Everest Group Ltd (EG) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to the fourth-quarter 2005 earnings release conference of Everest Reinsurance.

Today's conference is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference 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;

Tom Gallagher, our President, 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 I will turn the call over to Steve Limauro.

Thanks, Beth, and good morning.

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

Then we will take questions.

As we announced previously, our fourth quarter was significantly impacted by Hurricane Wilma and to a lesser extent Hurricanes Katrina and Rita, rounding out what is the worst catastrophe loss year in history for both our industry and Everest.

For the quarter, we had an operating loss of $186 million or $3.01 per diluted share.

This compares to operating income of 95 million or $1.66 per share in the fourth quarter of 2004.

On a year-to-date basis, we had an operating loss of 286 million or $4.96 per share compared to operating income of 425 million or $7.48 per share in 2004.

Our net loss, which includes realized capital gains and losses, was 162 million or $2.63 per share for the quarter and 219 million or $3.79 per share for the year.

These compare to net income of 93 million or $1.64 per share and 495 million or $8.71 per share for the quarter and full-year 2004 respectively.

Catastrophe risk is a fundamental part of our business, but even so, it is very disappointing to report net losses for the quarter and the full year.

The fact that we can and will later discuss the specific catastrophe results driving these losses and that all of these losses are in the context of record catastrophe losses affecting our industry is all of little solace.

What comfort we do take comes from three sources.

First, our underlying non-catastrophe operating fundamentals remain strong.

Second, our broad, diversified and disciplined franchise position does superbly.

Third, our capital base, including the proceeds from our secondary offerings, is as strong both objectively and relatively as it has ever been, allowing us to focus squarely on the future.

Turning back to results, our full-year gross premiums written at 4.1 billion were down 12.7% from 2004, generally reflecting our disciplined response to modest market softening, particularly earlier in the year.

Worldwide reinsurance operations at 3.2 billion were down 10%, while our insurance operations were down 20%.

Total net premiums written and net premiums earned were above 4.0 billion, reflecting declines of 12% and 10% respectively.

We have consistently cautioned against overweighting the significance of one quarter and do so again as respects our fourth quarter, which in particular was affected adversely by reductions of unreported premium estimates arising from our annual comprehensive reserve studies.

These reductions mainly impacted our U.S. reinsurance and international segments, but please note that as such estimates change so too do the related loss and commission provisions.

Highlighting our segments, U.S. reinsurance operations at 1.4 billion, a decline of 6% generally reflect an increase in propertied treaty business, coupled with modest declines in casualty treaty and facultative business.

Our U.S. specialty operations at 315 million were down 35%, reflecting our continuing response to soft conditions in the medical stop loss and more broadly A&H markets and to a lesser extent, aviation and surety markets.

All of these were partly offset by growth in our marine business.

International reinsurance operations were up 3% to 707 million, reflecting solid growth in Asia accompanied by flattish production elsewhere.

Our Bermuda operations at 769 million were down 13% with growth in Europe more than offset by declines in the UK and Bermuda, particularly the Bermuda individual risk business.

Our insurance operations were down 20%, reflecting as it has all year reductions in our worker's compensation writings, particularly in California.

Our insurance segment excluding California worker's comp was up modestly.

Across all of our segments, the year was generally characterized particularly prior to hurricane season by modest softening.

I will let Joe highlight current market conditions, including the January 1 renewals, but do note that we continue to see building pressures for a market tightening, in particular for property business.

Frankly, with the 2005 catastrophe experience, changing capital requirements and uncertainty regarding property exposures arising from both cap model developments and highly publicized long-term weather forecasts, we expect these pressures will increase over the course of the year as they filter through the industry.

Catastrophe losses were clearly the driver underlying our financial results.

For the quarter, our total pre-tax catastrophe losses net of reinstatement premiums were 572 million.

On an after-tax basis, this equates to 457 million or $7.39 per share.

For the year, our total pretax net catastrophe losses were 1.4 billion.

On an after-tax basis, this equates to 1.1 billion or $19.42 per share.

Hurricanes Katrina, Wilma and Rita alone totaled 528 million pretax for the quarter and 1.2 billion pretax for the year, equating to 422 million or $6.83 per share for the quarter, and on an after-tax basis and 989 million or $17.15 per share, again on an after-tax basis for the full year.

Our combined ratios for the quarter and year-to-date were 143% and 120% respectively compared to 103 and 99% for 2004.

