Everest Group Ltd (EG) 2006 Q3 法說會逐字稿

Good day, everyone.

Welcome to the third 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 the call over to Ms. Beth Farrell, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good morning, and welcome to Everest Re's third 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 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 market conditions.

Joe, Tom and I will then take questions.

Our third quarter results were another best-ever, with $240.2 million of after tax operating earnings, or $3.68 per diluted share, compared to the catastrophe-impacted after tax net loss of $438.9 million or $7.79 per share in 2005.

Net income, which includes realized capital gains and losses, reflected a similar recovery to a net income of $245.7 million or $3.76 per share, in contrast to 2005's $417.7 million or $7.41 per share net loss.

Our year-to-date earnings also represent best-ever results, with after tax operating earnings of $616.8 million or $9.44 per share, contrasting against an after tax loss of $100.3 million or $1.78 per share through 9 months of 2005.

Clearly a factor in our results was a benign 2006 U.S. southeast wind season.

However, with a year-to-date combined ratio of 88.6 on a well diversified portfolio, and earnings leading to an annualized ROE of over 19%, the real performance driver is our strong underlying fundamentals, and our continued focus on both underwriting discipline and market responses tailored to market conditions.

Gross written premiums on the year-to-date basis, which we believe is most meaningful, are down 7% to $3.01 billion, with our world-wide reinsurance book at $2.35 billion, down 5%, and our insurance book at $663 million, down 12%.

As we've noted previously, there has been significant portfolio repositioning in both our reinsurance and insurance books, which has obscured the underlying trends, trends we believe orient us to growth over the longer term.

In reiterating this view, we take comfort that our both insurance and reinsurance portfolios are showing healthy growth on a sequential quarter basis, 28% and 12% respectively.

We continue to expect a strong fourth quarter leading to a full-year result which is about even with 2005.

Turning to the underlying segments, again on a year-to-date basis our U.S. reinsurance operations at $989 million are down 10%, principally reflecting declines in casualty writings and the inclusion in 2005 of a reinstatement premium relating to the storms of 2005.

As discussed last quarter, the treaty property portfolio has experienced a substantial repositioning and was impacted by a significant cancelled contract return premium in the second quarter.

In this context, we note our treaty property operation is up nicely on a sequential basis from 2006's second quarter, which reinforces our view that the repositioning is behind us.

Our U.S. specialty operations are down 21%, reflecting some moderation in year-over-year declines, which have been principally driven by persistently difficult conditions in these markets, most notably in the [EMH] markets.

Our international segment is basically even against 2005, with growth in Latin America and Canadian markets, offset by declines in Asia.

Our Bermuda operations are up 6% reflecting modest growth in the UK and European markets, and flat volume to our Bermuda operation.

Our U.S. insurance operations are down 12% on a year-to-date basis, but up 18% for the quarter and 28% sequentially over second quarter, reinforcing our belief that the substantial transformation of our insurance portfolio, as we discussed last quarter, is moving behind us.

To summarize, we continue to believe 2006 will be about even with 2005 on a full-year basis, with year-over-year growth expected in the fourth quarter, reflecting both the significant portfolio changes we've made, and easing comparison against 2005, which included a significant one-time estimated premium reduction in the fourth quarter.

2006 has been a year of adjustment, as we responded to changing market conditions, particularly in the U.S. and related catastrophe markets, as well as to strategic issues, most notably our insurance portfolio.

We still see a somewhat dislocated market for U.S. catastrophe business, which we are taking advantage of in a carefully managed fashion.

Beyond that, although we note modest competitive pressures in most other lines, we continue to see generally stable conditions across both property and casualty markets, which are well suited to our strengths.

On an underwriting basis, our third quarter combined ratio at 83.1% was our lowest ever, and contributed to an 88.6% combined ratio for the 9 months ended in September.

These results reflect the strong underlying fundamentals of our 2006 portfolio, including in particular, the revamped property portfolio, where our risk-reward balance for catastrophe-exposed business has improved dramatically.

In this context, the relatively benign 2006 southeast wind season experience also contributed.

The third quarter's accident year combined ratio, excluding the effect of 3 points of favorable net reserve development, was 86.2%, which is consistent with the 85.6% accident year result reported for the 9months, and more broadly, our view of the ex catastrophe underwriting year results.

In the third quarter, we recorded $29 million or 3 combined ratio points of net favorable development on 2005 and prior years.

