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Everest Re Group, Ltd (NYSE:RE)

Q3 2010 Earnings Conference Call

November 1, 2010 10:30 AM ET

Executives

Beth Farrell – IR

Joe Taranto – CEO

Dom Addesso – CFO

Analysts

Jay Gelb – Barclays Capital

Cliff Gallant – Keefe Bruyette & Woods

Vinay Misquith – Credit Suisse

Brian Meredith – UBS

Matthew Heimermann – JP Morgan

Ian Gutterman – Adage Capital

Josh Shanker – Deutsche Bank

Operator

Ladies and gentlemen please standby. Good day everyone, welcome to the Everest Re Group Limited third quarter 2010 earnings call. 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. Please go ahead ma’am.

Beth Farrell

Thank you John. Good morning and welcome to Everest Re Group’s third quarter 2010 earnings conference call. With me today are Joe Taranto, the company’s Chairman and Chief Executive Officer, and Dom Addesso, our Chief Financial Officer.

Before we begin I will preface our comments by noting that our SEC filings include extensive disclosures with respect to forward-looking statements. In that regard I know such 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 Joe.

Joe Taranto

Thanks Beth, good morning. We are pleased to have grown our book value per share in the quarter by 6.4% to over $114. Despite $514 million of catastrophe losses in the nine months, $347 million of share repurchases and $82 million in dividends, shareholder equity is up $180 million for the year attesting to the strength of our organization.

Despite these catastrophes, book value per share is up 11% through the first nine months. Cash flow remains quite strong at just over $790 million for the nine months. Gross written premium increased 3% to $1.16 billion as we continued to grow in the international and US property markets. During the quarter, we repurchased $100 million of our shares. For the year, we have repurchased $347 million of our shares, representing 7.5% of the outstanding shares at year-end 2009.

We have $4 million shares remaining available under our current authorization. We plan to continue to purchase shares in the fourth quarter. As previously announced, I will be continuing as CEO through 2011 and 2012. I am dedicated and energized to continue to lead the company forward. Going to our underwriting results by our segments, first, our international reinsurance book which represents 28% of our worldwide book through nine months. This segment includes Latin America, Canada, Asia, the Middle East and Africa. This segment has increased premium by 13.6% to $906 million through the first nine months. Excluding foreign exchange, the increase was 9.3%.

The increased volume was a combination of new business, increased participations, rate increases in select areas, and economic and insurance growth in some markets. Included in this segment is our initiative in Brazil which continues to go quite well. We have a long standing important position in the international reinsurance market. For example, we were the number three re-insurer in Latin America, number three in Canada and a strong household name in virtually all foreign markets. Historically, our international reinsurance book has been very profitable. Unfortunately this year has been hit by both the Chile quake and the New Zealand quake, whereas rates increased in Chile in response to losses, we expect to see rate increases for Australia and New Zealand as well.

Second, our Bermuda reinsurance operation, which has produced 18% of our worldwide business through nine months. Our Bermuda operation includes London, Ireland and continental Europe business written through our Brussels office. Our international reinsurance in Bermuda reinsurance operations together produced 46% of our worldwide premium and 58% of our reinsurance premium overall. Bermuda reinsurance premiums are down about 5% to $565 million through nine months, mainly being driven by reducing our book of business in continental Europe in response to softening market conditions.

The combined ratio for the Bermuda reinsurance operation was 92.7 for the quarter and 94.8 through the first nine months. The nine month combined ratio includes 13.1 points of catastrophe losses. Third, our US reinsurance book, accounted for 28% of our worldwide book. Premiums are at 1% in this segment to $885 million through nine. However within this segment, property reinsurance is up 5% and casualty reinsurance is down 7%. The property growth comes from increased writings from our Florida quota share business, mainly from rate increases our clients have implemented.

In casualty we continued to underwrite and respond to changing market conditions. We continued to see insurance rates decline in most casualty products. Within US reinsurance, property now accounts for 70% and casualty for 30%.

