Everest Group Ltd (EG) 2006 Q2 法說會逐字稿

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

Today's conference is being recorded.

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

Please go ahead, ma'am.

Thank you.

Good morning and welcome to Everest Re second quarter 2006 earnings conference call.

With me this morning are Joe Taranto, our CEO, Tom Gallagher, our President, and Steve Limauro, our CFO.

Before I turn the call over to Steve for 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 second quarter results were our best ever 218.7 million of after tax operating earnings or $3.35 per diluted share, a 26.2% increase from second quarter 2005's operating earnings of 173.3 million or $3.03 per diluted share.

Net income, which includes realized capital gains, was 220.4 million or $3.38 per diluted share, a 13.5% increase from the 194.2 million earned in 2005.

For the first half of 2006 after tax operating earnings of 376.6 million or $5.77 per diluted share was up 11.2%, also a best ever result.

And that compares to 338.6 million or $5.93 per diluted share in 2005.

Net income for the six months was 388.8 million or $5.96 per diluted share, up 7.6% from 2005's 361.3 million.

Annualizing to an 18.2% ROE and with a year-to-date combined ratio of 91.3, these results reflect a strong underlying fundamentals of our evolving book.

Our opportunistic approach to property markets impacted by 2005 catastrophes and our long standing commitment to profitability as opposed to volume across all of our businesses.

Turning to production and focusing as we consistently have on the more relevant year-to-date basis, gross premiums written of 1.965 billion are down 8.9% year-over-year with our worldwide reinsurance book at 1.55 billion down 3.7% and our insurance business at 413 million down 24%.

This reflects a slower first half than we had expected with significant portfolio repositioning going on in both the insurance and property reinsurance elements of our book.

The effect of which has been to delay emergence of the more stable trend we believe we have engineered.

At the group level we now expect double digit growth over the second half of the year, with almost all of that in the fourth quarter, leading us to a full-year production result which is flat or up very modestly over 2005.

Turning to the underlying segment results, our U.S.

Reinsurance operations are down 10% with the casualty declines offsetting modest property growth.

We expect this will turn around as the full impact of changes in our U.S. property portfolio, particularly the treaty book, play out over the remainder of the year.

As an example of the kind of item which focuses our attention more on the year-to-date than individual quarters, I'll note that this segment, the Reinsurance and group totals, all include in the second quarter a $45 million one-time return premium accrual relating to the cancellation of a large Florida property treaty.

Our U.S. specialty operations are down 40% year-over-year reflecting continued difficult conditions in these markets.

This downward trend should moderate as we move through the year, but we do expect a full-year decline.

International Reinsurance operations are up 1% year-over-year reflecting modest growth in Latin American and Canadian markets, offset by slowing production in Asian markets.

We expect the growth trend here will pick up modestly as we move through the year.

Our Bermuda operations are up 25%, reflecting solid growth in Bermuda, the UK and the European operations.

Here we actually expect the growth rate may settle back slightly.

Our U.S.

Insurance operations were down a not unexpected 24% reflecting, as we commented on last quarter, the reductions in our worker compensation business, particularly in California, and in our auto credit program.

We continue to expect our new insurance initiatives will kick in as we move through the second half, effectively reflecting a substantial transformation of our insurance book.

To summarize, 2006 should be flattish, but very much back loaded driven by the portfolio transactions I've mentioned, or transitions I've mentioned, as well as an easing comparison against 2005 as we get to the fourth quarter.

You will recall 2005's fourth quarter included a one-time estimated premium reduction of over 100 million, which will appreciable ease the year-over-year comparison for that period.

We have seen, were encouraged by, and have responded to movements in U.S. and other catastrophe-impacted property markets.

In doing so we've have tailored our approach, selectively entering and existing transactions in market segments, carefully managed our catastrophe aggregates, and significantly enhanced our risk-adjusted returns.

Notwithstanding this, we believe that the catastrophe exposure shops from 2005 are still being assimilated globally and expect continued positive momentum in property pricing overtime.

And we are fully positioned and prepared to respond to these changes.

Casualty markets, both insurance and Reinsurance, remain fairly stable with pricing on balance attractive for those with the necessary infrastructure and strong underwriting expertise.

Overall these conditions are well suited to our strengths, but require diligent and disciplined and adaptive execution.

Our remodeled portfolio positions us extraordinary well, which becomes very apparent as I segue into underwriting results.

On an underwriting basis we had, with an 87.7% combined ratio, our best quarter ever.

The first half of the year at 91.3 is not far behind and both reflect improvements over 2005.