This was comprised of $120 million of net attritional reserve releases, principally reflecting the recognition of favorable annual comprehensive reserve assessments in several areas, including in our -- in particular, our property area.

The impact of these releases was offset by $47 million of catastrophe loss development on 2005 and prior events, and also by $44 million of net asbestos development.

It's worth noting here a comment that we included in our SEC disclosures.

Basically that the more granular a view you take of our reserves, the less stability they exhibit.

Each quarter, we go through a comprehensive analysis of our loss reserve estimates by profit center and class of business.

There are 200-plus IB&R groupings representing homogeneous groupings of business in this analysis.

Simultaneously, we reevaluate our prior period catastrophe event loss estimates, as well as review our mass tort and other exposures, which are not actuarially estimable.

In any given quarter, the comprehensive process generates movements in reserves, sometimes favorable and sometimes unfavorable.

While less is better, and favorable is preferred to unfavorable, summarizing these moving pieces into catastrophe event, asbestos and attritional, our current disclosure captions, doesn't really do justice to the entire process.

Stepping back and considering all the elements, we're generally pleased with the quarter where the movement is a $29 million net reserve release on an $8.9 billion reserve base.

Moreover, we believe that even the $87 million of reserve strengthening we have done on a year-to-date basis, just 1% of our current reserve base, doesn't fundamentally detract from our record underwriting results.

Turning to the operating results more broadly, pretax investment income at $147 million for the quarter and $446 million year-to-date was up 25.5% and 14.9% respectively, mainly reflecting invested asset growth and a rise in investment income from limited partnership investments.

One noteworthy variable impacting the quarter's operating income was a tick up in our effective tax rate to 14.5% year-to-date, principally reflecting the effect on our U.S. to Bermuda balance of income, arising from this quarter's asbestos and current lawsuits, a tick up equating to approximately $10 million of incremental tax expense.

Another variable worth noting was a $6 million expense associated with the effective interest rate reductions on the model liability values of the Company's equity put derivatives.

Turning to investments, our invested asset base grew $451 million or 3.4% for the quarter, and $667 million or 5.1% for the 9 months.

Unrealized depreciation was $254 million pretax, and $197 million after-tax for the quarter, in large part reflecting the impact of lower interest rates.

Year-to-date unrealized depreciation is $26 million pretax and $9 million after-tax, with solid equity appreciation, largely offset by the impact of interest rates on our bond portfolio.

Our portfolio characteristics, at a 4.3 fixed maturity duration, embedded pretax and after-tax yields of 4.6% and 4% respectively, in equity that 10.7% of cash and invested assets, changed little over the quarter.

Cash from operations was $181 million for the quarter and $494 million year-to-date, down from $377 million and $996 million respectively in 2005.

After considering the $140 million and $489 million of increases in quarter to year-to-date catastrophe payouts respectively, there was virtually no deterioration from the very strong 2005 results.

Additionally, paid loss ratios excluding catastrophe claim payments, remained stable in the mid-40s for both 2005 and 2006, reinforcing our view that underwriting fundamentals remain strong.

Lastly, turning to shareholder equity, our book value is up $445 million for the quarter, to $4.82 billion or $74.26 per outstanding share.

This is up $684 million or 16.5% from December 2005's $4.14 billion or $64.04 per share.

In summary, we had an excellent earnings quarter, yielding a 21.5% ROE for the quarter and a 19.3% annualized ROE.

And we did this through continued execution of our disciplined underwriting strategies.

The portfolio re-engineering we've worked on for several quarters, first in the insurance segment and then in our U.S. focussed property operations, saw continued progress and should be less of a distraction going forward.

And finally, we ended the quarter with the strongest infrastructure, franchise and capital base we've ever had.

I'll now turn the call over to Joe.

Good morning.

Thanks, Steve.

We're pleased with our third quarter results.

Any time we can have a 21.5 ROE and grow book value 10% in 1 quarter, we're happy.

As Steve noted, we expect the top line to grow in the fourth quarter, and expect 2006 to finish relatively even with 2005.

We see this as a good result, when you consider that we had some tough comparisons '05 to '06 because of the following items: First, we are continuing to reduce our book of California Workers' Comp business.

In 2005 we wrote $230 million and in 2006 we expect to write about $200 million, a $30 million reduction year-over-year.

