Everest Group Ltd (EG) 2007 Q3 法說會逐字稿

Good day, everyone.

Welcome to the third quarter 2007 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 conference over to Ms.

Beth Farrell, Vice President of Investor Relations.

Thank you.

Good morning and welcome to the Everest Re Third 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 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.

Thank you, Beth, and good morning, everybody.

First I would like to summarize our financial results and then comment on our investments balance sheet and capital management activities.

After that I will turn the call over to Joe for his comments on the market and our underwriting activities, and lastly Joe, Tom, and I will take questions.

We had a terrific quarter and in fact, a terrific nine months.

For the third quarter, our net operating income was $232 million, just slightly lower than the $240 million we earned in the third quarter of '06.

Our net operating income for fully diluted share was $3.68 for both periods with 3% fewer shares outstanding in this year's third quarter.

Net income including net after tax realized gains was $247 million, about equal to the $246 million we reported for the third quarter last year.

Our net income for fully diluted share was up 4% to $3.90 due to the fewer shares outstanding.

Our annualized operating return on average equity was solid at 17% for the quarter and 18% year to date.

The annualized net income returns on average equity were also strong, 18% for the quarter, and 21% year to date.

For the nine months net after tax operating income was $714 million, up by 16% from $617 million for the first nine months of last year.

After tax realized capital gains year to date were $113 million, almost all of which derived from our common stock portfolio.

Net income including after tax realized gains was $827 million for the first nine months of this year compared to $634 million for last year's first nine months, and that's an increase of 30%.

Gross written premiums were $1 billion for the quarter, and that's up 3% from the same quarter of last year.

Our year to date gross written premium at more than $3 billion is essentially flat compared to last year.

Looking at the segments, gross written premium for U.S.

reinsurance at $327 million was down 2% for the quarter.

It was up nicely on the properties side due to several new quota shares.

On the other hand, both treaty casualty and facultative were lower this quarter and that's due largely to our reaction to the more competitive market conditions.

U.S.

insurance recorded gross written premium of $228 million, down 9% compared to the third quarter of 2006.

We saw some growth from our newer programs, but otherwise premiums were lower particularly for workers compensation, contractors and the Florida property books.

International was up 15% for the quarter to $214 million.

Foreign currency movements provided about three points of this growth.

Although the weaker dollar aided the comparison somewhat we experienced strong fundamental growth in Asia where economies are growing and demand is strong.

We also saw growth in Canada while Latin America was relatively flat this quarter.

Bermuda wrote $235 million of gross premium and was up a strong 16% from the third quarter of 2006.

As with international, the weaker dollar contributed to the favorable comparisons and that's about three points on the quarter.

As well, early in the year we wrote some worldwide casualty business for U.S.

based clients out of Bermuda and this too has contributed to the growth.

The specialty segment gross written premium at $71 million was down $7 million compared to the third quarter of 2006.

And this is largely due to lower surety writings as we responded to the softer market conditions.

Our combined ratios for the quarter and nine months are excellent.

For the quarter, our combined ratio was 86.6% and this compares to 83.1% for the third quarter of last year.

Year to date, our combined ratio is 86% and this is 2.6 points lower than during the first nine months of 2006.

Looking a little below the surface, for the quarter we experienced a calendar and accident year loss ratio of 58.5% and this includes 3 percentage points of catastrophe losses.

So, a light quarter for catastrophe losses.

The catastrophe losses equate to $30 million for the quarter and the largest losses were from the July London floods, Hurricane Dean, and the Peru earthquake which we estimated at $37 million in the aggregate.

This was partially offset by a $9 million reduction for the June London floods and New South Wales storms, both second quarter events.

Catastrophe loss estimation as you know soon after any event is difficult, and both London and New South Wales events have proven to be a bit less severe than we originally estimated.

Overall, our reserve development was negligibly unfavorable for the quarter both in dollar and percentage terms.

Our asbestos reserves developed upward by $38 million which was almost completely offset by favorable development coming from the remainder of our reserves.

Our earnings release noted that we are going to more fully review our asbestos reserves as part of the year end reserve review process.

We have noted before that our exposure is small relative to many of our peers because of the shorter window during which we wrote covering asbestos liabilities.