This result was driven by the strong underlying fundamentals of our 2006 portfolio, in particular with respect to property where our risk-reward balance for catastrophe exposed business has improved rather dramatically.

Our quarter's combined ratio, excluding the effect of $36 million of net unfavorable development on 2005 and prior accident year reserves, was 83.7%.

Although I do caution that this reflects, as does the comparable 85.2% for the first half of 2006, periods which were largely devoid of significant catastrophe or risk loss events.

It's important to note that our opportunistic revamping of the property portfolio has and will going forward make it more sensitive to catastrophe and risk loss variability.

Generally the $36 million of reserve strengthening reflects development on prior period catastrophe losses with modest casualty reserve strengthening including noise with respect to asbestos, all of which was largely offset by favorable development on shorter tail attritional business, in particular our U.S. property lines.

With respect to catastrophe losses, our normal catastrophe disclosure for the quarter reflects 99.6 million of catastrophe provisions, only 5.4 million of which relate to 2006 events, cyclone Larry.

Some will be disappointed by this, but the fact of the matter is that we and our CDENTS have worked very hard and diligently in assessing our catastrophe exposures.

Unfortunately, this is against a backdrop where the hurricane events in question are among the largest and most complex losses of all time and have by all accounts, including PCS and the various model companies, seen significant and persistent upward revisions to the industry's overall loss estimates.

Whether these revisions represent the chicken or the egg, our clients' loss estimates and reporting continue to season and were increased in select cases, necessitating shifts in our provisions, mainly with respect to hurricane Wilma exposures in our U.S. treaty book.

Moving on to investment, pretax investment income at 153.3 million for the quarter was up 11.6% with after tax investment income up 12.4%.

Our invested asset base grew 37 million for the quarter and 217 million or 1.7% from the end of 2005.

These increases are net of the impact of declines in pretax unrealized depreciation of 164 million for the quarter and 228 million year-to-date.

For the quarter, the bond portfolio reflected unrealized loss of 125 million and the stock portfolio reflected a loss of 39 million.

On a year-to-date basis, the unrealized loss from the bond portfolio was 269 million, while the stock portfolio reflects unrealized depreciation of 41 million.

The composition of the portfolio remains stable with 87% of assets in cash, short-term, and bonds compared to 89% at year-end.

The portfolio's characteristics remain similarly stable verses December 2005 with no change in the June 30th embedded pretax yields of 4.5% pretax and 3.9% after tax.

And only a two tenths lengthening of duration to 4.5.

Equity investing continues to be an emphasis with equities amounting to 10.7% of cash and invested assets at June 30th, up from 8.4% at December 2005.

Cash from operations was 152 million for the quarter and 313 million year-to-date down from 292 million and 619 million respectively in 2005.

With 173 million and 348 million greater catastrophe loss payouts for this year for the quarter and year-to-date respectively, virtually all of the decline relates to these payouts.

This view is reinforced by catastrophe payout adjusted pay loss ratios, which are running in the mid 40s, which is a continuing sign of strong underwriting fundamentals.

Shareholders' equity at 4.38 billion or $67.42 per outstanding share is up 5.8% from 4.14 billion or $64.04 per outstanding share at December 31, 2005.

Our ROE annualizes to 20.7% for the quarter and 18.2% for the first half of 2006.

In summary, we had an excellent earnings quarter producing solid returns.

And we continued the execution of our discipline strategies in a way that we expect will position us for continued shareholder value creation.

I'll now turn the call over to Joe.

Thank you, Steve.

Good morning.

We're pleased with the earnings we've achieved this quarter and the transformation that we've made during the course of the year to our underlying book to produce a portfolio that has the best earnings potential we've ever had.

The adjustments we've made include capitalizing on the much improved property catastrophe market, constructing a portfolio with an excellent upside relative to the potential downside.

January CAT business did not bring all the market improvement we had hoped for.

And we wrote only those risks that met our requirements.

As the year is played out, the CAT market has continued to improve, particularly for peak zones, and in June and July we were much more pleased with the opportunities that presented themselves.

And as a consequence, we were able to write more business.

We've kept some power dry and continue to have capacity available if quality opportunities present themselves for the remainder of the year.

We are not just in the treaty and individual risk property market, but have recently entered the ENS insurance market to write commercial property business in Florida.

As we have looked to do more in the better rated products of our business, we've adjusted to doing less in those areas where industry profit margins have reduced.

This includes California Workers' Comp where market rates have come down to an okay level, but are well off of what they were in the recent past.

It also includes our medical stop/loss reinsurance business where our book has become significantly smaller as we respond to increased competition that is reducing market rates.

