Everest Group Ltd (EG) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the first quarter 2006 earnings release call of Everest Reinsurance.

Today's call 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, 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 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 summarize our results then turn the call over to Joe for comments on the market.

Then Joe, Tom, and I will take questions.

Our first quarter produced solid results with operating earnings of 157.9 million or $2.41 per diluted share, down 4% from 2005's 165.2 million or $2.90 per share.

Net income, which includes realized capital gains and losses, was 168.4 million or $2.57 per share, compared to 2005's 167.1 million or $2.93 per share.

These results include 50.6 million, or $0.77 per share, of after-tax catastrophe losses almost entirely relating to the 2005 hurricanes, 40.7 million and $0.60 per share more than 2005's first quarter.

Our combined ratio at 94.5% includes 6.9 points related to catastrophe losses compared to 2005's 91.6% combined ratio, which included 1.3 points related to catastrophe losses.

Despite these catastrophe impacts, our results reflected an annualized return on equity of 15.7%.

We believe these are strong results, particularly as we focus on the underlying fundamentals of our 2006 business and do so in the context of a stable to improving market, which plays to our strengths.

Turning to production, our gross premiums written were up 1% to 1.06 billion, reflecting 8% growth in our worldwide reinsurance premiums coupled with a 21% decline in our insurance premiums.

Total group net written premium and earned premiums both at 1.02 billion were up 1% and 2% respectively.

Highlighting gross written premiums by segment, our U.S. reinsurance operations were up 13% reflecting solid growth in our property operations, coupled with modest declines in our casualty operations.

Our U.S. specialty operations were down 38% as continued weakness affecting our accident and health businesses dramatically outweighed modest growth in our marine and surety operations.

International reinsurance operations were up 15%, reflecting solid growth across our principal markets of Latin America, Canada, and Asia.

Our Bermuda operations grew by 21%, with a growth in our Bermuda and London-based treaty businesses outpacing our European treaty and Bermuda individual risk businesses.

Our U.S. insurance operations were down 21%, mainly reflecting continued retrenchment in our Workers' Compensation business, particularly in California, and a fall-off in volume on our credit program.

Despite this, we are rebuilding momentum in this segment, which has added several new programs that are ramping up and should contribute appreciably later on in the year.

We've historically cautioned that one quarter does not a year make.

And we do so again this quarter.

We continue to emphasize discipline but remain cautiously optimistic about full year growth potential.

We are encouraged by the movement to date in property lines, but expect and believe that the market will continue to tighten.

We are also encouraged that casualty lines on balance have stabilized at generally well priced levels.

Overall these emerging market conditions are well suited to our strengths and we are focusing on the opportunities presented.

Our underwriting results for the quarter were impacted by the catastrophe loss development I noted earlier.

Beyond that, we believe the quarter reflects the normal mix of activity.

Non catastrophe net loss development was minimal, about one point on a combined ratio, and risk/industrial losses, which can and do vary, fell within what we consider our normal range.

Prudent reserving remains a focal point and net loss reserves increased $92 million to 8.2 billion for the quarter, despite $265 million of catastrophe loss payments.

Importantly, our reserve metrics continue to indicate balance sheet strength.

Pretax investment income at 145 million grew by 9% over 2005, with after tax investment income up nearly 13%.

The embedded pretax and after tax yields at 4.6% and 4% are each up 0.1 point from year end.

Duration at 4.6 years is up 0.3 of a year.

Total cash and invested assets at 13.1 billion are up 180 million from December 2005, mainly reflecting 160 million of cash flow from operations, which generally reflects attractive paid loss ratios when cat losses are excluded.

And that's partly offset by $63 million of unrealized depreciation.

Of the latter, bonds accounted for depreciation of 117 million and equities offset this with 54 million of unrealized appreciation.

Shareholders equity stands at 4.266 billion or $65.72 per share, up from 4.14 billion and $64.04 at December 2005.

In summary, our operating capital bases are strong, our markets are moving in a direction which plays to our strengths and we remain focused on disciplined execution.

I'll now turn the call over to Joe for comments on the market.

Joe.

Thank you, Steve.

Good morning.

The marketplace continues to offer quality opportunities for a company with our ratings, distribution system, reputation, and expertise.

Worldwide our reinsurance operations grew 8% in the quarter, in line with our expectation.

The casualty insurance market and reinsurance market remains steady and at a level that offers solid profit potential.

The property insurance and reinsurance market continues to improve, particularly for catastrophe risks.

Managements have continued to charge more for the volatility associated with these risks and continue to closely monitor their accumulations.

Revisions to computer models have suggested higher potential losses and consequently higher pricing.

Rating agencies have weighed in with higher capital charges.

All of these factors have made for a continually hardening catastrophe market.