Second, we had a sharp reduction in our insurance credit program, as our Asian loss [inaudible] franchise.

In 2005, here we wrote $175 million.

In 2006 we expect to write only $5 million.

That's a $170 million difference year-over-year.

Third, we sharply reduced our accident and health reinsurance book, as we continued to reduce our medical stop loss business.

In 2005, we wrote $140 million. 2006, we expect to write $90 million, that's a $50 million reduction.

Fourth, our casualty reinsurance premiums declined as we responded to a modestly changing market.

In 2005, here we wrote $730 million. 2006, we expect to write approximately $660 million, or a $70 million reduction.

Fifth, we had a $45 million return premium for a single property reinsurance account.

And sixth, in 2005 we had $55 million of reinstatement premium versus 0 in 2006.

In total, all of these items add to $420 million of premium.

Offsetting these declines was our growth in the U.S. property reinsurance market, as we capitalized on the much improved market conditions, and the growth of our new programs in our insurance operation led by [CV] Star of California.

For the property reinsurance premiums excluding the return premium and reinstatement premium, we expect to do about $150 million more of business in 2006 over last year.

For insurance operations, including Star, we expect about $250 million from new programs in 2006.

All of these changes demonstrate that we continue to remain a disciplined underwriting Company, shedding business that no longer meets our standards, yet we remain an opportunistic Company willing to grow new profitable opportunities.

It also demonstrates the value of having a diversified book of business.

As we move closer to 2007, we continue to feel very good about the underlying portfolio, which continues to generate the best-ever underwriting ratios across literally all product lines, surety, marine, aviation, casualty, accident and health, and property, and continues to generate the best ratios ever across all continents, North America, South America, Asia and Europe.

In 2007, we may continue to write less casualty reinsurance as we continue to respond to changing market conditions.

But we expect the property reinsurance markets to remain strong, and foresee continued growth for us.

The international markets should remain relatively stable, while our insurance operations should have growth on the back of new programs, and as we develop some new opportunities.

Investment income, taxes, cash flow should also show continued favorable trends, producing continued quality results.

As we noted in an earlier press release, Steve Limauro, after 33 years of service to our Company, will be retiring at year-end.

I want to thank Steve very much for all the great work he's done over those years.

The Company will miss him, and Tom and I will miss him.

As we noted in the press release, an active outside search is under way.

We've spoken to a number of candidates and we continue to expect to have a new CFO in place by year-end.

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

[OPERATOR INSTRUCTIONS] Tom Cholnoky, Goldman Sachs.

I hate to turn to a non-kind of core third quarter thing, but can you provide us an update on the Centrix deal in California -- I mean, in Colorado, following Protective Life's reserve charge?

What is different about your program, and why should we -- or should we be concerned that you could see similar charges arise out of that program?

Tom, it's hard to speak to somebody else's business.

So I'm really going to focus on ours.

Our program began after the involvement by Protective.

Frankly, as we looked at it, we looked at an opportunity that had to be structured very carefully in terms of the rate charge, the terms, the collateral features relative to reinsurance, and the reinsurance program itself.

We did a lot of work on that, and we felt very comfortable with the results.

We have not seen a substantive change in the results over the period that we've been looking.

Centrix is in a bit of a bind in that they're in the middle of a Chapter 11 bankruptcy, and we continue to be supportive, looking at that bankruptcy as one that is, we hope, a temporary obstacle.

We're continuing to work in that context to protect our own interests, as well as the interests of our clients.

And that process is one that will continue in a work out mode for a while longer.

Having said that, our analysis of our results and the underlying performance of our business continues to be up to date, and we feel very comfortable with the reserving that we've done on our book of business.

So at this point, we certainly understand this business has risk.

But we continue to work through the various risk elements, and are quite comfortable with our assessment.

And as I say, we continue to be actively engaged with the Centrix folks to make sure that that operation continues to provide the servicing that we and our clients need.

Okay.

Just 2 other quick questions, then I'll hop back in.

Just on specialty underwriting, I'm not sure if I fully understood, or if you commented on it, that why that was up 50% in the quarter.

And then also Bermuda, what kind of drove the down 21% premium volume there?

I know you can have some quarterly fluctuations, but those seem to be little bit larger than I would have thought in either direction.

We'd actually look at both of those as one of the reasons that we don't really focus on the quarter-to-quarter results, in the sense that there can be variability in the accounts, the accounting, how you handle estimated premiums.

