旅行家集團 (TRV) 2001 Q1 法說會逐字稿

Good day everyone and welcome to the St. Paul Companies first quarter conference call. Today's call has been recorded at this time for opening remarks and introductions. I would like to turn the confidence over to the Vice President of finance and investor relation, Miss Laura Gagnon. Please go ahead.

Good morning everyone and thank you for joining us for the St. Paul's first quarter 2001 conference call. Copies of the statistical supplement and press release are available on the investor's page of our web site stpaul.com. With me on the call today are Douglas W. Leatherdale, Chairman and CEO, Tom Bradley, CFO, and also in the room to address questions at the end of the call is Michael Miller, Senior Vice President-Global Specialty Practices. Stephen W. Lilienthal, Executive Vice President-U.S. Insurance Operations can not be with us today for personal reasons and Steve, if you are listening, our thoughts and prayers with you. This call is being recorded and will be made available on our web site through May 1. Because this information is time sensitive, any rebroadcast of this call by any third party may not take place after that date. Today we will be discussing our first quarter 2001 performance as well as the underlying market conditions. We believe that we are fulfilling the requirements for the contents of this call to be deemed fully disclosed under reg. FD. In that light, I would like to remind you that any comments made regarding future expectations, trends, and market conditions, including pricing and loss-cause trends as well as other topics, may be considered forward looking under the private securities litigation reformat in 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ from our current expectations. These factors - companies most recent report on form 10K filed with SEC is available through our web site. With that, I would like share my call over to Mr. Leatherdale. Doug.

Thank you Laura and good morning every one. First, thank you all for joining

us today to discuss our recent results. We had a terrific first quarter and I am very proud of it and anxious to discuss it with you today. We are continuing to realize the very positive results after 2 years of aggressively pursuing the repositioning of our book and our company. Not only am I extremely proud of what we have accomplished this quarter, the visible results of the several years of hard work, but I am also very excited about what it means for our immediate and longer [term] future. First, our operating earnings for the quarter were 75 cents per share, up over 19% from the first quarter of last year. The underlying fundamentals of our business are continuing to show accelerating improvements with worldwide net written premiums up almost 32% in the quarter. This growth is driven by price increases, by higher retentions, and an increase in new business. Price increases in our US insurance operations reached +16% during the quarter, up from 11-1/2 in the fourth quarter of 2000. Our reinsurance operations achieved a dramatic improvement in profitability with the combined ratio dropping from 114.2 in the first quarter of 2000 to 100 in the current quarter. The combined effects of the 17% average price increase we achieved on January renewals and continued underwriting initiatives have taken hold. Price increases on April 01 renewals, and you will recall most of these renewals take place in the Japanese market, those prices were up on

April 1 30% to 40%. Lloyds prices are also up significantly depending on the line of business, ranging from 10% on some casual line to as much as 50% on aviation. As well aware because of the US equity market turmoil our level of realized investment gains has slowed during the quarter resulting in our net income of 87 cents a share down from a dollar 51 in the first quarter of 2000. You may recall that we had tremendous realized after-tax investment gains of 90 cents a share in the first quarter of last year. It was primarily from one very successful venture capital investment. Yet, despite the market turmoil, our book value per share was actually up to 32 Dollars and 92 cents from 32 Dollars 88 cents at the end of 2000. In adjusting our holdings in John Nuveen to market, our book value per share stands at 35 dollars and 69 cents. Once again, this quarter, we found repurchasing our own stock to be a very attractive use of our capital. Since January 1 of this year, we have repurchased 200 million dollars of stock, 4.53 million shares at an average price of 44 dollars and 16 cents. All in all, it was very good quarter. Now that's it, we still have some parts of our business that are undergoing remedial actions. Fortunately, these represent less than 20% of our property liability segment. Specifically I am talking about our healthcare and our international segments. At this time, I want to

go into some detail on the fundamentals of our property casualty segments. Overall, our property casualty business just showed a marked improvement with a combined ratio of 103.8, down from 107.6 in the first quarter of 2000. The lost ratio dropped from 75.8 to 72.7 as price increases and underwriting initiatives continue to impact the bottom line. The 3-point loss ratio improvement actually understates the improvement, which was nearly 8 points, if you adjust our 2000 numbers for the benefit of the corporate reinsurance program. The expense ratio dropped from 31.8 to 31.1 reflecting our continuing focus on expense management and the progress we are making on reducing that towards our longer-term objectives. I might remind you that we have renewed our corporate reinsurance program for 2001 but we did not receive any benefit this quarter. During the commercial lines group, which is 26.6% of our net written premiums, they reported a 79.7 combined ratio and the net written premium growth of +25% to 491 million dollars. On an accident year basis, the combined ratio was 103, down significantly from the 106 booked in the first quarter last year, and the 125 we booked in 1999. The expense ratio

