Everest Group Ltd (EG) 2006 Q4 法說會逐字稿

Good day everyone and welcome to the fourth quarter and year end 2006 earnings release conference for Everest Re Group.

Today's conference is being recorded.

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

Thank you.

Good morning and welcome to Everest Re's fourth-quarter 2006 earnings conference call.

With me this morning are Joe Taranto, our CEO;

Tom Gallagher, our President and Craig Eisenacher, our CFO.

Before I turn the call over to Craig 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 Craig Eisenacher.

Thanks, Beth.

Since windstorm Kyrill seems to be in the news lately, I will address that first, then I will briefly summarize our results.

Next, Joe will comment on our results and market conditions.

As well, Joe will talk about recent events in Florida.

Joe, Tom and I will then take questions.

With respect to windstorm Kyrill , we think our loss will be in the $20 million to $30 million range.

It could be higher or lower, but right now, that's where we see it.

Not to overstate the obvious, but it's still early days for this storm that occurred less than two weeks ago and the range of estimates from modelers is from EUR2.5 billion to EUR8 billion, which is very wide to say the least.

Net-net then, based on what we know thus far, we don't expect this storm to be a large loss for us.

Now onto results.

Our after-tax operating income for the quarter was $201 million, or $3.07 per fully diluted share.

Net income including realized capital gains and losses was $206 million, or $3.15 per fully diluted share.

In last year's fourth quarter, we recorded a net operating loss of $186 million, which equated to a loss of $3.01 per share.

Last year's fourth quarter and year results of course were heavily impacted by catastrophes which obviously reduces the utility of year-to-year comparisons.

2006 as a whole was our best year ever from an earnings perspective.

After-tax net operating income was $818 million and after-tax net income, including realized gains and losses, was $841 million.

On a fully diluted basis, 2006 net operating income was $12.52 per share and 2006 net income, including realized gains, was $12.87 per share.

Our combined ratio was 92.9% for the fourth quarter and 89.7% for 2006 as a whole, which is our best ever one-year combined ratio performance.

Our return on equity was 18.7% for 12 months and 17.1% annualized for the fourth quarter.

We finished the year with $5.1 billion of shareholders equity, up almost $1 billion from year-end 2005.

Without question, the relative lack of catastrophe activity during 2006 combined with a harder property market contributed to our strong performance.

Having said that, we continue to be a capable and disciplined underwriter and we tailor our risk appetite to changing market conditions.

As well, we've significantly repositioned our property reinsurance book and improved its overall risk-reward balance.

For the fourth quarter and for the year as a whole, all of our reinsurance segments showed significant improvement in their combined ratios compared to prior-year results.

On the other hand, our U.S. insurance operations experienced some combined ratio deterioration for the quarter and full year compared to the prior year periods, and I will talk about that in a moment.

Turning to the top line, overall our gross written premium was $4 billion for the year compared to $4.1 billion for 2005, and that is down 3%.

For U.S. reinsurance, the decline is partially attributable to the relative absence of reinstatement premiums in 2006 compared to 2005.

In addition, we cut back our treaty casualty premiums in response to market conditions.

U.S. insurance declined by 7% primarily due to a reduction in our workers comp writings and a discontinued credit program that generated significant premium in 2005 but not in 2006.

Our Specialty segment declined by 20% as we repositioned our marine book to reduce our aggregate exposures and reduced our A&H writings in response to the more competitive pricing environment for that line.

Our International and Bermuda segments grew by 4% and 6%, respectively.

In International, we emphasized Latin America and Canada while reducing our Asian writings all in response to market conditions, and the Bermuda segment's growth emanated principally from the UK and European markets.

The repositioning of our book, which has been discussed on prior calls and which depressed our growth during the first half of the year, is now complete.

For the fourth quarter, every segment, expect Specialty, grew compared to the fourth quarter of 2005.

In terms of our combined ratio, our strong performance for the fourth quarter and full year was driven by accident year results in the mid-80s.

