starting to get to the point where we see little opportunity overall.

But having said, the vast majority of the business, Property/Casualty, in most countries is they’re still adequately rated.

Bill Wilt, Morgan Stanley.

You just touched on the question I was going to ask.

I was going to ask about just generally any additional color you could add on the competitive dynamics in Professional Liability broadly, both from a -- both the competitive dynamics and the loss trends that you’re seeing.

Well, I’ve been talking about the D&O.

You’ve kind of heard that we’re concerned about that area.

We really are -- have recently withdrawn some of our participation in that area.

We’ve seen a lot of rate decline in the last 12 months and, at the same time, whereas it’s a little fuzzier to figure out just where the claims are at, we’ve all read in the Wall Street Journal in the last 6 months about enough companies exploded to know that there’s going to be some very, very big additional claims out in that landscape that will have to be parceled among the people writing that business.

A lot of new capacity and limit was brought into that business in the last 24 months.

We did see this January 1, not just Everest but some other reinsurers take a step back on that business.

I was almost surprised by that, but in the main, not enough companies have taken a step back to really change the market.

The forum has not really improved at all.

Rates tend to continue to drift down somewhat in that pocket of business.

When you bounce around to other pockets of Professional Liability, we don’t think the same way.

We mentioned there is an Architects’ and Engineers’ program that’s going well.

Certainly, selectively Medical Malpractice physicians and hospitals, we see opportunities.

So, in other pockets of Professional Liability we still see continued opportunities.

But the D&O market is a touch market right now.

We just see and sense losses building but rates not really adjusting for it.

Would the -- just a point of clarification -- would the losses broadly, recognizing I’ve seen the same story that you have in the Wall Street Journal, would those be likely flawted (ph) back to -- you said earlier there were accounting problems or other issues from earlier years, would they be flawted (ph) to older accident years, or because of the nature of the business, would they fall into accident years ’03 and ’04?

Well, Directors & Officers Liability is really on a claims-made basis, so that means that when a -- basically it goes into the year that the suit is initiated, when the claim is made, so if it’s made this year it goes into the current policy.

Michael Christodolou, Inwood Capital.

With respect to Worker’s Comp in California, Joe, you mentioned in your prepared comments that somewhere along the line you’ll proceed onto other grounds.

Should we expect that you’ll shrink California further and just move away from WC in general, or would you think about other states?

Well, we are in other states.

We’ve been in Florida for some time.

We’re in some of the Midwest states.

There are probably 4 or 5 other states where we’re in the Comp market.

And we’re in the Comp market before we even entered California.

So, we’ll look to continue to do that business.

I don’t know that we’ll -- right now we’re not seeing any great opportunities in states that we’re not in to go into.

California itself will stay in the marketplace.

We’ll just continue to charge what we think is appropriate.

In the last 12 months that meant less business for us.

You may have seen -- most carriers are probably charging 20–25 percent less today than they charged a year ago.

Some of that is reflecting the legislative changes that are to reduce claims.

You may have also seen that the Worker’s Comp rating bureau is now seeing how recent years have gone very well and is proposing a 10–12 percent rate decrease July 1.

I think many of the carriers will adopt that.

So, there’s a correction going on out there that good profits were achieved and rates need to be lowered.

More competition is coming in as a result of it.

So, as I said, it’s kind of a normalizing OK market right now, but we can’t write what we want to write, what we wrote in 2003 and 2004.

But the other programs that we have, outside of Comp, are going quite nicely, and that’s where our efforts will be concentrated.

And just a follow-on into the California.

There do seem to be a lot of mixed information coming out of California Worker’s Comp and the general word is that the State Fund would be populating, which would create a void that the Berkshires and the Seabrights (ph) could move into.

And yet it seems like from their yearend numbers the premiums and statutory capital are up and they’re recently amended their (indiscernible) policies, so they’re now willing to quote on business even if others have already quoted.

Are you seeing them get more competitive in addition to the rate pressure?

We are seeing exactly the same thing that you’ve just reported.

It really boils down to the State Fund is not taking a step back.

If anything, they’re taking a step forward.

Well, Gentlemen, I commend your discipline.

There are a lot of other opportunities out there.

No reason to stay in a crowded site.

Hawney Sava, Viking Global.

(Indiscernible - highly accented language)?

Well, we were in the -- this was in the private passenger side where we had a pretty big book of business going back 2 and 3 years and started (indiscernible) a couple of years ago.

But UK Motor rates were quite good a couple of years ago and many carriers performed quite well.

And certainly the ones that we were with we were very happy to be with.

But then we saw competition heat up at the entrance level and we did not believe that this year, and probably next, overall the sector would make (indiscernible).

That seems now to be borne out by the latest numbers that we’ve seen.

And we transformed our book in the UK where that was by far the biggest product line that we had, well, I’d say 2 and 3 years ago, to almost no business on the books at this stage of the game in that sector.

So, we’ve seen that market change considerably in the last 3 years.

(Indiscernible - highly accented language)?

No, it’s not so much for the Excess Liability.

That’s not a market that we’ve particularly been in.

Probably Excess rates have gone up a bit and they needed to go up.

But I’m really more referring to the end of the world that we were in, which was the First Dollar, Private Passenger Automobile business, but they refer to it as Motor business.

Ira Zuckerman, Sanford Financial.

Joe, most of the questions have been answered.

On the asbestos side, can you give us any feel about the outlook for Federal legislation on asbestos and what impact that would have on you?

Yes, there seems to be more interest in Congress for doing something at this point than perhaps there ever was before.

Now, I can’t tell you if that means that something is actually going to happen, but the chances are greater than they’ve ever been before.

Now part of the reason seems to be some insurers have withdrawn support for a Bill, which has some Democrats thinking maybe that means that they should be supporting a Bill.

Drafts have been introduced.

There is still negotiating going on.

We’re unclear as to whether or not this is something that we would really support at the end of the day since it’s not totally well defined just yet.

So, I can’t really tell you the odds on something happening, although I would have guessed a few months ago very low.

They certainly are greater now.

And I can’t tell you exactly what the final form will be if they do make it to the finish line.

And with that I can’t tell you what the impact would be to us.

Certainly, you back 2 and 3 years ago when this was first being debated, most of us wanted some finality and certainty, if it could be done at sensible costs.

We also are seeing recently, which is pleasing us to some degree, some recognition as to the craziness that’s gone on in this end of the world where so many uninjured participants have been collecting money and so many lawyers have been kind of garnering ungodly sums of money and some fraud has been taking place at this end of the world.

That’s starting to be addressed.

So, independent of legislation, we’re seeing some movement where there is some sanity being restored in this end of the world, which pleases us.

So I really can’t give you a complete fix on legislation, whether it will happen or what the effect would be.

That’s all the time we have for questions.

I’ll turn the call back to Ms. Farrell for any additional or closing remarks.

Well, thank you for participating in our conference call today.

If we did not give an opportunity to answer any of your questions please feel free to call either myself or Steve Limauro.

Thank you.

That concludes today’s conference.

Thank you for joining us.