The combined ratio for our US reinsurance operation was 82.3 for the quarter and 84.1 for the first nine months. Our fourth and last reinsurance category is specialty reinsurance which accounts for 6% of our worldwide book. This category includes accident and health, surety and marine and aviation. Through nine months, this segment has grown by 8% to $198 million. The increase is driven by growth in our accident health book for both travel insurance and medical stop loss insurance.

The combined ratio for specialty reinsurance was $97.5 million for the quarter and $104.1 million for the first nine months. The nine month combined ratio includes 10 points of losses for the Deepwater Horizon. Overall reinsurance constitutes 80% of our worldwide premium. Accordingly, our insurance operation makes up 20% of our book. Insurance premiums are down 1% for the nine months to $645 million. The combined ratio was 105.5 for the nine months. The combined ratio for the quarter was 111.8 largely driven by increasing the 2010 accident year combined ratio for California workers comp to just over 100 and the impact of return audit premium adjustments.

This demonstrates the current difficulty in the US casualty insurance market. We are currently getting 10ish percent rate increases in California workers comp, but we believe much of this is needed to keep pace with claim inflation. On our general liability business, we have not been successful of getting any meaningful rate increases. Our plan here is to maintain discipline on casualty business and look for new opportunities in property and shorter tail business.

Our direct specialty business continues to perform well, and we’ll continue to look for opportunities in this space. Mark Herman and Daryl Bradley have their work cutout for them, but I’m sure they’re up to it. In summary, the markets are mixed bag. I’m pleased that we’ve been able to grow the top line albeit at a modest 3% through nine months. We have continued to expand our global reach in areas such as Brazil, Israel, China and Africa where we write property bond business and selective casualty.

We have continued to grow our business in the US and international property where rates are appropriate including Florida quota shares. We have done so without increasing our PMLs in 2010 for any major zone including Florida, California, Japan, Latin America and European wind. Meanwhile, we are doing less US casualty business in both insurance and reinsurance. In short, we continue to expend – extend our franchise where it makes sense to do so but we are looking to avoid the pockets of weak pricing we are increasingly seeing.

Now Dom will take you through the financial highlights.

Dom Addesso

Thank you Joe, good morning. As noted, operating earnings per share on a fully diluted basis for the quarter were reported at $2.67 compared to $3.43 one year ago, and $3.18 one quarter ago. These differences were mainly the result of catastrophe losses. In the third quarter, these losses amounted to a $1.34 per share compared to $0.90 per share in the second quarter and just $0.29 in the third quarter one year ago.

The third quarter CATs were result of pre-tax losses of $75 million from the New Zealand earthquake and $15 million from the Calgary hailstorm. The New Zealand estimate is based on the upper ranges of our estimates which take into consideration three different methods of measurement. Those being, market share, modeling of similar event sets and underwriter estimates.

The net range on the average of these methods was $48 million to $80 million. We feel our pick of $75 million is therefore a conservative estimate, particularly as it stands well above our underwriters range estimate of $45 million to $61 million. Total CAT losses for the year are now at $514 million or $491 million net of reinstatement premium.

Our operating income for the year-to-date stands at $4.50 per share contrasted with $9.32 per share one year ago. CAT losses year-to-date amounted to $6.97 per share in 2010 compared with $0.85 last year. Adjusting for CATs, our net operating income per share compares favorably at $11.47 this year, versus $10.17 a year ago. The operating income for the quarter equaled $149 million. This was mainly comprised of a pre-tax underwriting gain of $41 million or 95.9% combined ratio and a $141 million of investment income pre-tax.

The other major item affecting operating income was income taxes. The projected annualized effect of tax rate increased to 8.9% at September 30, from 7.1% at June 30, resulting in an effective tax rate of 10.2% for the quarter. The 8.9% effective tax rate assumes a certain level of CAT activity in the fourth quarter. If there is no fourth quarter CAT activity, it is estimated that our effective tax rate could rise to 11% all else being equal.

