Everest Group Ltd (EG) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Third Quarter 2005 Earnings Release Call of Everest Reinsurance.

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.

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 our 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.

I'll briefly review our results.

Then I'll turn the call over to Joe Taranto.

Everest's quarter was severely impacted by Hurricane Katrina and lesser catastrophe losses resulting in a net after tax operating loss of 439 million or $7.79 per share.

Net income, which includes realized capital gains and losses was a loss of $418 million or $7.41 per share.

On a year to date basis, 2005 shows an after tax operating loss of $100 million or $1.78 per share with an after tax net loss of 56 million or $1 per share.

These compare with operating incomes of 331 million or $5.82 per diluted share and net income of 402 million or $7.07 per diluted share through nine months of 2004.

Even though catastrophe risk is a fundamental part of our business it's very disappointing to report a loss of this magnitude.

In this context, we've reviewed our risk management framework and conclude that it is fundamentally sound.

Having said that there is no question that we'll be making refinements as a result of the Katrina experience.

Nevertheless, our underlying non-catastrophe operating fundamentals remain strong as is our positioning for the future.

On a year to date basis we've written 3.2 billion of gross premiums, a decrease of 8% from 2004.

This includes our worldwide reinsurance operations writing 2.5 billion, a 5% decline from 2004.

And our insurance operations experiencing an 18% reduction.

Total net written and earned premiums at 3.1 billion each, declined by 8% and 4% respectively.

Focusing on year to date gross written premium, our segment highlights are as follows.

Our U.S. reinsurance operations are up 5% to 1.1 billion, reflecting an increase in property treaty business coupled with modest declines in casualty treaty writings in a broader softening of facultative writings.

Our U.S. specialty operations are down 30% to 248 million, reflecting continued retrenchment in our medical stop loss business and modest reductions in our surety and aviation businesses, partially offset by growth in our marine business.

International reinsurance operations are up 5% to 540 million mainly reflecting continued strong growth in Asia.

Our Bermuda operation is down 15% to 593 million with declines in London and Bermuda offsetting continued growth in Europe.

Our insurance operation is down 18% to 756 million reflecting continued reduction in our workers' compensation writings, partially offset by strong growth in our non-comp lines both admitted and EMS.

Our insurance segment, excluding California Comp remains our fastest growing segment, up 17% year over year to $570 million or 75% of the overall insurance book.

Across all of our segments, market conditions pre-Katrina were softening but generally characterized by pricing which remained at or above adequate.

Post Katrina markets remain in a state of flux.

We expect this will resolve into a tightening market into a near term as the implication of Katrina clarify, and although property will be most affected we do expect all lines in geographical markets will ultimately be impacted.

Basically, we expect Katrina will change the way company managements and rating agencies view business volatility, as well as capital and the returns needed to support it.

Continued strong underlying non-catastrophe underwriting results for the quarter were pushed to the background by 784 million of net pretax catastrophe impacts, including 653 million and 54 million respectively for hurricanes Katrina and Rita.

Hurricane Dennis had 7 million, Emily at 15 million, wind storms in Ontario at 11 million, floods in India, 13 million, Calgary, Canada, 7 million and Europe 6 million, also contributed.

Current period losses were the fundamental driver as net 2004 and prior period favorable developments totaled 29 million pretax for the quarter.

Prudent reserving remained a priority with net loss reserves increasing 848 million for the quarter and 1.15 billion year to date.

Turning to investments, pretax investment income at 117.5 million is down 5% from the third quarter 2004 reflecting, mainly a 16 million dollar year over year reduction in other investment income from limited partnership investments.

On a year to date basis pretax investment income is up 7%.

Our invested asset base continues to grow nicely up 2% for the quarter and 6% from December 2004.

The embedded pretax and after tax yields for the quarter and portfolio are 4.5% and 3.9% respectively, down from 4.7% and 4.1% respectively at December 2004, with the duration down to 4.2 years from 5.2 years at year end 2004.

After tax unrealized appreciation on the company's investment portfolio declined by 69 million for the quarter and 42 million year to date, with a depreciation of our fixed income investments being partly offset by appreciation of our equity investments in both cases.