Hurricane season approaching has also focused industry management toward appropriate exposure and appropriate price to exposure.

In our insurance operation, premiums were down as we continue to cut back in California Workers' Comp premium, where rates continue to fall.

Also our credit program did less business as our partner has had difficulty attracting additional capital for new loans.

We have several new programs underway in this area that should propel growth for our insurance operation in the second half of the year.

These opportunities include, first, an agreement with CV Star of California to write contractor liability and public entity liability.

Star has a terrific presence in this area and we expect to do a substantial amount of business with them.

I would estimate this to be about $250 million of business at the low end for the future 12 months.

Second, we've added a new program to write contractor liability business in New York State.

We estimate that this business will be about $100 million on an annualized basis.

Third, we're entering the Florida property market for small commercial risks.

We'll write this business directly on an excess and surplus lines basis through primary agents.

We're looking to be up and running by June.

This reduction in our insurance premium in the first quarter essential offset the reinsurance growth, making for a flat comparison on a total worldwide basis.

Given the marketplace and the current opportunities, we expect to see more top-line growth as we get further into the year.

We also expect to deliver a quality ROE.

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

Now we're open for questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Tom Cholnoky from Goldman Sachs.

I have got a whole host of questions but I'll try to break it down to only a couple and leave some others.

Can we get a little bit more regarding your cat losses?

The one thing that surprised me a little bit is that you filed your K in early March.

There wasn't a lot of indication in there -- you had some wording in there that suggested that you could see upward developments.

But what specifically occurred in the first quarter that caused the significant upward revision to your estimates?

We monitor the losses on a day by day kind of week by week basis.

But then we need to do periodically kind of an assembly of all of the underlying data, and there's a lot of it, and then we have to make some calls.

As we look at the composite of the first quarter reports, how much was paid, how much was reported, what our underwriters felt about the individual remaining IB&R provisions, we concluded very recently that as we look at the world, we needed to make an adjustment.

That's a process that is ongoing, but also has lumps in it as we step back and make high-level judgments concerning what the detailed raw data we're getting means to us.

And in context, we saw that we needed to make adjustments with respect to -- principally Wilma and Rita.

Katrina was -- there was noise and numbers moved around, but when you're dealing with literally hundreds of claims, there's going to be noise in the sense that each one of those needs to be revisited.

So it was more -- probably Wilma at about 35 million, Rita at about 20, Katrina probably at about 10, and then there's some reinstatement netting that goes on in that process.

Beyond that, in terms of the type of losses.

Our marine book, our principally offshore energy exposures, very high layers was invaded a bit more than we expected.

We did see movement on our individual risk business, the facultative being the bulk of that.

And we did see movement in Mexico, where frankly the loss adjustment process was kind of overwhelmed by Wilma.

And so at the end of the day I can't tell you specifically when we concluded, but as we looked at the data very recently, we made this decision.

And then as a follow-up to that, given your experience with cats in 2005 and given the opportunities that the market appears to be presenting itself for June and July, are you kind of caught between a rock and a hard stone, between trying to figure out exactly how to take advantage of this?

And what are you doing to, I guess, ensure that you can take advantage from a production standpoint but also not to get caught if, in fact, we do have another very bad cat season?

Well, there is no question that we're making adjustments.

And those adjustments continue as we move along.

Having said that, the bulk of our losses we identified last year and we have factored those into our underwriting strategies and tactics and been executing on those strategies and tactics beginning for the 1/1 renewal season.

So this additional development really doesn't affect that at all.

And I think we feel very comfortable that we're prepared with our strategy in terms of how we're dealing with the market.

There's no question that we are remixing our book of business.

I don't know that our PMLs, as disclosed in the 10-K, are going to change appreciably.

There is a lot of things to consider, including the model changes that Joe alluded to.

Frankly though, we do expect that if you were to replay the loss events of 2005, our losses would be down appreciably.

And when I say "appreciably", on the order of half what they were.

So we think we've accomplished a good bit of remixing of the book.

Having said that, this is a risk business and we understand that in times when you have opportunities, you need to be moving towards the better priced business and that's what we're doing.

Tom, I wouldn't categorize it as caught between a rock and a hard place.

I like when there's some turmoil in the market and we actually see rates going up quite substantially.

Having said that, I think your point is, is the property side, where rates are hardening, has a certain volatility with it that we've now seen from just last year.

And so you have to be prudent when it comes to just how much volatility.

And frankly what we're looking to do is have more premium and substantially less volatility.

And we believe we have achieved that.

But we're not on defense here, we're on offense.

And we're very pleased that the market is responding on the cat side driven by these losses.

Okay, great.

I'll hop back in.

Thank you.

Next we'll hear from Matthew Heimermann from JP Morgan.

