Everest Group Ltd (EG) 2007 Q1 法說會逐字稿

Good day everyone.

And welcome to the First Quarter 2007 Earnings Release Call of Everest Re Group, Ltd.

Today's conference is being recorded.

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

Please go ahead.

Thank you.

Good morning and welcome to Everest Re's First Quarter 2007 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 disclosure 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 risk.

As you know actual results could differ materially from current projections or expectations.

Our SEC Filings have a full listing of the risk that investors should consider in connection with such statements.

Now let me turn the call over to Craig.

Thanks Beth, and good morning.

I'll briefly summarize our results then turn the call over to Joe for comments on the market.

After that Joe, Tom and I will take questions.

Our operating and net earnings are single quarter records for us.

Operating earnings were $268 million or $4.13 per diluted share which is a 70% increase over the first quarter of 2006.

Net income including realized capital gains and losses was $298 million or $4.59 per share up almost 80% compared to last year's first quarter.

Our annualized operating ROE was an extremely strong 21% compared to 16% for the year ago quarter.

And our annualized net income ROE was exceptional as well at 23% versus 17% for the same period last year.

So all in it was a terrific quarter.

Our gross written premium at just over $1 billion was lower than in last year's first quarter by 3.6%.

We experienced some growth in Bermuda but gross written premium declined modestly in our other segments compared to last year.

Since Joe will walk you through the segments and their outlooks in some detail as soon as I finish, I won't comment about them any further at this point.

Our combined ratio was 82.4% for the quarter.

And the accident year and calendar year ratios are very close as we experienced net favorable reserve development of just about $8 million, which was a little less than 1 point.

Catastrophe losses for the quarter coming from Carol and a flood in Indonesia net of reinstatement premiums were $23 million.

These items added 3 points to the combined ratio.

The combined ratio for the reinsurance operations was 73.4% for the quarter down by 22 points from last year's first quarter.

Besides the accident quarter results being excellent we experienced $51 million of favorable development on our reinsurance reserves.

Which aided the combined ratio by 6.3 points.

We reported a combined ratio for the quarter of 116.6% for our US insurance operations.

Up from last year's 89.1%.

The increase is the result of a $60 million adverse loss development charge we posted on the Centrix Credit Insurance Program, which added 31 points to the segment's combined ratio.

Exclusive of this charge the unit posted a very respectable combined ratio of 85%.

Operating cash flow for the quarter was $162 million, up slightly from $160 million reported in the quarter a year ago.

Generally lower net pay catastrophe losses in this year's first quarter were offset by higher paid losses in other lines and higher income tax payments.

Cash and invested assets finished the quarter at $13.9 billion, about even with the year end balance and up $793 million from a year ago.

Our net investment income was $156 million up $11 million or 7% compared to the first quarter of last year.

The asset growth drove the increase in investment income as the pre-tax yield on our invested assets was 4.6% in both periods.

Duration of the portfolio fell again to four years as we continue to build the short-term portfolio since the yield curve remains inverted after ten years.

You will note on the balance sheet that we have a new line for our equity securities entitled Equity Securities At Fair Value.

This is because we have early adopted FAS 157 and FAS 159 related to fair value accounting for the equity portfolio.

The change has been recorded as a cumulative adjustment, that is if you look at the equity roll forward which is on page three of the financial statements, you will see we reclassified $250.8 million between other comprehensive income category and retained earnings.

Going forward, we will be reporting changes in the fair value of these securities as realized gains and losses as required by the FASB standards.

Moving to the liability section of our balance sheet, our net loss reserves have moved down by $124 million since year end, principally as a result of $141 million of payouts against our catastrophe loss reserves for the '04 and '05 storms.

Since year end we have doubled our quarterly dividend to $0.48 per share and we've repurchased 2.1 million of our common shares at a total cost of $200 million.

The financial statement reflects 1.9 million shares or $181 million of these repurchases since $19 million was repurchased subsequent to the close of the quarter and is not included in the 3/31 financial statement.