Cash from operations was 376 million for the quarter down 25% from 2004's 498 million with most of the reduction attributable to $43 million of greater asbestos and environmental payments and 36 million of greater catastrophe payouts.

Cash from operations year to date was 992 million versus 1.29 billion in 2004 with incremental catastrophe loss payouts accounting for 191 million or two-thirds of the difference.

Cash invested assets stand at 12.2 billion, up 652 million from December of 2004 with the increase mainly reflecting our 992 million of cash flow from operations, partially offset by the 250 million dollar payoff of the March 2005 senior notes and a $42 million decline on unrealized depreciation on a year to date basis.

Shareholders equity at 3.6 billion or $63.57 per outstanding share is down 3% from the 3.712 billion and $66.09 at December 2004.

This is before the 476 million dollar proceeds of our October 6th, 2005, equity offering.

That offering re-offered at 92.50 per share came almost ten years to the day after our IPO at $16.75 per share and positions us superbly with respect to the opportunities which we believe will follow in the aftermath of Hurricane Katrina.

Over the ten year period since our IPO, we have never experienced the full year loss and we don't expect one for 2005.

Moreover, including 2005, we will have generated and averaged a 12% return over our first ten years.

We're pleased with what we have achieved since the IPO and though disappointed with the quarter, we remain committed to the underwriting discipline, financial strength and opportunistic culture which brought us to our current position of strength.

I'll now turn the call over to Joe Taranto.

Thanks, Steve.

Good morning, everyone.

I'd just like to make a few opening comments.

Katrina losses have made this quarter ugly and the best part of the quarter is that it's over and we can begin participating in an improving market going forward.

We expect sectors for the market most affected Katrina to meaningfully change by January 1.

This includes property catastrophe reinsurance, retro-catastrophe reinsurance, per risk property reinsurance, energy and marine reinsurance.

We expect underlying property insurance rates on cat exposed business to rise and terms to tighten.

We believe other sectors less directly affected by Katrina will see rates and terms and tighten as well.

This includes non-cat property, aviation and casualty.

We expect a greater flight to quality as buyers have witnessed weaker companies being impaired by Katrina.

Our superior ratings will serve us the best that they ever have.

I've been asked in recent years as the market has gotten smarter.

I take this to mean is management more disciplined that they'll only write business at adequate rates where the potential for positive returns justify the risk.

Well, we're about to find out.

We just had a 50 to $60 billion industry loss.

Managements need to stop the across the board slide that was in place.

Companies need to underwrite and properly address the risks they're taking on.

Investors should only support those companies that do just that.

I assure you that Everest will.

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

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll first go to Tom Cholnoky of Goldman Sachs.

Good morning, Steve and Joe.

Let me start off with two and I'll get back in the queue.

Steve, can you give us a little more clarity in the quarter of what drove down the specialty volume?

I know you mentioned the A&Hs, but can you kind of split it out a little bit more for us on how that went down.

And then secondly, to talk a little bit more about asbestos, because obviously the hit to asbestos reserves was probably a little bit higher than most of us were thinking about.

I did see that our high profile losses did decline by about 3 and then how are we -- how should we think about asbestos on a go forward basis?

And then maybe I'll come back later on.

Sure.

Let me jump on the specialty.

Certainly the -- the biggest part of the reduction is coming from our accident and health business, which is principally medical stop loss.

I think that business peaked out at over 400 million a year a couple years ago and is now trending towards 200 million.

There's been a very significant retrenchment that, if anything, has accelerated over the course of this year.

We continue to hope that there will be opportunities in that business which generally follow when -- when the business goes -- goes downhill for a while, but we're not at that point yet.

And so we continue to batten down the hatches and that certainly was -- was a significant element.

The other -- Steve, let me just -- maybe expand on the issue of 2005 premium volume.

Steve talked about the specialty area, where in 2005 it was really adjusting to the marketplace in the medical stop loss area that's driving that reduction.

The other components in -- in the specialty are the marine, the aviation and the surety, which I believe Steve, are relatively flat for the -- for the year.

Going into 2006 we really do not see another adjustment in -- in specialty.

Certainly not with the A&H medical stop loss.

That pretty much has been undertaken in 2005.