So there is nothing dramatic going on in either one of those situations.

We continue to see the specialty operation struggling with difficult markets, and the Bermuda operation is doing pretty well, more broadly kind of reflective of where our U.S. reinsurance volume is.

I'm sorry, as I said.

Let me just ask 1 more, which is just on the asbestos.

The $47 million reserve strengthening.

Was that in anticipation any way of perhaps settling a large claim at all?

Or is that -- how should we think about that?

Because that seemed to be a little bit larger than what you have been running at?

About $20 million of that related to our reinsurance operation, the remainder to Mt. McKinley.

In each case, really, there was significant new information that we got during the quarter that caused us to reassess.

In the case of Mt. McKinley, 1 case in particular was reassessed in a significant way during the quarter, and really drove the Mt. McKinley IB&R setup.

And, frankly, we have in fact settled that case early in the fourth quarter, within the reserves we established during the third quarter.

Okay.

Great.

But yes, Tom, there was certainly 1 case in particular that has in fact been settled at an amount higher than we thought, certainly, at the beginning of the third quarter.

Steve, we had 9 key cases at the end of the quarter, but actually we've settled 1, so we're down to 8.

Is that correct?

That is correct.

That is high-profile, right?

High profile.

Correct.

Okay.

Great.

Thank you.

Matthew Heimermann, JPMorgan.

Couple questions.

First was it, in your discussion of the reinsurance comment, I thought you made a comment about development on catastrophes, which I missed.

Did I hear you correctly?

You did.

We did have development on the 2005 and prior catastrophes.

Okay.

And what was that number?

It was about $47 million.

Okay.

Thank you.

The other thing was, can you split out that $250 million of growth from new programs on the insurance side?

How much is CV Star versus other things?

Order of magnitude for 2006, CV Star would probably be about half of that.

Okay.

And then just on investment mix prospectively, are you contemplating -- you've been increasing over the last couple of years the investment into equities.

Is that something that is going to continue, or are you hitting a point where you're a little bit more comfortable with the mix?

We're probably hitting a point where we're more comfortable.

I don't think that we're going to change our views significantly, that we do like equities as a contrast against the bond market.

Having said that, the bond market is a bit more attractive today than it was 3 years ago, and this is a fairly fluid process.

We understand that as we invest in the equities, we probably are giving up, on an annualized basis, about $40 million of after-tax earnings.

And as we look at the way we value ourselves and the market values us, we constantly keep that in mind.

Having said that, we've had good performance on the equity side.

Net, net, net, I don't think we're going to see equities continue to grow.

We may in fact, trim them a bit.

But this is just something that we have to adjust as we go through the ebb and flow of capital markets.

Fair enough.

We're very pleased that we put a 1.5 billion to work in the equity market in the last 3 years.

As Steve noted, some of that originally was driven by the fact that we expected interest rates could only go one way.

And so we didn't want to put more money into the bond portfolio.

But clearly, our portfolio on the equity side performed extremely well, and so we are revisiting how we move money at this point.

Also keeping in mind that the S&P and the Dow and the other indexes are at an all-time high.

Fair enough.

The last question for you, Joe, I guess, if casualty business continues to decline just from a diversification credit standpoint, does that put any pressure on the amount of property volume that you can write, either stable or growing?

No, we don't look at it that way.

I mean, I do think we may do less casualty reinsurance business next year.

Although, that's not necessarily the case.

We certainly will look to develop some new opportunities, and Tom Gallagher sitting here to my left will debate that item with me if he thinks we can do more than perhaps I feel.

Our insurance operation, which is primarily a casualty operation, we expect to grow.

So perhaps in grand total, even I would say that our casualty operation would grow.

But what we do on the property side will not depend on the casualty landscape.

It will depend on the property landscape, and just how good we see the opportunities there.

We think there will continue to be some excellent opportunities and we're preparing to do more business this January 1.

We're pretty sure that we will.

Again, our ratings in the market should make for a very nice marriage, so I think we can grow on the property side.

I think we will.

And that really -- all the thoughts on that are independent of what we do on the casualty side.

All right.

Greatly appreciated.

Thank you.

Susan Spivak, Wachovia Securities.

Could you, Joe, go into a little bit more detail if you can.

It seems as if yourselves and other players are talking about writing less casualty business.