The average price paid was $95.32 per share or about 1.16 times book value as of the end of the quarter.

As noted in our earnings release, the unused portion of the authorization stands at 2.9 million shares.

Given our strong capital position, strong core earnings and fast pay back on repurchases at this level we believe these actions are an excellent use of the excess capital we're generating at present.

And are a significant benefit to all of our shareholders.

We ended the quarter at $5.2 billion in shareholder's equity, up almost.

$90 million since year end despite the significant share repurchase activity.

More importantly, book value per share climbed 4.6% in the quarter to $82.18 from $78.53 at December 31.

So as you can see maximizing shareholder value is and will remain our key objective.

Now I would like to turn the call over.

Good morning.

Thanks, Craig.

We are pleased to have earned $298 million in net income for the quarter, to have achieved an ROE of 23.3% on net income, and to have increased book value per share by what translates to an annualized increase of 18.4%.

I would like to offer some commentary on trends in our market and the strategies we are employing in response to these trends.

I will begin with our international property and casualty reinsurance book.

This sector was roughly 32% of our worldwide book in 2006.

It includes our operations in the U.K., Continental Europe, Latin America, Asia and Canada.

Approximately 70% of this business is [short tail] and 30% casualty.

So far we have experienced minor changes in the reinsurance terms in 2007.

But our business, given the structures, will largely be influenced by underlying changes at the insurance level.

Insurance rates have generally continued to decline on the order of 5% to 10%.

Although this varies greatly by sub class of product and by country.

In most cases, coverage and deductibles have not eroded.

Results from recent years show exceptional returns.

So we continue to believe today's market will produce reasonable returns.

The fact that we are a long established player on the international market with great long-term client relationships, terrific ratings, and highly regarded employees stationed around the world continues to be a great advantage for us.

Accordingly we expect our premiums to be level in this sector relative to 2006.

Next I will discuss our insurance operation which represented 22% of our business in 2006.

All of the business in this segment is written in the U.S.

Roughly 95% of the business is casualty and 5% is property.

Commenting on the components of this book, first, California workers comp is expected to continue to decline as we continue to see increased competition.

Both in the form of reduced prices and higher commissions.

This segment was 20-ish% of our insurance premiums in 2006.

And we believe it will be 15-ish% in 2007.

The current Workers Comp Council's recommended rates are one-third of the rates in 2003 when rates were at an all-time high.

Now plan costs are down from the impact of legislative changes, but clearly not down as much as rates are down.

The market is one where with proper selection, underwriting and claims handling a reasonable return can be expected.

But it is not the market that it was.

Second, our workers comp book outside of California will show some growth as the classes we have targeted continue to meet our pricing requirements.

This sector will become 10-ish% of our insurance book.

Third the Starr account continues to come in as expected and should be 25% of our book in 2007.

We are, however, beginning to experience increased market competition both on the public entity business and contractor liability.

Contracting is further impacted by fewer construction starts.

The other half of our insurance business is quite varied and specialized and includes professional liability for accountants, for architects and engineers, and for doctors.

A program for security guards, a landscapers program, a New York contracting program, an environmental program and our Florida property program.

We also expect to add one or two new programs to the mix before the year is out.

Generally we are seeing more competition across the board.

As a rule the more specialized the program, the better rates are holding.

Also, the smaller the individual premiums the better rates are holding.

It is my expectation that we will have modest growth in total for our insurance operation in 2007.

I'll move on to our U.S.

property reinsurance sector which represented 20% of our business in 2006.

I've included in this category the U.S.

property reinsurance business written out of our Bermuda office.

Let me start with the Florida specific business which we had much discussion on last quarter.

Florida business was roughly 6% of our worldwide book, so roughly 30% of this sector in 2006.

The vast majority of our premiums were pro rata.

We have recently visited with many of our clients and are much more hopeful that they will be able to continue to write a profitable book of business.