And with regard to the marine and hopefully the aviation, we see a much improved market going forward as in that world, the marine and energy world, was greatly impacted by Katrina.

Let me take you into some of the other areas and expand on your question, Tom.

In the insurance side, as Steve noted, we've been also adjusting, we're down for the year and that's driven entirely by our adjusting to the changing California comp landscape.

You know how we expanded there in 2003, 2004, the world is recognizing what wonderful results will now be coming out of those years. 2005 is still looking pretty good as well, but rates are off perhaps 30% of the marketplace 2005 versus 2004.

So you're going to do a lot less business just on the back of rate decrease.

Going into 2006 our insurance operation really has already undertaken the change in California comp.

That should not be a significant change, 2006 versus 2005.

Meanwhile, as Steve noted, all of the other programs are up by about 17% this year, so we're seeing some very good growth in the non-California comp areas.

With regard to the rest of the world, well, we've been reacting in 2005 to a generally weakening property and casualty market.

We expect to be responding in 2006 to a generally strengthening property and casualty market.

So I just thought I'd get the bigger picture, Tom, while we we're on the question of production.

Thank you.

And then asbestos?

Sure, Tom.

We did in the quarter record $48 million with respect to asbestos. 18 of that was in our Mount McKinley operation where we continue to be very active on the settlement front.

As you noted, we did settle an additional 3 high profile cases this quarter so that our high profile cases are down to 10.

That's probably down from -- from a total of 30, if you kind of look retrospectively.

So good progress there and frankly we continue to make progress.

As we look at the settlements, two of those settlements actually came in slightly above where we had reserves.

One, a good development came in less than what we had reserved.

At the end of the day, though, it's important for us to make sure we've got the reserves where they need to be at the end of every given quarter and as we factor our analysis of the individual cases, together with our willingness, what we can achieve relative certainty to -- to put additional capital into this space caused us to make the increase on Mount McKinley.

With respect to reinsurance, this is a bit trickier.

The reporting coming from primary companies is not particularly good.

We have an analytical process that we've gone through and it continues to be fairly intense.

This quarter we did have significant interaction with two of the larger clients dating back to that period and as we looked at their book of business, we felt we needed to make adjustments.

As we made those adjustments, we then reassessed the landscape with respect to our remaining IB&R and we concluded that we wanted to -- to make an adjustment.

Again, all going through what is a fairly well established process that -- that gets us to where we believe is the -- the correct number at the end of the quarter.

Now, having said that, I will note that even including the asbestos development, we are reflecting in this quarter's results $29 million of net favorable development on 2004 and prior.

So I think that kind of puts the -- the asbestos in context.

Okay.

Sorry.

And one other just follow-up question which is you -- through nine months on an operating basis I think have lost $1.78 and you're saying you think you'll be profitable for the year so I guess from that I can conclude that you don't think your Wilma losses will be very significant?

Well, it's very early, Tom, in the sense that we're just now beginning to get some clarity on what happened with Wilma and frankly it will take several weeks before that all settles out.

Having said that, we don't see the kind of unusual impact of this storm that would suggest out of the box that we're going to offset what otherwise would be a strong quarter for us in the non-catastrophe elements of our business, which continue to run very nicely, thank you.

And so at least at the moment we continue to believe that the Wilma losses will be fairly contained, certainly you know, in reference to something like a Hurricane Katrina.

We certainly will monitor that situation and -- and take the reserve actions we need to take, but at least at this point we -- we remain fairly -- fairly comfortable.

Okay.

Great.

Thank you.

I'd just like to reiterate the point that Steve made on reserves to be clear.

For the quarter we had positive developments on reserves.

That's if -- that's on a total pot of reserves.

Asbestos plus non-asbestos.

Okay.

Great.

Thank you.

Moving on, we'll next hear from Steven Petersen of Citadel Investment Group.

Thank you.

Steve, I was wondering, on the 29 million in favorable development, could you maybe provide a tad more detail in terms of what sectors that may have come in?

Sure.

We certainly saw favorable development across many of our property classes so that that development is spread out across our segments.

At the end of the day, our treaty property areas saw good favorable development coming from its reserve study.