dropped to 30.5. Price increases continue to drive improvement with COG commercial alliance group pricing up 11.8% in the first quarter after increasing 10.3% last year. Standard commercial premium retentions have continued to increase and are now approaching 90%. Because of this, we believe we will be able to continue to push price increases even higher in subsequent quarters this year. COGs new business increased from 21.9% in 2000 to 24.4% in the first quarter. Steve Lilienthal and his team had continued to a phenomenal job in managing this highly competitive business. We turn to surety operations. Surety represents the 6% of our net written premium this quarter and continues to deliver outstanding results. Written premiums have declined as we tightened underwriting standards in anticipation of a potential economic slowdown. You will recall I have mentioned this on previous conference calls that we had expected an economic slowdown and were managing our surety book accordingly. This quarter premiums declined 14.5%, but surety delivered an impressive combined ratio of 84.3, and you should know that we avoided several newsworthy surety loses this quarter. So, our efforts to improve the quality by book have made a measurable difference. Our other specialty category, which represents fully 25% of our net

written premiums, grew by 45% as we took advantage of our superior domestic and global positioning in these segments. The growth also reflects the impact of some small acquisitions like the Penco renewal premiums and a small Australian professional liability business. The combined ratio for this segment dropped to 98 from a 106 last year with the 3 largest segments of this business all performing very very well. Construction, construction net written premiums grew 51% driven by price increases exceeding 15%, stable retentions reflecting a winding down of our re-underwriting initiatives and an increase in new business from 23.4% to 28.5% of premiums. We our leveraging our construction and surety distribution channel and customer relationships to enhance profitability and growth potential in both segments. Constructions accident-year combined ratio dropped from 110 last year to a 102.1 this quarter. Technology, one of our real stars, had net written premiums growing 51% as we solidified our preeminent position in this market. We continued to get price increases approaching 12% and to expand our technology products to non-technology companies facing technology related risks. This book continues to generate an accident-year-combined ratio just under 100. Financial and professional services, year net written premiums were 31%, with

price increases approaching 10%. This book also continues to generate accident-year combine ratios of just under 100. Two of our segments continue to underperform this quarter, that is 18% of our premiums represented by the International and Healthcare segments. And while we are making significant changes and aggressively addressing the issues, we don't expect the bottom line in these segments to show significant improvement until later this year, probably the fourth quarter. International reported a 126-combined ratio, still unexpectedly high. Out of 38 million in gap losses, Lloyds is responsible for about half with a gap loss of 18 million. Union America produced gap losses of 5 million as that business goes through the initial phases of runoff. The remaining international primary business is only just beginning to turn the corner. The Lloyds combined ratio of 130 is clearly unacceptable. Price increases averaging 25% to 30% in the first quarter are expected to continue and should significantly improve profitability going forward. Over the past year, we began to reorganize and restructure this business, and these actions will be completed by the end of this year. Over the next 12 months, we will continue to consolidate back office and staff functions into a single efficient organization. It should result in better service and is 2-point decline in the expense ratio. We are developing the information systems and strengthen the management organization to leverage our

specialty focus across our global enterprise including Lloyd. We will leverage our expertise to take advantage of Lloyds 64 licenses and the business flow that comes through the London market. Here we will end up with six specialized areas: Casualty, global property, aviation, marine, personal alliance, and non-marine reinsurance. We will eliminate all multiclass or non-specialty underwriting across all our syndicate, and while we complete the reorganizations we will continue our aggressive re-underwriting of the casualty and non-marine reinsurance works. Looking forward we are forecasting a 115-combined ratio for Lloyds for the full year 2001 with net written premiums of about 500 million dollars for the year. First quarter represents only about 10% of the annualized premium. Based on the actions already underway and the price increases we have already achieved and current market conditions, we expect to hit our targeted accident year ROE on business written by the end of this year. The remaining international business, which is about 55 million of primarily European net written premiums, reported 130 combined ratio in the first quarter as well. We are aggressively repositioning this book and have exited a numbers of most significant problem businesses in the UK and the Netherlands. We're determined to rehabilitate these businesses in one year, and if there is any portion of our businesses that is not now or cannot be made profitable in 12 months' times, we will

exit. The non-US insurance markets are beginning to experience the significant turmoil often seen during the initial stages of the hardening market. Companies, both domestic and foreign, are withdrawing capacity and raising prices. We have obtained significant rate averaging about 15% in the UK, Ireland, and Latin America. Canadian rates are accelerating from an average increase of 10% during the first quarter, and Australia continues to be just a phenomenal place to do business, and we are writing some business at two times the expiring prices. While we expect our international segment growth to slow from its historical 30% growth rate to something closer to the near [term] to 0, we do expect profitability to improve dramatically over the next six quarters. Now for healthcare. Today healthcare represents less than 10% of our premiums. They generated almost the 150% of our underwriting losses of this quarter. Clearly, this cannot go on. We will not allow healthcare to continue to underperform. In the major accounts book which are the, you remember the large complex healthcare risks and major metropolitan areas, I think we have made significant progress. In the past six months, we have aggressively targeted this book. We told you last quarter that price alone could not fix this book, but the 40% to 50% price increases combined with significantly higher customer retention levels and severely lower limits have gone a long way we believe