As mentioned the combined ratio for the quarter was 95.9%. This is comprised of a 67.7% loss ratio and a 28.2% expense ratio. The expense ratio remains stable, relative to other comparable periods. The loss ratio was broken down between 60.8 points of current year attritional losses compared to 56.8 points in the prior year, 2.1 points of favorable development versus adverse development of 0.9 points in the ‘09 quarter and finally 9 points of CATs versus 2.5 points in 2009 which I’ve already outlined.

The favorable development for the quarter was contained within our reinsurance book and similar to the second quarter of this year, was primarily from our international operations including Bermuda. The rise in the current year attritional loss ratio from a year ago generally reflects a conservative reserving in philosophy in the phase of a continued soft market, along with an assumed increasing loss trend overtime.

Turning to investment income, I previously noted that this equaled a $141 million for the quarter. This compares to a $165 million one year ago. This decline is primarily attributable to results from our limited partnership investments where there was a $1 million loss in 2010 versus a $23 million gain one year ago. The loss in 2010 is primarily result of change in equity valuations which are booked on a quarter lag, representing values at June 30. At that date, the overall equity markets were depressed. These markets are used as a relative benchmarking valuations and therefore had a negative impact on limited partnership valued.

I would however point out that equity markets have rebounded during the third quarter, and this should have a positive impact on fourth quarter valuations. I should also point to year-to-date investment income of $469 million compared to $401 million last year. This year’s number includes a $30 million gain in limited partnerships versus a $20 million loss – $29 million loss last year. Excluding the effects of limited partnerships, net investment income is up 2% year-over-year. Investment income from fixed-maturities is generally flat over comparable periods in the prior year.

There are few factors that play here. First, declining yields available in the market. Second is a bias towards shortening the duration of our portfolio to reduce price risk and anticipate a higher rate environment. Third, is while cash flow from operations is strong, we have directed some of that towards share repurchase and finally, we have increased our allocation to public equities.

This strategy has been one which emphasizes dividend income and large cap stocks. This combination has enabled us to maintain our investment income via dividends while providing upside depreciation with less volatility than other equity sectors. Other investment strategies have been deployed to somewhat mitigate the impact of a lower rate environment. We have allocated funds to the high yield markets in the bank loan or floating rate market.

While this reflects an approach to increase credit risk versus duration risk in order to achieve yield, it is not been at the expense of maintaining the overall credit quality of our portfolio at AA. Given the economic times we’re emerging from, we find these alternatives opportunistically attractive as spreads have widen for many credits, and overtime we expect them to contract less in a rising rate environment, at the same time credits are more likely to improve as economic conditions turn.

We are also considering emerging market debt for these reasons as well. Finally, overall net income for the quarter was a $174 million comprised of the operating income discussed above plus after-tax net realized capital gains for the quarter of $25 million. These realized gains reflect valuation changes for our equity portfolio as a result of a strong market through September 30. There were no significant gains or losses from the sales – from sales of securities. Comprehensive income for the quarter of $367 million is the result of net income plus $193 million of other comprehensive income.

The other comprehensive income is primarily the result of unrealized gains in our bond portfolio due to declining rates. The total comprehensive income for the year of $596 million has resulted in book value per share rising to $114.16 from $102.87 at the beginning of the year. This represents a 11% growth in book value for the nine months. Given this capital position we are still bullish on share repurchase.

With that I’ll thank you and turn it back to Beth for Q&A.

Beth Farrell

That concludes our prepared remarks and now we would like to open it up for questions.

Question-and-Answer Session

Operator

And ladies and gentlemen if you’d like to ask questions at this time. (Operator Instructions) And we’ll take our first question from Jay Gelb with Barclays Capital.

Jay Gelb – Barclays Capital

Thanks and good morning. Joe, can you give us a bit more additional insight on the recent management changes, as well as any thoughts you might have on next steps in terms of leadership or any areas of focus for you in particular? Thank you.