We did nick that a bit with some incremental development on the Florida storms, so that was reducing the amount that -- that came from the U.S. reinsurance segment, probably the largest segment in terms of the favorable development is the insurance segment, where as a practical matter we've been very careful to articulate over time that we had what we thought were conservative reserving practices, particularly as regards to California comp business.

We're very pleased that all of the indications continue to indicate very -- very favorable development on that class and so we did release about $24 million on the California workers' comp book and frankly we continue to monitor it on the -- on the possibility that more will need to be released, you know, as the development continues -- or as the emergence continues to -- to come in very favorably.

And so mainly it's on the property classes.

With respect to property classes in the reinsurance base and the casualty class in the insurance base, generally speaking, you know, we have seen very strong reserving positions in the sense that all of the metrics that we apply on a -- on an ongoing basis against our reserves are suggesting that our reserve position is in fact, very strong and we felt that this point, it was appropriate to -- to take some action, particularly on the insurance side, but also on the -- on the property side in a couple of our segments.

Okay.

Terrific.

Thank you.

We'll next hear from Joshua Shanker of Citigroup.

Good morning.

Good morning.

Good morning.

In discussions with the rating agencies about your capital position, the first thing I'm interested in just general discussions, if you take investments and put them into equity, do the rating agencies give you the same kind of credit for that equity capital as they would for capital invested in fixed income instruments?

Yeah.

The discussions with the rating agencies are actually quite complicated, go a lot of different places, but in -- you know, with respect to your particular question, there are capital charges associated with equity investments that -- that are a bit higher than they are on the bond front.

But on an overall perspective, I think we continue to be very pleased with the capital strength which we offered to the rating agencies.

The practical matter is even with respect to Katrina, we appeared on none of the watch lists from either S&P or bests.

We believe that the rating agencies will be changing their view of capital adequacy as the world moves forward.

We certainly understand that there's -- there's some flux with respect to just how much they'll change their -- their capital adequacy calculations as it regards property and in particular catastrophe exposures, but we certainly believe with the -- the additional offering we've done that we are positioned to remain off all of the watch lists and frankly we had a discussion with S&P recently where we're still waiting for them to complete their annual review, but we continue to be cautiously optimistic in the sense that most of the issues they have raised over the past couple of years suggesting that they should not move to -- to give us an uptick, we have really seen and answered, if you will, over the last year or so in a -- in a very favorable fashion for the company.

And so while it will be difficult for them to move in the face of a reinsurance base that they have an overall negative take on at the end of the day, we remain cautiously optimistic that we might see some action to the upside.

And in terms of business mix shift, by any chance can you reveal to us what percent of your business is property cat now, where it was a year ago, and where you'd be willing to take it one year from today?

That's a little hard to say, because some of our business is pure cat, some of it just has an element of cat.

But you know, probably on the order of 20, 25% of our business has at least some cat elements into it.

Rates will go up in that sector.

There's absolutely no question about it and -- and you know, how much we're willing to do will depend on just how much rates go up and how much terms tighten.

There'll be just a scarcity of capacity in the reinsurance sector.

There'll be, I think, buyers looking to buy more, responding to events of 2005.

So we'll have to really determine that in the next couple of months, a big part of that will be done in January 1, and we'll be assessing just where the market's going in the next couple of months.

So we're prepared to certainly do more in that area if things improve to the degree that we hope and believe that they will.

And one final question.

You mentioned terms.

Which terms in particular would you most key in on seeing some tightening?

Well, on the reinsurance side, you know, I'd see deductables going up, I obviously see REITs going up.

I see on some of the deals, exposure in terms of total limit per occurrence and in the aggregate, being kind of squeezed down.

With regard to the insurance side of things, again, I see for the insurance customer, deductibles going up, exclusions being, you know, a bit tighter.

Certainly a lot more attention being paid to -- to key locations.

So I really see in terms, kind of in tightening both in terms of the insurance level, mainly through deductibles and exclusions and at the reinsurance level through caps.

Okay.

Very good.

Thank you very much.

Our next question will come from Susan Spivak of Wachovia Securities.

Good morning Joe and Steve.

I've just got a couple of questions.

The first one is on the retro market.