Our insurance operation has also reduced its writing on the national credit program that we've previously reported on, as loans that supported the program have dried up.

Nonetheless, new initiatives in insurance, including our Florida property program and the CB Star California program, should provide growth for our insurance operation for the second half of the year and produce a highly profitable diversified portfolio.

Our partnership with Star began in June.

As noted in our previous call, Star did roughly $400 million worth of business last year and we expect on a going forward analyzed basis to do about $250 million worth of business with Star.

Other pockets of our business, including our International Reinsurance book and our U.S.

Casualty Reinsurance book have remained relatively stable.

In Bermuda, we've been able to grow as we've done more casualty reinsurance in addition to our established property book.

In summary, it's been a year of significant change as we've capitalized on market opportunities and in disciplined fashion reduced our writings in select areas.

On the year, we see all of these ups and downs largely offsetting producing a flat overall top-line.

More important, we see this engineering producing a high-quality portfolio with excellent profit potential as is evidenced in the quarterly earnings numbers.

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

[OPERATOR INSTRUCTIONS] And we'll first go to Tom Cholnoky from Goldman Sachs.

Good morning, I just wanted to focus on two areas if I could, Steve.

First on the catastrophe additions which came in, I guess, at around $90 some odd million .

That's obviously substantially higher than what you did in the first quarter in terms of topping off the estimate there.

Can you just go into a little bit more detail what drove that?

I recall at the end of the first quarter you had about 12% of your CAT losses in IB&R, where's that IB&R now?

And are you now very comfortable that we won't have anymore attritional losses coming out of 2005?

Tom, I guess I'll start with the easy part.

Our IB&R at this point is a tad over 60 million on a outstanding reserve base with respect to the catastrophes of about 820 million.

The development we saw this quarter was principally with respect to Wilma.

It is interesting to note that PCS upped their estimate for Wilma from approximately 6 billion at the end of the year to over 10 billion at present.

While I don't suggest that that has a direct linkage with our numbers, it certainly has indicated that many companies have seen their exposures grow.

Our seeding companies have been among that group.

We saw roundly $60 million of development with respect to Wilma.

It was split between our CAT excess business in the treaty property book and our proportional business in the property book.

We think that we've gotten the numbers where they need to be at this point.

We certainly on the proportional side have now run into caps on most of our larger clients, certainly would expect there's little movement from here.

But at the end of the day these are very complicated storms.

They continue to require a lot of care and attention.

And we certainly believe we've done the credible job and diligent job of getting the numbers where they need to be and we'll watch it from here.

This is obviously more seasoned now, Tom.

Not only that, this becomes a part of the overall 9ish billion that we have in reserves.

And as Steve kind of indicated other portions of our reserves developed favorably during the course of the quarter in large part offsetting the CAT development.

I guess my second question goes to the U.S.

Reinsurance business.

If I back out the 45 million of return premiums, you're still down about 18%, if my math is right, in the quarter.

I know you don't like to focus on quarterly numbers, but that's still significantly down versus what it was in the first quarter.

Could you go into a little bit more detail because I think you cited casualty as the primary reason for that.

However, Joe, you seem to think that casualty rates were actually reasonable.

I guess I'm a little bit perplexed as to what is going on.

Well, our casualty, we do like to talk year-to-date and we don't like to focus on any one quarter because of the lumpiness that you get.

Casualty is off a bit for the year.

I'd say underlying insurance casualty rates are down modestly in most sectors.

Modestly off of what we think is a very good starting point.

So the insurance rates for most of our business we're still pretty pleased with.

Reinsurance terms haven't changed significantly in the last couple of years.

So we still overall look at the casualty market like it's in a good place, but we are seeing rates off a bit.

We are seeing people keeping a bit more net, as well in light of the good results that have been posted in the last three years.

So we do expect our writings on the casualty Reinsurance side, U.S., to be down modestly for the year.

We expect property to be up.

And really that 45 million was in the property side.

So we see property for the year still being up nicely as we really capitalize on some of the market conditions, with a lot of that capitalizing coming in the second half of the year.

Sorry, and then just --

And Tom, I was just going to comment.

The lumpiness that really happens on a quarter to quarter basis is amplified when you have significant portfolio turnover and frankly, particularly in our U.S. property account, we've had dramatic rebalancing and shifting, if you will, of the account structuring.

So there's a lot of lumpiness that can affect the quarters and the reality is we think the year-to-date and our thinking for the full year projects a better perspective of what we expect.

Sorry, and one -- thank you Steve.

One last question, can you speak to the 22% loss ratio in specialty?

Was that all favorable reserve development?

It was.