Our combined ratios include net adverse development of $44 million for the fourth quarter of 2006 and $131 million for the 12 months.

The development added 4.5 points to the combined ratio for the quarter and 3.4 points to the combined ratio for the year.

In the quarter, we incurred $62 million of adverse development from prior year's catastrophe losses and $50 million of adverse development from asbestos.

These amounts were significantly mitigated by a $68 million net release of prior year's attritional reserves which continued to run off favorably.

All in then, the net change for the fourth quarter was reserve strengthening of $44 million.

Similarly for the 12 months, we saw adverse development of $272 million on catastrophe reserves held at December 31, 2005, and $112 million on asbestos.

On the other hand, we saw $253 million of favorable development on our other reserves.

All in then, the net strengthening was $131 million for the year as a whole.

The net development we reported in the quarter represented 0.5% of the $8.8 billion of reserves we held at September 30.

The development for the 12 months represented 1.4% of the $9.1 billion of reserves held at December 31, '05, very small percentage changes in each case.

I want to note that, each quarter, we establish our best estimate of reserves by line and accident year.

We're frustrated by the adverse development for the quarter and for the year.

Having said that, the 2005 storms proved difficult to assess because of their magnitude, our large pro rata book, and because of the size and complexity of the marine losses.

And the evaluation of the adequacy of our asbestos reserves is heavily impacted by ever-evolving case law which clearly defies actuarial analysis.

We do an enormous amount of work trying to get our reserves right and we believe our overall year-end reserve position is very strong.

Results of our U.S. insurance operation were negatively impacted by the Centrix credit program, which is in run-off.

Through the third quarter of this year, it appeared that the business was running off profitably.

However, during the fourth quarter, we got more and better data and it began to look like the ultimate frequency of loan defaults would be higher then we had previously believed.

We carefully studied the evolving data and concluded that the program would likely result in a loss to us, rather than a profit, as we had previously believed.

As a result, we recorded a pretax charge in the quarter of $80 million.

This charge is the cause of the higher combined ratio for the Insurance segment for the quarter.

Also during the quarter, we recorded $37 million of favorable development on prior years, principally related to workers comp.

We also concluded that the 2006 accident year loss ratios on several of our other programs were better than we had previously estimated and these items somewhat mitigated the impact of the charge for Centrix on the quarter's results.

Moving on to our investment results, net investment income was $184 million for the fourth quarter of 2006 compared to $135 million for the fourth quarter of 2005.

That is an increase of $49 million, or 36%.

The largest factor in the increase is income from our limited partnership investments, which was $28 million in this year's fourth quarter compared to a loss of $300,000 in last year's fourth quarter.

As well, average invested assets at cost were almost $1.2 billion higher for the fourth quarter of 2006 compared to the fourth quarter of 2005.

For the full year, net investment income was $629 million, compared to $523 million for 2005, that's an increase of 20%.

Similar to the quarter, our limited partnership investments contributed significantly to the growth, as did higher invested assets.

Everest held little in the way of equity securities in 2003 and prior and began increasing its equity allocations in 2004.

As of year-end 2006, the cost of our publicly traded equity securities was $1.3 billion and the market value was $1.6 billion.

Our equities represent now about 30% of GAAP net worth.

Total return on the equity portfolio was 10.2% for the fourth quarter compared to 6.7% for the S&P 500, and it was 19.2% for 2006 as a whole compared to 15.8% for the S&P 500.

Looking at the fixed-income portfolio, as of December 31, 2006, our tax equivalent portfolio yield was 5.3% compared to 5.1% as of December 31, 2005.

We were holding $1.6 billion of cash and short-term investments at December 31 and because the yield curve is so flat at present, we don't think it makes sense to commit the funds more permanently.

Total invested assets were almost $14 billion compared with $13 billion a 12/31/05.

The duration of the portfolio was 4.1 years and the average credit quality was Aa2.