I guess I got the impression that you'll be participating more in that market because there's an opportunity there and I was just wondering how much you expect to write and whether you've had discussions with the rating agencies about increasing your exposures there.

And then my second question is, I'm really getting kind of a mixed message on what the development of Katrina losses will be.

Some players like some this morning some think they'll know what the losses are by the end of the year in time for January 1, so Joe I'd be interested on your thoughts on that, will it extend into next year further increasing demand once some of the primaries or even reinsured realize what their losses are and what will that do to the supply/demand equilibrium.

And then finally you've been one of the companies that during harder or more favorable markets has continued to surpass all of our expectations on premium growth.

Is that something that you would expect going into next year?

You pulled back in the competitive market.

It sounds like you're ready to gear up and should we see the same sort of top line growth numbers that we've seen in the past?

Okay.

You had a few questions there, Susan.

I'll try to take them in the order that you've presented.

Let me start with Katrina.

It is the type of loss that is difficult to assess.

I mean, once again, it took a while for adjusters to even get in, you know, much of the city of New Orleans is still not functioning.

There's going to be business interruption losses where, in many cases you have companies that -- or hotels or casinos that weren't even necessarily hurt in terms of property damage, but there's no city, there's no business and so the insurance industry is paying out claims for, you know, the next few months.

On top of that, you have the issue of flood versus the hurricane, which will be debated in the courts to some degree, so yes, there are a series of issues that make this loss difficult to pinpoint.

Having said that, we think we've done, you know, the best job that could be done.

You probably have heard that we're talking for the industry something in the order of 50 to 60 billion, not that we spend a world of time figuring out the industry loss.

We spend a little bit more time on what we think our end of it is, but we certainly have seen some companies that believe that the industry loss is going to be far less than that and predicated their own losses on some estimate that's far less than that.

So -- in that sense if we're right, there may be some more development for others.

Yes, if there is more development, that continues to put some pressure on the marketplace.

We do believe the -- the retro cat market will tighten significantly.

Many, many reinsurers have relied on -- on buying in this area.

In fact, I would say more have relied on buying in this area than I realized.

When the Katrina losses started coming out in some areas such as Lloyd's I've been surprised to see how much retro is actually purchased from that side of the pond.

So there will be significant changes to the retro market.

How much we do, how much we participate will again depend on how significant those changes are.

We'd probably look into the cat market, meaning supporting insurance companies first before supporting reinsurance companies.

But a lot of reinsurance companies have their business plans currently depending upon buying reinsurance and so they may look again to buy even if costs are extreme.

Our business plans don't rely on -- on buying retro, so we can proceed without that -- that concern as far as our business plan is concerned.

Very tough to say, Susan, just what we'll do in the retro world.

We're going to take a good look at it.

We know it's going to be much tougher terms and much higher rates and we'll have to decide just how much of that catastrophe we want to allocate in that area.

This whole issue of what you're willing to bet on catastrophes is an issue that all companies have to take a long look at.

You've seen from this year that if there are severe catastrophes no matter what they get, you can still lose in this area, so you have to parcel out whatever exposures you take on looking at it in the long tough way.

I think there will be great opportunities, we'll look into the retro world.

What we come out with at the end of the day is a bit hard to say.

Growth into 2006, we don't give earnings numbers and we're not going to give premium numbers and the market is pretty much in the state of flux.

Thank you for what you've said.

We believe we have responded very well to market changes in the past.

We took a very low profile in the soft market which served us very well.

Between 2002 and 2003 we tripled our position and in terms of overall company volume maximizing I think what the market had to offer doing extremely well in 2003 and 2004. 2005 we started paring back in many areas in response to market changes.

That was appropriate as well.

We see some very positive trends going into 2006 and I went through that on the first question with Tom, kind of talking about all the various areas.

So we do see some much better opportunity at this stage for 2006 than we saw going into 2005.

Okay.

Joe, if you could just comment on one more thing.

Are you concerned about any new startups in the market?

We're all hearing about a few of them down in Bermuda.

No I'm not particularly concerned about that, Susan.

I mean, certainly we saw a tremendous amount of activity after the World Trade Center and we had a whole bunch of new billion dollar startups, many of which did a lot of business between then and now.

And some of which have grown into sizable companies.

