旅行家集團 (TRV) 2001 Q2 法說會逐字稿

Good day everyone and welcome to the St. Paul Company’s second quarter conference call. Today’s conference is being recorded. At this time for opening remarks and introduction I would like to turn the conference over to the Vice President of Finance and Investor Relations, Mr. Laura Gagnon, please go ahead Mam.

Good morning everyone. Thank you for joining us for the St. Paul second quarter 2001 conference call. Copies of this, statistical supplements, and the press release are available on the investor page of our website, www.stpaul.com (http://www.stpaul.com). With me today on the call are Douglas Leatherdale, Chairman and CEO, Thomas Bradley, CFO, Michael Miller, Executive Vice President, Global Specialty, and Marita Zuraitis, Executive Vice President of US IR. This call is being recorded. It will be made available on our website through August 3. 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 second quarter 2001 performance as well as the underlying market conditions and our future outlook. In light of that, I would like to remind you that any comments made regarding future expectations, trends, and market conditions including pricing and loss cost trends as well as other topics maybe considered forward-looking under the Private Securities Litigation Reform Act, 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ from our current expectations. These factors are described under forward-looking statements enclosure in the company’s most recent report on form 10Q filed with SEC and available through our website. With that, I would like to turn the call over to Mr. Leatherdale.

Thank you very much Laura. Good morning everybody and thanks for joining us here today. Before I talk about the highlights of the quarter, I wanted to acknowledge that our Healthcare results this quarter have been disappointing to all. We have been finding the acceleration in Healthcare claim severity as an issue for the past three quarters. Still I am disappointed that we continue to see trends that indicate increasing severity on old accident years. There is positive news, however, in that the severity trends for accident years 2000 and 2001 appear to continue to be well behaved. The old years’ results only confirm that we have taken the right action in recent years to exit jurisdictions, change terms and conditions and fight for aggressive rate increases. Now given that medical malpractice is a volatile line and as the business we are placing on our books today appears to be well behaved and profitable, any other company might have been tempted to ignore the data of the cost of doing business in this line. I must say today that it does sound like the easy way out but it is not the way the St. Paul operates. It would send the wrong signal to our customers, to our regulators and our employees who must all continue to deal with the significant changes we are making to restore Healthcare to profitability and to recoup our economic losses. More importantly it would send the wrong signal to our investors. If there is one message we have been consistently delivering is that we are conservative in our financial practices. Shortly I am going to ask Mike Miller to provide you with additional details about we are seeing in our Healthcare segment, the actions we are taking, and our outlook for that segment. But before we get into the segment details, I would like to cover the overall results, because aside from Healthcare, I am really proud of what we have delivered this quarter.

Over 80% of our net written premiums is in specialty areas and reinsurance. The percentage of our business in specialty high margin businesses continues to increase reflecting our focus on customers and the creation of value-added products and services. Within our specialty book, over 90% continues to perform very well showing improvement ahead of the aggressive goals that we set last year. The in stream specialty businesses, over 80% of our premium continue under the same exceptional leadership that has taken us this far. Those individuals responsible for setting the pricing, the products, the underwriting, and the distribution strategies remain in those roles. Although, Mike Miller’s direct responsibilities have expanded to include oversight of an additional 10% of our premium portfolio, the Vice Presidents of that additional business, our technology and ocean marine units for example, continue to lead those units. They just now report directly to Mike. While the leadership of 20% of our business standard Commercial Lines has changed, we are very confident in the new leadership.