Who will be picking up the slack and gaining market share, in your view?

And then if you could just give us a bit of an outlook on more on the European markets, on the European property markets.

Are you seeing any improvement there, or is it continued pressure because of the larger players in those markets?

Yes, again, let me repeat on the casualty side, I think our insurance operation will grow.

Where I am a bit more concerned is on the reinsurance side.

And really the dynamic that I'm talking about there is not losing market share to other reinsurers.

I mean, there really are only a handful of market leaders in the casualty reinsurance world, that we're very happy to be one of them.

But the market forces that I really -- I'm thinking about is one with results having been terrific for the last 3 years.

We are seeing companies keeping more net.

And that's part of the equation.

The other thing that we're seeing is with results having been terrific for the last 3 years in most pockets of the casualty world, we're seeing increased competition at the insurance level.

So we're seeing modest declines on renewals.

At this point in most areas it may be five-ish percent.

But nonetheless, there is a reduction in insurance rates.

So between insurance rates going down modestly, companies keeping more net, and us remaining disciplined in terms of the terms and conditions that we're willing to write -- that is the other part of the equation.

Companies will want more seeding commission and better terms because they've been generating such wonderful results.

And if they are going to part with these profitable premiums, they're going to want more reward in terms of the structure of the reinsurance.

So with those trends in mind, I'm kind of sensing we may do less.

Having said that, with our ratings and with our abilities in the casualty world, we see all the major deals.

And we believe we will continue to see all the major deals.

And we may see some things that really excite us and we do in a big way.

And we may even grow.

But the market dynamic that I really speak to, Susan, is really more insurance rates going down and companies keeping more net.

Okay, versus market share -- companies being market-share driven?

Correct.

And how about on the international side?

[inaudible] talk about European?

Sure.

On the international side I think you'll see the same effect is going on there.

The results have been excellent.

People looking to grow.

If they're not growing in the States because of accumulations, they are growing internationally.

I suspect there will be pressure on some pricing.

But overall, I still think it will be a good marketplace, both in continental Europe, as well as the rest of the world.

Okay.

Great.

Thanks.

And, Steve, I just want to say congratulations, and it's been a real pleasure working with you.

Thank you, Susan.

Joshua Shanker, Citigroup.

Going over -- just trying to track back in the past, the $120 million of attritional favorable development, how does that compare with what we've seen in previous quarters?

It's a bit larger this quarter, and that really reflects the favorable indications we've been seeing over the course of the year.

But now in the context of our completed annual reserve assessments, mainly for our shorter tail lines, in the sense that we generally complete the shorter tail earlier in the year, say in the third quarter, and the longer tail in the fourth quarter.

We continue to see very solid indications of reserve strength.

And so as we complete these annual assessments and vet the indicative results we've been talking about, we're in a position to release a fair amount of attritional IB&R reserving.

So, should I take it that the core is working in reserve analysis is part of the reason that it's higher than it usually is?

Or that we should expect if there is favorable development, that we're entering a newer stage where the more IB&R-held sort of areas are starting to come into their own, so to speak?

I would say that there's no substantive change in what we do.

We try and anticipate, as we move through a year, what our reserve studies will do by looking and working with diagnostics.

And we have been seeing reserve strength as we've come through the year.

In this quarter we did complete these comprehensive kind of reviews and that certainly had an implication.

But there isn't any fundamental timing mismatch, if you will, going on.

Some of what we're seeing is just the ordinary seasoning of our business and 2004 and 2005 and 2003, absent the catastrophe issues were all very nice years and very strong years that we're very pleased with.

Very good.

Regarding the asbestos reserving, given the fact that this one high-profile case settled for higher than you thought, does it give you any thoughts on your actuarial analysis for the other 8 cases that remain?

I wouldn't call asbestos in any way, shape or form, actuarially kind of driven.

I mean, this has really built up from the bottom-up by our experts, who really have been working this book very hard over the last few years.

And the fact of the matter is, in this 1 case, we have been looking at it, we have been reassessing an increase in volumes which was somewhat counter-intuitive, flowing through that claimant's books.

We reassessed our litigation strategy, and reweighted, if you will, what we thought we could achieve from a leverage perspective.

We weighted all of that against the exposed limits that we had that would be at-risk if you go into the full litigation.