And our earnings supplement, which is posted on our website, contains details of incurred and paid losses and gross and net reserves for our direct and reinsurance asbestos exposures.

The $38 million of asbestos development we saw this quarter came from the reinsurance segment and that's where our focus is.

Our current reserves are $321 million for the reinsurance book, and this represents a survival ratio of eight years.

Admittedly, that's a rudimentary measure but it's one that is widely used in our industry.

We have seen increased activity in this book with new incurred losses of $75 million over the past 12 months.

This is an uptick to be sure, although nothing too severe.

Nevertheless, we believe it's only proper to give these reserves a thorough new look.

We will look at the direct reserves as well, as part of this process, but other than the remaining seven high profile cases we aren't seeing much activity on the direct side.

I would like to note that my previous comments here are intended to provide some context but clearly until the study is finished we can't comment on the likely outcome.

Cash flow from operations was $356 million for the quarter up from $181 million for the third quarter of 2006.

The main driver of the increase was lower paid losses, $126 million lower in the third quarter of this year compared to the third quarter of last year.

Our cash invested assets were $14.9 billion, up $932 million from year end, and by $1.3 billion from September 30, 2006.

Since year end, we have generated $619 million of cash flow from operations, and we have raised $400 million from the issuance of new subordinated debt.

Over the same period, we returned $331 million to shareholders in the form of repurchases and shareholder dividends.

Net investment income was $173 million for the quarter.

That's an increase of 25 million or 17% from the third quarter of 2006.

We had 8% greater average invested assets which drove much of this change.

The pre-tax yield on the fixed income portion of the portfolio was 4.7%, up from 4.6% in the third quarter of '06, and that added a bit to the growth as well.

Other invested assets which represents our limited partnership investments earned $17 million in the quarter, and that's an increase of $9 million from the same quarter a year ago.

The annualized yield on this $600 million asset class was 13% for the quarter, and this was a little bit higher than our long term expectation.

The quality of our fixed income portfolio remains very high, at Aa2 on average and the duration is short at 3.7 years.

Despite the securities market turmoil during the quarter, when all was said and done our bond portfolio appreciated by almost $100 million, and our equity portfolio appreciated by $27 million.

Although we don't normally comment on other income there was a significant increase in the quarter.

It was $16 million this quarter compared to $6 million in the year ago quarter.

This growth is primarily due to foreign exchange as we benefited from net long positions in foreign assets as the dollar weakened against other currencies.

You will note that our tax rate is 20.8% for the quarter, and this is about three points above the rate for the first six months.

This largely emanates from our tax treatment of foreign exchange which has been challenged by the IRS.

They had accepted our treatment in the past and consequently we believe we have a strong chance of prevailing on this issue.

Nevertheless, GAAP reporting requirements specifically FIN 48 mandate that we provide for the potential addition of tax and we have done this in the quarter.

All of the things being equal we expect our tax rate to fall back to the 17% to 18% range for the fourth quarter.

Looking at our liabilities, our gross loss reserves were $8.8 billion at September 30, and this is down by $29 million from year end.

We have paid out $345 million so far this year, on prior year catastrophe losses, which has mostly been offset by reserve additions for current year business.

As noted on our last conference call, we issued $400 million of 6.6% long-term notes due in 2067.

Given the wider credit spreads recently, we feel really good about our timing on this.

And previously we talked about calling the $210 million of 7.85% trust preferred securities on November 15th and we have now notified the trustee of our intent to do that.

So you will see less debt outstanding at year end.

Our balance sheet remains conservative with a debt to capitalization ratio of 20% as of September 30.

This will fall to 17% when we redeem the $210 million of trust preferreds.

We have $5.6 billion of equity compared to about $4 billion of annualized writings, and this is conservative as well.

Our book value per share stood at $89.33 on September 30 and this is up by 14% from year end.

We purchased $40 million of our shares during the quarter at an average price of $96.72.

Originally we did not intend to purchase shares in the quarter since we were still in hurricane season.

However, we decided to take advantage of the buying opportunity provided by the market volatility that we saw during the quarter.

In summary, our balance sheet is the strongest it's ever been and we remain very conservatively leveraged.

As well, we continue to be focused on capital management and maximizing shareholder value.

That concludes my prepared remarks and now I would like to turn it over to Joe.

Thanks, Craig.