We saw favorable reserve development on our medical stop/loss book, which we've been monitoring for a while.

And we're convinced and so we've adjusted some of it.

We also saw favorable development in the marine nutritional area as well as a small amount in surety.

So, yes, it was all development, Tom.

Great.

Thank you.

We'll next move to Matthew Heimermann from JP Morgan.

Good morning.

I have a couple questions but I'll go one at a time.

Just to understand the comments you made in your introduction about growth.

That second half growth seems that it actually will be driven in large part by insurance, perhaps even more so than Reinsurance, am I hearing that correctly?

Yes, Matt, as we kind of look at the end of the year, what we're thinking is third quarter will be pretty flattish, fourth quarter will be the quarter where we have significant growth.

We certainly expect significant growth in the second half out of the insurance book, but we'll see growth across the Reinsurance book, as well.

And so a lot of what's transpired has been rejiggering of these portfolios, both insurance and in particular the property portfolio.

And that will kind of turn around as we get to a more stable kind of booking arrangement through the remainder of the year.

Okay, and I just want to make sure I have these numbers right because there is a lot of pluses and minuses.

There's, I think, 49 million of reinstatements that impact third quarter to your detriment?

45 million.

45 million.

Then there's another, I think, 25 million in fourth quarter?

But then you have the 100 million working for you in the fourth quarter.

Correct?

So that kind of a 75 million benefit doing nothing, effectively.

Matt, I'm not sure where you're getting those numbers.

From your Q and K. I think your back half reinstatement premium was 75 million of which the 45 million wasn't --

This is the reinstatement on the catastrophes last year?

Correct, correct.

Yes, I think you're kind of angels dancing on the head of a pin.

Getting down to that level of detail, I don't know that I'm going to be table to walk you through the pieces.

Perhaps if you give me a call.

I just wanted to make sure -- I just wanted to make sure.

It's not so much I wanted you to comment on growth, I just wanted to make sure that those were the only issues that I needed to think about impacting a year ago's premium numbers.

You've lost us with that, those numbers don't sound right.

I think that's why Steve said we'll get with you separately.

Okay.

I'll follow-up offline with that, then.

I guess the $45 million return of premium.

Right

From the Florida CDENT, is it fair to presume that there's also renewal business that you therefore did not write with that CDENT this year?

We canceled that on a cutoff basis, so effectively we stopped writing with that CDENT effective 6/30.

Let's call it 6/30.

And at the end of the day, the capacity that had been committed to that or aggregate capacity committed to that, it was redeployed.

Okay.

And then I guess the last question I had was, I just want to make sure I'm thinking about your book correctly.

So it's fair to say that really what we have happening in your property book is a huge shift away from proportional to risk excess and excess of loss.

No, I wouldn't say that.

I would say we have a different balance in the portfolio, meaning that we've changed some of the dynamics within the portfolio.

So we do write both proportional as well as excess of loss.

We just redistributed our capacity to the best places.

Okay.

And then geographically, has there been any change in terms where you've been deploying your CAT aggregate?

No, we look to employ the aggregate based on where the best opportunities are.

In the current market it seems that the best opportunities happen to be in the wind exposed areas, such as Florida, the Gulf of Mexico.

I guess what I am trying to get at is if we think about your exposure by state, are you, irrespective of the changes in terms and conditions if you kind of put same store basis, is Florida more or less less than it was last year?

Is Texas more or less, the northeast?

I just want to get a sense of how your exposure to certain geographic losses may be changes or not.

I would say at this point in time, we do it by zone.

And if you look at zone three, which includes part of the gulf, Florida and the lower eastern seaboard, I'd expect that our exposure has been reduced.

I would say the same thing as respect to Texas.

And along the eastern seaboard up to New England.

Okay.

Just because we may see some, as Joe indicated and Steve did as well, that we expect to see premiums grow for a property portfolio, doesn't necessarily mean we'll have an increase in exposure.

Matter of fact, at the end of the day we'll have a reduction pure limits exposed in those territories.

No, I appreciate that.

I was just trying to think about, obviously, the terms and conditions last year were equivalent across zones and obviously there's been changes across every line of business this year.

So I just wanted to get a sense of where things may be higher or lower.

Again, as Tom said we saw in the wind areas, perhaps the best opportunities, the most in the way of change year-over-year, specifically Florida.

I think in June and July you saw some pretty dramatic changes and better terms for reinsurers and better underlying commercial and homeowner rates.

As you kind of move away from there, we saw changes but not quite as extreme.

You move into the gulf, we saw some changes start moving up the eastern seaboard, we saw some changes.