And the fact of the matter is, we made a decision that at this point given all the facts, including the changed facts in the quarter, we wanted to up the reserve and ultimately, enter into discussions that led to a settlement that will be actually recorded in the fourth quarter.

Very good, very good. 2 other quick things.

The first one is regarding equity investments on your book.

I noticed [inaudible] obviously having done well in the quarter given the strength of the market.

The actual mark on the balance sheets didn't go up dramatically.

I'm guessing [inaudible] you sold down that portfolio into I guess, short-term investments.

Is that correct?

I'm sorry.

I missed the question.

You're asking whether or not the equity portfolio has actually come down in the quarter?

Well, no.

Well, look, at the end of the second quarter it was at 1.42.

Now it's at 1.46.

Probably actually did even better than that.

I'm wondering if you started taking -- selling profits in that portfolio?

We took a little bit, not a great deal.

We certainly did see some appreciation.

But on balance, I would call it within a range of the same as what it was at the end of last quarter.

I mean, certainly we have not been investing in long duration fixed income securities.

And so there has been a bubble-up in our short-term income at least, and a bubble-down if you will, in the long-term fixed income -- net investment income amounts.

And there is a fairly good table in the back of our disclosure exhibit that gives you the splits.

And final thing -- sorry to take up so much time on the phone.

The final thing, last year when we go back to the renewal season for cat reinsurance, it is rather disorderly and number of primers were holding out until the last possible moment to make a deal and wound up in some ways, spoiling the market.

Are you seeing any indications that this quarter is shaping up in front of the renewal season to be more orderly?

And that counter parties are coming to the table earlier willing to do deals?

Well, let me say this.

It's the beginning of the renewal season right now.

So I can't answer what it will be, other than to say at this point in time, most of those participants in the January 1 renewal season have taken a hard look after a year, and said that they have a greater need to get this done quicker, and to get more limits.

So hopefully it will be a more settled type of environment, but we won't know for a couple of months.

Very good.

Well, thank you for all your time.

And, also, Steve, good luck in the next job.

Thanks, Josh.

David Small, Bear, Stearns.

If you could just give us some sense for the changes in the limits and the attachment points in the property reinsurance book, that would be great.

I mean, just especially given in light of what we've heard from the market.

When you say points of attachment, we have a fair size book of business that is proportional.

With a proportional book, we have caps on it.

So that is one aspect of our book.

As respects the points of attachments, they vary greatly.

So I don't think they've changed that much since last year, comparatively.

As respects to the limits, we do a review on both limits exposed, as well as do a PML based on a cat review.

On a limits exposed basis, taking the U.S. which is the key area, we're probably a third less limits exposed.

As respects the cat modelling, we're probably equal to last year, only because the models have changed dramatically.

And as you move forward -- as you move forward, is that where you would want to be?

Or do you think you can have more limit on -- do you think you could write more limit?

As Joe said, if the opportunities are out there that lend themselves to well-priced business, we will look at expanding our capacity.

There are a lot of factors that go into figuring out potential losses.

You mentioned some of them, limits and points of attachment, deductibles.

And Tom mentioned a few others, caps, and we try to take all these into consideration.

More or less, the directional change that we were trying to achieve was premiums to be up rather significantly.

I mentioned how our property premiums are up when you make adjustments, probably $150ish million.

And yet at the same time, have exposures that were down from last year.

And probably are down a third to half of what they were a year ago, because the market changed so much that we were able to construct the new portfolio that way.

So we're very pleased with the portfolio.

Yes, with capital-building, if we see good deals that we like the race, we like the upside potential versus the down side risk, we have the ability to do more.

And in January 1, the brokers and the markets know that we have capacity and something in our arsenal where, if the deal is right, we can put down some significant limit.

I know that premium to surplus is not the ideal way to look at your capital position, but maybe you could help us understand or how to think about your capital position.

The premium [inaudible] obviously ticked down in the quarter.

How should we think about your capital position and excess capital?

We certainly look at our capital position very carefully and have made clear that in the long-term, capital utilization is a very important element of kind of how we run the business.

There are very sophisticated models that we use that look at the exposure coming onto the books, as well as the exposure in the books, as well as ancillary exposures, such as investments and other kind of risk situations.

Having said that, you can capture that pretty well in the leverage measure that we include in our supplemental package.

And frankly, there is no question that our operating leverage is growing stronger based upon the earnings that we're moving in to our capital base.

This is something that's got to be looked at over time, and it's got to be integrated with the business opportunities.