First, we are now hopeful that they will not have to adopt rate decreases that represents significantly more savings than what they will actually receive from switching coverage to the Florida hurricane catastrophe funds.

Second, at least for now, Citizens is writing business that many of our clients did not want to write.

Accordingly, they have not significantly invaded our clients' portfolio.

Third, many of our clients will continue to purchase pro rata.

I currently believe our Florida premium will be the same in 2007 as 2006.

Although it is still early, remember, most of these deals renew in June or July.

It currently appears more cat excess of loss will be purchased from the professional reinsurance market than I thought in January.

Nonetheless, it will still be much less than last year.

But for us, this was a small part of our business.

The other 70% of this sector is as follows.

Roughly 30% is composed of quota shares that we lead for some specialized accounts both personal lines and commercial outside of Florida.

I expect these accounts to show some growth for us in 2007.

Roughly 15% of our business in 2007 will be retro business.

Somewhat ahead of the 2006 numbers.

I've included this in the U.S.

and property account because much of it is written out of the U.S.

But most of this business has worldwide coverage.

We meaningfully entered the retro market in January of 2006, but we held back some capacity for mid year 2006 which proved to be the best course as rates continue to firm.

In 2007, we front loaded our writings to January.

This also proved to be the correct strategy as we currently are seeing meaningful rate reduction in this area driven by increased competition and exposure reduction from the changes in Florida.

In 2008, we expect to transition much of this aggregate to the more traditional and stable catastrophe excess.

The remaining 25% of this sector is national excess of loss catastrophe, risk excess, and individual direct and facultative accounts.

Here we are experiencing continued competition and rate decrease on the order of 10ish%.

Deductibles and coverage are generally holding.

Adjusting to the marketplace we expect premiums will be down somewhat for this subset of our book.

I expect premiums to be modestly up in 2007 relative to 2006 for our overall U.S.

property reinsurance sector.

Although as noted, some pockets will be up and some pockets will be down.

I remain pleased with the overall composition and terms of this portfolio.

Next I will address our U.S.

casualty reinsurance sector which represented 20% of our business in 2006.

Once again I have included in this category the U.S.

casualty reinsurance business written out of our Bermuda office.

This includes business written on a treaty and facultative basis.

Classes of business written include directors and officers liability, professional liability, general liability, umbrella, medical malpractice, workers comp and auto liability.

Results in this area have been excellent in recent years.

As a result, so far in 2007 we have witnessed increased competition in the form of lower rates and more commission.

We have also seen customers looking to keep more business for their net account.

Underlying insurance renewals were being written earlier in the year at 5% to 10% off.

More recently we had witnessed greater decreases and we have become somewhat concerned about the trends.

We have also seen some new reinsurance entering this sector and it sometimes appears to us that they are not driven by experienced underwriters capturing profitable opportunities, but rather less experienced underwriters motivated by the lack of other opportunities.

Given these conditions, we do not expect to write much new business in this sector but are generally content to stay with the existing partners that we have.

We expect to write less business in this sector in 2007 versus 2006, perhaps on the order of 10% to 15% less.

The last component is our specialty book which represented 6% of our 2006 book.

This includes our marine, aviation, surety, and accident and health business.

Here we see some additional opportunities on marine, expect to do less aviation as we see rates dropping to often less than adequate.

And anticipate surety and accident and health markets will be much the same in 2007 as in 2006.

Putting it all together, our specialty book should be stable.

In summary, I like the current portfolio which as always we continue to modify as the market changes.

I expect in grand total our top line to be modestly off for the year as it was in the first quarter.

I also expect our quality portfolio to generate a quality return for the year, as it did in the first quarter.

Now, Tom, Craig and I will take your questions.

(OPERATOR INSTRUCTIONS) I'll pause for just one moment to assemble our question queue.

We will first go to Tom Cholnoky from Goldman Sachs.

Good morning, everyone.

I have two questions.

Number one, Craig or Joe, could you give us a little bit more color on what changed in the credit program that led to the additional 60 million of reserve strengthening?