Cash flows from operations were $142 million for the fourth quarter of 2006 compared to $75 million for the fourth quarter of 2005.

Absent payouts on catastrophe losses, operating cash flows were a strong $330 million for the fourth quarter of 2006 compared to $315 million for the fourth quarter of 2005.

In summary then, as noted in our earnings release, 2006 was our best earnings year ever.

We finished the year with over $5 billion in GAAP equity and book value per share of $78.53.

Our operating leverage is low with premiums to GAAP equity of 0.76 to 1.

We have worked hard to better position our book of business from a risk management perspective.

We continue to be a disciplined underwriter, and having strengthened our reserves for catastrophes, asbestos and the discontinued credit program, we entered 2007 with the strongest balance sheet in our history.

While we see signs of increasingly competitive conditions in many areas, we expect our 2007 results, absent catastrophes, will be quite good.

And with that, I would like to turn over to Joe.

Thanks, Craig, good morning everyone.

We are pleased to have earned an operating income of $818 million after tax in 2006, to have increased our equity by $1 billion from $4.1 billion to $5.1 billion, to have achieved an 18.7% ROE and to have increased book value by 23.4%.

Now onto 2007.

Let's start with January renewals.

Overall, we found the market to be much what we expected and were pleased with what we achieved.

With regards to Property CAT business, including retro, rates were up over 2006 January rates on U.S. business and steady for most CAT business outside of the U.S.

Many deals were significantly overplaced, demonstrating the buildup in market capacity from new companies, sidecars, surplus of established companies growing and perhaps an increased appetite on the part of all following essentially a loss for a year.

Whereas this buildup did not significantly affect January rates, no doubt it will have a future market impact, depending on losses.

Everest was able to write to the aggregates we had planned, given our superior ratings and established platform.

That was certainly not true for many others.

While discussing the CAT market, let me comment on the recent Florida legislation.

By doubling the amount of reinsurance coverage, the state is prepared to provide up to $36 billion worth of coverage.

The state will be largely replacing the professional reinsurance market.

Most Florida reinsurance CAT contracts are renewed in June or July.

Last year, Everest wrote about $50 million of Florida excess of loss CAT business.

I would expect that most of that business would not be renewed.

Going forward, there will be a knock-on effect with regard to retro business and national account CAT business as both will have greatly reduced exposure from the Florida homeowner market.

How homeowner writers will fare is less clear.

Certainly, their reinsurance costs will be significantly less.

However, their rates will be reduced by the state and Citizens will be a formidable competitor as it will no longer be required to have the highest rates, and, in fac,t will likely have the lowest rates as it is not required to buy reinsurance, pay income taxes or make a profit.

How all of this will shake out in the short and long term is unclear and will depend on evolving issues, certainly including future hurricanes.

We will visit with many of our Florida clients in the next couple of months to see what their new game plan is and how we can be of help.

Citizens will also be entering the commercial market.

We'll have to wait and see what this means.

As you know, we started an insurance platform in Florida last June and wrote about $20 million worth of business in the second half of the year.

We still expect good opportunities in 2007.

We will have to wait and see what competition Citizens presents.

Much has been set about this irresponsible legislation.

V.J.

Dowling has stated that Florida is playing Russian roulette, and I agree.

Clearly, they don't have $36 billion to pay out if needed or a clear plan as to how to get it.

Having said that, done is done.

They will be the reinsurer and largest insurer through Citizens for 2007.

Moving away from Florida CAT, I'm happy to note reinsurance has not been legislated away and replaced by structures with an inability to pay in other product lines in other states and in other countries.

On the casualty reinsurance front, January renewals were as expected.

Casualty reinsurance deals are spread well through the year.

On January 1 business, we renewed with most of our existing clients at similar reinsurance terms to last year.

Of course, our clients are faced with increased competition and finding their business being renewed at 10%-ish less rates than a year ago.

These reductions generally are passing through to reinsurers, whether the deals are excess or pro rata.