We would still like to see in Texas and in the northeast and in California.

We'd like to see more changes that have taken place so far.

And we are hoping that there will be a continued build in changes in catastrophe rates.

So Florida and the gulf, perhaps, offered the most significant change and then perhaps the best opportunities.

Other areas were spotty, but we are hopeful for continued change.

Okay.

Thank you.

We'll now move to Matt Carletti with Cochran, Caronia & Waller.

Thanks.

Couple questions.

One is the Florida CDENT that we're talking about.

Can you tell us how much the return of premium was?

Can you give us an idea of how much the premium for the whole account was in terms of the whole on the books or what would be replaced?

Well, you're talking about the individual account we lost?

Yes.

I would expect that account represented about $100 million worth of premium to us.

Okay.

Which the return premium represented the remaining portion of the exposure.

As Steve said it was on a cutoff basis.

Okay, that's helpful.

And then kind of shifting away from the topics we've already talked about.

The asbestos, notice it was probably about the best number in about 10 quarters.

You had previously mentioned that I think the high-profile number of cases you maybe wouldn't be surprised to see that down around the 5 mark by year-end.

Is that still how you foresee the future unfolding?

Yes, that's still likely.

You can see that we're at nine at the latest reporting.

There's a three or four that we're working on and hopeful of closing out in the next six months anyhow, maybe sooner.

But, yes, we continue to work at that.

That number was something like 30 a couple of years ago.

We're pleased with what we've achieved.

And we'll continue to whittle down that number.

Okay.

Great.

And last question in terms of favorable development.

We talked about what was in the specialty underwriting segment.

Was there any favorable development elsewhere, any movement on Workers' Comp or any other lines that was anything material?

Yes, there was 10 or $12 million on Workers' Comp in the insurance segment.

And then in the U.S.

Reinsurance segment, there was a significant amount of favorable development on the non-catastrophe property reserves, which have been running very well for us.

Can you give us an idea of how much?

Or no?

Yes.

We don't want to get down to the individual detail, casualty versus property versus facultative, but order of magnitude if you understand that most of the $90 some odd million of CAT development is there and the ratio hasn't moved all that dramatically, it's pretty significant amounts.

Okay.

Helpful, thank you very much.

We'll now move to Susan Spivak with Wachovia Securities.

Thank you.

Good morning.

Joe, I was just wondering if you could talk a little bit about if there's been any fallout from your CB Star relationship with -- in terms of the business that you're doing with AIG.

And second, are there any other potential alliances, another alliance with CB Star going forward?

And then I wanted to follow-up on the comments in the property market.

You talked about keeping some powder dry.

And I'm just wondering what type of opportunities are you looking for the remainder of the year?

Would you perhaps be writing backup covers in the event of losses.

Or just what do you see out there in the next few months?

Sure.

Let me start with the AIG and CB Star.

No, we enjoy a very good relationship with AIG.

We're one of just a handful of reinsurers that they deal with and we are happy to continue to support them.

Clearly with regard to Star, that's something that we've gotten involved with after the breakup between AIG and Star.

So we enjoy a good relationship with both.

We like it that way.

And certainly we'll work to continue to keep it that way.

I'll farm the third one over to Tom and then I'll come back in terms of what we're looking for that might pop up on the property side.

Well, you never know at this point in time.

There still to be still a shortage of capacity out in the marketplace right now for many lines of business, specifically for the CAT exposed winds.

There could be backup coverage.

There's some coverage that are still out there.

A lot of covers weren't fully placed in June and July.

Matter of fact, a lot of the national covers nationwide probably had holes of 25-30%.

So I expect there to be more opportunities.

Doubling back to the Star, the other part of your question, Susan.

Right now we're happy to work on the opportunity at hand.

And it's a very large opportunity with them getting together to do the municipality business and the contractor business.

And that's a very sizable book.

And that's off to a good start and we're pleased with it.

We're not working on anything else at this point.

Having said that, yes, there may be more that we can do together as time goes on.

Okay, thank you.

We'll now move to Josh Shanker with Citigroup.

Good morning, everyone.

Morning.

A few questions in different areas.

First item, your equity exposure performance, down probably about, from quarter to quarter, about 14 million but up about 41 million, I think you said for the full year.

That's very good given the performance of the market in the second quarter this year.

How is that allocated that capital?

That capital is about 250 million in 10 individual stocks and the remainder, which is call it 900 million, in exchange traded funds.

The exchange traded funds are index in orientation.

We probably underweighted the U.S. large CAP space, overweighted international, overweighted small and mid-CAP.

But it's not particularly sexy.