It seemed as though when you had scrubbed this book in the fourth quarter you felt very comfortable that you had taken a hard look at default rates and what not.

What gave rise to this additional reserve hit.

And then I've got a follow-up.

Okay.

Thanks, Tom.

What changed with respect to Centrix.

It may seem like three months is a short time period over which to develop such a different view of the ultimate outcome on this program.

But during the quarter we obtained an enormous amount of additional information.

This is because the backlog of unreported claims was almost 6000 at year end and it's now less than 500.

Now the backlog represents claims that we know are in process, but we don't really have any information on.

Such as we don't know what origination month they belong to.

We don't know how much they are.

We don't know when they're going settle, et cetera.

So the remaining work needs to be done on completing the claims before they get reported to us.

So as of the end of March, we had 46,000 reported claims.

An increase of 30% from where we were at year end.

So we had a lot more data to work with.

And I suppose I should put the covered portfolio in perspective on this.

We insured about 180,000 loans originally and they were insured between July of 2003 and August of 2005.

The loans were about evenly distributed between five year and six year maturities.

On average they are 66 months in length.

The oldest loans are now 44 months old and the youngest significant group of loans is only 19 months old.

And the average age of the portfolio is 29 months.

Therefore we don't have a single group of loans that is run from cradle to grave, if you will.

And all of our analysis has to be done by extrapolation.

Our technique for analyzing the experience and projecting it changed significantly between year end to where we are now.

As of year end we attempted to project experience to ultimate but because of the thinness of the data at that point we principally relied on ultimate default projections based on the aging of the portfolio at the time.

We looked at experience as much as we could.

The experience was fairly thin and spotty.

It wasn't necessarily consistent.

And we compared the two methodologies.

As of the end of March, our actuaries were better able to analyze the default behavior and the severity of the losses through time, by origination month, by age of the loan, if you will.

Extrapolate the data and build models to project ultimate.

Net our process this quarter involved developing a range of possible outcomes and selecting an amount that we believe is highly likely to be sufficient to cover the ultimate liability.

I guess I would like to add at this point that while we posted a reserve addition for the quarter, the rest of our business, and this is programs and reinsurance, produced an even larger redundancy than the deficiency we saw here.

So I think that while we generated a lot of disclosure about this particular situation, we need to keep it in perspective.

It was and is a small part of our business.

We took a calculated risk.

It's gone about as badly as one could imagine.

Maybe worse than one could imagine.

And still we have absorbed it in stride and our business is performing at record levels in the aggregate.

If there's any more questions on that -- I can --

I'm sorry.

I guess I have maybe a few follow-ups then.

All right.

One follow-up is of the reserves that you have up there in this credit program, is there a concept of IBNR in here?

Or kind of a --

Oh, absolutely.

There is?

Totally Tom, reserved to ultimate

Okay.

The chances of getting nicked again in future quarters should be somewhat minimal?

That's what we hope.

That's what we plan for.

I guess my second question, Joe, has to do with your buy-back which obviously we applaud.

Given the fact that you're talking about flat to slightly down premium volume for the year and assuming the normal cat year you could make from $800 to $900 million this year.

Would that in your view be available to you to buy back stock?

How should we view your buy back?

Is this just a one-shot deal?

Are you committed to this on a longer term basis?

Well we're committed to proper capital management.

So, no, you should not look at this as a one shot deal.

Having said that, Tom, we are not providing guidance as to exactly what we plan to do since that is something that we ourselves will continually decide and evaluate as we move through the year and continue to take a look at the potential business opportunities.

Continue to take a look at the surplus needs that we have.

But having said all of that, yeah, we were very pleased to buy back 3% of the stock in the first quarter.

Okay.

Terrific.

I may check in again later.

Thank you.

And now we'll move on to Jay Gelb from Lehman Brothers.

Thanks, and good morning.

I was hoping you could walk us through what your thoughts are on the capital structure of the company.

We've seen a number of new companies come out with hybrid equity and then using that to buy back stock.