Marita Zuraitus, Executive Vice President of the US IO, has played a significant role in making the Commercial Lines grow to what it is today. In a role as head of the US IO, she will continue to work jointly with Mike Miller and Robert Lamendola to implement our specialty strategy. There is little doubt in my mind that we continue to be one of the best-positioned companies in this industry and I think that the numbers will continue to bear that up. We continue to see an acceleration of price increase. Price increases that average 15% for US primary insurance, 20-25% for reinsurance, and 15% for international in the second quarter. Accelerating price increases combined with strong competitive positioning continue to drive growth in net written premiums and improve profitability in the remainder of our segments. Our net written premiums were up a little over 24% in the quarter and 28% year-to-date. On an overall basis, our statutory combined ratio for the quarter was 106.5, but 4 points were attributed to catastrophes and over 6 points of prior year development in Healthcare. Our expense ratio continues to improve as we maintain our expense discipline, dropping to 29.3 points for the quarter and 30.2 points for the first half of 2001. We have achieved our expense ratio goals, but we continue to look for opportunities to enhance operational efficiency. Book value per share at the end of the quarter was $32.23 or $35.17 per share after adjusting for our holdings of John Nuveen moving that to market. We have continued to aggressively repurchase our stock, acquiring over 4.1 million shares during the second quarter and over 8.3 million shares this year. Since we began the program in 1998, we have repurchased nearly 41.2 million shares at a cost of $1.4 billion. And to put that in perspective, that is over 60% of this shares at the St.Paul company’s issue to acquire US F&G in the spring of 1998, or roughly 20% of the current number of shares outstanding. And while I am totally not very happy about our share price performance in the last week, I can assure you that we view this as a buying opportunity. Now before we get into the other segments let me ask Mike Miller to address the trends we are seeing in the Healthcare and the actions that we are taking.

Thanks Doug. The severity problems we see are same ones that we have been describing to you since the third quarter conference call in 2000. They were in prior years, principally 1997 through 1999 and primarily in the large hospital and nursing home segments. In both segments the vast majority of developments is from policyholders that we no longer write. In interpreting the severity data for old years, there is a multiplicative effect in that our actuaries assume that the severity trends will impact the future years to the extent that the business is similar. Reviewing the impact of the recent two quarters severity trends there are three key factors skewing the data towards those increases in severity. They are, one, our client initiative that we undertook at the beginning of this year to quickly resolve the high-risk high-severity cases in the high judicial enquiry and jurisdictions that we have talked to you about in the past. The objective is to resolve the high-severity claims as quickly as possible, to minimize the ultimate impact of continued judicial inflationary pressures. This initiative has resulted in quicker claims payments of high-severity claims, which actually increase the average paid severities in the first two quarters of this year. We are estimating that this initiative may have resulted in an additional 100 million in healthcare claims being paid out in the first half of 2001. This is strictly a timing issue, but it skews the reported claims data.

Second the completion of the MMI integration. The integration activities influence the pace of claim settlement of the MMI claims over time. MMI historically tended to pay higher severity claims more slowly than the St. Paul. With the completion of the integration, we are now paying these claims on the St. Paul’s timeframe though getting their, skewing the average severity data upward in the first half of this year. And third, jurisdictional shifts over the past five years are not fully captured in our data. While we always analyze the data by state, we are now refining our capabilities to cut the analysis by classification of jurisdiction, which may be state, county, or city level. Recently we have been migrating our book away from known problem jurisdictions. However, the severity trends in these problem jurisdictions are increasing the average severity. Because the data shows increased severity driven by these three factors as well as what we believe to be a true underlying increase of severity, we elected to increase reserves by 107 million which is our best estimate given all known factors. Over the next two quarters, much of the uncertainties from the factors I described should pay as we develop the jurisdictional data. Frankly, continued impact of the claims initiative and of course, the recently completed MMI integration, and claims cleanup will no longer be a factor. It is important to understand that all these factors relate only to prior years. Now just as it is important that you understand what we see in our data, I think it is important also that you recognize the significant actions that have really changed the profile of our book of business from what it was in 1997. We have and will continue to reduce our exposure to long-term care facilities. We are continuing to reshape our large hospital book, severely falling back limits, increasing the customer retentions and pushing significant price increases. And more recently we have gone after price in our positions in surgeons’ book and we have obtained rate approvals in 23 of the 28 states averaging 20+ percent. As a result, the business we are putting on the books is generating positive returns although not yet to the levels we would like to see. The patent case indicators on the associated business, the earliest indicator we have of the impact of our initiatives, has improved 6 points in 2001 over 2000, but we are not done yet. We have spent the past six months conducting a strategic review of the healthcare market place. We have four primary initiatives to re-profile our book for less volatility and less severity. They are, a re-profiling of our hospital book in total, a refining of our physicians and surgeons book, this places us in a position to continue to get appropriate pricing levels, continuing our analysis of an adaptation to external factors affecting the healthcare industry, and execution of our catastrophic claims initiatives. Some of the implementations have already begun and we expect all actions to be under way fully in the third quarter. Doug…