Were you surprised by the lack of growth in the first quarter vis-a-vis your double-digit expectations we talked about last quarter?

We were surprised by what we encountered in the insurance operation.

I would tell that you the reinsurance side was more or less in line with our feeling.

Casualty was flattish and property was up quite nicely on the reinsurance side.

But in the insurance operation, a couple of things happened.

One is California comp, we continued to see decline in rates.

To give you an example, the bureau is now kind of filed for another 16% take-down in rates for July.

Many, many companies are already at that rate point.

And that would yield rates that are roughly half of what the rates were 18 months ago.

So we're responding to that, and frankly part of the response is doing less business in California.

At our peak in California we did about $800 million worth of business.

This year we expect to now do about $150 million worth of business.

The business we think is okay, but the business that we did at our peak was outstanding.

And as it's seasoned, has basically been showing terrific profit margins.

So California comp, which was once 80% of our insurance book, and we were happy that it was because it turned out to be great, this year will probably be more like 15% of our book.

So there's a rather dramatic transformation going on with regard to that pocket of our business.

And that happened at an accelerated rate in the first quarter.

The second item, again within our insurance book, we mentioned we have a credit program, which has also done very well.

But that depends on our partner making a certain amount of loans.

And the money that he gets to make the loans come from credit unions and there was a national oversight board that put some rules out six months or so ago that dramatically cut back the amount of new loan money that he has.

And so that again affected our production in a rather significant way, very much so in the first quarter.

So that's really, I think, the change that took place, not so much on the reinsurance side, but on the insurance side where those two areas we did less for those two reasons.

Now, the good news on the insurance side is that we've recently entered into some new programs.

I mentioned the CV Star and I mentioned the New York State contracting business and the Florida property business.

And we're very bullish on all of those items, but those items in the main will kick in in the second half of the year.

When this is all said and done, our insurance operation will be far more diversified than it was a few years ago, with programs that are growing that we're very pleased to have.

But, yes, that was the change, I think, was in first quarter, was the insurance operation, because of those two items.

And then just a follow-up.

Could you -- I mean, you did a pretty good job of laying out what type of volume potential some of these new programs have.

Can you help us get our arms around some of the runoff that's left in the existing lines of business, just to -- because I struggle just to figure out what the insurance book will look like at the end of the year in absolute terms.

Well, I think it will be along the lines of a billionish worth of annualized premiums for 2006.

As I noted, California comp may be 15%, or 150 millionish of that, but then we have the Star program kicking in.

As I said, in the next 12 months I thought maybe 250 million is a reasonable number there.

So you might take half of that for the second part of the year.

And New York State contracting business.

We have some other programs, too.

Security guard program, architects and engineers program.

We're writing Worker's Compensation in Florida.

We're writing Workers' Compensation in the Midwest.

So this is what I mean by it's really a -- it's become a much more diversified operation.

And then it looked like development, ex- asbestos, was pretty much nil.

Was there anything that happened underneath the surface, either positive in certain product lines with negative offsets, or all else equal, were things pretty stable?

It was actually pretty stable.

Having said that, our property operations continue to look very solid.

There's been noise on some of the casualty operations, but very minor.

And basically the kind of thing that has caused us to really see the net development be really only the asbestos.

And when I talk about movement, these are modest movements.

We try and stay ahead of reserve studies by adjusting reserves internally, but there's nothing dramatic going on there, Matt.

Okay.

And then would you -- I mean, you said your balance sheet metrics -- I'm sorry to kind of take over this call -- but you said your balance sheet metrics were positive, to paraphrase.

I mean, is it fair to kind of think about -- do you feel like we're at an inflection point where we're kind of through the worst of it and potentially if some of the business you wrote in the hard market turns out to be as good as it might be that we see a lift from that going forward?

I would think that we went by the inflection point last year.

And first quarter is very early.

Look, we just got finished with the full year-end analysis and we have really gotten into first quarter.

And frankly, first quarter typically is pretty quiet.

But I think we reached the inflection point last year.

We're very pleased with what we wrote in '02, '03, '04, and '05, and we'll wait and see.

But certainly the metrics we employ are suggesting that our reserves remain strong but we need more data to play out.

I will say that one of the areas that you certainly can see some modest netting is on the insurance side, where the California comp business continues to run off very well.

But on balance, we continue to see strength.

It's hard to know what the future holds and it's early in this calendar year, so we'll wait and see.

Okay, thanks much.

And next we'll go to Matt Carletti from Cochran Caronia Waller.

Just a few questions.

One, I hate to beat a dead horse, but back to the cat losses in the quarter.

Just wanted to get your thoughts on how you guys view pre-announcements in the sense that this was about 20%, a little more of the quarter's earnings.

Did you just not feel that that rose to the level of enough materiality to preannounce?

Look at it this way, we don't provide guidance.