That's the first question.

And then the second one is one of the big primary commercial insurers last night was potentially taking a more aggressive stance in trying to close the Bermuda tax advantage in Congress this year and I would be interested in your thoughts on that.

Okay, on the first issue I think Joe pretty much hit upon where we are, with respect to our capital plans, and that is where we are attempting to continually right size our capital, if you will.

And certainly we continue to evaluate what's going on in the debt markets.

The debt markets are very attractive at present and certainly we haven't ruled that out and as I mentioned we are evaluating doing something along those lines.

I really don't expect any changes in the tax situation with regard to Bermuda.

Certainly there are people that are advocates for change and many that are against change.

But there is nothing right now, I think, where its clear that there will be change to me.

Can you give us just a little more color on that, Joe?

Why is that?

Well, you know, I'm not going to tell you that I know exactly what is in everyone's mind in Congress and the Treasury department at this point.

There clearly was a big push to make changes, perhaps three or four years ago, and that gained some momentum.

But ultimately that was seen as not the right way to go by both the Treasury and by Congress.

It just seemed to me as if there was more focus on it and more study done on it at that point in time than what has recently been done.

Where things develop from here, I can't again tell you I'm more expert than anyone else.

At least with regard to what was done a few years ago, the ultimate conclusion was to leave things more or less the way they were.

Okay and then finally on the tax rate, 15.3% on an operating basis in the first quarter, what is your view in terms where that could come out in the full year of 2007?

That basically would be our estimate for the full year, 2007.

As you know, we are booking to our expected tax rate for the full year.

Now if our view changes during the course the year, obviously we'd change that Basically the reason that it's up in the quarter is underwriting results were very, very strong.

The Kyril loss was all offshore.

It didn't generate a tax deduction.

Okay, great.

Thank you.

Now we'll go to Vijay Misquith from Credit Suisse.

Hi, good morning.

Good morning.

Your accident year combined ratio is really low this quarter.

It was about 81% and close to 84% to 86% last year.

Was there anything special happening this quarter and should we use this quarter's accident year combined ratio as the way forward for the next -- for the rest of the year?

Tom, you want to address that?

Well, the first quarter we had an excellent property time.

And that was the driving force for the first quarter.

And the total results.

Most of the other operations had very good results.

But the property was the driver without any cats, really helped the quarter.

Property was quite good for the U.S., exceptional for the U.S.

And same for Bermuda property and even international property.

So it was a uniquely terrific quarter for the property business.

I would not tell you to use this kind of combined as the going forward expected combined for our business.

When you get into a diversified worldwide book like we have, 82 is good as it gets.

And I do not think you should use that as the expected number going forward.

Plus, as we indicated both property and casualty, we were seeing increased competition and rate decreases at the insurance level and to some degree at the reinsurance level.

So we expect to continue to do well and generate a very good ROE in subsequent quarters.

We look at this as an unusually terrific quarter.

Okay, the FAS 159 I believe Craig mentioned that it will have to record the realized gains and loss of each quarter.

That will not be reported as part of operating earnings, will it?

Yes, it will.

So it will be shown as part of operating earning, correct?

For the equity, you are talking about the equity portfolio?

Yes, the $1.7 billion that it moved from market value to fair value --

Oh, you mean the one time adjustment?

Right.

That's a cumulative adjustment.

If you go back and look on, I believe its page three of the financial statements, see where it got reclassed from other comprehensive income category to retained earnings.

Then going forward, changes in market value will go through realized gains and losses.

In the income statement.

But then when you actually report earnings, you will x it out because it's realized correct, so you won't show it as part of operating?

I wouldn't.

I mean, you all are the analysts and you can do it the way you think makes sense.

We have a $1.7 billion equity securities portfolio.

And it's our objective to earn a total return on that over time, and a total return that is greater than what we are going to earn on bonds.

If you were just to pro forma that at the 4.6% or 4.7% that we are earning on the portfolio that's a significant amount of operating earnings.