Some customers are keeping more net, but again, this so far has less impact on Everest, given ratings and relationships.

On international business, including Bermuda, we had a similar landscape on both property and casualty.

Insurance rates are edging down.

That in turn is inching reinsurance premiums, although terms and conditions are holding.

Some parts of the world, like Latin America, are holding more steady than others.

Our insurance operations should show growth for 2007, driven by our deal with CV Star which incepted last July; our Florida E&S commercial property facility, which also started in mid-2006 and some prospective deals that we currently have in the pipeline and hope to soon have online.

As always, we will remain a disciplined underwriting company, and that will be increasingly important going into 2007.

In summary, the market is changing to some degree in response to additional capital and excellent results.

Further, the Florida legislation is a new curve ball for our marketplace.

Nonetheless, given our diversification, clients, ratings and platform, I expect us to have an excellent 2007 and once again generate a quality ROE.

Thank you.

We'll now take any questions that you might have.

(OPERATOR INSTRUCTIONS).

Tom Cholnoky, Goldman Sachs.

Couple of questions, if I can.

Number one, just going back to Centrix, can you give us just -- you were obviously pretty comfortable after the third quarter that you had everything under control.

Can you give us a little bit more detail as to what actually emerged in the fourth quarter that caused you to take the charge that you did?

Sure, Tom.

I will have Craig start on that.

As we have looked at the results coming into the fourth quarter, we got more and better data as I mentioned in my comments, and that was largely due to our request.

And it appeared to us that there was a growing backlog in the claims area.

And as we got a better handle on that data, it became evident to us that the frequency of loss was going to be greater in total than we had originally expected.

We analyzed the data very carefully and concluded, as I said, that the ultimate frequency would be higher, and that led to the additional monies that we put up on the program.

Having said that, the inception to date underwriting loss we booked is something like $65 million.

Given the premium in the program and the length of the payout period, we would expect net investment income before tax in the $45 million range.

So we are looking at maybe an after-tax loss of $13 million, $13 to $15 million in total on this.

So while it's a significant charge for the quarter, it's not really significant to our results.

And in the overview of the program business where we have 22 active programs, it's not that big a deal.

Should we take some comfort that -- I mean, you have really scrubbed this pretty strongly, and the chances of any further erosion are pretty minimal?

That is our hope.

We have assumed frequency that is greater than the observed frequency in any month.

This program has been in operation since the middle of 2003, so some of the age coordinates are 2.5-3 years in at this point.

So we think we have put enough up.

Time will tell.

I think that is the most we can say.

Okay.

Joe, on your comments about the outlook for '07, obviously, there is loss of premium in Florida.

But given the opportunities you spoke about in insurance, should we still expect top line to be up in 2007, or will it be generally flattish or so?

I think when you put it altogether, Tom, I would not indicate that you should expect it to be up.

It will be a mixed bag, as you have already noted.

Insurance I do think will be up on the back of some of the new items that we have, and casualty reinsurance I think will be down a bit with underlying insurance rates going down.

Property is a little bit harder to peg.

We will be off as I noted in the Florida excess of loss CAT business, but there's some other pockets on the Property side that we expect to be up.

But having said that, when you do put it altogether, given that the market is generally speaking at the insurance level inching down, I would tell you to not expect growth in premium.

It will be a flat to down a bit, quite honestly, when you put it all together.

That just leads me to my last question, which is just leverage and capital management.

As you noted, that your premiums to surplus is at 0.76 to 1.

If you add another $800 million-plus to income -- $800 or $900 million to income in '07, your leverage is going to go even farther down.

And one would think that you might start entertaining the idea of capital management, given where the stock is trading today.

And I was wondering if you can comment on that.

Clearly, that starts to cause us to consider those options more so than before.

Craig, you want to add a little color to that?

Sure.

We are actively looking at a range of possibilities.

As you know, we raised the dividend late last year.

We have a 5 million share standing buyback authorization from the Board of Directors, and we certainly expect to discuss the topic more fully at our next Board meeting, which is in I guess three weeks.