I really don't see anything like that happening at this point.

There may be some new companies that -- that come in.

I think it will be tougher for them to get ratings out of the -- the gate.

I think it will be tougher for them to get business right out of the gate.

As I mentioned in my opening comments, I just see security and being established and having good ratings and being around for a while and being battle tested and having relationships and people and seeing that you've measured your aggregates in the past, it's very important.

I hear a lot of buyers saying that they were surprised that some companies lost half their capital in one day in the last few months, and so I just don't see new money coming in anything like what it did after the World Trade Center.

Certainly some of the existing companies have raised money.

We have as well, and some more will.

I think about 5 billion has been raised and people guesstimate there may be another 5 billion in the pipeline.

Well, that's 10 billion.

I think Katrina in and of itself took out 50 to 60 billion, so there will be some more money coming in, but it won't be anything that will change the -- the landscape all that significantly, in my opinion.

Okay.

Thanks for all the answers, Joe.

I'll let someone else ask now.

Moving on, we'll go to David Small of Bear Stearns.

Hey, guys, good morning.

Good morning.

Maybe we could just, on the pricing side, you've talked about pricing increases maybe you could give us some sense of the magnitude of these increases that you expect.

Maybe just kind of on general property, property catastrophe, and the casualty side.

I know it may be too early to nail it down but a range might kind of be helpful.

I'm going to cite a publication.

I'm here in Chicago.

We're at this property and casualty convention where a lot of reinsurance people gather to start talking more specifically about the January 1 renewals.

I saw a publication on the property cat this morning that was estimating 15 to 20% rate increases on cat.

If you stacked up all the other terms and conditions stayed the same if there wasn't a loss in significant rate increases, if there were losses, that wasn't my estimate, but when I read that I certainly said that could be.

Now, we won't know exactly where the market will land until we get to January 1 because you can -- you know, right now it's speculation.

And once we get into negotiation and seeing where the competition comes in, how much capacity there is, how much is being sought, that will all shake out.

But I give you that which came out of the paper this morning which is one educated guess that's being made.

You won't see that kind of change as you move into areas less affected.

I mean, if we go to the casualty world, that -- you know, there already some claims coming out of Katrina and the environmental casualty world but in the main, there's not a lot of claims relative to the casualty premium.

So that area clearly was less hit.

Nonetheless, I'm finding that managements are reacting to these catastrophes by looking at it like we need to stop the slide that was going on in the marketplace across the board.

Because it's a slide that can only -- if continued, lead to the wrong results.

And so let's use this as a wake-up call to say that, you know, put the brakes on the rate decreases that were happening in casualty.

Let's start to increase rates in those areas where we really should be increasing rates as we're seeing more claims costs, more escalation in claims costs, and let's start to get this market right.

There's one pool of capital that supports most of this market at the end of the day.

The same pool that supports the property and the casualty.

It's the same pool that supports the marine and the aviation and -- and you kind of have to get rates adequate and moving in the right direction and across the board fashion to kind of have the right thing going on.

So I'm hearing more and more management that certainly at this convention talking about using this event as a wake-up call to -- to try to right the ship in more areas than property cat.

But certainly when you get to the property cat, that's been pointed, that's been hit, that's been volatile.

That's just been hit again with Wilma so there's just -- the pot is so boiling in that area that that will be the area that's most significant impacted in terms of rates, terms and conditions.

If I could add, this is an issue as well that's going to play out over time and there are certainly some fundamental kind of background elements that -- that remain to be articulated both within companies and across the industry at large.

Things like, you know, how do you look at the models given what we've seen with respect to Katrina, how will individual companies change their risk management practices and their appetites?

How will the rating agencies look at property catastrophe exposures as well as general property exposures which may have catastrophe components.

You know, what is going -- what is going to be the capital adequacy standard that emerges?

How important will ratings be?

Our view has always been that the product we sell is security and the best ratings are really very important to us and we've been very straightforward in trying to make sure we secure and retain those great ratings, and at the end of the day we still have a lot of companies that you know, are not at our ratings level and frankly, it isn't clear you know, how the clients are going to look at that over the long-term.

Particularly as they see this kind of -- of loss activity.