Yes its going to be choppy.

It can be up some quarters and down some quarters.

But we would certainly expect over time for it to be greater than what we earn on the bonds.

You need to take that into account however you do.

I wouldn't exclude it all together.

Okay.

That's great.

One last question on the retro.

There were some comments last quarter by some players in the retro market that the market was softening.

I was a little surprised that it increased your exposure retro.

If you could add some color on that, that would be useful.

We were quite pleased with the retro market in January.

And as I noted, really, the bulk of our yearly expected writings we completed in January.

We have seen subsequent to January some softening.

And, of course, shortly after we wrote the business January 1, there were changes in the Florida law which quite honestly will benefit us and the retro that we wrote because we will have much less exposure on that worldwide book to Florida losses than we had anticipated when we wrote it just a few weeks earlier.

With less opportunities in Florida for cat writers and retro writers and with building surplus and many Mono line companies looking to do more, we have as time has gone on subsequent to January 1, seen more competition and we expect that trend to continue.

Now we're not particularly looking to write a whole lot more for the remainder of this year.

Unless a deal comes to us that is particularly terrific, we probably won't.

We are kind of filled up with what we wanted to fill up with.

Looking forward with, and assuming there are no losses and certainly different ball game if there are, looking out to 2008 by the time we get to January of 2008 I expect the retro market will look very different than January of 2007 and of 2006.

And we expect if that's the case we will do a lot less business.

And as I said, we will take the aggregate and probably look to transition it into a more traditional cat excess of loss of book of business.

So retro was kind of a unique opportunity for us.

It's looking to us now like it probably is going to be a two year opportunity.

Barring losses, it kind of played out the way we expected it to from beginning to end and we were pleased with the strategy that we employed.

Thank you.

We will now move on to Matthew Heimermann from JPMorgan.

Good morning.

Just a couple cleanup questions, I guess.

First, can you just remind us what the outstanding net reserves are for Centrix and just what, and the split case in IBNR and also maybe the premium.

I don't know that I have that at my finger tips but I can get it to you though.

We will get back to you on that.

That's great.

The next question I had was, your questions on casualty, Joe, can you maybe break that down by what's happening U.S.

business thats transacted in the U.S.

versus Bermuda and also maybe size of cedant because some of the commentary I've been picking up is exactly that.

But I wondered given that there is maybe really only six or seven true U.S.

based casualty writers if that -- If there is any variance between some of those factors.

Give us a little bit more color on your question?

Really, if you talk about the changes in the casualty, your market you are seeing in the down tick and the fact that you talk about new competition.

I guess one of my premises is that part of the reason casualty pricing has been so stable the last couple of years is really there is a lot fewer companies operating in the market, particularly of your size.

For example, so I guess I was curious when you talk about new entrants coming in, is -- are they more or less attractive to certain cedant based on those cedant's size for instance or in differences in credit appetite, for instance, as well as where the business is transact.

I think you are correct that on -- in the last few years with regard to casualty reinsurers, U.S.

casualty reinsurers, there really were only a few of us that were experienced and take meaningful positions in that business.

In that sense there wasn't a staggering amount of competition and I think again it was people that were quite experienced.

What I was referring to is we have a lot more companies today, reinsurance companies and a number of companies were born in the last few years.

And where as most of them initially went into the catastrophe business, property business, certainly a few have decided to diversify.

They are not necessarily -- in fact they are not casualty leaders.

They certainly have an increased appetite and many of them suddenly to do more business.

All of a sudden in terms of the number of players, there are more -- you are right, most of them don't have the same credit ratings and credit quality as the established players do.

That may mean that they have to post LOCs or do other things to satisfy the credit needs of the client.

Having said that, with clients putting out less business and with more mouths looking to kind of access that business and with underlying rates going down, particularly in casualty insurance sectors that are kind of large account and volatile accounts like umbrella, D&O, the type of thing where people buy reinsurance.

You start to put all those vectors together and it starts to come out for a tougher situation for us.