Pre-tax catastrophe losses accounted for 64.6 points in the quarter and 36.3 points year-to-date, well above 2004's respective 13.9 points and 8.8 points.

Although catastrophe risk is a fundamental element of our business, we don't take these losses lightly.

We maintain a comprehensive framework of risk assessment, accumulation and management, which I can assure you has been reexamined in minute detail.

We have and will continue to adjust this framework, but it is also clear that there was no escaping the frequency and severity associated with the 2005 events.

Our underlying non-catastrophe underwriting results remain strong for the quarter and the full year.

Net loss development on 2004 prior, including asbestos and environmental and prior period catastrophes, was favorable, reinforcing our view of reserves and totaled 89 million in the quarter and 49 million for the full year.

Although as noted earlier, some of these amounts related to the reductions of unreported premium estimates.

Basically we believe that our net loss reserve base, which is up 1.4 billion from 2004 and now totals 8.1 billion, is strong, and we look forward to continued seasoning of these reserves as our metrics continue to suggest favorable loss emergence trends.

Combining this with our view of the 2005 underwriting year, running in the low 90s for a combined ratio on a normalized catastrophe loss basis, we believe we are well-positioned for 2006.

Turning to investments, pre-tax investment income at 135 million was flat against fourth quarter 2004, in part reflecting portfolio mix changes, including a significant increase in short-term investments and lower returns from limited partnership investments.

Full-year pre-tax investment income at 523 million was up 5%, reflecting growth in invested assets mitigated by these same factors.

The invested asset base at 13 billion was up 6% for the quarter and 12% year-to-date with the proceeds of our secondary equity offerings contributing for both periods.

The embedded in the period portfolio yields stands at 4.5% pre-tax and 3.9% after-tax, down from 4.7% and 4.1% respectively from December 2004, mainly reflecting the elevated short-term holdings, which reduced our duration to 4.3 years.

Realized capital gains were 33 million pre-tax and 24 million after-tax for the quarter and 90 million pre-tax and 67 million after-tax for the year compared with an after-tax loss of 1 million and an after-tax gain of 70 million for the comparable periods in 2004.

Our equity and other investments accounted for 26% of the gains for the quarter and 14% year-to-date with bonds contributing the remainder.

Cash from operations was 73 million for the quarter and 1.1 billion year-to-date, despite 240 million and 460 million respectively of net cap loss payments over the course of the quarter and the year.

Adjusting for the cat loss payments out of both 2004 and 2005, cash flow at 1.5 billion was down 9.5%, which is consistent with our reduced writings but still reflective of very strong underlying fundamentals.

Our 1.4 billion of invested asset growth over the year rose mainly from 1.1 billion of cash flow, 758 million of equity offering proceeds offset by 250 million of debt repayment earlier in the year and a $78 million reduction to our unrealized depreciation.

That reduction in unrealized depreciation is split between 174 million of depreciation on our bond portfolio and 96 million of depreciation on equity and other investments.

Shareholders equity of 4.1 billion is up from 3.7 billion at December 2004.

Book value per share at $64.04 per share is down from $66.09 at December 2004, effectively reflecting our losses offset by our capital raises.

Our catastrophe losses made this our 10th anniversary year a very disappointing one, which frankly we are happy to see end.

We remain, however, optimistic as we move into 2006, both with respect to pressures from market strengthening and with respect to our franchise, people, capabilities and financial strength.

We can bring all those to bear on 2006 opportunities.

I will now pass the call to Joe for an update on market and renewal conditions.

Thank you, Steve.

Good morning, everyone.

We expect 2006 to be a very good year for Everest.

Whereas in 2005 we spent the year responding to worsening conditions, we expect to spend 2006 responding to generally improving conditions.

In 2005 we reduced our overall premium as we did less in California worker's comp insurance, less in medical stop loss and less in the United States property and casualty reinsurance market.

In 2006 I see us resuming overall growth, and I expect double-digit top-line growth and a high-quality bottom-line ROE.

The market is such that a company like ours -- that is a company that has a diverse of book of business, a strong balance sheet, solid risk management and terrific ratings, plus an opportunistic approach -- a company such as ours can do very well in today's marketplace.

With regard to 1/1 renewals, we're pleased with what we wrote.

Whereas the overall market may not have changed as much as many had anticipated, the better deals went to the low rated well capitalized companies with extensive distribution systems.

In the property market with wind exposure, we will clearly be able to write up to the full exposure we are prepared to undertake with business that is high-quality with much improved turns from last year.