Joe Taranto

Sure Jay. Well I think I’ve been with – through this with many of you who are on the call, but I’ll go through it one more time for everyone’s benefit. The Board decided it was best for the company if I continued as CEO. Once this decision this was taken it was mutually agreed that it was best for Ralph to pursue other opportunities. We thank him for his many contributions at Everest and we wish him the very best.

There are no financial issues whatsoever in connection with this matter. I am fully dedicated to continue to build the franchise. The Board will resume its succession planning and it can be done in a deliberate manner, since I’m here for two more years. Currently with regard to the President’s role, I will be sharing that role with the Executive Vice Presidents. Our EVPs are seasoned group, they’ve known our customer for many years as I have. So I expect no interruption to business.

Our team has increased book value per share by 14% compounded over 15 years. And we’re 11% through the first nine months of this year despite the catastrophes. So I expect us to continue to build value. As far as the strategy and the game plan on virtually all fronts, it continues as it has been. I’ve been the CEO and continue to be the CEO.

And I think that probably summarizes what I need to say on that front and I’d like to move on to questions for the quarter and the strategy and the future.

Jay Gelb – Barclays Capital

Just for Dom, just a quick one. The market was down overall, the equity markets in the June quarter, and up 11% September the alternative asset income was essentially unchanged. We were just trying to get a little insight in terms of what equity market moves mean in terms of sensitivity for the alternative assets.

Dom Addesso

Well I don’t know I have the direct correlation for you Jay, but I guess I was just trying to suggest that many of our limited partnerships use the equity market as a benchmark in terms of valuations. So that was part of a reason or big part of the reason that our limited partnerships did not experience any uplift in our books for the third quarter because it’s on a quarter lag. So those valuations were based on the 6/30 equity market. And so given the fact that equity markets are up for the third quarter, I would expect that there should be some upward momentum or lift coming from that, but I don’t have a prediction on what that might be.

Jay Gelb – Barclays Capital

And the asset base – that if we were to put a return profile on that what type of asset base do we think about for the alternatives?

Dom Addesso

About $500 million.

Jay Gelb – Barclays Capital

All right, thank you.

Operator

And we’ll take our next question from Cliff Gallant with Keefe Bruyette.

Cliff Gallant – Keefe Bruyette & Woods

Good morning. I just wanted to talk a little bit more about the insurance line of business. Joe, you said that the manager there, who have their work cutoff for them where as we talk a little bit more about in detail, what you think really needs to be done to produce consistent profitability there, and in terms of timeframe, when do you think we can start to see stay profits again in the interest line?

Joe Taranto

Well what I meant there is, that is mostly a casualty book of business at this stage. And the casualty, certainly US market is very difficult. We’re seeing most lines of business are 100ish in terms of combined ratio, some a bit higher, maybe a few bit lower. They’re going to need to press on rate. We’re doing that in the comp market, we were probably the first market out there to start that, at least in a meaningful way. We will continue to push this year and next. We are starting to see the market being a bit helpful in that regard.

We’ve done well in these the new operations that we started on the direct side, our FID&O [ph] group is doing very well and where we have selective opportunities on the direct side, we’ll need to grow that. We are looking currently at some opportunities that are not casualty and I think some of the better opportunities going forward for the next year or so maybe in the shorter tail space. So we are examining that as well.

We’ve been pushing on the general liability front. As I noted with not great success at this point, but that doesn’t mean that we won’t continue to keep pushing, we will. And if we have to sacrifice some business there, we may. So our outlook going into 2011 is to be disciplined. It’s not necessarily we wanted to grow. We may grow in the shorter tail or the direct side, but we’re going to push for rate in all the business that we have. We’re not going to particularly worry about the top line. My guess is we’ll probably be down next year in the insurance space top line versus this year.

We’re much more focused on the combined ratio. So I expect us to do better starting next year. Its little bit hard to give you exact numbers in the sense that it’ll depend upon the marketplace. And as far as our team having their work cutout for them, it’s not just our team, it’s going to be anybody in the casualty insurance space in the United States.

Cliff Gallant – Keefe Bruyette & Woods

Thank you.