And the practical matter is -- I know you analysts do models that come up with views of what could develop.

But at the end of the day we look at our 15.7% annualized ROE and we had a very solid quarter.

It was certainly dampened by the catastrophe losses.

But at the end of the day we think it was very good.

And I would contrast that with the second two quarters of last year and the fourth quarter of '04, where we were talking about really significant movements from expectations and really needing to get out information with respect to the implications of the catastrophes.

So I don't know that we necessarily consider 20% an immaterial move, but I think our framework is that we produced a 15.7 ROE, a significant income.

It was certainly dampened.

Our business is one where there's lots of pieces underneath the surface that you need to be tracking.

And I think we concluded that in the scheme of things, a preannouncement really wasn't appropriate.

Okay.

And then going forward and looking at -- obviously, there's still moving pieces.

Do you have any greater level of comfort now after looking at the quarterly data as we get further and further away from when they actually occurred?

Any material further comfort than say you did when you upped it to 1.2 from 1?

Just trying to get an idea of are we getting far enough away from it and enough confidence in that that's closer to being the number?

Certainly another quarter of seasoning was very helpful.

We've made our adjustments that we consider appropriate.

There is IB&R of about 12% of the existing reserve base.

We feel comforted by that a bit.

At the end of the day, though, let's recall that these are very complex losses that we're dealing with.

There's lots of different issues.

We have lots of reservation of rights letters out there.

At the end of the day, we've made our best estimate of how this should play out.

We would hope that movement from here would be noise.

I think what we saw in the first quarter was a bit more than noise.

And frankly, noise can go both ways.

And we are where we think we need to be.

Okay.

I'll get away from the cat issue.

Can you just comment on what your views are on the D&O market right now, obviously on the reinsurance side, particularly domestic versus international?

Tom, you want to tackle that?

Yes.

On the domestic side, I would say that the D&O market continues to be less than positive.

The rates are declining.

We don't see a real positive movement there.

We see better opportunities in the D&O market in the international side, which is growing need there.

And the prices and the coverages are better suited to our needs.

Generally that's what we see it right now.

One last question.

If you could just comment on what you're seeing in the retro market and how your appetite there has changed this year versus last.

Well, the retro market is a market that has been very badly affected by the events of '05 and '04.

And we see that market changing dramatically.

It's changed effective 1/1 and it changes daily.

Matter of fact, it gets much more difficult each and every day passes.

Most of the retro market -- predominantly, I would say, 80% of it is done 1/1.

But not all of it was done 1/1.

And the pricing that appeared in 1/1 range anywhere from 50 to 100% increases where the points of attachment increased dramatically as well.

As we see right now, there are a lot of covers in the marketplace today where there's a limited capacity for retro.

It's putting a real strain on the reinsurance community as they go forward.

And it will make them change what they take in the front end.

I don't see it getting any better.

There's a point right now where the prices have reached a level where it may be uneconomical for them to purchase it.

I'll give you an example.

You could have a retro, or standard retro, on a $20 billion attachment point where the rate on line is 30%.

Where a year ago it may have been only 15%.

You see them right now in the marketplace looking not to fill the retro, because it is too expensive to some degree, and moving into more of purchasing of ILWs.

Much more specific events, much more narrow in focus.

In some respects it is territorial.

It's a good market.

We have increased our participation in it since the beginning of the year.

We're open to write it right now.

We'll continue to be a market for that.

I hope that covers it for you.

Next we'll go to Susan Spivak from Wachovia Securities.

Good morning, I think my question is already answered but I just want to confirm.

Steve, you said that if last year's hurricane events were to repeat this year, your exposure would be reduced by -- was it one-half?

On that order of magnitude, Susan.

We certainly have remixed in a significant way.

So, yes.

Again, I mean that's a hard thing to pick with exactitude but our view is order of magnitude cut by half.

Thank you very much.

And Steven Labbe of Langen McAlenney has our next question.

Just want to follow-up quickly on a couple of things that have been talked about.

One, as it regards to the adversed hurricane development, was that specific to business that you had written on a retro basis?

Pass me that one again, Steve.

The adverse development for Katrina, Rita, and -- or Wilma, Rita, and Katrina, in order of magnitude, was that a function of retro writings?

I wouldn't attribute it all to retro writings.

Certainly the marine component would have had some retro and very high layer excess exposures, yes.

But I wouldn't characterize it that our development was mainly related to retro.

There was an element of that in the marine portfolio, but this development really reflects movement in a number of areas.

And frankly, minor movements in a number of areas.

While kind of 5% is what the total relates to the total losses from last year, at the end of the day this comes about by a process where you get down and dirty with the individual cost centers, the individual treaties, the individual facultative risks, and you're trying to make the right call as to the provision that's needed.