We are most pleased to have earned a net income of $827 million for an annualized ROE of 21% through nine months.

We are also pleased that our worldwide gross premiums are essentially level with last year through nine months.

Given the changes in the market, that is quite a strong result.

Commenting on the market I will begin with our insurance operation.

Recently we announced that Daryl Bradley had been promoted to President of Everest National.

Daryl has been with Everest National for 12 years and has been key to the success of the operation.

I am confident that under Daryl's management the building process will continue and our success will be taken to a new level.

Through nine month Everest National represents about 20% of our worldwide book of business.

We are seeing intensified competition in our municipality business and contractor liability business, which has affected production on the C.V.

Starr book We continue to see increased competition in Workers Comp both in California and elsewhere, on our New York contractor liability business and on medical malpractice.

As a result, through nine months the overall book is down 8%.

Despite the market trends, I am optimistic about growth for 2008 in this unit.

We have recently agreed to three new programs that will add roughly 100 million of premium next year.

This book remains a niche highly specialized book of business that I expect will continue to produce quality results going forward.

I will move on to our international property and casualty reinsurance book.

This sector remains roughly one-third of our worldwide book of business.

It includes the U.K., continental Europe, Latin America, Asia and Canada.

Generally insurance rates in this area have continued to decline modestly.

And reinsurance terms have also weakened modestly.

However, we continue to believe a reasonable return can be achieved on the better business.

Through nine months our international premiums have increased 7%.

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

Catastrophe losses in this area for 2007 include flood losses in the U.K.

and Australia, the earthquake in Peru, and Hurricane Dean hitting the Caribbean in Mexico.

Whereas these losses may mitigate some decline on the property business, we do not expect they will produce material upward market corrections.

I will move on to the U.S.

property reinsurance sector which represents about 25% of our business through nine months.

This business has shown excellent growth through nine months and has offset declines in our U.S.

casualty reinsurance operation.

Much of our growth comes from lead positions that we have established on single state pro rata deals with the majority from Florida.

As I reported on our last call, in June and July we successfully renewed most of our 2006 deals, and in fact have modestly expanded this part of our business.

In Florida, we are continuing to find that our clients do not have to adopt inappropriate rate decreases that represent more savings than they will receive from the larger participation from the Florida Hurricane Catastrophe Fund.

We also continue to find that Citizens tended to write the business that our clients don't want and has not meaningfully invaded their portfolios.

Our casualty reinsurance book represents about 16% of our book through nine months.

This sector is down most for us as we continue to experience casualty insurance rates declining, ceding companies keeping more net and ceding companies looking for more favorable terms on their reinsurance treaties.

Again, we will continue to maintain discipline and only write business that meets our standards.

Our specialty book represents about 6% of our writings and includes marine and aviation, surety and accident and health business.

We continue to see these markets much the same in 2007 as in 2006, and we expect to have level premium writing.

In summary, we have used our broad distribution system, our extensive product array, and our leadership position in the market to craft the unique and profitable portfolio both in the U.S.

property reinsurance, U.S.

casualty reinsurance, and on our international business.

We have used our seasoned team, market reputation and terrific ratings to secure the better part of what the market has to offer.

We also continue to build our highly specialized and profitable insurance operation.

While doing this we have maintained the most cost effective expense ratio in the business.

I am extremely pleased about the overall quality of our portfolio and it is showing itself in the quality of earnings.

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

(OPERATOR INSTRUCTIONS) And we will go to Tom Cholnoky with Goldman Sachs.

Good morning, everyone.

I have three questions, if I can.

I know you didn't want to get too much into the asbestos study, but if you could give us a little bit of background as to what changed because it seems to me in having listened to other primary companies asbestos seems to be relatively stable from a primary side.

And yet, you seem to indicate that there may be some trends that are somewhat troubling and in part two of that question -- sorry, I guess it's a two part question, you kind of historically adopted a bit of a pay as you go approach.

Would this suggest that you may change the way that you look at asbestos?

Okay, Tom.

Yes, what we are doing here is we are responding to the uptick that we are seeing in reported losses.

Principally what we are looking at is the reinsurance book.

So, there is a lag between what the primary companies see and when the reported losses get to us.

And as a consequence of that, we are continuing to see leakage.