Joe Taranto

You’re welcome.

Operator

And we’ll move on to next question from Vinay Misquith with Credit Suisse.

Vinay Misquith – Credit Suisse

Hi good morning. This quarter we saw the accident year margins decline and I believe on the US reinsurance side, you had more property premiums from the Florida quota shares. Just curious as to why the accident year margins were declined this year versus last year when you had sort of a more favorable business mix?

Dom Addesso

Vinay, this is Dom. I think as I mentioned in my prepared remarks, it really reflects a conservative reserving approach. We’ve got certainly in the overall markets a softening market trend. Generally that’s in casualty but also property rates are flat in some jurisdiction and even down in others. So it’s partly in recognition of that as well as in recognition that loss trend although sometimes uneven is a never ending progression upwards.

And as I said it does not necessarily mean that loss trends in any one year up but over the long-term, loss trend is on the rise. So we feel that its conservative position in fact, based on the way we’re – we price the business, our pick loss ratio is actually higher than our underwriters estimates that they’ve recorded on each and every detailed treated level. Now it’s my experience that you tend to want to need to do that in a softening environment, in terms of trying to mute some level of optimism.

But we feel we’re very conservative in our position and very confident that those numbers will hold up.

Vinay Misquith – Credit Suisse

Okay, that’s great. The second question was on the fixed-maturity securities. The income was down about $6 million quarter-over-quarter. Was there something special happening in that?

Dom Addesso

No, again as I mentioned in my remarks, its low yield available in the marketplace. And we have redeployed some new money to share repurchases, as well as in terms of maturities and new money into share repurchases and into the equity markets and a declining overall yield.

Vinay Misquith – Credit Suisse

Okay, so we can use it as a run rate for the future. Okay, that’s great. And then one last thing if I may, your premium to equities on a 0.63 to 1. I was wondering if that can go up in the future or whether your business mix has changed to more sort of property focused account and therefore the premium to equity ratio should stay at these low levels?

Dom Addesso

Well, we think it certainly has room to go up even at 0.63 or even if you change the mix of property business relative to our own capital models as well as rating agency models, we feel that we have some amount of excess capital which is why we continue to be very bullish on share repurchase.

Vinay Misquith – Credit Suisse

Do you have an estimate as to how much it is right now and when do you plan to deploy that?

Dom Addesso

That’s not something that we have habit of disclosing.

Joe Taranto

In terms of future purchases we just want the flexibility. I did indicate we’d be buying again in the fourth quarter and we will. But on the issue of, the amount of access capital. Can you give any guidance on that Dom?

Dom Addesso

Well I mean certainly we have rating agency model which produces one number but we tend to use our own economic capital models and depending on those scenarios it would be anywhere from $500 million to $1 billion.

Vinay Misquith – Credit Suisse

Okay and is that $500 million to $1 billion in excess of what really is required?

Dom Addesso

It would be within that yes. The rating agency numbers would be higher than that.

Vinay Misquith – Credit Suisse

Okay, that’s great. Thank you.

Joe Taranto

The excess would be a lot greater, just using the rating agency models.

Vinay Misquith – Credit Suisse

All right, fair enough. Thank you.

Joe Taranto

Yes.

Operator

We’ll move on to our next question from Brian Meredith with UBS.

Brian Meredith – UBS

Yes, good morning. Two questions for you. First, on the insurance business. Joe, any changes in strategy here going forward here on the insurance business that you’re thinking about now particularly as it relates to building our platform versus using MGAs?

Joe Taranto

I mean the MGAs that we currently have – we’re very pleased with them, we have some very long standing relationships that we expect to continue. But as a general direction, I think especially at this part of – at this time in the marketplace, unless it’s something unusual most of the future growth would probably be more on the direct side, having said that that’s going to be slow too if the market stays the way it is. We’re not going to be too aggressive on that front either.