And the practical matter is, we certainly are seeing that the buildup of capital and we'll deal with that in the fullness of time.

We do certainly expect that next month, when we meet with our Board, we will talk about our capital position.

That will also get us through the end of the formal hurricane season, and we'll have a full and complete discussion of opportunities and risk elements and then make decisions at that point.

But, let's be very clear.

This is something that there isn't a metric that turns a light switch on and off that says do something about capital, don't.

It is a fluid situation where we have to balance our capital position against the risk elements in our book, and coordinate all of that very carefully with, not only the business operation, but also the way we deal with our rating agencies.

So a lot goes into it.

But we're certainly mindful of the fact that we're adding a lot of capital this year, and effectively subtracting leverage.

And, then the last question I'd have is just how close are you to your aggregate limits for the '05 storms?

It's hard to deal with a question like that, on a kind of a yes or no, or black or white answer.

Having said that, these storms are pretty well seasoned.

We have a modest amount of IB&R left, about $15 million or $20 million and frankly, we think we're pretty much at the point where these storms won't develop further.

Let's recall that these were extraordinary events.

And at the end of the day, that, the fact that the events have continued to move, the losses over our underlying insurance seeding companies continues to move, and the fact that we have a proportional book of business, all contribute to a difficulty in landing a number.

Having said that, from here, we wouldn't expect to see a substantive amount of development.

Well, thank you for the time.

Vijay Misquith, Credit Suisse.

It appears that your growth is -- in the future will come more from the primary insurance operation.

The question is, is your strategy to reduce your reinsurance business, especially on the casualty front, in favor more of primary insurance?

No, that's not the strategy.

We would like to grow both.

It's more that we see some very good opportunities on the insurance side right now, as why we're growing in the second half of the year.

And we believe we'll see some continued opportunities on the insurance side going into 2007.

As I noted earlier, some of what we see on the casualty reinsurance side is people keeping more net.

And that's just not an issue that we have to deal with in our own insurance operation.

So it's not the strategy.

Our strategy has always been to go where the opportunities are, and grow our business as best we can in the areas where we can make a profit.

We still think the casualty reinsurance landscape will be very good next year, the property reinsurance landscape will be excellent, the opportunities for our insurance operation will be quite good.

So overall, our book right now just looks terrific, just about any way you slice it and dice it.

And we may see some increased competition in certain pockets, and I am anticipating the market forces making it a little tougher for us on the casualty reinsurance side.

But our strategy has always been to go where the opportunities are and grow them.

If that's international, fine.

If that's property, fine.

So we're not shying away from the casualty reinsurance business.

We'll still be a major leader and a major writer of casualty reinsurance business in 2007.

All right.

That's great.

On the cat side, are you seeing a move from the primary insurers towards more non-traditional products like ILWs and cat bonds?

And what impact is that having on the pricing of the cat business?

We're not seeing that much to be honest with you.

We've been hearing about cat bonds for 10 years now.

And yet they really just represent a small amount of the coverage that's provided in our universe.

So no, we're still seeing traditional property reinsurance as really the bulk of what people purchase to handle their exposures.

The world hasn't changed that much.

All right.

And 1 last question on the cat side.

I believe you mentioned there was $47 million worth of [inaudible] development?

Correct.

On page 3 of your supplement, you have about $46 million worth of cat losses.

So is that the same number?

It is.

Essentially yes.

All right.

Thank you.

Stephan Petersen, Citadel Investment Group.

2 quick ones.

Steve, I was wondering if you could revisit Josh's question on the $120 million of attritional reserve favorable to reserve development.

You just mentioned that it was short tail line.

Could you add any more color as to what you meant by short tail line?

Is it primarily property?

Is there some casualty in the mix?

Is there some workers' comp in there?

I would say there is certainly some favorable development on the primary workers' comp that is in there.

Most of the other development is -- does relate to property business.

Now, property would be in our main frame treaty property U.S. operation, as well as our international property operations, including in the Bermuda segment.

It would also include Asia.

It would also include marine and aviation and our AMH.

So most of our specialty units we would consider shorter-tail as well.

Surety I believe, is in there, also.

So what remains is mainly the casualty business, and some pockets of the international property business.

The casualty business would be both [facultative] and treaty.

And again, we monitor all this with diagnostics, but we've actually kind of recorded the comprehensive studies for the shorter tail lines.