January 1 is an important date, but not as important as it used to be, and there will be opportunities to write significant more business as the year goes on.

We see a continued build in demand for cat reinsurance as companies and rating agencies continue to reassess their business.

Areas less affected by last year's hurricane saw less improvement, both in underlying insurance rates and reinsurance terms.

However, the 2005 turmoil has helped stabilize the weakening that was taking place in many sectors, and that is very important.

The U.S. casualty market has steadied and generally stabilized at a good level, allowing us to continue to find good opportunities for insurance and reinsurance deals.

This represents almost half of our business, so it is exceedingly important for us.

The international property and casualty market likewise has leveled at a generally good place.

Latin American property business will improve as it was affected by Wilma.

Overall we envision capitalizing on current market conditions and having an excellent year.

Steve, Tom and I will take any questions that you have at this point.

(OPERATOR INSTRUCTIONS).

Tom Cholnoky, Goldman Sachs.

Two questions if I can and then I will hop back in.

Number one, either Joe or Steve, can you walk us through a little bit more these fourth-quarter adjustments?

Because I guess what I'm confused about is, how you can go into the year with certain estimates of primary company premiums and then find that they are so much lower than what you would have thought at the beginning of the year, given that a lot of primary companies I think that we have been following have not reported those kinds of declines?

So how could you miss by so much, or what is going on, and can you kind of get into that a little bit more?

And then I have got a follow-up.

Sure, Tom.

Let me take that.

I mean basically every quarter we need to reassess the estimates that we have in place for unreported premium.

We do that on a regular basis over the course of the year, and like many others, we do a comprehensive annual update to all of our reserve studies, and in this case what we noted in the fourth quarter is the pattern that we had seen earlier in the year, we had not been as quick to adjust to as perhaps we might have.

And so at the end of the day, we had an estimated premium adjustment of just over 100 million at the company level that needed to be run into the overall estimate reserves that we have up.

Now, of course, that is going to affect commissions and loss provisions as well, but we see it as a normal kind of adjustment we need to make and one that we anticipate as we come through the year.

But having said that, it caught up just a little bit more on a cumulative basis for the fourth quarter.

So how should we think about the run-rate of premium growth in the fourth quarter?

Well, I think the run-rate of fourth quarter absent this adjustment was pretty much where it was as we came through the year.

That is a reduction kind of in the low teens, and frankly, all of these adjustments really reflect the underwriting years 2005 and prior, and so there is no implication for 2006.

We think we have got the reserve right at the end of the year, so there should be no real implication as we get into the first quarter.

And so at the end of the day, we don't see this as but a hiccup as you look at the business over the long-term.

Okay.

Which is why, Tom, I have provided double-digit growth estimates for 2006 for the worldwide operation.

Right.

And that kind of leads onto my second point, Joe, which is that at the end of '04, you were leveraging your capital at about 1.2 to 1 on your trailing 12 months you are about 1.0 to 1.

How high do you think that ratio can go in '06?

Could you get back to 1.2 to 1?

Are there enough opportunities to leverage your capital at those levels again, or are you restrained from the rating agencies of going that far?

No, I don't really see any restraint from the rating agencies at this stage.

I think we are well capitalized from that perspective.

Certainly there are additional opportunities, and that is why I have talked about premium growth.

Likewise, Tom, we expect to grow the capital pretty nicely in 2006 as well.

So I cannot tell you that we will necessarily get back to the same number, but we do see some very good opportunities at this point, and frankly we believe we will see more as the year unfolds.

Okay.

Great.

I may hop back in.

Matthew Heimermann, J.P. Morgan.

In terms of the growth, I know this is a difficult thing to try to quantify, but your double-digit growth expectations for '06, how much of that is pure price versus potential increases in exposures or clients?

I would say it is all price.

We would expect our total limits on capacity to be about equal or less than we had this year.

Yes and whereas I would agree it would be all price, the price changes will be mostly coming from the property end of our business where there will be 20 plus in terms of price change.

Price to exposure changes I think will even be greater than that.

So property business, which property cat probably is somewhere in the area of 25% of our business on the worldwide basis.

That end of our book, we will have significant price to exposure increases.

The other side is 75%, which is mostly casualty, it will be more steady, less price increases.

But overall when you put it altogether, I would agree with Tom that the overall change in premium is driven by price increase.

And then just to follow-up on that, one of your competitors released renewal update on 1/1 last night, and one of the comments coming out of that was clients were retaining more potentially changing from proportional to excessive loss.