So we will make appropriate announcements when the time comes.

Okay, great.

Thank you.

Matt Heimermann, J.P. Morgan.

A couple of questions.

First, you talked about Florida, but the one area you did not mention was your proportional business, which if as I recall correctly, even ex the pro rata business going away is roundabouts $100 million.

Can you just comment on how that potentially is impacted by Florida changes?

That is less clear, and you are right.

We do write pro rata business, and it's north of $100 million.

It's probably closer to a couple of $100 million.

That is where I refer to the business that we're going to have to pay visits to our customers.

Many of them I believe will still need pro rata coverage because they don't have the surplus to support the premiums that they are planning on writing.

There also are customers trying to figure out what their new game plan is, given that they're going to have lower reinsurance, but that they are unclear as to what rates they will be able to have in effect.

They are unclear as to what business Citizens will do and exactly how that will change their portfolio, what their attritional loss ratios will be and what their overall reinsurance needs will be.

My best guess at this stage of the game, and it's very early, is we'll probably write about the same amount of business.

But there will be 10 or 12 business calls that we make in the next two to three months to really get into detail with our clients who are just faced with this new development themselves and trying to figure out exactly what the '07 game plan should be.

But guessing at this stage of the game, it will stay about the same.

And then can you just elaborate on that a little bit in terms of -- of that pro rata business, is it all home owners, or is there some percentage that is commercial that perhaps is less affected?

No, it's all home owners business on the pro rata side.

We have our own commercial program that's part of our insurance operation, and we may have some national accounts that write commercial business, including in Florida, that we support.

But the business I was talking to you about, the $200 million-ish, is pure Florida home owners business done on a pro rata basis.

From a margin perspective, if I think about the buckets you gave - XOL, primary, quota share - relative to your overall property margins, is it fair to assume XOL lower pro rata, maybe a little higher primary kind of right in line with the averages?

We expect good margins on all of them, and of course in all cases, it is really related to hurricanes, so it's volatile.

But the margins on all three buckets have been, in the past year, the best that they have ever been.

I'm sorry to cut you off, Joe.

I was just -- more from the standpoint of as we think about how premium translates into earnings in the worst case, I just wanted to make sure relatively speaking, I was correct in kind of the assumption I made about relative impacts on margins.

So in other words, pro rata might be the biggest amount of premium in the pot, but perhaps actually generates a lesser proportion of the property book's profits than the XOL book in Florida, for instance?

I have to say, the profits we have generated from our pro rata or proportional covers in Florida were extremely good.

And were they equal to the excess?

In some cases, they were.

So I wouldn't give it up and say the margins will be substantially down.

They will be down, because the exposures will be down.

I suspect that once this is fully integrated into the system down there, a lot of the heavy exposures on the coast, whether it be Tri-County or others, will shift to Citizens and there will be a better spread of business in the programs that we do write.

Can you get more specific specifically with the aggregate that perhaps is freed up by the $50 million, XOL, going away?

Just -- particularly in light of this whole issue of what is happening with your capital?

You could probably work backwards from a 20 rate online to multiply by 5 on the 50, and that gets you into the ballpark.

But we'll have to see where and how that can be reallocated.

There will still be some excess of loss buying done by the marketplace, but not nearly as much as before, given the state is replacing us.

Getting back to your other question, clearly in a no hurricane year, the excess of loss business is going to be almost all profit and there's still going to be an attritional loss ratio and an expense ratio on the pro rata business.

But when you start getting into average hurricane years, as Tom noted, we get some pretty good margins in all three categories.

I appreciate it.

Thank you much.

David Small, Bear Stearns.

Just a quick question -- on the other programs outside of Florida, the two of them, the ones in New York and California, are they progressing as expected relative to what you've said on previous calls?

Well, I think the one you're referring to in New York is a contracting program that we have had in place for about a year now, and that has been going very well.