to restoring this business to profitability. That said, we are still seeing some adverse development on 98 and 99 cases, and we cannot predict with any high degree of confidence when this prior period drag will begin to end. During the ongoing strategic review of this segment, we have also determined that our positions in Surgeon's business is the need of some significant rate increases and soon to stay ahead of expected increases in Unlike major accounts, this is the portion of our book where we need regulatory approval before we can implement rate changes. For example, we have applied for a 70% plus rate increase in Nevada, and the indicated rate increase in Georgia is plus 40%. Over the next three months, we will be approaching regulators in our key states and requesting the necessary rates. If we cannot get the required increases now, we will not continue to write the business. I did hope by this time we were able to give you some more explicit guidance and how fast we expect to see the profit improvement in our healthcare segment. Unfortunately, regulatory uncertainty prevents that at this time. But what I can say is this; our current business in the major account area is improving rapidly, as we restructure our products and our portfolio and raise prices. In 2002, we will either be a very large and profitable healthcare insurer or a very small and profitable healthcare insurer. We will continue to keep you posted

as events develop through this quarter. Reinsurance operations have shown phenomenal improvement with the combined ratio dropping from 121 in the first quarter last year, excluding the effect of the corporate insurance program, to a 99.6 this quarter. Gap underwriting losses dropped from 77 million to 17 million. The London and catastrophe loss problems that plagued us last year are no longer driving on our performance and price increases and underwriting initiatives have resulted in significant current year improvement. There are some 41 million in positive events in the quarter. We had a 23 million dollar benefit from the reinsurance policy as a result of a couple of old events being designated catastrophes, and catastrophe losses in the quarter were something like 18 million dollars less than we had anticipated. Now offsetting these positive events were some 28 million dollars in losses. Our loss of 15 million was booked in the quarter. We expect a fairly rapid repayment of that loss. In our North American casualty results, we increased by 13 million in the quarter. There are still issues and uncertainties in the North America casualty block. This business has not had the same level of rate increases as other ones and remains under price. That said, we are pushing for and believe we can attain significant rate increases going forward. For the remainder of the year, we are expecting the combined ratio on the reinsured segments to be in the 103 to 105 range.

In borrowing major unexpected catastrophes, we are confident that our reinsurance segment will meet our expectations on an accident year hourly based. Now because of the long tailed nature of reinsurance, significant growth, even at very profitable prices, causes pressure on short-term gap underwriting profit. However, as we find opportunities to write long tailed high ROE business, we will continue to do so. Now, you know we don't very often highlight our discovery operation and some of you may even have forgotten that it is a part of our reinsurance operations. Discovery services the alternate of market customers and large accounts, and it's a rather booming business in today's hardening market. While it accounts for less than 8 percent of the reinsurance segments net written premiums, Discovery controls 139 million in gross written premiums and is growing at 50% per year. It is a very profitable business. US purchased this business in 1995 for about 80 million dollars. Now for you it goes same acquisition multiples on today's performance, that company would be worth over half a billion dollars, and that will represent more than a 40% average annual return on investment. We think that is a nice little business. And now I would like to turn the call over to Tom Bradley who is going to discuss investments capital management and life operations. As you know, Tom was recently elevated to the position of Chief Financial Officer and you will have the privilege of hearing and seeing him more frequently over

the next several quarters. Tom.

Thank you Doug. First investment performance. The first quarter property and cash as the net investment income was up 4%, due to higher than normal real estate investment income and the inclusion of MMI investment income. We continued to expect investment incomes to be flat but slightly down for the remaining quarters of the year. It is widely known that we have significant exposure to venture capital market. It is important for you to understand that we are not big players in the dot com sector. Our focus is on healthcare products, consumer goods, and technology. As a matter of fact, our practice of liquidating our venture capital investments as soon as our restrictions lapse has served us well in affording market driven fluctuations. During the first quarter we experienced a 140 million-dollar decline in unrealized gains in this business, for a total return of negative 13%, compared to a decline in the NASDAQ composite approaching 26%. During the quarter, we also liquidated a significant equity investment in Renaissance RE. We sold our complete position for a 125 million dollars for an after tax gain of 39 million. Ren RE is a highly successful and very well managed firm. That said, we feel very strongly that investment in our own businesses either through internal growth or through share repurchases is a better use of that capital. Our traditional equity portfolio also experienced decline with unrealized gains declining by 225 million. The last quarter has been difficult but we fully expect all of our asset classes to continue to generate long [term] performance in that half quartile of their sectors. Now after capital management,

it should be perfectly clear by now that our commitment to share repurchases is unwavering. During the first quarter, we utilized remaining capacity on the third authorization and now have 475 million left on the fourth authorization. Over the life of our share repurchase program beginning in the fall of 1998, we have repurchased over 1.2 billion dollars of stock, almost 37 million shares, for approximately 15% of our outstanding share base. The average price of these purchases was 33 dollars and 35 cents per share. We are continuing to refine and enhance our capital allocation models. They will continue to seek an optimum utilization of our capital. F&G Life continues to have very strong fundamental growth. Annualized sales this quarter rough over 2 fold from the first quarter of last year and invested assets have grown 8.3% since year-end 2000. Margins have come under some pressure this quarter with about 2 million dollars of advertising and promotion cost that we expect to recoup throughout the remainder of the year. We still believe we will hit our targeted earnings growth of 10%. With that I would like to turn back to Doug.