Is there a risk that if these trends continue through the year that double-digit growth is not possible?

Ton, do you want to --?

Yes, I don't see that.

I don't see -- there is some changes in retentions on (inaudible), which was expected based on the change in reinsurance pricing, which from our point of view adds volatility to their results.

From our point of view, I think it would offer us opportunities on excess programs.

So I don't see it to be a negative when it comes to premium growth in the future.

The changes, and we did see that (inaudible), but the changes that we have seen where people have kept more net by either raising the deductible or just keeping a greater percentage of the reinsurance they used to buy, most of that has come about on the national accounts, the big country-wide accounts where companies have a large capital base and they feel as if they can take more net.

And likewise, they did not want to pay some of the rate increases or as much of the rate increases as they were being confronted with.

Much of our book has developed such that we really just don't have that big a book with the national accounts, and frankly, after January 1 we have a smaller book with the national accounts.

Because someone that did not want to pay the increases, we will be able to allocate the aggregate that we want to undertake without question, and we want to put it to the better deals.

And frankly, January 1 a lot of the national accounts were trying to not pay the increases.

That was not necessarily better deals.

So a lot of our accounts are either small or midsize accounts that don't have the same options in terms of taking more net and exposing more of their capital.

So we were really less exposed to that market change.

And then just a final question if I may on investment income for Steve, which is obviously cash flow or payments for catastrophes will influence investment income short-term.

But in terms of extending duration of the portfolio, what do you need to see in the macroenvironment to potentially push that out to somewhere between five and six years, which is your target?

Do you need to see interest rates rise more or just get more comfortable that the Fed is done and we are kind of stable in terms of interest rates?

I think we are looking for stability.

I think, frankly, some of the elevated position at the end of the year in the short-term portfolio was driven by us waiting until late in the year to make final decisions about how we were going to deploy the capital that we raised.

As we look forward from here, we certainly will see the duration begin to creep out.

There is certainly not the kind of macroenvironment that we saw year before last and last year.

And so I think it will creep up.

We are not in a rush to do it, in particular with short-term rates where they are, but certainly we will move it out over the course of the year.

Joshua Shanker, Citigroup.

First of all, is there anyway we can quantify what the apples-to-apples premium decline would be excluding the reductions of unreported premium estimates from the comprehensive reserve studies?

You know, I did that calculation, don't have it with me, but it would be about 13%-ish on a process basis.

That is what we do every quarter is we look at what we have actually processed, and then we add to that whatever is changing with respect to our estimates.

And so on a process basis, our full year was down between 12 and 13%.

Very good.

Thank you.

And then you said during the market commentary that you recorded a win risk.

You are prepared to underwrite the full exposure you're willing to undertake.

Compared to 2005, had you underwritten the full exposure in that year, and what has been changing about your risk tolerance?

Well, you know, what changes is the market changes.

So you go in and you see the deals that you can achieve and kind of the upside relative to the downside.

Deals generally speaking in the property category will be better in 2006 driven by the losses of 2005.

And so in that sense, we expect to write more premium.

Now that does not necessarily mean we're going to take on more exposure.

Candidly I really do believe we will have less exposure but more premium in 2006.

But just what our appetite is overall depends on the quality of the deals.

As the deals get better, the margins get better.

The upsides get better relative to the downside.

We would be prepared to take on more.

Having said that, I still see us with less exposure in 2006 than we had in 2005.

Okay.

Very good.

Finally, looking at the reserve picture, on the direct business, asbestos reserve declined by about 75 million.

You have about 132 cases remaining.

I don't give the survival ratio so much credence.

But it has been declining fairly quickly.

How do we get our minds around your confidence and your reserve adequacy in the asbestos arena?

Well, I think at the end of the day what we saw in the fourth quarter was about 81 million of payments. 71 of that was on Mount McKinley, and basically it was on large settlements that we had made before and that had required payments before the end of the year.

At the end of the day, really nothing substantive is going on with our asbestos book.

As we look at it on an adjusted basis, we still are looking at a 12 plus year survival ratio.

And again, you have to go through the components to get there, but at the end of the day, our focus is on our book of business.

We continue to look at the reserves quarter by quarter, and we certainly look at the payments quarter by quarter as well.

But we see nothing about this quarter that is out of the ordinary or atypical, and frankly the adjustments we made were very minor.

They were on the reinsurance side where again we think we are situated well with respect to reserves.