So we are being more conservative going forward.

As I said, not particularly looking to do new and different deals, staying with the people that we know, like and trust and they know us and trying to stay on the right deals.

So that market just has a few things going for it that kind of works against us at the end of day.

And we are concerned about underlying insurance casualty rates, especially in the bigger premium items.

Let Tom make a few comments.

Success breeds competition.

And the market for casualty has been pretty good the last three years.

And the rest of the market has been good equally.

The cats and the marine markets.

As the cats has and marine markets, as I've just said, starts getting a little more competitive, they look for other areas that have been equally as successful if not better and we see the competition continuing.

Now, the competition is two-fold.

Not only the new players in the market who are looking to write some of that casualty business but you also have competition on part of the ceding companies keeping much larger retentions or not buying any reinsurance at all right now.

The overall market is shrinking simultaneously.

That's fair.

If there are two lines of business where you probably wouldn't mind going back, umbrella and D&O are probably at the top of the list?

Even prior to these changes?

That's correct.

The other thing was just on the underlying loss ratio -- or the ex-cat and development loss ratio this year.

You completely appreciate that you don't want anybody to annualize that.

But with thinking about the premium changes you are anticipating, is it fair to expect the business mix shifts a little bit more short tail so net-net there might be less pressure for upward movements over the short-term?

I don't know what you mean by the upper movement.

You are right, there is a subtle shift going on to shorter tail.

I think that's it.

Thank you.

Thank you and now we'll go to Josh Smith with TIA Crest.

Hi, thanks for taking the call.

Just one more quick one on Centrix.

Can you tell us what the assumed ultimate default was last quarter versus this quarter or would that be wrapped up in the data you are going to get for Matt.

Well I can tell you -- it's 30 -- 31% last quarter and its 38%.

Thank you.

And one more quick one on the tax legislation.

I guess Joe talked about $10 to $20 billion that could be recouped from offshore entities, Bill Berkeley is on board with the same type of plan.

As far as the ultimate -- Let's see if we play what if, what could be the worst case scenario for someone like an Everest if we doubled your tax rate, talking $200 million if something like this or if that's not the case, can you tell me what mitigating factors ?

Well, Everest is not a company that was born in Bermuda.

Everest was more or less born in the United States and has extensive U.S.

operations and pays a lot of U.S.

taxes.

So when you see a 15% tax rate, that is certainly higher than a lot of the companies that started out in Bermuda.

In fact, arguably if we were all U.S.

and had a ton of money and tax exempts, it could be not too far from 20 at the end of the day.

15 is better than that.

So more accurate would be if worst case scenario they are successful doing what they are trying to do it could be another 5% or so.

I'm trying to get a sense the worse case scenario is.

I guess you could say that.

Its kind of crude.

I can't even tell you -- I don't know exactly what they are trying to do.

It's hard.

Trying to do is eliminate Bermuda all together.

I guess what I am trying to get at is, it's less of an issue for you than someone who pays zero taxes?

Yes, it is.

I would go the flip side on that.

Our Bermuda operation continues to grow nicely.

So they are still going forward.

The possibility that tax rate goes down.

Thank you very much.

And we will go on to David Small from Bear Stearns.

Hi, good morning.

Just one quick question on Centrix and then another one on the comments you made earlier, Joe.

On Centrix are the younger loans defaulting at a higher rate than the older ones?

No.

No.

We are basically seeing a fairly similar pattern to the extent that we have data.

They default at a sequentially lower rate over time.

The other thing that happens is loans pay off over time so we have less loans that are exposed to default, if you will.

And the third thing that happens over time is the severity goes down because as the loan principal balance gets paid down we have less exposure.

So then the increase in the ultimate default was simply just that you had more data to look at this quarter.

Correct.

The fact we had more information led us to believe that the development, if you will, of default for the older years or the older months of loan originations was higher and that's why we had the higher default rate a little higher than we had thought than when we looked at it in December.

And my second question was on the insurance business.