So it’s really is just selective opportunities to come into us. We’re probably more keen on the direct side. We’re probably more keen on the short tail side. If it’s in the casualty space, it’s going to have to be proven to be highly specialized that we think it’ll deliver some very, very good results. We were able to achieve that a year or two ago with regard to the FID&O where we hit a nice window of opportunity and continue to have a very good renewal base that works for us.

So it’s – the general direction might be more direct, more short tail. If it’s an MGA opportunity, we won’t exclude it, if it’s really an exciting opportunity. And those that we currently have that we very much likely will continue with. That’s been the plan, that’s been the trend for us for the last year, maybe the emphasis is a little bit more on some short tail mix to kind of go with the casualty, it’s something that we’ve been promoting more recently but that’s the plan. That’s – and to stay very disciplined on the casualty side.

Brian Meredith – UBS

Great. And then – and the second question Joe, can you give us your early read on what’s it going to look like pricing particularly property CAT and then your thoughts on what things you’re going to do with respect to retentions?

Joe Taranto

Well I think most people believe that there will be some moderation in pricing that’ll continue into January 1. So the general expectation is CAT rates will be off a bit, I guess I hear 5ish percent change down as what most people believe. Clearly if it’s in a pocket where they’ve been losses it will be different, there will be a correction. And we saw that in Chile. You’ll see that in Australia, any other pockets that have had losses, you’ll see some upward corrections sometimes you see a model change that might lead to an upward correction. We saw some of that in Canada.

But in the main I think on the property side and on the CAT side, you’ll probably see things come down a bit same for retro CAT pricing. Insurance rates, property and casualty, US and outside the US, again we continue to see a bit of a slope down. Casualty rates you’ve heard about my concern in the US. So I think you’re going to see more of what you’ve seen in the last three – six months except for some selective pockets. I mean we’re pretty lucky that we have this international franchise that we can go into the product lines and into the countries that we really think are offering some new and exciting opportunities.

Brazil was a good example of that in the last year or so. But China, I would probably add to that list and even Africa to a degree. But it’ll be tough sliding in terms of any companies that’s mature growing its top line business in 2011. I think we’ll see some more challenges and I think discipline is the word to be used.

Brian Meredith – UBS

What about terms and conditions?

Joe Taranto

I haven’t really seen much change on that front, either at the insurance level or the reinsurance level. It may creep in as you go into 2011. I don’t expect much of that to change in January. We expect there will still be some very good pockets of opportunity besides the international space. I think it was Vinay that mentioned the Florida quota shares, we’re involved there in pretty important way and that’s actually one of the spots that is improving in the sense that underlying insurance rates are going up by a meaningful amount for the first time in years.

So it will be a question of picking the spots that make sense and being discipline in those that don’t make sense.

Brian Meredith – UBS

Great, thank you.

Operator

(Operator Instructions) And we’ll take our next question from Matthew Heimermann with JP Morgan.

Matthew Heimermann – JP Morgan

Hi good morning everybody, couple of questions. First, for Dom, I had a question. Last quarter you changed the definition of CAT from $5 million to $10 million. I was curious if you could potentially give us a sense of how that would impact the underlying loss ratios historically, because I would assume you’d get losses reported as attritional on a go-forward basis? And whether that’s a material Delta if we were to look at the last couple of years for example?

Dom Addesso

It is not a material Delta which is why we change it from $5 million to $10 million.

Matthew Heimermann – JP Morgan

Okay. And then with respect to the quota share book in Florida. Could you just remind us how big that book is today? And I’d just be curious given we haven’t really gotten any rate there has been some underlying loss issues, I’d be curious where that business is running relative to the rest of the US reinsurance book today?

Joe Taranto

The book is roughly about $300 million of book of business. Our clients have received pretty much approval for 15% rate increase this year over last year. So their book tends to be growing on the back of that. Keep in mind too in terms of CAT rates; they are paying a little bit less this year than they did last year, so their net has improved that way.