We expect to write about the same amount of business in '07 that we did in '06, but the program is a little bit south of $100 million and it's an excellent program.

California, our operation out there, the main product that we've had out there is the California comp, which we write on a direct basis.

And I guess we wrote $200 million-ish in '06.

We continue to see rates going down in California, so I would expect that we will write a bit less in '07.

It's hard to guess exactly how much, maybe in the neighborhood of $150 million.

But that market continues to get increasingly competitive.

The Star program, that kicked in in the third quarter, is that now up to the run rate where you would have expected it to be?

No, the Star program we originally estimated would be about $250 million on an annual basis.

We did write in the second half of the year roughly half of that, $125 million.

We still think that we'll write about $250 million for a full year of 2007, maybe a bit more.

So that's tracking with exactly what we originally thought.

And then just also, could you just give us a little detail on the 2005 adverse developments in the storms?

Which storms is that from?

Is that from the Marine and Energy piece that you kind of no longer write?

And I guess how far are the cedants from closing up their books?

Let me take that.

It's a combination.

Some of it has come from the Marine side on the Gulf, which we have stopped and reduced writing a great amount of that business.

There is some development also, as Craig mentioned, on our proportional business, and some excess layers.

I think we are near the end, as Craig also indicated.

I don't see that much more development coming from that.

Okay, thank you very much.

With respect to the storms, it's from all three.

And just to give you an idea what we did besides assessing loss reports from the ceding companies, we looked at the development patterns of no less than a dozen major storms over, I don't know, the last 15 years I suppose, and looked at what happened at the same age cohort as where we were with these storms and concluded that -- and we're talking about reported loss development, and that is our ceding companies reporting to us.

And we concluded that about 3% from here on out would be reasonable, and that is what we have up in IBNR at this point.

Having said that, the range we saw was from a small amount of downward development after the sixth quarter to up as much as 8%.

So it's quite volatile toward the end of the tail, but looking at the data -- we thought -- we think that where we are is a good place.

And then just the last question I would have is, you have made a lot of changes in the book of business over the last year, and maybe -- could you just maybe compare the types of business you wrote in the book last year at 1/1 versus this year at 1/1 in terms of -- did you write more retro this year versus last year, and issues like that?

Are you talking about the property portfolio?

I guess the property portfolio, as well as the casualty portfolio, I guess geographically as well.

On the property portfolio, we said before, we took a difficult stance on many of our accounts and reduced our ultimate exposures probably by a third of what we had before from limits exposed on property in the U.S.

We changed terms and conditions on pro rata accounts where the downside risk is limited greatly, as well as increased the margins on each and every one of them.

On our Marine portfolio, we decreased our writings in the Gulf substantially and capped it at $25 million for any given loss or an event.

As respects the Casualty side, Casualty has been pretty stable the last couple of years for us, so I don't see major changes in our portfolio.

Just to clarify, a lot of the changes Tom was talking about on the Property side was what we did in 2006.

And when it came to January 1 in 2007, we did not see the need to make continued major changes to the property book.

In most areas, we kind of renewed as is.

On the retro side where we did get into the market in a meaningful way in '06, we actually increased the amount of retro that we wrote in January 1 and are very pleased with how that market was standing up.

We still found that we could pretty much get the terms that we wanted, and they compared quite favorably to what we had achieved in 2006.

So a bit more aggregate on the retro side, but otherwise, the Property market was pretty much the same as we had transformed it in 2006, and the Casualty side was very stable in terms of terms and conditions and reinsurance rates.

Thank you very much.

Vijay Misquith, Credit Suisse.

On the Centrix transaction, could you let us know when the policies run out, [as in] when does your liability on the policies run out?

Most of the loans were five-year loans.

I would imagine that the average loan at this point would be about 2-2.5 years.

I would guess about that, yes.

The program ceased mid-2005.

So you have on there, about three years left on the loans approximately?

Yes.

Okay, that's great.