So I guess there is some retro loss in there, but I wouldn't call it the driver.

Okay.

You talked about -- I believe the word you used is you've increased your exposure to the retro market and you're still a market for it.

Can you quantify at all how much retro you wrote at 1/1 this year versus last year, just for -- I know it doesn't tell us about exposure, but from the standpoint of premium I'm trying to gauge how large it is for you guys.

Let me think a moment.

I would suspect that we probably did about $50 million worth of retro premium.

This year? 1/1/’06?

Yes, compared to 25 last year.

I would say the majority of that increase related to rate, not increase in exposure.

Got you.

Okay.

And maybe one last question, more big picture.

You talked a little bit about casualty reinsurance and you talked about it being -- I think the word you used was flat.

Maybe it was a different term.

But I'm curious if you could delve into that a little bit more.

Do you think that this is just a bump in the trend down again?

Or do you think that the casualty reinsurance markets will remain flat throughout the year, for lack of a better word?

The general conditions in the casualty market right now for reinsurance are holding pretty well.

They're at a very good position, have been for the last couple of years, you see movement up and down but no major change.

I suspect you'll have a little more pressure going forward on rate and terms and conditions but I don't see it being dramatic.

Okay.

It's important to note as well, Steve, that really first quarter results are one quarter.

And we've always been more comfortable kind of blending that into our view for the year.

And the reality is on the casualty side, while we might have been down very modestly in the first quarter, I think we really see that as more flattish for the year.

And that involves us selecting the opportunities that we like the most.

And when you think about the casualty reinsurance, one thing that has been heightened greatly over the course of the last year has been security.

And we stand probably most of the time first in line to see business because of our rating.

So I think as the market evolves we'll continue to be a major factor in that market.

And we should be seeing most of the deals that are within that casualty market in the U.S.

Do you sense greater competition in the casualty markets as the year unfolds as companies attempt to better diversify their business mix?

There's always some movement and competition in the casualty market, whether it be higher or lower.

I suspect it will be a normal competitive market.

I don't see it being that aggressive at this point.

Okay.

Thank you.

And next we'll hear from Joshua Shanker from Citigroup.

In terms of -- you made a comment about the retro market that there probably is a price where it may not be economical for reinsurers to be buying coverage.

I'm wondering if we can trace that?

As you are a writer of both retro reinsurance and insurance, is there a price for insurers where continued purchase of cat covers become economical?

I understand what is driving pricing up, but isn't there a place where the insurers walk away and say I'd rather just not buy the cover?

I think you've seen some of that already.

When the renewals were done in January many of the national writers increased their retention.

And part of that reason, I suspect, had to do with the price related to that first layer of cap risk.

But the reality is I don't think the companies, especially the larger companies who have a substantial amount of cat exposure, can afford not to purchase cat covers.

What we did see is them purchasing more limits, or looking to purchase more limits, to cover them on the future because they all expect, as we all know, that model changes are occurring.

There were surprises last year, but I suspect there will be more surprises coming in the future.

So even though the price may go up, I think there is a need out in the market that will overcome that.

Josh, on kind of a macro basis, we've made clear since late last year that we see structural shifts taking place in terms of capital adequacy requirements, volatility associated with modeled results, the models themselves.

All of that is going to take a while for the various players in the market to kind of absorb the information and adjust their operations.

We think over time reinsurers, generally speaking, are going to have to be paid more for the risk they take.

And the primary markets are going to have to pay that extra amount.

Now, it's going to take a while for that to become clear.

Individual companies will make decisions about retention and layering and structuring.

They'll try and buy retro cover.

They may or may not be able to complete their programs.

There's a lot of pieces to this puzzle.

But we think that we are seeing affirmation of our view, which is that there is a structural shift, particularly around property catastrophe exposures, that is going to play out for some time to come.

And when I mentioned the fact that it may be uneconomical for purchasing retro, the reality is that that forces the reinsurance community to get a better price on the original product to pay for the additional protection on the back-end.

So there's a shift here that pushes them and drives them to start making a different play on the front-end of a transaction.

Do you think that the insurance/reinsurance relationship will stabilize around a price agreement more as a 2007 phenomenon or in the second half of '06?

I think it will be a trend that will continue through the remainder of '06, right through '07.

I don't think it will stabilize until all these factors start to integrate within the system, whether it be the model changes, price changes for climates of capital, adequacy, and that's going to take a little time to absorb within the system.

There will also be an interplay with the model changes, which we expect very currently, and then what's going to happen during this particular wind season in the U.S.

And frankly what's going to happen outside the U.S. in the sense that the volatility that we've seen the last few years has been in the U.S.

But, if in fact there are structural climatic issues driving that, you would certainly expect that the U.S. isn't the only territory that's going to be affected.

Thank you.