Thanks Tom. Before I wrap it up I want to address the John Nuveen's performance throughout this quarter. Nuveen's first quarter growth sales were a record 3.8 billion, that is up about 20% from the year ago period. I think that having a diversified product strategy is clearly been a winner in today's market as recognized by their customers and their owners. At the end of the first quarter, Nuveen's 12 month absolute price performance was +41%, that is at about 65% better than the S&P 500. We continue to believe that

Nuveen is an outstanding investment, and they continue to prove us right. They as well have an active share repurchase program and as a result of that repurchase program our, that is the St. Paul's percentage equity ownership, has increased slightly to 79% and frankly we could not be happier with their results. In concluding, let me just summarize. Fully 82% of our property casualty businesses are in top shape and are capitalizing on both the current market conditions and our superior positioning. The remaining 18% in our healthcare and international segments are undergoing dramatic change and we expect noticeable improvement before the end of the year. Now barring any unforeseen events in the balance of the year, I am confident of the earnings guidance I gave you all in January, and let me repeat specifically what I said at that time. We remain confident at the St. Paul can deliver operating earnings per share of 3 dollars to 3 dollars and 25 cents per share. There our loss ratio will fall between 71 and 73. Our expense ratio should reach our objective of 31 and may be even a little better lower, and that our superior market positioning and continued price increase, will certainly drive overall premium growth well above 15% for the year. I think this is really the year that we will prove to you what it means to be one of the best position property casualty companies in the market place. Thank you for listening to us this morning and being with us and now we will be delighted to entertain your

questions.

At this point in time, I would like to open it up for questions.

Thank you, the question and answer session will be conducted electronically today. If you do have a question, please press star 1 on your telephones. We will proceed in the order that you signal and we will take as many questions as time permits. Once again that is star 1 to ask a question, and our first question today will come from Ken with

] Yes good morning. Two questions. Tom, I wonder if you could just quantify for us the total market value and cost bases for the venture capital portfolio as if 3/31? Next, I wanted to ask you about the reserves and the amount of favorable reserved development if any in the quarter and if you could comment about the trends and incurred and then a question for Doug. Doug, just with respect to Lloyds and some of the international operations, could you, I guess in some more detail, talk a little bit about your tolerance for or I guess clarify your tolerance for paying up the Lloyds operation and whether it makes sense to have as many stored fund as you have there. Thank you.

On the reserve issue, we took down about 100 million dollars of reserves in this quarter. They are all related to US F&G business with active years prior to 1998, I'm sorry, 1988. As you recall, we bought US F&G 3 years ago and kind of drew the line in the sand at 1988, and separated those obvious those reserves out given that they were much harder to assess. We spent the last 3 years analyzing, watching, and monitoring those reserves and now feel that that is appropriate to take down that 100 million dollars. It does still leave

over 700 million dollars of reserves in that category.

] Tom just to clarify was that reserved redundancy specifically at F&G Re or other operations.

It was throughout the US F&G operation. F&G Re really didn't start writing business until about '86, so there's really very little that related to F&G Re. On the incurred situation, we are still seeing those ratios higher than 1% or higher than a 100% given the run office somebody's old books of business like personal lines and some of the other smaller books we have gotten out of, in addition to our expanded claim initiatives throughout the first quarter. Overall you'll notice our reserved base went up during the first quarter from the year-end which is a reverse of the trend seen over several periods.

Ken, this is Doug. My tolerance for unsatisfactory results at Lloyds is not terribly long, but we have built I think the nucleus of the pretty good operation there. That market has been behind the rest of the world market in terms of getting the necessary pricing, and quite frankly we ended up as a result of the acquisition with some business that came through the US F&G site, that quite frankly and I will take responsibility whether this did not get on its fast enough and get it turned around fast enough. I think we've got a focus here now that is really much more aligned to the specialist focus we have in this company. I have got people from here and there cooperating a good deal, for example, Mike Miller who runs our financial professional

side, is very involved in overseeing and underwriting and pricing an operation there as well. So we've got much better coordinated global operation here today, and I am quite optimistic that we certainly feel we will hit our targeted accident year ROE next year, and by the end of the fourth quarter of this year you all have seen some really significant progress having been made. We've played aggressively on top of this one so I feel okay about it. I don't like the current number that's being reported. I am disappointed in it. I thought we would be a little further along, but I as had spent a fair amount of time personally on that in past several months. I feel pretty good about it going forward.

Yes, Doug, and thanks. One clarification back on that reserve take down, I mentioned about the 100 million-dollar take down on that one US F&G component. We also had about 100 million dollars of adverse prior year development in the health care book. So, for the quarter would basically a net zero in terms of prior year affect. In other words, our calendar loss year ratio with based on the same as our accident year. And back to your venture capital question, we're booked at currently just under 1 billion dollars book value on that investment now and our clock basis is just over 600 million dollars.

] Thanks very much.

And next question will come from Tom from Goldman Sachs. Thanks.

] Yes. Good morning. I just wanted to clarify one thing on the commercial lines area. I assumed the big difference obviously between the accident year of the calendar year had to do with reserve release. Is that where most of the reserve release had placed.

Not yet.

Okay, and then secondly Doug, I just wondering, you know one of the things that Tom was talking about was issue of rate

sustainability and how much higher rate can continue to go in terms of just incremental increases, and I was just wondering how you are seeing the market place in terms of your ability to continue raising rate at an accelerating rate.