And in terms of your Florida exposure, and I just need some clarifications because you threw out a few numbers there, $50 million CAT excess of loss for your Florida program -- is that correct?

And the second piece is, you also have a $200 million pro rata business only for Florida home owners.

Is that also correct?

That's correct, both are correct.

So the $50 million should -- loss should go away, but the $200 million you are saying, you might have some opportunities to maintain it at the same level in '07 as in '06?

That is correct.

And virtually all of that business is renewed in June or July (MULTIPLE SPEAKERS) pockets.

So you're saying that, even though Citizens might take some more business from the primary insurers in Florida, you might still find some additional opportunities in some other areas in Florida home owners market so that the numbers stay the same?

That's correct.

The early discussions that we've had with our clients, they are kind of giving it a mixed reaction to all of these changes.

And they know that Citizens will be more competition, but in some cases, they think that Citizens may write business that they don't want and they may still be able to write business that they do want.

And certainly, Citizens cannot do everything.

When you throw onto that, that they will have much lower reinsurance costs, and of course add to that, they're a little bit unclear as to what rates they will be able to have in effect, it's fuzzy, but a lot of them remain optimistic that they can revise their game plans and still write business very favorably going forward.

Early days, a lot to be done on that front, but yes, we are still hopeful and they are still hopeful that they can write a profitable book going forward.

And the -- so the limits I would assume is below the $3 billion offered by the cat fund, correct?

You lost me on that one.

All of the pro rata book of business, I assume that the business you're writing is below the --.

Well, it would be dollar one.

We would be writing business with them, sharing proportionally.

We would also share in whatever reinsurance coverage they would purchase.

Deals have been done on a net basis.

So again, if they get more affordable reinsurance because the state is providing it at a lower rate, then we benefit from that, just like they would benefit from it.

It is below the Florida CAT fund.

Right, right, right -- okay, fine, exactly, that's what I was getting at.

And finally, on your Accident and Health business, I think you've been cutting back on that for the whole year.

Is that lastly done, or should we expect more of that to come in '07?

I think it will be steady.

The environment is still kind of rough, especially for the medical stop loss business, which had been the big product in that area.

But we have done so much cutting in the last three-ish years that I just don't think there is much more cutting to be done.

So I think that will be level '07 versus '06.

Alright, thank you.

Jay Gelb, Lehman Brothers.

I wanted to just touch base on the European winter storm loss and potentially $20 to $30 million.

Given that it's early days, how comfortable are you with that range, and what is the potential for that to rise?

That's an early estimate.

We have talked with our people in London and in Bermuda as well.

They have talked with some of their ceding companies, and it's a very, very rough estimate.

It's very early.

And as I said, it could be more, it could be less.

And right now, I think that's the best number we can put on it.

Also, let me note that, in continental Europe, we have been shrinking our exposures there due to what we believe to be insufficient pricing.

So I think a combination of what Craig said, to recap, both that of London, Brussels and Bermuda, as well as our own reduction in writings there, is the best estimate we can make at this point in time.

And there is a tremendous amount of range of possibilities here.

Until that settles down, I think we are -- would be in a better position then.

I think the main thing is, we don't see it as a major item for us.

Okay.

And then more broadly from a reserving perspective, do you typically look at the adequacy of reserves each quarter, or is that more of a fourth-quarter type event?

I guess what I'm asking is, is there anything else coming up that we should be aware of from a reserve adequacy standpoint, in terms of your reviews?

I will start, maybe Craig wants to add a little bit more color.

It is something that you do every quarter.

Having said that, there are some routines that we go through at year end in greater length than we do for the other quarters.

But this is something that we really are trying very hard to post the best numbers we can at the end of each quarter.

And certainly at year end, we are doing even a more comprehensive review.

In terms of the exposed limits left on the '05 hurricane losses, how much is left there?

I don't think we have an exact number for you on that.

And, again, some of it's pro rata, so it's not really just all excess of loss that has a fixed limit.