We feel that we need to do a study and potentially post additional reserves to represent what we are seeing -- representative of what we are seeing.

Will this be an outside study?

We are not at this point planning on using outside consultants.

Although this may change.

We really think that our own people, our claims professionals our actuaries, underwriters, et cetera, are qualified to do this.

It's in response to an uptick that we are seeing.

Not necessarily a big change in direction.

Okay.

And then my second question revolves around capital management.

I mean, clearly given the kind of earnings that you're generating, even if your premium writings are relatively flat in a normal cat year we will be generating a tremendous amount of operating income in 2007, would it be wrong to assume that you wouldn't be become more active in capital management if you can't deploy that capital?

I would say it would not be wrong.

And we certainly don't expect looking at our asbestos reserves to have a significant impact on our capital management activities.

Yes, we are generating very strong earnings.

I think we signaled earlier in the year that we really didn't plan to be active in the third quarter in the market just because we are in the midst of U.S.

hurricane season.

And we, I think, indicated that we wanted to husband our capital through that.

As of this point in time, yes, we are probably in the best financial condition we have ever been in.

Our capital position is real strong and so we can continue those activities.

And sorry, my last question is, just the wildfires in California, should we be concerned from your perspective on how everything is unfolding?

At this point, this is Tom Gallagher, the events are in progress right now.

I don't have much information right now but based on our portfolio I don't see it to be a material event to us.

Okay.

Terrific.

Thank you very much.

We will go next to Josh Shanker with Citi.

Thank you.

Just following up on the asbestos, in the past few quarters, not looking at the study but when you closed a case, is there any pattern about how much of a premium it cost you compared to what you set up on the reserve to close that case and given the two cases you closed this quarter, how much more than you had set up did you have to settle that for?

I would say no, there hasn't been a pattern.

I think -- I know on one of the cases we settled for a tad less than we had up for it.

Does somebody know on the other hand?

Yes but again, the cases we are talking about in this quarter are on the reinsurance book.

So to be clear, these aren't cases that we are settling.

These are cases that our reinsurance seeding companies are settling.

And I guess what we are saying is especially with regard to this quarter we got some surprises from our ceding companies that ended up posting reserves or settling cases beyond what we were led to believe by audits and back and forth with those companies previously.

In terms of -- I'm talking about the open claims, open claims declined by two cases this quarter.

Yes, you are talking about the insurance side now.

There was little activity on that this quarter.

Yes, you are right.

That's down to just a small number of cases on the direct side.

The reserves for this quarter primarily emanated from our reinsurance book.

And I think if you look at the direct reserves, there wasn't any change in incurred loss for the quarter.

So that would signal, between case reserve, additional case reserve and IBNR, we settled out at what we expected to in the aggregate.

Thank you.

We will go next to Susan Spivak with Wachovia.

Good morning.

Joe, I was hoping you could go into more detail about the competitive environment and what it means having Munich make an acquisition and say that they are really looking for profitable growth potential within the U.S.

and how you think that will impact the competitive environment in the U.S.

going forward?

Well, you know, I'm not sure exactly what Munich will bring to bear going forward.

But looking at the marketplace today, it's a mixed bag.

We certainly are seeing more competition in the U.S.

casualty business.

And that's most impacting insurance rates.

I would say reinsurers have been pretty disciplined about resisting some of the changes that have taken place.

And avoiding business and within the U.S.

casualty world, most of the competition we are seeing is on tougher business, big premium items like medical malpractice, like huge product liability cases, contractor liability.

And that's the part of our insurance book I think that's been most impacted.

Now a big part of our insurance book is really small premium items and highly specialized niche business like Landscaper Liability and Security Guard Liability and that's much less impacted at this stage and I think we will be much less impacted going forward.

Property cat rates have held pretty well.

We will see what happens this January.

Property insurance rates are off a bit.

But again, if it's cat business, they are not bad.

International rates are off modestly.

But we still kind of like in the main where they are especially the better end of the business.

So clearly we were seeing more competition and that's to be expected after two wonderful years, and really a benign loss activity.

But still the better end of the market which we can access given our ratings and distribution and people, we are still pretty pleased about.

And as you know, we are willing to change.

The pro rata deals we have done on the property side especially in Florida, something we are very happy about, the retro business we did in the last couple of years is something that we have been pleased about.