We are very optimistic about that. The fact that our retentions are right up in the 90% level and higher which are greater than, quite frankly if you had asked me 6 months ago, I thought we could have maintained. The fact we are showing very significant growth from the numbers that I just I gave you, we are able to continue to get those kind of price increases and maintain those retentions, all suggest to me that I have no concerns about our ability to continue to get significant price increases through the rest of this year and into 2002. There are just too many companies out there that I think are still struggling. They don't have their acts together. I think there are too many balance sheets that have too many holes in them, that need a period of good earning to replenish that, and we see no evidence at all. And I have in the last month just been out for meeting with great number of our agents and distributors. I see no evidence at all, of the customer saying they will not accept this kind of price from the St. Paul. I think, there is clearly a cheering going on in the sense that the companies with impeccably strong balance sheets and high credit ratings like the St. Paul's are very much in favor into as far as the customers are concerned, and we are very confident that we will see this kind of pricing environment continue through this year and into next.

If I just do one quick follow-up. One of another company reported this morning

was talking obviously about more pressure in the property catastrophe, reinsurance markets. Now, I was just wondering what you folks are seeing there, I do not realize this is not a huge part of your business but I believe you are involved in a part of it.

Yes but, and we have seen very acceptable price increases. We had about 55% of our book, our reinsurance book renewed on January 01, a very high percentage of that is property. We average a +17% and that includes a number of less than that on the some of the casualty North-American casualty business. Though in fact we are getting higher than that in terms of property and we just have renewed our book as I said in Japan, where we saw significant price increases, and we are looking forward to the July 01 renewals be equally stunning. I don't see any real mitigating price downward pressure in terms of property reinsurance rates. We have been very happy what we have been able to get.

Thank you.

We'll now move on to Jay Cohen with Merrill-Lynch.

Yes, just a couple of questions. Tom, just to clarify something you said. I guess you suggested that the net reserves increased during the quarter from year-end.

Yes, that was the book reserves 18.2 billion dollars at year-end and now 18,234. So they are up slightly.

Gross reserves then.

Yes.

You had given gross reserves.

Yes.

Yes.

Okay.

GAAP reserves.

was that?

GAAP reserves.

Right, right. Next question. The combined ratio in the commercial lines group obviously helped rise in prior year favorable development. You expect to see

more favorable development? In other words, how sustainable is the kind of combined ratio you showed in the first quarter there.

Well, I think remember that the before we combined ratio was largely influenced by the reserve release that Tom talked to you, talked to you a little while ago. I think we will continue to see the lost ratio and that is really, I think, what you are focusing on the accident-year loss ratio. I think it got little bit more improvement to continue over the next several quarters. We will continue to see some improvement there. I don't know whether that one is going to be 2 points or 3 points, but we that business is continuing to get better. We are continuing to see accelerating prices and we are retaining, as I said, +90% of that kind of business. So we expect to see a little bit of more improvement in the expense ratio, a little more improvement, and I don't hold this to me that would be may be 2 to 3 points in terms of the loss ratio going forward. So that business will continue to get better.

As my Calendar year standpoint, you said the last reserve releases that helps to combine ratio, probably not going to continue at those levels. Is that a fair statement?

Yes. We have a little bit left, I think in the amount of about 60 million dollars, don't hold me exactly to that number but I think it is above that. Just, it is a way to think about it is we think overall that 71 to 73 loss ratio is for our US book of business is pretty reasonable. We think we can generate that.

Great. Thanks

Doug.

And then you combined that with as I said we expect our expense ratios will BE gearing towards the 31 expense ratio and we are about there and we are going into the budget season around here so there be some encouragement of my associates to continue to reduce that.

Great. Thanks a lot.

We will here from Charles Gate with CS First Boston.

Hi. Good morning. Two questions. My first. I believe you'll find in your opening comment that the gross and investment coming in the first quarter would not continue for balance of year. I think you said that part of the growth and investment income in quarter specific to extraordinary real estate income. Could you quantify that?

Yes. I think what is really happening here Charley is that our growth and investment income will be largely influenced by the amount of cash flow we have and the fact that interest rates are at a lower level today then what we certainly had anticipated 6 months ago. The third factor working there is that we haven't had the realized gain coming out of our venture portfolio to add to our investable cash resources. So you got really 3 things continuing to work in a negative sluggish fashion. 1. Lower interest rates. 2. Not as many big realized gain. 3. Still a sluggish cash flow coming out of insurance operations. All of that will make it difficult to generate substantial increases in investment income.

My second question. I believe you will find that one factor in the quarter was what you termed a reclassification of some loss in the past as the catastrophe and therefore there was a pickup to earnings. What was that?

Well, there was in the reinsurance book of business, there was a piece of an old catastrophe that was categorized as catalog and got thrown back to another one of the old treaties and that gave us a positive impact in the reinsurance segments for and that quarter amounted to about 23 million dollars. It was an old event, I can't even remember the name of it but it amounted to, it gave us a 23 million-dollar benefit that we collected in a reinsurance recovery.

Was that, my only other question, was this pre or after tax?

That is pre-tax.

Thank you.

I will now hold on to Michael Smith with Bear Sterns.

Good morning, on the reserve rate issues, I think you said you have another 60 million dollars tucked away but you sound like you also have some medical malpractice reserves that will continue to develop. Dare I ask if there's a perfect offset?