Does that help?

Yes, it does.

So of those things that you described, nothing you could point to is -- was a dominant factor?

I would say our U.S. treaty property area was certainly the biggest contributor where we've seen excluding catastrophes, very sound, favorable development trends.

And I would also comment that at the end of the day, we continue to watch all of our reserve pockets very carefully on a quarterly basis.

And we continue to see the very strong performance that we've talked about.

And that is really represented in the underlying accident/underwriting year run rates.

Terrific.

And my second question is your ongoing appetite or caution about writing retrocessional cover as we head into the January 1st renewal season.

What's your outlook for that particular business?

And you've in the past indicated that you're fairly cautious.

It's never going to be a significant part of the book.

But just curious if any of that has sort of changed in the last couple of months?

Well, let me start and then I'll ask Tom to kind of add more color.

But historically, we really have not been a big player in the retro property market.

Having said that, in 2006, we're the biggest we ever have been.

Again, dictated by a changing marketplace, where rates were much better in property reinsurance, and particularly improved in the retro area.

So we did a lot more this past year than we ever have.

And I see no reason why we should change that.

The outlook right now is that the retro market will still be pretty tough, and the expectation is that the prices will still stay firm, and there will be a limited amount of capacity out there.

So I see us in '07 continuing to play the same way we did this year.

Okay.

Terrific.

And let me add my congratulations to Steve, and best wishes in a happy and healthy retirement.

Yes, and let me just comment, Stephan, that I think the earlier caller mentioned my next job.

There really isn't a next job.

I'm looking forward to a little bit of relief after a long period.

So thank you, Stephan.

Good for you.

Thanks.

Ken Zuckerberg, Fontana Capital.

Joe, I just wanted to revisit 1 issue on the California Workers' Comp book.

We've seen some very strong re-estimates of reserves by some of your competitors, including the market leader there.

I just wondered if you could speak to your view of the abetted equity and the reserves established for the California Workers' Comp book?

Well, let me start with an overall response before I get to the comp specifically.

And I'll kind of just piggyback on what Steve has been saying.

At the end of any quarter, we provide the best estimate that we can for all pockets of our reserves and in grand total.

And yes, when we go back and revisit the next quarter sometimes we put some up in one area and we take some down in the other area.

But at the end of any quarter, what you should take from us is that we've done the best job we can.

And so we don't have any expectations that things will run off favorably or against us.

Having said all of that, every time that I think we have revisited the comp reserves in probably the last year, year and a half, we have been pleasantly surprised to see that they've been running off even more favorably than we had thought the previous quarter.

So now when we look back to to our results in 2003, and 2004, and 2005, we see results that have never been achieved in the history of workers' compensation in any state, and we're very pleased about how we did at that time frame.

We're very pleased that our reserves continue to run off favorably, and show even more and more profit for all of those years.

The implication is also that for the 2006 year, that also kind of has us feeling pretty good about the book of business that we have, even though it is a much smaller business than we had at our peak in 2004.

And of course, rates are much changed, so we're not going to have the same profit margins that we had in 2004.

But we still believe we can get a very good ROE and result on the 200ish million that we're currently writing in California Workers' Compensation.

So, yes, we have reviewed them in the last year and a half, and almost every quarter found ourselves taking down reserves, because we found that we needed less than we thought we originally needed.

And we will continue to do that review.

And we're very pleased with everything that we've seen come in for the comp book.

Great, Joe.

Just a follow-up numbers question.

So the current book is 200 million of -- that's gross written premiums, or is that on the net line?

It is both.

We don't buy any reinsurance on the California comp book.

That's fair.

And in terms of the carried reserves on a net basis for the California comp book, Steve, do you happen to have that number handy?

You know, I don't have that number handy.

And Ken, why don't you give me a call later on, and I'll share that number.

It's a couple hundred million, but I'm not going to be able to really refine that down, not in a way for a public call.

I can dig that out easily for you.

We'll get back to you on that one.

Great.

Thanks.

I'll give you a call.

This concludes the question-and-answer session.

At this time, Miss Farrell, I will turn the conference back over to you for any additional or closing remarks.

Please go ahead, ma'am.

Thank you for joining us today.

Certainly, if there are any questions remaining, please feel free to call myself or Steve Limauro.

Again, thank you.

This concludes today's conference.

Thank you for your participation.