And they’re trying to improve the book in some other ways as well. So I think at least for the important relationships that we have, there is much more margin this year if you will than there was a year ago and of course there needs to be, because you have to have a good result to pay for those CATs when they do come along. Fortunately, they haven’t had a hurricane in a few years and they didn’t have one so far this year. But that’s actually improving in terms of the quality of the attritional and the overall combined for the partners that we have, so we’re happy about that.

Keep in mind we also have some containment on that book in terms of where we get stopped out. So that’s an equation that actually has gotten better in the last year. In fact we’ve done less excess of loss in Florida and a bit more on the quota share, our PML is pretty much to-date the same. But remember the excess of loss ratio has actually gone down, probably will continue to go down into next year. So the ROEs on that business is a little bit less favorable.

Matthew Heimermann – JP Morgan

Okay and then just in terms of underlying combined ratios because I mean if I looked at homeowners as a proxy for some of the primary guys it looks like, I would guess that ex-CATs that’s probably running around 80%. Is that ballpark?

Joe Taranto

I would say – yes, I was going to say 75% but I think we’re in the same ballpark.

Matthew Heimermann – JP Morgan

Okay.

Joe Taranto

Yes.

Matthew Heimermann – JP Morgan

All right. That’s it, thanks so much.

Operator

We’ll now move onto our next question with Ian Gutterman with Adage Capital.

Ian Gutterman – Adage Capital

Hi Joe, I actually wanted to follow-up on that question too. What did you seen as far as part of the reason I guess combining Matt and Vinay’s questions on the US reinsurance business. Is part of the reason we saw the tickup, where there any issues in Florida with sort of the attritional claims that have been worse for a while, was this bad quarter for sinkholes or anything like that on the attritional side or some of the thoughts there?

Joe Taranto

No it really wasn’t, Ian. I really do think much of the issue just goes back to what Dom said about picking some numbers that are higher. It really is nothing emanating specifically from Florida. That portion of our book, we do like better as we just discussed. But we know at the same time that we have this overall market that if I put it all together, it’s so sense – it’s not better this year than it was last year and so let’s pick some higher numbers.

If they prove to be too high as things play out next year or the year after, that’s all well and fine by us. But no, there was nothing new and different coming out of the Florida claim side that I looked that as particularly worse.

Ian Gutterman – Adage Capital

Okay, got it. And then Dom to that point about how you’re seeing the picks. Is it new at Everest to be setting picks above where the underwriters come out or is it just that the margin above it is greater than it is used to be?

Dom Addesso

I can’t speak specifically as to what our practices have been in the past, but I can tell you that generally I think our approach more recently has been a bit more conservative.

Ian Gutterman – Adage Capital

Okay, fair enough. And then if I can just ask one more on California comp, you mentioned Joe how 10% rate increases kind of just keeping up with trend. How does you view on the attractiveness of that business changed at all given just what’s going on with particularly there plus some of the results of smaller competitors in that state?

Joe Taranto

Well it’s certainly not an easy state. I think some of the smaller competitors are – no, that hasn’t concerned me. I think they’re in a different part of the market than we are. Some of them are the USL&H business or the high hazard group, we’ve been in the low hazard group. We haven’t really grown our book of business in quite sometime. We have a book of business that’s been very steady with a very high renewal and retention ratio. And we’ve been there for a quite a number of years. So I think we have a team that knows what it’s doing, but it is still very difficult to figure out just what the medical inflation is going to be for 2010.

A lot of the tort reform that was put in place, some of that is certainly being attacked, it will be fought out in the courts, it will be while before we know exactly what the answer on that front will be. So there is still a fair amount of guesswork in terms of just what the severity will be. And I think there is every reason given that to push for rate and to try to be safer. And that’s why we’re pushing for 10 and even as you heard with the 10, much of that may get taken in our mind to pay for severity changes. And we’ll continue to push for something next year on top of what we’re getting this year.

So it’s a dicey market, and no question of that. And that’s why even there its more rate than a lot of discipline as far as we’re concerned and watch it closely.

Ian Gutterman – Adage Capital

Okay and can you remind me just ballpark what your premiums and reserves are for Cal comp?