It's just a portfolio that has pretty good balance with a bit of an overweight to international and a bit of the overweight to the small mid-CAP sector.

Okay, very good.

There's been a lot of talk about premium written volume.

But I noticed that premiums earned have been pacing premiums written for the most part.

When we're talking about second half potential growth, do you think that the premiums will be earned sort of inline with the degree to which they're written?

Or is that just coincidence that seems to be falling out that way?

No, I do, Josh.

Basically, as we look at the remainder of the year, we would expect that the way that earned would balance out.

Earned is a little bit more stable, typically than written.

Although it can be subject to some lumpiness, as well.

But at the end of the day, we'd expect pretty much to earn most of what we see in incremental writings over the course of the year.

And in terms of your projections that you think third quarter volume largely even with last year, do you get extra confidence in that knowing what you've written in the first month of the quartet or is it still too early to make any thoughts on how the quarter is going?

I would say it's still a bit early.

We've seen the first month and we're kind of parsing through it, but at the end of the day, there's a lot of complexity to putting the numbers together.

So I think at this point I would say that it's more based upon a view of how the first half has actually changed our portfolio.

And then applying that in discussions internally with each of our underwriters to get a sense of what their expectations are as we move through the year.

And certainly we're not seeing anything that's conflicting with that in terms of the numbers we've seen for July.

But still very early.

And then finally regarding asbestos, you settled one high profile exposure.

It seems that four new low profile exposures have appeared.

Is there any risk that a low profile exposure becomes a high profile exposure?

Well, there always is that potential, although realistically our book is pretty well aged and seasoned at this point.

And anything that's sliding in that's new low profile generally speaking has been looked at very hard and we've known about for a while and has just kind of tricked up above some of our screens.

So we wouldn't think so, but you can never say never.

Okay.

Thank you very much.

Vinay Misquith from Credit Suisse will have our next question.

Hi, good morning.

I was trying to get to your net accident, your loss ratio ex-[scant].

So could you provide me with one net number for what your favorable development was for the year net of all the adverse development on your CAT losses?

Our net development for the year is 118 million.

For the quarter it's 36 million.

For the quarter --

The 32 is part of the 118.

Sure so the $36 million is net unfavorable --

They're both unfavorable.

So we had $94 million of catastrophe development in the quarter, 6 million of asbestos development, that was offset down to 36 million unfavorable by offsets elsewhere, which included the specialty lines which we already spoke about, the insurance lines and then the shorter tail lines embedded in the U.S.

Reinsurance line.

Sure, that's wonderful.

What is your normalized CATs for the quarter because I believe you mentioned earlier that this quarter and the first quarter was favorably impacted by low CAT.

What's the normal CAT level I could expect for a normal quarter like this?

Well, that's hard and it's getting harder in that that number is changing as our portfolio changes.

A few years ago, or this time last year I might have suggested that a normal CAT quarter was 25 or $30 million.

Perhaps even a bit more.

Having said that, what we saw in the second quarter was 5.4 million of losses on cyclone Larry out in the Pacific.

We saw no other current period catastrophes.

And frankly the other element you have to consider is unusual risk losses in the sense that our portfolio certainly is exposed to unusual risk losses, which could be industrial fires, explosions, accidents, that kind of thing that typically are not going to be included in catastrophes which really are oriented to natural events.

So it's hard to come up with a hard estimate.

And frankly that number is moving around because our book is more sensitive today to CAT losses and less sensitive to attritional losses than it used to be.

And frankly there is a risk exposure component to it that is also pretty consequential.

So it's almost inappropriate to think in terms of an average catastrophe quarter provision anymore.

All right.

And one last question if I may.

From your commentary on the Florida exposures, you say that you have kept some powder dry.

That just makes me feel that you haven't used your entire capacity on July 1, is that right?

And that you're just keeping it maybe for some backup [powers] if you have some strong hurricanes in '06?

No, that's correct that we have more available for the right deal.

Now, as we do deals, and we're looking to do only the best that's out there, and as we keep some in reserve, then clearly we want the best of the best to use the remainder of what we have.

At this point for certainly Florida and most of the Southeast, most of the deals are done.

But we are still seeing the odd ball deal come in here and there, in a kind of a sporadic way.

We're happy to see that.

We're happy to work on them.

And if everything is right, we will put down a good line on that.

So, yes, we have more available if we like the deal.

All right.

Thank you.

We'll next move to David Small from Bear Stearns.

Hey, good morning.

Maybe given all the changes you've made to your book and you continue to make, could you give us some insight into what percentage of the book now or the premiums in the book are property that are CAT exposed?