And so there's a lot of factors that are still up in the air and it's going to take some time for those factors to come to a landing and certainly January 1st is an important season, but even as we go out into, you know, next year, some of these are still going to be in a state of movement.

And just in terms of the way other companies view risk, I guess historically you guys have looked at your P&Ls in terms of a one in a 100 year event.

Does Katrina start to make you think about it looking at it slightly different, maybe looking at those higher severity, lower frequency kind of events that may arise?

Well, we -- let me start that out, Joe, and you can jump in.

We haven't exclusively focused on one in 100.

Certainly our public disclosures have focused on 1 in 100 because that's a reasonably easy concept to grasp, but we have looked at 1 in 250, 1 in 500, 1 in 1,000.

We look at if different types of catastrophes and where in particular we accumulate exposures depending upon which catastrophe type is most likely to hit in those areas, so we have a framework.

Now, that framework held up fairly well in -- and fundamentally we think it works well.

We will do some refining and some tweaking and we certainly are in the process of even reassessing our own appetites and we certainly want to hear more from the rating agencies and do some more analysis in house, but it's a very complicated process, but it's one that can't simply be derived from the models, in the sense that the models do -- do a wonderful job giving you hypothetical scientific information, you know, but at the end of the day, you really have to have a strategy for how you're going to put your capacity to work, where is the best place to get the best rate, what is the optimum mix, how are you going to protect yourself, and those are all issues which tie back into the underwriting more so than -- more so than -- than the pure modelling function.

Yeah, following up on that, we're not changing our stripes, but of course we really need to go back -- everyone should go back to Katrina and say, let's analyze this, and what is to be learned from this.

As Steve noted, even from the beginning we looked at models as -- as hypothetical and -- and we knew that they were inexact.

It's not a complete science.

And in fact, the two biggest losses we've had in the last five years, the World Trade Center and Katrina, when you look at it after the losses, you know, the models could not have forecast exactly what would happen.

And so we've always had that viewpoint that to a degree, you have to expect the unexpected.

To a degree, the models show one thing but you probably need to price beyond that and you probably need to manage your capital beyond that, figuring out that that could be wrong.

And it could be wrong and you could get negative surprises.

In fact, some of that thinking entered into discussions that we had with many with regard to capital management.

I mean, the reality was in the last six to nine months we've had a lot of questions about capital management.

And -- and we more than most have said we hold capital dearly.

We sell security, you know, if we have extra it's not the worst thing in the world and sometimes it's hard to figure out if you exactly have extra in this business and the last conference call we almost took the question of -- of capital giving back capital off the table as we said we were entering the hurricane season.

So let's not even talk about it on this call.

Many of our competitors that gave back capital frankly last month went back and looked to restore that capital and more at prices where the equation just didn't make a world of sense for them for the last six months.

So everyone should look back at Katrina and realize that these models are imperfect, realize that you have to underwrite beyond models, you have to build in something for the unknown, and so I think there are lessons to be learned.

But much of that we had already tried to factor in -- into the process.

That's not to say that we won't go back and look at the losses and try to learn a bit more.

We always do that.

Let me just ask you one last question then.

Just in terms of the writing more catastrophe business, what type of pricing increases would you need to see to be more aggressive in terms of excess catastrophe writing?

Yeah, it's always hard for me to give one number and kind of leave it at that, because we get so many individual cases where -- where there are a lot of other issues that come into play beyond just rate increase.

But if there are rate increases of the magnitude that I cited at least one publication has come out with, that would make that end of the world certainly much more interesting to us.

Great.

Thank you very much.

We'll go next to [Venay Miscrit] of Credit Suisse First Boston.

Thank you.

There will probably be some good opportunities for profitable growth in the quarter -- southeast and do you have any limitations in growth given your current market share in that region?

In which area?

I'm sorry.

I didn't catch that.

The coastal areas of the southeast.

Oh, okay.

You know I guess that gets back to basically the catastrophe business.

I think the, you know, going into this year with four hurricanes in Florida we saw some dramatic changes in the Florida market as far as pricing catastrophes at the insurance level and reinsurance level and that certainly was much more appealing to us.