But we are constantly taking a hard look at what we have got up so that we are never finding ourselves in a catchup position.

You cited the total number of cases in the insurance operation, but we really focus on what we call the high-profile cases.

And we're down to 10 cases at this point.

A couple of years ago that number was 30.

We have two or three of those 10 cases that we are looking to close out very very soon.

I think by the end of this year that 10 could be down to a number perhaps as low as five.

So we really are getting down in the number of high-profile cases, and we have made tremendous progress in really taking our exposure down in that end of things.

So we do, we feel better and better about quantifying that exposure and about the reserves we have up.

Susan Spivak, Wachovia Securities.

Joe, I have got a couple of questions.

I hate to try and tie you down to a number, but with all the focus on the decline in premium in the fourth quarter and then your comments about this year, knowing what you know about January renewals, is it safe to say you will meet that double-digit top-line growth in the first quarter?

Well, you know, I'm not sure.

I think we will, but I really don't like to comment so much on quarterly numbers.

Steve and I have always said the quarterly numbers can be lumpy as you saw for the fourth quarter.

So it is my expectation for the year;

I would tell you it is my expectation probably for every quarter in the year.

But there is a lot more variability when you get into one quarter over the entire year.

And then just to follow up a little bit more, on the mix of business you talked about the importance of the U.S. casualty market being half of your premium.

With the opportunities building in the property market, do you see that mix changing, and are you going into some lines that perhaps you did not write as much before like the retro market?

We do see more potential growth in the property side -- I'm talking about the reinsurance book now -- than we do with the casualty side since that market is changing more than the casualty side.

Within the property side, yes, we are always willing to change our mix within that world depending upon how that market and its pieces change.

The retro end of that market has probably been the part of that market that has changed the most.

And so we already have written more in January 1 and are prepared to write more in the retro market and in the property reinsurance market overall as the year goes on.

And I would have to say that fits into our total cumulation.

The retro, as we reallocate the capacity, we move, as Joe said before, to some of those areas that have the best upside downside analysis, and retro had a much better return in a lot of cases.

And then just my final question, I read this morning about [Validisys] writing about 220 million of gross premium and just wanted an update on what you're seeing from the class of 2005 and any impact they might have on the market?

Well, in January we did not see much impact whatsoever from them in either the property side or the casualty side worldwide.

I would suspect that as they start gearing up, we will see some impact.

But again, as Joe said, we have the upperhand being, one is our security, one is our structure, our financial capabilities and our people all over.

So impacting us, I don't see it.

What about impacting the market?

We have not see much so far.

It probably will be more as the year plays out, and some of the new companies get better established.

But they don't get looked to first.

They are not out there with big limits.

There certainly are some companies that if they can fill what they are looking to feel with better security won't use them at all.

They tend not to be market leaders.

I don't think they will be market leaders even as the year ensues.

So a little more capacity is obviously going to have a little impact on the overall marketplace.

But I kind of get back to we will be able to write everything that we want to write.

The only thing that stops us is ourselves.

In this instance we will reach a certain exposure where we will say we just don't want to go beyond this, and I don't see any issues about building to that aggregate and having a high quality portfolio.

As you have better security, you will tend to have better and better people and better distribution and better customer base.

You will have a better mix, a better portfolio.

A better pull business as well.

Yes.

There will be some marginal change to the marketplace for this, but nothing that really I think will come back to affect what we write at the end of the day.

Thank you all for your answers.

That is very helpful.

David Small, Bear Stearns.

Perhaps could you guys just give us more color on the casualty market and the lines you are writing there?

Are you looking to write new lines of business?

You have obviously been pulling back as pricing has been declining there.

Are there new lines you are looking at, or is pricing stabilized at a level where you feel it is profitable?

I think right now that the pricing has stabilized where we think overall it is profitable based on the segments of business we write, and we are more of an E&S writer both in U.S. and internationally.

So I would say that at this point in time we don't see expanding into other lines of business that we see are changing to our advantage.

We did write a little more of malpractice business as of 1/1 where we thought the opportunities were good, terms and conditions were tight and where there were some tort reforms both in Florida and Texas.

But, beyond that, we don't see much.

No, I think our product mix will generally stay very much the same in 2006 versus 2005.

In 2005 we did cutback in some areas.

Probably the most notable was directors and officers' liability, where we have a smaller presence in 2005 than we had in 2004 because we saw some slippage in that end of the casualty market.

But generally speaking the spots that we are in, environmental and malpractice and some of the other areas, we are really happy with that product list and don't see any significant shift in our product mix going into 2006.