We were still a market leader on the casualty side so we can get the best end of the business.

And on the insurance side we are looking at the smaller premium highly specialized business.

More competition and frankly there will be more to come going forward from Munich and from everyone else.

But given a snapshot as to where things are at and a part of the market we can get, we pleased.

Thanks, Joe.

That's helpful.

And we will go next to Vinay Misquith with Credit Suisse.

Hi.

Good morning.

Could you provide us with some color on the growth in the Bermuda and the international segment and how pricing is out of the U.S.

versus the U.S.?

Pricing on international business versus U.S.

business?

Yes, correct.

Do you want to talk a little bit about that?

Yes.

The international business, our portfolio internationally is predominantly a property plus portfolio.

And though the rates have seen some decline as Joe indicated, it has held pretty well worldwide.

Some places, as Joe indicated also, that we had some cat activities so that should make it stay.

It's quite different than that in the U.S.

which the U.S.

market had dramatic increases for a couple of years, both on the property cat side or cat exposed business as well as the casualty and had more room to shrink which it has shrunk particularly on the casualty side.

But overall, I think the international portfolio is in a much better position today and the rate of decline, I will give you an example just take cat rates.

Internationally cat rates probably are down 6%, where in the U.S.

it's down 9% and 10%, as an example, because our increase was so great over the last few years.

Give you some idea?

Sure and your growth in those areas has been a function of your strong ratings?

Well, I think the growth in the international area has been a combination of not only the strong ratings but the fact that we are located in most regions of the world where the local staff has given us good insight into the local market.

By doing so we are able to have good contacts with our client base, thereby being able to not only increase the shares of the programs we have today, but increase our new program activity as well.

That's great.

The second question was on accident.

Year Margins were really strong this year and better than last year and in part because you move more towards property business.

And more Florida pro rata business.

How do you look at your business mix going forward?

Do you see more property and less casualty business next year?

And the offset to that being lower pricing because we have had a very benign hurricane season this year?

Thanks.

It's a little hard to tell going forward.

You are correct.

If you went back a year or two ago we probably on a worldwide basis would be -- would have been 55% casualty and 45% property and if you took a look at us in 2007, it's probably flipped around where we are 55% property and 45% casualty.

As we have seen more opportunities in the U.S.

property side, and less opportunities in the U.S.

casualty.

Given the market dynamic, I would believe that our casualty operation will probably be down again next year.

As I said, we are finding more competition there in terms of lower insurance rates and usually the reinsurance side supports the bigger tougher, risks the ceding companies have and again those are the large premium risk.

Those are the ones that are seeing the most rate decline.

So, we will be disciplined there.

Likely that will lead to less volume in U.S.

casualty reinsurance.

Property reinsurance, it's unclear.

We are very pleased with the portfolio.

We hope we can maintain it into 2008.

A lot of business renewed in the middle of the year.

So that means that it goes for the first six months in 2008.

If I had to get into guessing it may be level.

As far as the insurance operation in the U.S., which is mainly casualty business, I still believe that we can grow there.

So when you start putting all of that together, I'm not sure the mix of 45, 55 would change substantially going into 2008.

But as always we will grow where the opportunities are, where the rates allow us and we will move away from the areas that we can no longer achieve the ROEs that we need to achieve.

Thanks.

We will go next to Matthew Heimermann with J.P.

Morgan.

Good morning, everyone.

Craig, quick question and Joe maybe you can opine on this as well.

When you think about the reserve study that's undergoing right now from an outsider's perspective, is it fair to think -- your direct operation has -- you have a better sense of what the reserve number and consequences if survival ratios are low.

But as you are looking at reinsurance reserves, as an outsider is if fair for us to look at the bigger primary companies in the state and their survival ratios as indicative as where you think you need to get going forward?

It may or may not be indicative, I think is the best thing for me to say.

I think you can look at that and think of it as you will.

We are in a unique situation having been in a fairly narrow window.

And as I said, we are just -- we are responding to what we are seeing.

And where we come out on the continuum of survival ratios is where we come out as a result of the study.

Is it fair to say though that given this is a new reported trend kind of looking at three years lag in paids, probably understates where that -- understates where the ratio needs to be?

I don't think I'd draw that conclusion.

And we are not far enough along for me to really opine on that.