Yes, Tom, why don't you give that a try?

I would say right now our premium for property -- reinsurance is at about $3 billion worldwide and property probably represents right now about 60% of that.

And of that 60%, I would say that the premium associated with CAT is probably in the neighborhood of about $700 million.

Okay, great, and then in terms of pricing in Mexico and Latin America.

Have you seen similar trends there that you have seen in the gulf coast?

Yes.

We have, Mexico obviously has been badly hit by losses last year and the year before.

We saw in Mexico, as an example, price increases of 100% plus.

We saw a tightening of terms and conditions.

We've seen on pro rata a tightening of event limits.

We see restriction and what the seeding companies are willing to write.

Particularly those hotels along the gulf.

As respects to Caribbean, we probably saw a 30% increase in CAT rates, On top of what adjustments were made last year.

So a very good result.

Then, maybe, Joe.

It seems like, at least in the second quarter, the market is progressing as you might have expected.

Yet it seems like you're backing down a little bit or you're pushing out further when the premium growth is going to come through.

I think we started the year you expected double digit for the whole year and now that's kind of backed off to double digits in the fourth quarter.

What's changed again in this quarter that is making you push this out again another quarter in terms of the premium growth?

Well, let me say, first of all, I think a lot of the changes we've made aren't so much from the property side, although certainly this quarter you had a RP from the property side.

But perhaps for the first six months it's more the insurance side of things.

It was the California comp and the credit program that caused us to rethink our numbers.

But let me take a step back before we talk about -- because I almost think there's been too much talk about volume and which quarter it comes in.

We had a 20 ROE for this quarter.

Hasn't been much mention of it, but I think it is a good number, especially all things considered.

We like the portfolio, how it's positioned.

We like the profit potential.

And we're going to really focus a lot more on profit here than individual quarterly volume.

We love what we've constructed on the property side.

The market wasn't all that we wanted in January, but certainly improved as the year went on.

We hope will continue to improve.

So we're pleased about that again and how it affects our portfolio.

Now we've talked about volume because we've had an RP.

We had some lumpiness to the quarters.

We had the credit program, the Comp, the A&H.

But I want to kind of bring all of this back to the fact that if there's an opportunity on the property side, we're not going to shy away from it.

We're going to look to maximize it.

We think we've done a good job in that.

But likewise, if there was an opportunity on the Workers' Comp California side, well, we'll take care of that better than any company out there.

We had writings at 800 million.

But we'll also be diligent and disciplined if that market is no longer there and take our writings down to probably the 150 million they'll be this year.

You talked about A&H reinsurance and how that's run off very well.

That was also a great story for us, but at one point that was $400 million worth of business.

That market is not there, so we are adjusting for that as well.

So our way of operating is if we see opportunities, we'll go for it.

But at the same time, if those opportunities are reducing, we'll reduce as well.

Put all that together, it's kind of made for a mixed bag this year.

And so, yes, I say the total volume number is less than what we guessed at six months ago.

More because of the insurance side, to some degree the RP on property and to some degree that the CAT market and the property market has been improving as the year went on, but in January wasn't that wonderful.

But I want to get back to this is not a volume chase.

This is about property.

And so I'm not exercised as to whether the growth comes in the second quarter or the third quarter.

Okay.

And just finally, maybe you could just give us the size -- how much retro-session you wrote at 71 and maybe just finally, the current size of the Workers' Comp.

As respect the retro market.

Most of that retro is placed in the first quarter.

Though, some was done in the second quarter, it was far less than would have been done in the first quarter.

Overall I think we have written probably about double our volume for retro at this point in time.

Okay.

And with a rate structure that is probably doubled, as well, and our points of attachment have moved up substantially.

On the California Workers' Comp, this year I think the latest thinking is we'll do about 150-ish million worth of business.

Steve, I think last year was about 250 million.

And at the all time zenith it was 800 million.

Going forward things are leveling out now in California.

Rates are well off of a couple of years ago, but they're stabilizing.

So when I look into next year, I'd probably guess that more or less the same volume as this year in California.

The insurance operation, though, we had a credit program that we did about 150-ish million in the first six months of last year.

And next to nothing this year which made for very difficult comparisons on the insurance side.

But we didn't do much on that program in the second half of last year, so that makes the comparisons easier in the second half.

Plus we have Star kicking in and the Florida program kicking in the second half of the year, which will really aid the comparisons on the insurance side.

Thank you very much for your answers.

You're welcome.

And we'll now move to Sackett Cook with Menemsha.

Hi, good morning.

A couple questions.

On the program that you got the return premium on that you mentioned and you said that seems to be kind of behind you.