And then just I think in the past you have talked about a $400 million PML for the Southeast.

Is that still a fair kind of number to think about?

Let me start that one off.

You may get some other folks coming in.

Normally the 400 PML is what we disclosed at the beginning of last year over the course of the year.

It probably drifted up to the 450 to 475 kind of territory, and we continue to believe that that is a one in 100 occurrence limit that we will continue to manage from.

Having said that, we look at return periods as short as 20 years and as long as 1000 years, and you have to understand that a PML speaks to a specific exposure to an event in a particular zone.

It does not take into account an annual aggregation of exposures, nor does it take into account cross zone kinds of issues.

And, frankly, when we put out one number that happens to be Southeastern U.S., it is for 2005.

For 2004 I think it was Northern European windstorm.

In prior years we have had it be the California quake.

We are working on kind of our disclosures in the sense that certainly after the experience of 2005 we want to be more articulate about the exposure.

But kind of jumping back, we have a very detailed accumulation monitoring and management framework, and as we have said before, we believe fundamentally it worked the way that it should have worked.

And at the end of the day, we have looked at it very hard, we have made a lot of tweaks and refinements as is inevitable given the experience of 2005, but I think we are satisfied that we have the framework in place, and we are rolling it forward.

And as we move forward, as Joe and Tom have both indicated, we are not looking to change that one in 100 kind of event PML in a significant way.

It may, in fact, drift lower.

Having said that, we will look at the capacity we are willing to put down in any given marketplace around the world and every given product class and make the decision that uses our capacity in the most efficient and positive risk versus reward relationship.

Yes, I think Steve just did a good job of saying it is not a simple subject, and it is very hard to give you one number that really satisfies you in terms of tackling all the issues.

Having said that, we are looking and I do believe we will have less exposure as I said in 2006 than we had in 2005.

The challenge is having a bigger upside and more premium in 2006, even though we have done that.

What will help us accomplish that will be market changes.

What will also help us accomplish that will be going back to these losses and learning from them in terms of where there was more volatility than we had appreciated.

We have been through them 10 times.

We will probably be through them another 10 times before we are done, but underwriters often think they know what they are underwriting.

But when a loss comes along, they then find out what they have underwritten, and it is important to go back and learn from these losses.

So I think whereas exposure is hard to describe and measure because you have to look at it from a number of points of view, but having said that, I think from almost any view that you look at it, we will certainly have less exposure to property cat in 2006 and hopefully more upside, more premium.

Let me add to that we're very hopeful that the loss side in 2006 will be far better than 2005.

Wilma, Rita and Katrina really were quite a load.

That is just horrific hurricanes, and any year when you have a major U.S. city disappear because of a hurricane is just going to result in a horrible year.

So that is what leads us to be just much more bullish with regard to 2006 on the property front.

And then maybe I could just finish up with a question on capital and the rating agencies.

Again, in talking to the rating agencies, how much do you think your capital requirements for your property book are going to increase?

And then when you speak to them in terms of potential loss of capital in any one year, is there a target -- is there a potential worst-case scenario there?

Well, each of the rating agencies is taking a slightly different approach.

They are both tweaking the level of capital you need for property exposure.

We have been through those discussions with both rating agencies, and frankly, we are very well-positioned for where we are in 2006 and, frankly, have a lot of room to increase our leverage.

We certainly will continue to watch our cat aggregates as those are certainly issues the rating agencies are very interested in, but we're not looking at any significant constraint as we look at 2006 and, in fact, have plenty of room to leverage up.

We are in very solid shape with the rating agencies as we should be, whereas some of our competitors are not, and that has actually been a boost for us in the past year.

But (A), we are diversified. (B), take a look at this year.

It has been as horrible a year from the cat side as one could imagine, and we end the year with substantially more surplus than we had at the beginning of the year.

Sure, some of that came from capital raising, but some of that came from the fact that we had a diversified book where other pockets made a substantial profit.

Some of it came from our investment portfolio, where I thought we would put together a very very intelligent mix given all the changes that we anticipated and interest rates and other parts of the investment market.

So here we end 2005 with more capital than we had and once again prove as a battle-tested company that we are quite solid.

So we are in terrific shape with the rating agencies.

We don't see that as something that restricts business opportunities for us.

Jay Gelb, Lehman Brothers.

Joe, in 2002 and 2003 Everest Re grew premiums over 60%.