Finally, on the partnership income, that was a great result in the fourth quarter.

It's a lumpy result.

Any expectations for 2007 or overall for investment income in terms of how we should be modeling that?

That is a hard one.

It's going to stay lumpy from one quarter to the next, and maybe even to some degree from one year to the next.

So I don't think I have any guidance to offer you on that.

Your best judgment.

Should we look at the -- is the best way to do this to look at the growth in the average invested assets, and then think about what type of yield we want to put on that?

Is that how you look at it?

I think that's reasonable.

I think we make a planning assumption for the limited partnership investments, and I think that's around 9%, not that you should use that number, but that's what we use.

And what's the invested base?

I think about $440 million.

The invested assets for the limited partnerships?

Correct.

And again, it's very lumpy, so what we use for planning purposes is one thing, and it could be significantly greater or lesser.

Of course.

And then, is the capacity for share buybacks, is looking at past times when you've used written premiums to shareholders equity, when that got pretty low, is that a good indicator of how much buyback potential there is?

I think we need to discuss it with our Board of Directors and we need to come to a landing on that, and then we can make an announcement.

I don't know -- in our current situation, particularly with respect to our ratings, where we stand, the level of the business, our earnings expectations -- that we can give you a number right now.

Premium to surplus is really a very, very simplistic ratio, and I think years past, it was used more than it is today.

Companies look at CAT exposure and risk and opportunities and investment possibilities; it's certainly more complicated.

But having said all of that, we understand that the capital is growing quite nicely and the top line is not -- that certainly starts to make us want to look at capital management more so.

Okay, thank you for the answers.

Steven Labbe, Langen McAlenney.

Two questions.

Number one, can you perhaps size the Centrix charge of $80 million relative to how large the reserve balance is for this book of business on your balance sheet today?

And then the second question -- I'm curious as to your thoughts on the size of the CAT excess of loss market in Florida relative to that $50 million that you would expect to not renew.

How big of a part of the market do you think that is?

And are there enough opportunities in the excess of loss CAT market outside of Florida to replace that business?

I will start with the second part, and then we'll double back to the Centrix.

I've seen estimates of anywhere from $1.5 to $2 billion in premium as to what some thought was the reinsurance premiums written for the state of Florida CAT business.

And so that is what they think will largely be loss.

There may be some continued buying for the 10% co-insurers for a second event below the CAT fund, maybe even above the CAT fund.

But a good chunk of that $1.5 to $2 billion will be lost.

So I would say, the 50 million that we were talking about as part of that $2 billion-ish.

Whether or not there are some other opportunities remains to be seen.

Florida was a big part of the CAT world.

It was throwing off some very healthy rate on lines. $2 billion was a big chunk of the worldwide CAT premium.

And lots of times in other pockets of the world, we pretty much were doing what we wanted to do to begin with.

So I would say that the likelihood is, there's no other simple way to get another exposure from Florida to offset that.

As far as the Centrix --.

With respect to the first question, and that is the level of Centrix reserves in total, we think it's in the neighborhood of $200 to $240 million of reserves, including the $80 million.

Is that gross or net, or are they equal?

Well, it's net.

Ultimately, we -- it's net.

Joe, do you have a guess as to how big that $2 billion of Florida market is relative to the global CAT market?

That's a tough one.

Certainly, Florida is a very important piece of it.

I might guess something -- well, Tom is kind of indicating to me 10%, but in would thought maybe even a little bit higher than that, maybe more 15%, possibly even more.

Florida had the highest rates online because of the fact that it had seven hurricanes in 2004 and in 2005.

But it's a pretty big chunk.

Okay, thanks a lot.

That is all the time we have for questions, so that will conclude the question and answer session.

I will turn the conference over to Beth Farrell for any additional or closing remarks.

Thank you for participating on the call.

Certainly, if we did not get your questions, please feel free to call myself or Craig Eisenacher.

Again, thank you for joining us.

That does conclude today's conference call.

Again, thank you for your participation.