But I think it's risky to draw that conclusion.

Okay.

And then the last thing was, you said you were going to do this internally.

There is a parallel we can make with asbestos, vis-a-vis Centrix where that was an internal review but the last time you looked at it -- I guess what I would say is you took a much more conservative view of ultimately where the trends were going to converge to and the consequence was a much higher reserve than you would have taken, even using your internal metrics relative to the past?

There is a parallel we can draw with this?

I would say not.

I mean, the situation with Centrix was we were attempting to develop an ultimate loss with faulty and incomplete data.

And as a consequence, we missed it the first time through.

I think we are in very good shape with that at this point so that when we had enough information we were able to analyze it carefully.

I think we came to a really good place.

This is different than that.

I mean we have had these liabilities and these ceded companies for years and years.

We know our book of business.

We know the ceding companies.

And what we have seen, as Joe indicated, is an increase in reported losses and we need to respond to that.

So I would say no there is not a parallel.

The only thing to take away is once surprised by Centrix, we went in and really brought to bear all of the resources of the organization to look at it as thoroughly and from as many different angles as we could.

And, yes, you are correct, that we then posted additional reserves.

Those reserves have looked and continued to look quite solid.

Which is why you heard no more mentioned with regard to Centrix.

So, similarly here we got reports from outsiders that we had to bump up the reserves.

And we have, this quarter and in prior quarters.

But it is going to cause us to bring increased focus on us as well.

Okay.

All right.

On a different note, do you see any changes in the environment with respect to ceding company retentions going forward.

Do you think companies have a threshold where they don't want to take them any higher?

Do you expect that trend to continually increase as we go through '08?

We are still seeing -- it may change, but we are still seeing companies looking to keep more net.

And again, it kind of comes from the fact that they are having difficulty growing with rates going down.

And I'm talking primarily about the casualty, by the way.

On the cat side there are still limits to what people can keep net.

Going forward, maybe it will start to level out.

But I think most recently, yes, we have seen that trend continuing.

Let me tell you this, that who knows what may happen going forward.

There is an appetite on the part of the ceding companies, and as Joe indicated, the primary sector is still having a fair amount of competition, particularly in the U.S.

To keep their premiums level they would have to keep a higher retention.

There are some pockets where rates have decreased to the point where it does not really problematic for us that they are keeping it net.

We aren't particularly thrilled to be taking it on, especially when they want more favorable reinsurance terms.

That's fair enough.

I guess last question is, you've seen an appetite by some other companies to do deals where they are acquiring wholesale brokers, MGAs, rather than just being the capacity for these companies, being the owners, is that something that has any interest -- is that something you are interested in at all?

It actually is something we are interested in with the right people and the right book of business.

If it's business that really fits into our insurance operation where it's, again, specialized niche business that we think is somewhat insulated from the softening that's taking place in the marketplace and if we like the people, the chemistry is good, that is a situation that would be of interest and we would check out.

Okay.

Appreciate it.

Thank you.

We will go next to David Small with Bear Stearns.

Yes.

Good morning.

Just going back to your capital base for a second, so we can understand better how much capital you need to operate the business.

I mean, this year if you look at it, your premiums were essentially flat quarter over quarter and your earnings were about the same but obviously the ROE was down.

We are just trying to figure out how much more capital do you think you need to keep now versus last year now that the new models are fully in place, you know what the rating agency requirements are and of course, as you talked about before, you have more cat in the book of business.

Where we stand at this point, I mean our capital base is up almost $600 million for the year.

We are very comfortable where we are relative to the rating agencies.

We have been through reviews with AM Best and Moody's.

We are in process with S&P.

And where we were as we had a -- redundancy as of last year end.

Nothing much has really changed relative to our cat exposure and other capital needs to support other risks generally, we are quite comfortable from a capital position and I would say any earnings that we generate potentially we can use in capital management endeavors.

And then it you -- Joe, you mentioned the three new programs.

Can you maybe give us a little more detail there?

I'll ask Tom to do that.

Sure.

I mentioned it before, we have three new programs that were initiated this year.

One took effect 7/1, which was a MADOEI program which is approximately about $40 million.

It is a combination agricultural logging, moving and storage.

Number two program is one that took effect in October, TIPPS It's a tow truck and salvage operation which is probably about $49 as well annualized basis.