And the other question, if you guys are increasing your direct writings in Florida on the E&S cat basis and you're also an open market for retro, how do we as analysts become more comfortable around the idea that your aggregate risk for Atlantic wind has been downsized by as much as 50%?

I didn't say that our aggregate risk for U.S. wind is down by 50%.

We said that the events of last year replayed through our current business would produce an order of magnitude 50% reduction.

Our aggregate, for instance, PML, which is usually what we kind of measure through our 10-K disclosure, will certainly be moving around.

We don't expect it to climb dramatically.

But I don't think we really expect it will fall, particularly when you factor in the model changes, although we are sensitive there.

So realistically what we're getting is more price per risk exposure, number one.

And number two, we're moving to a more protected position within the various risk layering structures that apply to us.

But let me add one thing.

The Florida market right now is in disarray.

There is a turbulence that's going on with citizens, people moving out of the marketplace down there.

And it is a market that won't be settled for a while.

So there are opportunities that present themselves in that type of environment.

And we are just looking for ways to access that business, either on a reinsurance basis or through that direct business through our adverse national operation.

That doesn't mean we will push our limits beyond where we believe it is prudent to write them.

But I think it is a point where we want to access the business.

And this is another way to access it, so we could decide which is the best opportunity for that to be on a direct basis or through the reinsurance basis, whether that be direct reinsurance or through a retro agreement.

We're pleased to enter the market.

There's, frankly, a screaming need for commercial property insurance.

Rates will be the best they've ever been.

Terms, deductibles, et cetera, will be the best that they've ever been.

We like the fact that we can manage it where we can have the appropriate spread that we designed to kind of produce the maximum return.

Now, having said all of that, entering the market in June means that for this wind season we really won't have that big an exposure from the insurance operation.

But we are keen to enter the market.

It will be, by far, the best it's ever been.

The brokers have a crying need for someone to come into the vacuum that's been created.

I appreciate all your candidness.

Thank you.

Thank you, Josh.

And David Small from Bear Stearns has our next question.

Given the production trends we saw in the first quarter and even if we annualize them with some growth, we still get to a premium to surplus level of less than one.

I guess the question is how do you fell about the size of your equity base versus your ability to grow the business at this point?

Capital management is something that we live with every day, as is risk management.

And at the end of the day, while our capital is as strong on a relative basis as it's ever been, we're pleased with that in that it has produced for us great ratings, among the best in the business, and that certainly is an advantage.

We certainly understand the need to be efficient.

We do see this period of adjustment I spoke of where, as a practical matter, we are reassessing the risks that we need to cover and the overall macro pricing that we need to achieve to support those risks.

And that's somewhat of a fluid issue.

Now, you may recall last year in the first quarter we had lots of discussions about capital management and, frankly, I think some folks might have perceived that there were actions that we ought to have been considering.

As we sit here today, I think we feel reinforced that being conservative with respect to our capital base is important for us in the sense that last year, while we did have to go to the capital markets, we did not have to go to the capital markets at gunpoint.

And frankly, we feel we're very well positioned today in this climate to do very well.

We've got some of the best ratings in the business, people are actively looking to get us on their accounts.

We see virtually every account out there.

We have as good as anybody an opportunity to take what we want of the good accounts.

And so at the end of the day, we think the capital strength that we've got and that we demonstrate is very useful in our business.

Having said that, we have said all the way along that we're going to be effective users of capital.

As we get to the latter part of this year and see how the results emerge and what goes on with respect to both the wind season in the U.S. and our own development of thinking with respect to enterprise or risk management, capital requirements, et cetera, we'll continue revisiting this issue.

And so would it be fair to say that given some of the repositioning that's gone on in the book, just by the fact that premiums that you're pulling back from the Workers' Comp area, you may write some more Florida risk, that the optimal capital level has gone up potentially in terms of a premium to surplus level?

I would say, stepping back even one step further, at the end of the day we've learned a lot about cat exposure in the last two years.

Now, let's recall that prior to 2001 our biggest cat year on a pretax basis was $45 million.

In 2001, we had the Trade Center.

That put us to a pretax of 222.

And then '04 jumped to 390 with the combination of several significant events in the Florida hurricane area.

And then 2005 at over 1.4 billion, it's clear from our accounts, as well as from the industry's accounts, that volatility is up.

The risk exposures that we take are being re-denominated, if you will.

The rating agencies are looking at us differently today.

And so at the end of the day has net-net the capital that a reinsurer is required to carry gone up?

I would say it has.

Then you get into kind of how much.

And that gets to be a question that’s very much attenuated to the type of book that you're writing and the style of the risk that you're taking.

There's a balance there.

But net-net, we have to hold, as reinsurers, more capital.

That means the insurance industry has to pay more in premiums so that we can generate the kinds of returns on the capital we hold that are required to support it.