Ah-Ha-Ha-Ha-Ha. Yes, the 60 million is probably you know a soft number plus or minus a little bit. As there, as I said, the some of the older business is in medical has continued to develop unfavorably. I have got Mike Miller here in the room and as you know

the healthcare segments is one of the global specialties that Mr. Miller is responsible for and I am going to just ask him to just say a word what you see in there.

Clearly, as Doug mentioned in his comments, the prior year specifically 1999 and 1998, we have seen significant adverse development there and which is of concern to us and it is not only ourselves, it is in the healthcare Med-Mal industry overall. After significant great pressure for a number of years in judicial inflation, we have seen that continuation in the year 2000 which is in large part wise you see the overall reaction that we are taking aggressively in the market on substantial price increases across all segments of the book. So we unfortunately, at this point, have not seen any significant slowdown in the judicial inflation amounts and the payments for the first time as we talked about reasonably here in the first quarter we have seen some early signs on the source year paid in case declining for the first time in number of years. But given the prior year development over the last 3 years, it would be far to early to suggest that that's something we are going to take full confidence in and react to. We do believe though at some point the significant actions we have taken over the last couple of years we will have a positive bottom line effect.

Can you characterize or give us some color on the development of the St. Paul book versus what you acquired with MMI?

We have seen development across all

segments candidly; it is not specific to any one book. I would tell you that I think that medical malpractice liability business for the industry and for the St. Paul as the leader as for number of years been underpriced and in fact the judicial inflation which came in the late nineties was really much more of unanticipated adverse affect which pronounced the under pricing and I think realistically we have taken action, as Doug mentioned, on the large metropolitan institutions, and we will continue to that given the exposures of ongoing forward but as well the traditional doctor business has been underpriced and needs to be rectified and we are about that process as aggressively right now. But I think in aggregate we have clearly price increase issues across the entire portfolio.

Just to give you a flavor of that, Mike, just comment for a minute about experience just this week in state of Nevada.

Yes, this, as Doug mentioned on the physician and surgeon business that is filed, and the rates are filed, we this week were in the state of Nevada which is a fairly significant state to us, and we are pursuing and had meetings this week for increases an excess of 70%. We are very committed to getting the appropriate pricing where we need it and a number of these significant underpriced jurisdictions and we will obtain those price increases or we will not be writing the business at the inadequate risks. The other additional feature that we are looking at are

additional alternative ways to distribute the products which could include such things as offshore operations, surplus lines and So what we are considering all options to try aggressively move the appropriate pricing on this book of business.

Okay, thank you very much.

We'll now move on to Ron Frank with Salomon Smith Barney.

Hi Doug. A couple of things first of all, I am a little confused about the healthcare business, as recently as a few months ago your characterization seem to be more that the business was okay except for major accounts or could be okay except for major accounts. Now it almost sounds like major accounts is the only thing that you're sure is headed in the right direction and I wanted to get a sense for that turn around if it is indeed one. Related to that, I would like yours or Mike's opinion on whether the regulators will restrict your ability to non-renew physicians and surgeons at all should you decide to start non-renewing a lot of business. And on the international piece of philosophical question, at this stage of the game with those markets beginning to turn, and you are still having to prune the book and slow down your growth. Is there a not a legitimate question here is to whether you better put Mike's and others time on exploiting the US opportunities instead of sort of putting out fires overseas.

Let me take the last question first, as there is a very quick answer to that. No, I do not agree with you. I think we have got a very strong infrastructure. We have got a strong group of people there and that you got be more careful

when you are looking at these numbers, Mike, remember the international segments that I talked about doesn't include the global specialties. I have got surety, got construction, we have got technology, we have got healthcare, financial, and professional, we have a lot of specialties that we are distributing overseas that are doing very well and those numbers are included in the other specialties that we gave you. So, no I do not agree with you, I still think that is a very attractive market. I think we have got the right organization and the numbers will come through in due course. Back to medical, you asked very astute question because you are absolutely right. Several months ago I suggested to you that the major accounts, the very large hospitals and I characterize them as teaching hospitals and larger appeared to be the area that was creating the most problem for us. We have attacked that very aggressively but the same time we have had a very major strategic overview of it with little bit outside folks like Mackenzie to look at the entire medical field. And, as I said, we have put in some 40% to 50% price increases, changed retentions, change limits, etc. and we seem to be getting our arms very quickly around those major troublesome accounts. As we were going through this analysis, it became apparent to us that the physicians and surgeons part of the book of business, which we have become really convinced about in the last several months, was also going to be requiring some significant price actions, and that was Mike was talking to you about. Let me turn it back to Mike Miller for a little bit more color that what I just gave you.

Yes Ron,

I think to your question in the way Doug was characterizing it, we have been able to more quickly move on the large account business for two reasons, one, because of the ability a lot of that is individual risk based and individual rate files, and so we have done account by account, and secondarily, the market for large accounts clearly has moved dramatically, and there is an interest and much very strong commitment to the financial stability of the St. Paul for those larger institutions as well as the history we have in the business. So, I think it would be fair to say we have been very aggressively working that book and really taken some dramatic action very quickly and I have seen some pre-positive reaction and movement on that. On the physicians and surgeons business to follow-up again Doug's point, that business candidly on a state-by-state basis, which is how it is done, varies dramatically from place to place. In aggregate though when you are the size of the St. Paul we have this business on the nationwide basis, save a couple of states we really aren't a factor, and what we have seen is if you work at that book an aggregate, those significant states that are troubled really are affecting the entire portfolio on the physicians and surgeons. We are aggressively going to the states that I have mentioned. Your question is a very good one and I wanted to be very specific. I did not suggest to you that we would be non-renewing the business to be clear about it, but we will getting the appropriate amount of rate and that is what we will be pushing in the market place and there are all kind of ways that we are working at to get that

done. And we will be operating that business as you suggest with the regulators' full involvement and awareness as needed as necessary and in compliance.