In retrospect, I think there wasn't enough respect in terms of underwriting and price in terms of conditions with regards to the Gulf Coast, and we should see some significant changes in that part of the equation going forward.

But it gets back to the question of how much do you want to place in terms of exposure on these areas and that gets back to what's the upside, what's the expectation relative to change of terms and conditions.

So no question things will improve many that sector more than most any other.

We'll take a look at what it is and decide what we're going to do.

Was your market share before this event in line with what you wanted or do you have some more to go in that area should pricing improve significantly?

It's not a market share issue for us.

We could have written more, but we chose not to.

Combination of aggregates and exposures that we had taken on and also a look at the terms and conditions and terms of the pricing and what we would get out of it if -- if there were no cats or a small amount of cats.

We can do pretty much as much of the market share as we want.

The limitations really more come for us based on just where do we want to stop.

We kind of decide on how much aggregate we want to write based on prices and then we try to fill up that aggregate with the best set of deals.

Our ratings and our surplus put us first in the queue, so we really get to see all the business and we can write as much as we want to write.

We're the ones that determine where the cutoff is.

All right.

And my sense is, you know, we're a very small part of -- of the market.

I mean, when we said, on Katrina, we expected 1% of the industry loss to be our loss that tells you we're 1% of the market in that area.

It's sort of been more a casualty writer than a property writer.

Do you plan to make any significant market shift changes because of greater perceived improvement in the property lines?

Well, we certainly do normally shift into the areas that are improving the greatest.

And we believe the property world should have the biggest change in '06 versus '05.

We are hopeful that the casualty world sees some positive changes as well.

Thank you.

Our next question will come from Adam Star of Gulfside Partners.

Hi.

I think my questions have pretty much been answered, but I was really interested in whether you think there will be opportunities in the casualty lines as well.

You alluded that some -- you see some firming across the board but you weren't very specific on the 75% of your business that's historically been casualty related.

Yeah, I -- I think that the casualty market will -- will improve going into 2006.

Now, it will vary by pocket.

I mean, I've been talking about California comp as an example of where it's getting more competitive.

That will probably continue into 2006.

Other pockets you'll see more competition as well, but main line casualty, general liability, product liability umbrella, maybe comp and the other states, auto liability, I think some of those areas you may see a -- a modest firming.

You're not going to see what's going on in the property cat side happen to those areas.

Now, I don't know that the buyers -- reinsurance buyers will feel the need to buy a whole lot more.

That's not cat driven the way property is.

But if you kind of imply we have casualty business just -- not just on the reinsurance side, but on the insurance side, so we certainly would look to continue to grow our insurance casualty business and certainly we'd look to do some reinsurance -- additional reinsurance if we saw an improving market and we had the right deals in front of us.

So I haven't spent a lot of time talking about the casualty market because I don't think that will undergo the same dramatic change, but what I am hopeful is that instead of seeing a weakening casualty market, we see a generally strengthening casualty market.

So you don't see this as just being a flash in the pan as occurred after Andrew where the market firmed very briefly and then went right back into the tank?

No, I don't, Adam, but it remains to be seen.

You know, I mean, I don't control the market and you know, I'm here at this convention, it's very interesting because there's a lot of companies that are rather bullish in the sense -- and it's insurance companies that we're talking to, that are looking at this and saying you know, we really have to make some across the board changes.

I don't usually mention names, but I was with some people with AIG yesterday and they certainly were seeing the world that -- that way.

But then there's some other companies that are sleepier and -- and take longer to react.

I'm not ultimately sure if they'll react at all, and -- and so it's this whole mixed bag that has to kind of come together in the next few months.

So yeah, when it comes to property cat I think it's kind of a no-brainer because of what's happened.

When it comes to casualty, it's really more difficult to predict.

Thanks a lot, Joe.

That's all the time we have for questions today.

I'll turn it back to you, Mr. Limauro, for any closing or additional comments.

Thank you very much.

I would simply say if there are any questions we didn't get to please don't hesitate to call Beth Farrell or myself.

We are, as Joe mentioned, in Chicago, so it may be that we'll -- we'll have to come back to you, but we certainly are available for additional questions beyond that.

Thank you for your attendance and have a good day.

And that concludes today's conference.

We thank everyone for your participation.