So we appreciate the outlook of double-digit premium growth, but I'm hoping you can quantify that a little more finally, and then I have a numbers question?

Yes, it is not 60 or 70%.

I will call it low double digits.

This is not a market like 2002 or 2003 where (A) we were coming from a ratebase that was very low and rates were going up quite substantially on the insurance side and the reinsurance side, and it was happening in an across the board fashion.

Property casualty for that matter, marine, aviation -- it was happening not just in the U.S. but throughout the world.

Here we have in most pockets kind of a leveling 2006 versus 2005 with the exception of the cat exposed property world where we have substantial change.

So I think we will look to capitalize on that substantial change.

We are very happy that the leveling that is taking place is leveling out rates in that area that they are still adequate, and that is very important, and that means we can continue to do well in that area.

But I'm talking about low double digits.

Thank you.

And then on the prior period development, Steve, that ran past me kind of quick.

Can you go through that?

I think you mentioned the 89 million and the 49 million.

I was not sure if that was positive or negative.

The 89 million was for the quarter, and it was favorable, including cat development, as well as A&E development.

The 49 million is year-to-date, and that also is favorable and includes both cat and A&E.

So I mean there are a bunch of moving pieces here.

You have got cats and -- we have got cats, you've got asbestos and environmental.

You have got the effect of the premium adjustments, and all of that is netting to 89 favorable for the quarter, 49 favorable year-to-date.

Great.

Thank you.

And then finally, if you think about normalized results going forward, what are you including in your assumptions for the impact on the combined ratio for catastrophes?

Well, you know, this is a tough question, and you really have to look at the underlying factors.

But generally speaking, what you're looking at is 30, 35, perhaps even 40 million per quarter.

A lot depends upon the mix.

A lot depends upon what is going on.

But, frankly, if you get those kinds of losses and it is seasonalized reasonably well, you kind of expect that the quarters would play out in a stable fashion.

If you get greater than those numbers in any given quarter, you will have to make some decisions about what is going on elsewhere and what the implications are for our overall level of reserving.

I mean we have been very successful over the years making sure that we are prudent in the way we construct reserves, and frankly in the early 2000s, we saw more adverse development than we wanted, and we consciously over the last couple of years tried to position ourselves to return to the kind of pattern we distributed -- we showed right after our IPO.

And so we're trying to make sure we are prudent.

As we do that, we will certainly consider what is going on with respect to cat.

But I hate to give you a long-winded answer to a short question but --

(multiple speakers) -- potentially 120 to 160 million a year?

Yes, that is order of magnitude.

That is not some summerization of a bunch of different numbers.

That is more of a judgment call.

What you really have to do is look at the underlying moving pieces on a quarter by quarter basis, but that order of magnitude.

Scott Frost, HSBC.

I'm trying to get a little bit more context around the pricing environment.

On a scale from 1 to 10 with one as an ideal market, I guess would that be 2002 or 2003, and 10 is I guess 97 to '01.

Could you rate the pricing in terms for each general business line right now versus, say, a year ago?

Well, first of all, were you talking about just the property cat level (multiple speakers) talking about everything else.

Okay?

Yes, well, actually all lines.

You are getting increases where you need to get them, but for the other lines, too.

How is that environment as well?

Well, I'm not going to give you a number and go through all the products that we have. (multiple speakers).

Let me just generally summarize.

In a spot when you try to put everything together, that is a good (technical difficulty)-- you know, barring unusual losses (technical difficulty)-- combined ratio that leads to a high-quality ROE.

So that speaks to the fact that we think rates are in a good place.

The area that rates are really changing dramatically is in the property cat in the world.

And even there I would say it's even more specific to wind exposed U.S. risk.

It is not necessarily Tokyo earthquake or European storm or even California earthquake that is changing dramatically.

So the end of the world is changing dramatically as Florida, Louisiana and Mississippi, the Gulf Coast (technical difficulty)-- of the spectrum.

It is looking quite good, and so I would give it a quite good rating.

Having said that, this is cat business that is still subject to just how many hurricanes you get and how intense they are and where they hit at the end of the day in terms of whether or not you will make money.

But right now, driven by the losses of 2005, that end of the spectrum is looking quite good.

So I obviously would have given it a very good number, although it is still volatile, so there's only a certain amount that you can do.

Bill Wilt, Morgan Stanley.

A couple of questions.

First, on property reinsurance, could you give us some anecdotes or describe some of the most impactful changes in terms and conditions for underwriting that occurred at January 1?