Joe, you had mentioned earlier that you thought they could have modest growth in '07.

And I guess if you look at this quarter that's the U.S.

insurance business was down just a little bit and the comp get more difficult as the year goes on.

So I guess how much in that assumption is -- I guess how much in that projection is new programs that haven't been announced yet?

There is some of that in there.

I wouldn't call it a big part, but still an important part.

We do believe what we are looking to add or two programs during the course of the year.

There is one that is just about a done deal.

In fact, Is it signed at this point?

It should be signed this week.

Okay, and we are still looking to do another and that's part of my forecast, if you will.

We expect to do well with the Starr program and expect to decline in California comp.

It's a mixed bag.

Some things are going up, some things are going down.

My latest view on it and again it may change as we get further into the year is modest growth for that pocket of the business.

But is the Starr program perhaps performing -- producing a little less revenue than you thought it would have?

Right now it's tracking, I'm concerned about the casualty market and we intend to remain quite disciplined in that marketplace.

And as we noted the amount of contracting business is down not only because of rates being down but less construction, particularly in California so yes so far that's on track through the course of nine months.

But we are kind of meeting a little more head wind.

So we'll see how it goes going forward.

Last question, on the new program you are about to sign, could you give us some sense of the size of it?

Its about $50 million.

It would come in mid year, 50 million annualized so maybe $25 million will come in for the year.

Thank you very much.

And we will now go to Kevin O'Donoghue from Banc of America Securities.

Hi, good morning, just a couple quick questions.

First of all on a couple of the segments it looked to me like your loss ratio in Bermuda was extremely low and in specialty underwriting was kind of high.

I'm sorry, Not Bermuda but U.S.

reinsurance.

And I am wondering if in U.S.

reinsurance there was a good deal of favorable development that you talked about that offset the Centrix charge and if you could talk about what may have contributed to the higher loss ratio on specialty underwriting.

Okay, I can do that.

In terms of the 2005 catastrophe losses, we reallocated approximately $10 million of reserves from U.S.

property to the specialty areas, particularly for marine and that just had to do with the way we see the reported losses coming in.

We didn't change our estimate in what we thought the ultimate would be but just what lines of business and what departments are going to ultimately pay it was altered somewhat.

And yes, you are correct as well in terms of the favorable development.

The U.S.

reinsurance lines were about $27 million favorable exclusive of catastrophes.

International was favorable by ten and Bermuda was favorable by 15.

Okay, great.

Just one other thing if I could.

I think you said in Florida you expect to write about as much premium in '07 as you wrote in '06.

I was wondering if you can get more granular on that.

Are you just renewing last year's book at the same premium rates?

or there are certain areas you are losing premium and maybe other areas where you are finding some opportunities that weren't around last year?

Well 80% of our business last year was pro rata home owners business.

And as I said we met with those clients and believe that they can still generate a profitable book of business forward, even with all they have to do per legislative changes.

Many of the existing clients we expect to continue with.

They may have a little bit less rate but they may also be able to grow their units.

So they may not be much change in terms of what we write with existing clients and we may have one or two new clients.

We are working on that now.

This business is June and July business so it's yet to be concluded.

It's really being discussed at this point.

On the excess that was just 20% of our business, and we will write some excess business, perhaps not quite as much as before but again that was the smaller part of our business.

Putting that together -- and also appreciating that the first six months of this year is kind of already a done deal in the sense that that we get this six months is deals we did last year and the premiums are coming in on those and I think certainly the first six months will be up versus the first six months of last year for Florida.

That's a done deal already.

So its really the second six months that we kind of have to guess at.

But when you put all that guesswork together, I still think we come out with pretty much the same premium in '07 as we did '06.

Okay.

Thank you very much.

That is all the time for questions today.

I'd like to turn the conference back over to Ms.

Farrell for any additional or closing remarks.

thank you for joining us today.

If you have any questions please feel free to call myself or Craig.

Again, thank you.

That does conclude today's conference.

Thank you for your participation and have a great day.