Joe Taranto

Premiums I would guess about $240ish million. That’s pretty close.

Ian Gutterman – Adage Capital

Okay.

Joe Taranto

Reserves, I don’t have in front of me, but Dom do you have it?

Dom Addesso

Yes, about $160 million.

Beth Farrell

No, that’s.

Dom Addesso

No, that’ll be more than that.

Beth Farrell

$160 is the premium.

Dom Addesso

Premium, I’m sorry.

Joe Taranto

Through nine months, okay. So $160 million through nine months. So again would be a bit over $200 million annualized.

Ian Gutterman – Adage Capital

Right.

Joe Taranto

And we don’t seem to have the reserve number in front of us. So we’ll get back to you with that Ian.

Ian Gutterman – Adage Capital

Okay, great. Thank you, guys.

Operator

We’ll move on to our next question with Josh Shanker from Deutsche Bank.

Josh Shanker – Deutsche Bank

Yes, good morning everyone. Back in I guess, probably the early part of 2009 you had very topical on the market, you decided to back into equities. And you’ve kind of doubled the size of portfolio. But it’s still nowhere near where you guys were back in 2007. How are you viewing your ultimate equities as a part of the investment portfolio? And what does the NAIC think and what would you in the future?

Dom Addesso

That was a lot of questions.

Josh Shanker – Deutsche Bank

Yes.

Dom Addesso

I’ll answer the last one first, I don’t know.

Joe Taranto

But we’re thinking of that.

Dom Addesso

The one thing we keep in mind is that we look our equity exposure. We consider both our limited partnerships and our public equity and we put those kind of in the same basket, even though it may the specifically or not. But in terms of evaluating our equity like exposure that would be appropriate. And we have just recently increased our allocation to the public equity market. And we’ll probably continue to do that little bit more into the next couple of quarters.

And given our level of investments seen in limited partners. We also likely going to be seeing our limited partnership investments continue to trend down, as some of those mature if you will or get cashed out. And at that point we will probably, again given wherever state of the markets are at that point in time, we would more than likely all of the things being equal, allocate some of that take down in limited partnerships more than likely back into the public equity markets. But that’s all predicated on in appropriate market environment at that – at whatever point in the future that is. Does that help?

Josh Shanker – Deutsche Bank

And what you think about NAIC considerations?

Dom Addesso

No, there are none.

Joe Taranto

No it’s purely where we want to put the money that we think it would be best. And it’s a tough call. As you can imagine for anyone in today’s market and, but we are a little bit more drawn to the equity space, some of that’s because we’re less drawn to the bond world.

Dom had mentioned we’re going into the bank loan space to some degree in the high yield. So we’re like the rest of the world look best opportunities. We’ll still have very big bond portfolio being an insurance and reinsurance company. But pound-for-pound we probably are finding more opportunities in the equity side today with new money, than we are in the bond side.

Josh Shanker – Deutsche Bank

Understood, and I don’t mean to be labor a point, I do apologize. But I’m trying to understand also when you decide to retire maybe about a year ago, why did you chose to come back as CEO and not interim CEO?

Joe Taranto

I’ve never left as a CEO.

Josh Shanker – Deutsche Bank

Well, I understand, but things in your mind, you maybe had some thoughts about retiring and just what’s going on – how are you thinking about this yourself?

Joe Taranto

Well I think I told you that the Board asked me to stay on and I’ve agreed to and that means that I’ll need to be dedicated towards that end and I am. And that’s why I said I’m energized and I will just do all the work that needs to get done. There will be a succession plan put in place, that the Board will work on that. But they can do that in a way that it’s sensible and deliberate. So I’m here, I’m energized, I’m dedicated to working hard.

Josh Shanker – Deutsche Bank

Very good, thank you.

Operator

At this time we have no further questions.

Beth Farrell

Okay, well thank you for joining us on our third quarter call. And certainly you have any questions, please feel free to call me after the call. Thank you.

Operator

And ladies and gentlemen that does conclude today’s conference call. Thank you for attending.

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