And the last one is the Brownstone program which is a -- just as it says, it is a brownstone program, it is commercial package policy, covering buildings in New York, Boston and Chicago.

Estimated premium is probably in on an annualized basis somewhere in the neighborhood of about $60 million and that will take effect as of 1/1.

Okay.

Great, thanks.

We will go next to Jay Gelb with Lehman Brothers.

Thank you.

I just want to get a sense perhaps on the timing of the release of the results of the asbestos review.

Would you anticipate putting that out in conjunction with the first quarter earnings results or if it's done earlier would you put it out before year end separately?

It's our hope to complete it earlier and make a release later in the fourth quarter ahead of our earnings release for the year.

Okay, and do you anticipate the buying back stock in the fourth quarter given that you are going through review?

We take a lot of things into consideration: Our overall capital position, market conditions, et cetera, et cetera.

And then we purchase stock when we think it makes sense.

So we may or may not be in the market, just depending on our overall assessment.

It's very difficult for us to commit ahead of time.

And we haven't.

We haven't offered guidance on stock buy-back.

We really will not be offering guidance.

We like the flexibility of taking a look each quarter, if not each month, in what are the business opportunities and what are the capital needs.

Okay.

Next issue on the investment side, the partnership income, as you pointed out, has been quite strong.

Is that reported on a current quarter basis?

Or is that lagged and given the issues that the overall capital markets have dealt with in this third quarter do you anticipate being able to maintain that run rate?

It is reported on a one quarter lag.

Most of our limited partnerships are not public equity market related.

They are generally early stage capital or specifically oriented to real estate power plants, health care, et cetera, et cetera.

So it's difficult for me to comment on what the return might be in the fourth quarter.

I did indicate I think that we thought that the third quarter was a little above our expectations.

We are not aware of any significant issues with respect to the limited partnership portfolio as a result of the turmoil in the third quarter and apparently continuing.

Okay.

Good.

And then the tax rate, you said 17% to 18% for the fourth quarter.

Is that a good run rate expectation for 2008 as well?

I think all other things being equal, yes.

And that is our underwriting profitability, the percentage of our portfolio that's invested in tax exempt, et cetera, et cetera.

Underwriting income really, and how much of it is onshore and offshore is really a significant driver of the tax rate.

I think at this point I think it's fair to assume a continuation at about the current rate.

Okay.

Then finally on the capital side, debt to capital will go down quite a bit after you redeem the trust preferreds.

Do you have any sense if you might relever given where the stock's multiple is and how much excess capital you are driving?

Assuming we are continuing to look at, as you know we indicated that we are focused on capital management activities.

So that fits into the overall mix depending on what we might do in terms of shrinking our equity base, returning capital to share holders in that manner, and that would fit in to our thoughts about what we wanted to do on the debt side.

Great.

Thanks for the answers.

Uh-huh.

We will go next to Bill Wilt with Morgan Stanley.

Hi.

Good morning.

I can't resist a few more asbestos questions.

Bear with me.

Craig, in your prepared remarks you quantified the acceleration in your reported losses.

But I missed it.

I thought it was $75 million but if that's the right number I might have missed the time frame.

Right.

It was $75 million over the last four quarters.

In fact, we had nothing in the first quarter of this year.

Okay.

That's helpful.

Thanks.

Related, and I may be behind the times here, but I think your chief actuary left a couple of months ago.

Any relationship between this study and that event?

Or anything you can add on who will be leading the study internally?

There is no connection whatsoever with those two events.

And it's going to be a joint effort using our actuaries, claims people, underwriters and auditors.

So, I'll sit very carefully, very tightly, on top of it and I will be involved.

Understood.

You named a new chief actuary yet?

No, we have not.

I'm happy with the people we have on staff in each of the disciplines and our chief reserving actuary and our chief pricing actuary and the other people on staff.

At some point we intend to refill the position.

At this point I think we are fine with the people that we have on staff.

Helpful.

Thanks.

Two more quick ones if I may.

First on the wildfires, past practice or industry convention?

Maybe just an education here.

Multiple fires, different locations from a reinsurance perspective, is that typically considered multiple events?

Or is there any industry convention that would be helpful?

There is no industry convention.

Right now there are 12 wildfires.