We've also been very conservative when it comes to issues like ratings.

We want the highest ratings.

We think it serves us very, very well in the business.

And some companies that were less conservative with regard to capital management last year found themselves on negative credit watch after losses.

That was not the case for us.

It never was even close to being the case for us.

And we continue to want even higher ratings than we have today, even though we're among the elite group to begin with.

Let me just ask you, just switching gears for one second, it seems like you're adding more programs at one time than you have in the recent past.

And I guess just how do you get comfortable with these programs in terms of the future profitability, given the maybe more internal controls or maybe you can just give us a little color there?

Well, we're -- basically I mentioned three.

So we don't find that overwhelming.

And one is a very specific situation in Florida that we would have not entered earlier because the factors, the way they are today, are far different than what they were a year or two ago.

So that's what's kind of drawn us to that particular opportunity.

The CV Star opportunity was also a rather unique opportunity.

It happened because Star and AIG parted ways.

And so that made for a unique opportunity.

As far as the New York contracting business, or even the Star contracting business, we've been in the contracting market through a direct operation in another program in the last two or three years.

So we're very, very familiar with that product.

And so we're very comfortable, frankly, with all three.

But they're unique situations and we can manage three.

Let me just finally ask, on the first quarter, and I know this has been discussed a little on the call, but in the first quarter call you said you expected double-digit top-line growth for the year.

Is that what you still expect?

Probably not.

I think that's still something I'd like to see for the second half of the year.

Obviously we were flat in the first quarter.

But the two items in the insurance operation that affected our production in the first quarter will affect us in the second quarter as well.

So, no, now that those two items have kind of caused a decline in the insurance operation, I really see it as less likely, although I'm still bullish on the second half of the year.

Thank you.

And JF Tremblay from HSBC has our next question.

You seem to be pretty satisfied with the premium growth in your international reinsurance segment.

Can you give us some more color on some of the market trends you are seeing there and maybe address the April renewals?

Tom?

Sure.

We see the international market being generally stable with terms and conditions holding.

We see some adjustments in those areas that had losses or where exposures have warranted change, where we see the rate increases anywhere from flat to 15%.

When we talk about the April 1 renewals, it's fundamentally for us it was Japan, Korean market, and India, a little bit in central and Latin America.

We were generally pleased.

We saw rate increases in almost all the areas.

The better ones being in the Japanese market and the Central and Latin America market aspect.

I would say that we did increase our position in Japan.

We're probably flat as respects to exposures in Korean market.

We did not write as much in the Indian market.

Even though the prices did go up, they weren't sufficient to what we believed that was necessary after the floods last year.

Overall, I think the international market is holding well.

Thank you.

And my second question has to do with your relationship with the CV Star in C's.

Can you tell us a bit more about your expectation there?

Whether we can see some more programs coming on line, what kind of businesses.

Maybe give us some background on the tone of your discussions with the CV Star in C's?

It's been very positive.

We're very happy to reach an agreement with them.

And both of us are excited about moving forward.

We really are focused on the California contractor and public entity business right now.

And that's a business that they've been just terrific at for many, many years with great connections.

Star does have other programs.

But right now our focus is on the one situation.

And whereas there may be more that we do down the line, there's nothing on the table right now except for this one item, although that's a very big item.

Thank you.

And we'll take our last question from Sackett Cook of Menemsha Capital.

Can you tell us a little about what's going on with the Bermuda margins?

I know that business gets very little profile on calls like this.

But it seems there's a pretty good underwriting margin in the quarter.

I'm just trying to kind of understand how to put this into context for the full year and how to think about it.

Yes.

Some of that is adjustment with respect to our catastrophes in the sense that whereas the U.S. operation, generally speaking, outside of treaty properties was the driver of most of the increase, the Bermuda operation was not.

And, in fact, it maybe saw minus minor adjustments downward in the facultative area.

The other thing that's affecting it is that is principally a property oriented business.

And both the Bermuda operation and the U.K. operation had relatively clean quarters.

The U.K. operation, of course, includes both what we do in the U.K. and what we do in Europe.

So I think we feel pretty comfortable that, absent significant events, this is not a bad reflection of kind of where that book is.

And I guess my other question, and I'm sorry to beat this to death, but I'm still struggling to understand -- the commentary would suggest that another loss like we had last year would be reduced by 50%, when I see premium growth up in the U.S. reinsurance and the international.

So I'm just trying to figure out a way to pose this question so it will be helpful to people.

Is the aggregate exposure to the southeast, including Louisiana or whatever, is that flat to what it was last year or -- maybe that's a start?

It's probably flattish compared to where it was last year and that moves around depending upon business coming on and business going off.

It is our kind of game plan that it stay in a range around where it was last year.