Mike, just a follow-up for argument sake. You go to Nevada with a 70% increase in they come back with 30 and that is not enough and if you are not going to non-renew, how do you fix it?

What I would tell you and I prefer not to go too deep into that because we had an discussions and what we have indicated to them is the need for it. We have provided the appropriate documentation. We believe we will come to a very agreeable and acceptable conclusion on it, and we will be stood fast in the need to obtain it as we deal with that. And should we not be able to come to that agreement, there are variety of options we have opened to us and we will consider all of them and take the appropriate step relative to the financial decision and the business implications.

Okay thanks.

Next question will come from Paul Newsum from Lehman Brothers.

Good morning. I just want to get your feed comments on this extraordinary growth you are seeing across the board really, and how you personally come to be comfortable with where you are growing is where you want to grow. Whenever we see extraordinary growth and in any property casualty company, we always wonder whether or not the new business is as good as the old.

Yes, I think that is a good question and we have clearly are growing even faster then what we perhaps had anticipated,

but, having said that I remain very comfortable with the quality of the business that is going on here. We monitor that new business very, very carefully. We also monitor the business that we don't like and we have got so that we have an understanding of what is happening with that business. Keep in mind that our premium retentions, our retentions are very high, and we are getting significant price on top of that, so that does add significantly to the premium. Remember we also seeded a number of premium last year to our corporate aggregate excess freeze so that helps a little bit, but by enlarge the fact of the matter is that we are finding that we have a very smoothly running infrastructure across the country. This business, this company is working like a well-oiled machine today and not every one of our competitors can say that. Our agents tell us we are very easy to do business with and they are much happier dealing with us than a number of our competitors. Two, I think that we have been intelligently implemented price increases. Three, we bring all of the other things that we have built over the years from risk management, loss control, and very specialized clients kind of services. You put it all together. We are in the enviable position and we are not reorganizing and we are not changing management anywhere. Everything is running smoothly. It was the best exemplified by the meeting we held last week with the number of our major agents. We said, we have no announcements. We are open for business and not everybody

can say that. So we have seen that kind of business of that together will retaining the business that we had plus price increases, all result in pretty-pretty substantial premium wrote numbers that you are seeing for the quarter. Worldwide, premiums are up 32% for the quarter that is a very-very strong number, but it is done so in an environment where we feel very good about the quality of that business.

Do you think that it is a bigger factor that others may be raising prices faster than you, that are you giving the great retentions, or is it much more essentially a flight to quality?

No, I don't think there may be isolated spots where other people have raised prices more than we have, but by and large, I think that our price increases are as strong and as compatible with anybody else. I think the two advantages that we have is one the very high quality nature and recognize so of our balance sheet and two the fact that we are such a smoothly running operation.

Thanks.

You know, and also remember we are pretty early at this game. We started in the third quarter of 1998 and moving prices and re-underwriting our book of business and we got that behind us. We got a lot of other people are pretty Johnny come lately to that party, and keep in mind that we will not only raising prices, but we will re-underwriting our book of business, and at the same time smoothing out some crinkles in this operation. All of those things we have done early and we have been in business in that fashion for the last couple of years here now and

that is something not everybody else in the industry can say.

Paul?

Yes?

This is Laura. I just want to say I'll admit that I listened to Chub's conference call this morning, and based on what I heard, our prices are actually higher than the US commercial insurance business.

Fair enough.

We'll now move on to Bob Glastico with Lincoln McLane.

Good morning, Doug and all. We're talking about International with the same words that you used for medical six months ago, that you are underwriting and willing to walk away from clients that were unprofitable. By the way, medical was growing. With their premium growth last quarter, I guess you're hoping to get to that sort of premium growth this quarter, but, where does International stand strategically in your sort of vision of where the company is, and how crucial is it for you to execute your US Strategy to have International peace?

Well, we think it is pretty critical from the strategic point of view. Remember we run, we are specialist commercial insurance company that operates on a global basis. That Mike Miller, for example, who is sitting here at the table, is responsible for a health care on a global basis. That means in both the US, but it also means what he is doing in South Africa, what he is doing in Argentina, or what he is doing in Netherlands. We think that we see the growth in those specialties being substantially greater outside the United States in the long [term] than they are. At the same time, they have re-confined specialties outside the areas that do not have the growth or the profitability. For example, we have exited public sector in the Netherlands; we could not see enough business or enough future in the construction business in the UK.