Whether that will be considered one event or 12 events is really based on the contract.

I don't know if you could pick any convention that would be perfect.

Same question that rose with the U.K.

storms.

Sure.

Okay.

Understood.

Thanks.

And then Joe, you mentioned in the prepared remarks there was some modest deterioration in the reinsurance terms and conditions, if that's the correct characterization.

Could you maybe give a few specific examples?

Well, I mean, you will see some of the obvious things like requests for higher ceding commissions.

When you actually get to some of the other terms that just get into the nitty-gritty about how contracts will be handled.

If you get into arbitrations or all the other issues.

There has really been a push for ceding companies to make the conditions better for them and consequently more difficult for reinsurers.

There is an awful lot of discussion that's going on in the last few months on treaty terms, as well as the economics like ceding commission.

Okay, thanks very much.

We will go next to Mark Serafine with Citadel.

To clarify there was no reserve changes for the runoff program in the quarter?

No.

So as the auto loan credit environment continues to deteriorate, there is no read across to having increased exposures?

No.

See that's a runoff book of business.

And we were continuing to see it run off well within or range of expected loss.

Okay.

Regarding the additional tax provision in the quarter, is this a current quarter issue?

Or is this something the IRS is concerned with over past financials?

This has to do with the examination of our 2004 return.

Okay, so the provision in the current quarter, is that an attempt to avoid restating historicals?

Doesn't have anything to do with restatement.

We followed a methodology for foreign exchange that historically going back years and years they have accepted.

This examination team has decided not to accept it.

So what we have done, not only have we put up a provision, if you will, for the 2004 year but for the 2005 and the 2006 years.

And this is basically a FIN 48 requirement that we do this.

It doesn't mean that we will lose on the issue when we get into appeals, but given the accounting requirements, we are mandated, we are required to put the reserve up, so we did.

Thank you.

And due to time constraints we will take our final question from Kevin O'Donoghue with Banc of America Securities.

Thanks.

Good morning.

Good morning.

You mentioned that in Florida primary companies not being required to reduce rates beyond what's justified by the changes to the Florida cap fund.

Now that we have the OIR issuing subpoenas, rejecting rate increases by some primary companies and reaching settlements with others, I'm wondering if you see the possibility it can change and affect demand for reinsurance in Florida?

Well, again, I will just repeat that our clients have really been able to charge a rate that they believe is proper and adequate for their home owner business.

And there was a serious concern a year ago that it would be mandated that they had to come up with rates that were going to be inappropriate and too low.

And that just hasn't come to be the case.

So, I am expecting this year and going forward that they will still be allowed to charge a proper rate.

In terms of whether or not they want more or less reinsurance, certainly for the last year or two many of these companies that are not big companies with a lot of surplus, have needed reinsurance to support their operation.

Now, they have made plenty of money last year and hopefully there is no more storms this year and they make plenty of money along with us this year and into next.

So that would be mean growing surplus.

It might mean on the back of that that they need less reinsurance going forward.

But getting back to the rate environment, it's been what it should be and I believe it will stay that way.

Okay.

Thanks.

And if I could ask one follow-up about Florida.

I think you mentioned that you saw some decline in your Florida property business and the insurance segment.

I'm wondering if you are referring to your excess and surplus lines program down there and.

If so, if you found that business in any way disappointing and sort of what the prospect for it is going forward?

That has been what we said, that is exactly what I think Craig was referring to earlier is the commercial business, not the home owner business, but the commercial business that we do on an insurance basis.

It has been disappointing.

I think when we went into that market a year and a half ago we really thought there would be a big need of the shortage of companies like ourselves providing capacity.

But more companies have come in and provided capacity in the commercial property world than we believe would happen at that stage of the game.

So we were still in the market and still writing business.

There are plenty of other people in the market, too.

And we have not seen the demand or the rates to be what we originally hoped they would be.

Yes, we only do a small book of business there.

I suspect at this point in time at year end we will probably do about $25 million worth of property business, commercial property business in Florida.

Okay.

That's very helpful.

Thank you very much.

Well, thank you for joining us on the call.

And as I said, we are pleased with the nine month results and we expect to have a terrific 2007 and are very optimistic about 2008.

Thank you.

This does conclude today's conference.

Thank you for your participation.

You may disconnect.