We certainly are trying to get a lot more rate per unit of exposure.

And, generally speaking, we're -- I would say you could characterize that we're moving higher, if you will, in ranges as we've put those limits down.

Tom, do you want to add to that?

Yes, let me say this, that you cannot just look at purely the exposure to accumulations as a number.

You have to look at the spread of business within the portfolio.

I think what we did going forward since January 1 on U.S. book is changed the dynamics of that portfolio to get better balance and better spread across the portfolio.

We talked about the premium increase.

Most of that increase you've seen, as respects the U.S. portfolio for property, is relative to purely a rate increase.

I mean, the rates, in most instances, could have increased by 25 to 100%.

So in spite of the fact we had premium growth does not necessarily mean you have the same exposure growth within the territory.

And also, as Steve indicated, it could be points of attachment, the fact that you've put on some business limitations on whether it be a currency caps, loss ratio caps.

There's a lot of dynamics within the underlying portfolio which will prevent us from having the same type of losses we did before.

Let me take a step back and talk about the international portfolio.

We have grown in the international portfolio.

But I will tell you that our limits exposed and our accumulations on a one in 100 basis outside the United States has always been small.

Other than the combined northern European exposure, our total limits exposed probably are under, on a PML one in 100, under 250.

So we don't have the same dynamics of exposure outside the United States.

And I guess following on for this is how much room is, and this is a hard question because I think everybody's excited about the market hardening and Florida's yet to come on line and there's some big companies that haven't bought cat, but from a capital perspective, how much room does Everest have to really grow that business?

Is the capital base right now, let's renew the exposure that we had last year at much higher rates, which I think is good news?

Or does your capital base support being able to increase the exposure to Florida and take advantage of the rating?

I'm just trying to understand that.

Yes.

Our capital base, at this point in time, doesn't leave us in any sense feeling constrained.

Having said that, we manage within ranges that we consider prudent, always balancing the profit potential and the opportunistic potential against incremental new exposure.

You've seen in our 10-K kind of what we've disclosed from 1 in 20 out to 1 in 1,000.

That's been the parameter that's been pretty well tested for us.

We continue to manage on that kind of a basis.

Having said that, we are very attracted to some of the things going on in the market and the rates, terms, and conditions available and we'll be responsive.

We don't think at this point that our PML based aggregation, if you will, is going to change substantially.

But that's something that does change on its own as we add business and roll off business.

And we monitor it carefully.

And again I don't think we feel capital constrained at the moment.

By the same token, no one wants to take on limited exposures.

And in particular, there are lots of questions on the table about the exposures in the southeast.

And we're still forming and then revetting our view of that on a day by day basis.

Just one more question.

As far as giving us any disclosure on what kind of reinsurance protections you have in place, there's not much in the 10K.

I'm wondering if you can give me some disclosure?

And I'm wondering if how your reinsurance protections look in '06 over '05 and, potentially, whether when you look at Florida maybe you're going to go for it a little bit more in Florida but you're going to buy cat bond or do something more in retro.

I'm just trying to focus the discussion on what you've done in protection and what you might do.

Yes.

I mean, the answer is pretty easy in some respects in the sense that our reinsurance program this year is a lot like our reinsurance program last year, which really is oriented to protecting our primary book, which is mainly a casualty book, and on the property side we don't buy a lot of reinsurance.

Having said that, we're not unmindful of developments that have taken place ranging from the start-ups last year in Bermuda to the introduction of side cars to cat bonds to ILW coverages becoming quite prevalent.

We look at all of that stuff regularly and we assess whether or not there are possibilities for us there.

And frankly, we will continue to do that.

And if we see something we like, we will move.

But in respects of what we've done in the past as we go forward, we've always been a net line underwriter.

And looking to make the most of the marketplace where we could keep it rather than giving away to someone else, when there's opportunities to take advantage of the market dynamics as may appear to be so in the case of Florida this year.

We don't know yet.

There's a lot of talk about what's happening in Florida.

We haven't seen the hard and fast terms yet.

We expect it to be very good.

We'll constant revisit where we are based on where we think the best returns are.

Okay.

I understand.

I think it's hard for investors to try to figure out how companies are managing the volatility from an external point of view.

I would say that kind of one of the ways you might think about it is we're certainly not thinking about it defensively.

But we're constantly on the lookout for things that could play for us.

And as Tom said, we, generally speaking, when we see a great opportunity want to take it all for ourselves.

Okay.

Thanks very much.

And at this time I will turn the call back over to Ms. Farrell for any additional or closing remarks.

thank you very much for joining us on the call.

If we did not have a chance to answer your question, please feel free to call either myself or Steve Limauro following the end of this call.

Again, thank you.

And that does conclude today's conference.

We thank everyone for joining us and have a great day.