We could not see ourselves implementing the health care business and in a major enough up way to make a difference for us in France, and those are 3 things that we executed, that we have exited. On the other hand, we continued to see growth opportunities, for example, on financial and professional not only here in this country, but also in the UK, for example. Surety is another example where we continue to see substantial growth outside the United States. So, you've got to really look at this as a part of our strategic way and this is the way I would look at it, as our specialty focus just taken beyond the United States and the rest of world. We will have a few things that we will do that do not fit that and that is the kind of the other international segment and to the extent that those segments can be profitable, specialties will be profitable we will stay there. If they are not, we won't. You know, the railroad business for example in the UK is a perfect example. It is not a global specialty. It operates in the UK alone, and we have got a couple trains run into each other, but on the other hand we still have a dominant position in that market place, and I expect that has been and will be profitable again in future.

BOB GLASTICO I think I've followed you. Thank you.

And now before we move on to our next question, as a reminder please press the * 1 if you do have a question today. We'll now hear from Michael Lewis with UBS Warburg.

Amazing, I already put in a question about a half hour ago and I missed the first half of the call because they forgot to plug me in, but other than that Doug, everything is wonderful.

That's a good story, Mike.

I figured I'd give you some funny stories here. I am going to just follow-up what everybody is asking is right now. I still have a one problem in here and I can understand growing aggressively I can understand having an attractive

franchise with the agents who love you, but I have trouble with this growing problems lines on the fly. In other words, It is one thing to have 18%of your business that has difficulty, but that 18% was 12% of your business 12 months ago. I am just trying to get a little clarification on what is pruning? What I have usually heard from the companies that is pricing and pruning and this seems to be growth and whatever else you do. So maybe you can explain how you grow things that have problems. Number 2 could you just tell me if also if the sit back and say if you had the same opportunity today, would you have bought MMI, or was it as bad as it looks on paper? And lastly, any changes in your deployment of investable assets appointment as it is? What was it and will it change at all? Sorry about that.

In terms of investable assets there is really no significant change. Our philosophy is still the same. The majority of the funds going into high quality fixed income securities, and we balance the rest between the venture capital real estate and common stocks depending upon our view of the attractiveness of those markets. So that really the asset allocation, investable assets really haven't changed. That when you look at the premium numbers you've got to adjust to a couple of things. One, you got the acquisition of MMI which is in and that which wasn't there. You've had some very some very steady price increases that we have been putting through without necessarily an increase in exposure, so, I hadn't looked at the numbers in the way you had put them together. You know, we are less than 18% of our total bulk of business and you know you have the talk over the years. We run a portfolio of businesses. I don't expect everyone of those is going to be

operating on all cylinders at all times, and I think we're well down the road in fixing what we need to do in terms of our medical book of business Mike Miller's got his arms around that. We understand what the issues are and we are very aggressively implementing that. We have a small amount of international business outside of the global specialties that we have to continue to prune and deal with price increases. Remember the price environment outside the United State hasn't been nearly as good as it has been in this environment over the last couple of years. So, I recognize we've got couple of pieces that we have some work to. I think this is a company that probably always have a piece or two that we will have some work to do but I am very comfortable with where we are and in the meantime the rest of the business is going just gang busters, turning into superb results, so we can afford a little couple of quarters to fix a couple of problem areas.

An MMI, Doug, if you had it to do again was it a mistake or is just am I missing something?

No I think clearly the results have been a little disappointing, but I can't lay that all on an MMI. Our medical book of business, there is absolutely no doubt that it has been deteriorated. There is nothing in MMI book of business that we have not seen in our own book of business. So in that sense I would say that it was not a mistake.

Thanks alot Doug.

Mike, do you want to add anything else?

Well the only thing I would say relative to the growth questions specific to healthcare. Two things I would say significant heart of that is really the aggressive price increases and in the first quarter of the 45% on the major account business in total. So, significant amount of that had really been driven by rate increases. Second of

all, about a 3rd of the new business written in healthcare was in the supporting property casualty lines, which are extremely profitable and in fact relative improving the profit feature adding to the mix profitable business clearly helps as well and that is part of our strategic positioning. And then third of all, that on healthcare basis the current axis and year picture is dramatically better than the prior year, which is really the drag. So that the combination of the work we have done over the last few years, the pricing we are getting on today's book, the quality of underwriting around it on a current year basis, is well positioned.

Thanks very much.

We will take a couple more questions, operator.

Hello.

Are there any more question at this time?

Yes thank you. And our next question will come from Ira Zuckerman with Securities.

Doug, just a technical question. You have been reinsurance through the worked up very nicely over the last couple of years. I assume that given the losses you now reporting, you have got to be ending up paying back some of the gains this year into back for the re-insurers. And I assume that's faceted back into your projections.

No don't like that is the case. We did renew the beginning of the year the corporate aggregate treaty. We renewed it with somebody with another firm and that we had actually we had several people who wanted to business with us. We chose somebody else. We have not touched that treaty in the first quarter. The terms of it are

substantially more favorable then what we have had in the past and, but our business results are such that we have had no need for assistance as an insurance policy against extreme volatility and that is what we think about it.

If your clients did that to you, you would be unhappy.

Ha, ha, ha, ha, interesting observation.

Thanks.

Is there one last question?

Okay, thank you very much for being with us this morning. As I said we are really pleased with this quarter with 19% increase in earnings of net premiums worldwide up 32% for the quarter. US on average of 16% price increases, a 100 combined ratio on her reinsurance segment, all of that came together that I think that we find it to be a very acceptable and exciting quarter, and I hope you do as well. Thank you for being with us. And that concludes today's conference call. Thank you for your