Well, I will start and I don't know if Tom will want to add anything.

A lot of the changes came in terms of rate and a lot of the changes came in terms of change in deductible.

You would see some detailed change in terms, especially as you get down to the insurance side, but Tom, do you want to comment on some of that?

Well, let me say this.

We mentioned somewhat before the large national accounts.

There we saw them purchasing a larger share of cat limited 10% or more.

We talked about them increasing their retention.

I would say their price increases on a lot of their cat programs could of went from anywhere from 20 to 100% increases based on their prior losses and their current cat management approach.

On proportional programs, I would have to say that the original rates are hardening in a lot of places with reinsurers tightening terms and conditions, putting on (inaudible) in aggregated caps where warranted, particularly in wind exposed areas, and we saw reductions in overrides and estimation of margins increasing about 20%.

And E&S companies where there is wind or earthquake exposure, we saw prices moving up greatly, some changes in terms and conditions on the portfolio both from their point of view, as well as the reinsurance point of few, and ranges have increased anywhere from 25 to 50% with them purchasing some additional excess protection.

Now the launch risk business does not renew mostly on longline.

It comes out in the middle of the year where I think even there major changes will occur based on the exposures and the experience after the hurricanes where you will see much tighter terms, conditions and price.

What you don't see, what is hard to measure but what is also going on, is that the insurance companies are making changes themselves.

They are going back and taking a look at where their losses came from, and they are looking to do a better job in terms of underwriting going forward.

So they are going to go back, they are are going to see a ton of their losses came from hotel chains as an example.

They may not underwrite those, or they may have different deductibles when it comes to hotels.

They certainly will charge them a lot more if they do.

They may do a better job on the engineering.

Certainly floating casinos of the world are going to be changed different for them as it should be.

But they will get into construction.

They will get into their own underwriting manuals.

They will, frankly, look to reduce their exposure to some degree as well.

So you have this multiple patient that is going on where reinsurers look to charge more, raise deductibles, tighten terms, but insurers at the same time are looking to do much the same for their portfolio, again for that end of the world, the wind exposed U.S. exposures.

That is helpful.

Thanks.

I will end on a I guess philosophical note.

Why did not I guess in your estimation -- why did not the pressures of the marketplace and the sad and huge losses create more pressure on January 1 renewals, or were expectations simply too high?

Well, I don't want to look at it like the outcome was a bad outcome.

I mean sure I could say the industry did not get hurt that bad.

The players like ourselves, well rated, are still well rated, still more capital than we had before, and we did have some new guys that came in.

But what has shook out of this is kind of a stabilization for most parts of the market stabilizing at a place that still offers adequate returns and in pockets specifically impacted turmoil that offers opportunity.

So I'm not overly displeased with where things shook out, it is not 2001 where the market was in terrible shape to begin with and then you threw World Trade Center on it.

It's a more sophisticated market in the sense that it acts more quickly, and then that is certainly part of the answer as well.

But I still believe given where the market is at for a company that is nimble and has the finances and knows what it is doing, it is a market that offers terrific opportunity.

It is not shooting fish in a barrel in every product in every country, and that does not happen too often in our industry or in any other industry.

So in that sense I am not overly disappointed that it did not go that way.

If I could just add, there is a lot of pressures that are still playing out through the system, and we certainly are well aware that model companies are working on new versions that will be available later on in the year.

The discussions with rating agencies over property and in particular cat exposures is not completed yet.

There is always the tension between primary and reinsurance over the right price, and it may take us a couple of go rounds to move that.

In addition, as Tom mentioned, a lot of the risk business is renewing later on in the year and is going to get just increasing amounts of attention.

So we really see that this is something that is going to play out over time, and frankly, that is as you would expect would happen.

I would add that the market has changed, though, in different ways, and the full impact of that change is yet to be fully realized.

It will take more time, but it is a great step going forward, and I think, as Steve said, we still have renewals coming up in April.

We have Florida, Mexico coming up in July, and the changes are not going to end.

I think the pressures from all the outside factors, whether it be rating agencies, their own internal reviews by seating companies will make this for a good market on a long-term both for '06 and possibly into '07?

That is all the time we have for questions.

I would like to turn the call back to Ms. Farrell for closing remarks.

Okay.

Thank you for participating on the call.

I know we had to cut our time short, so if there's a few of you that still have questions, please feel free to give me a call.

Thank you, again.

That does conclude today's conference call.

We thank you all for your participation.

Have a great day.