I understand that that was Florida exposure and I'm just wondering if you've replaced the 100 million of premium that was lost there and kind of what that whole contract going away kind of does to the Florida exposure or if you just have replaced that Florida exposure with some of the stuff you wrote at July 1?

That's my first question.

Okay, very easy to answer.

We did eliminate that contract effective in June, as Steve told you.

We did it on a cutoff basis, so we did have availability and capacity, which we reallocated and wrote some other contracts in Florida.

At the end of the day, a combination of those new programs written as well as our renewal portfolio, we're probably down in exposure as respects the Florida on a prorata basis.

So does that premium that you've kind of replaced it with, is that a second half event?

Well, some of it is, some of it is.

Okay.

Because a lot of the June business, which Florida has predominantly written, was not completed in June and fell into parts of July.

So you have a trending which will fall into the second half.

All right.

Okay.

My second question is, you discuss a lot that your U.S.

Insurance book is going through a lot of changes and obviously you've got some nice big programs coming on.

I was hoping you could kind of tell me what you think that book will look like.

And I'll say I looked back at the 10K and I can see that U.S.

Insurance in the past has been primary a casualty operation with the Workers' Comp obviously the highest profile.

I think it was about 80% casualty.

What should that book look like a year from now, because I know that you may be looking at the second half as maybe a bit distorted because you are just starting some of these programs?

But is the U.S.

Insurance going to be a 50/50 property and casualty OP?

Is it going to be -- how do you expect that to look kind of longer term?

Well, it's been, historically it's been 100% casualty.

And now with us entering the Florida commercial property market, we will do some property business.

But, it should still be 85% - 90% casualty next year as well.

Okay.

And my last question is, and I know I asked this last quarter but I'm going to ask it again, is basically the Bermuda OPS, they are now actually look like your second largest operation.

I know that there's some internal quarter shares and some other stuffs, but the underwriting results were fantastic, again, and you had 25% premium growth.

And I don't really hear you talking about kind of the opportunities -- none of the opportunities that you are describing or you sound so excited about I can kind of place them in Bermuda.

So I was wondering if you could just spend a couple minutes talking about what is driving 25% growth in Bermuda and what is driving very attractive margins there?

Well, let me answer that question.

Our Bermuda operation is not limited to Bermuda.

That includes our Bermuda specific underwriting operation, our London operation, and continental Europe.

So what you see is a result that is a combination of the three.

As respects to growth in premium for the quarter, some of that has to do with seasonalization.

And I don't believe by the end of the year that the Bermuda operation will be up 25% collectively between those three items.

But it will be more in the neighborhood of 10 - 15% increase overall.

As Joe indicated when he first made his comments that we have expanded our Bermuda specific operation to write more casualty business, building on the property operation we had in existence for a number of years.

So we do see some opportunities to expand there both for casualty, as well as property going forward.

But at the same time, we have to be caution about how the prospects of capacity works, as well.

So, I guess the reason why I emphasize this, it seems like Bermuda, everybody focuses in on contractions in your other businesses and it sounds like you're just making more use of your Bermuda subsidiary as an underwriting vehicle.

Maybe the investors and all need to consider Bermuda as can't really get lost in the shuffle and maybe this is an operation that investors will start to learn more about and kind of offset it against what they see in the U.S.

Reinsurance, because it does get lost in the shuffle.

Well, important to note, we have a full line's operations in Bermuda where we can do, in Bermuda itself, physically.

This is separate from the UK and European operations, but we have a full lines platform where we can do facultative and direct insurance, individual risk underwritten business.

We can do property and casualty on a treaty basis, as well as specialty to some degree.

We also have a life license.

And the fact of the matter is we have always focussed on trying to grow the Bermuda operation at a pace that's appropriate for what the plant has and what the opportunities are.

What you see in the Bermuda segment, though, generally speaking, does not include the affects of inter-affiliate agreements we may have.

So what you are looking at isn't the total for our Bermuda legal entity, it is the writings of our Bermuda physical operation as well as the UK and European operation.

Just to be clear on that, because it wasn't clear from your earlier comments that it seemed to be that you thought it included the results of the inter-affiliate sessions and it does not.

All right.

Okay, great.

Thanks very much.

That is all the time we have for questions today.

At this time we'll now turn it back to Beth Farrell for any closing remarks.

Yes, I'd like to thank everybody for participating on the call.

I know we didn't get a chance to respond to everybody's questions, but invite you to either call myself or Steve Limauro following the call.

Again, thank you.

And that does conclude the conference for today.

Thank you for your participation and have a great day.