Thanks Mike. Let me turn to the other segments of our business now. Our international segment was about 20% of our net written premiums this quarter, has begun to show improvement, and should continue to strengthen as we take advantage of the hardening markets we are now experiencing in Lloyds and in the other primary markets outside the United States. The combined ratio dropped 7 points from 126 to 119 in the second quarter, premium growth in the segments being driven by rate and by increased capacity in our Lloyds Syndicates. Our Lloyds premium is up to $272 million but that includes reinsurance to close. As we have increased participation over time, our share of that reinsurance is up proportionately. Growth is also being driven by an increase in global property insurance premiums. Our rates are up substantially. The first stage of our Lloyds reorganization is well under way. We have taken steps to have each of our syndicates write individual classes of business, eliminating redundancies and increasing the focus of each underwriting chain. Now the next big action will be the capacity auctions that take place this year in the fall, where we expect to continue to increase our capacity on currently managed -syndicates. Our reinsurance business, which is about 17% of our net written premium is also doing well. Now we expect the combined ratio to return to the range of 103-105 for the remainder of the year, barring any unusual catastrophes. Price increases have been very strong in this business. April renewals, primarily Japanese treaties, saw rate increases of 30-35%. As you know one of the principal renewal dates is July 1, our July rate increases average 30% on international business, 22% on North American Casualty Treaty, and 20% on North American Property Treaty.

Cap losses from Ellison 16:10 were 20 million in the quarter in the reinsurance segment with total second quarter 2001 cap events resulting in $30 million in losses, and that is about three times that we would normally expect in the second quarter. Rates are the main factor behind written premium growth of almost 32% in this business segment. Our Discovery operation continues to benefit from disruptions in their competitive market place and net gross writings were up 75% over a year ago. The expense ratio increased to 36%. That was driven by contingent commissions in the Financial Solutions business and higher ceiling commissions and premium adjustments from 1999 and 2000. Contingent commissions increase reflects that the fact the loss ratio on this business is performing very well so I never mind minding paying those. Our Surety business continues to perform very well with a combined ratio of 85.5, net written premiums of 108 million and that represents about 5.8% of our overall property casualty premium volume. Although we remain conscious given the uncertainty in the US economic environment we continue to expect Surety to deliver a combined ratio in the mid to high 80s this year.

Our Construction business showed a significant net written premium growth of 37%, it represents about 8% of our total net written premiums. Premium growth in this segment has been driven by year-to-date price increases of plus 17% as well as increased exposures of renewal although new business is also up slightly. Prices here averaged 18.4% in the second quarter alone. Both Surety and Construction continue to benefit from the distribution and customer leverage created by combining their management teams under the leadership of Bob Lomendola. Other specialty excluding construction represents about 18% of the company’s total property casualty premiums and consists of two larger specialties, Technology and Financial and Professional Services and four smaller specialties, each approximately 40 million or less in net written premium in the quarter, Marine, E&S, Oil, and Gas and public sector. All segments continue to see price increases above expectations and exhibit a very well behaved loss cost. Singling out the Technology at a 107 million in net written premiums this quarter made, they grew at 37%. US price increases average 13% in the second quarter and 12.4% year-to-date, both the accident year and the calendar year combined ratio on this book are performing very well. Financial and Professional Services grew 21% to 95 million in net written premiums, it now accounts for about 5% of our total volume. While the US portions of this business have always performed well, the UK segment of this business has significantly improved over the past year. As a result this global business unit is contributing underwriting profits both in accident year and calendar year basis, with US price increases over 9% in the second quarter and year-to-date. All very, very satisfactory results. You can see from these numbers that we have got good price increases, we have got good growth and this is profitable business. At this point I would like to introduce Marita Zuaritus, Executive Vice President of US IO which includes all of our primary insurance operations in the US and our Commercial Lines Group segment, roughly a quarter of our total premium. Marita has only been in the job for two days, but she has had full operational responsibility for the eastern half of the country since 1998 and prior to that position, Marita was Chief Underwriting Officer for commercial insurance at US F&G. She has sat at almost every type of commercial underwriting chair that is over her 18 years in the insurance industry and I am very pleased to present her as new Executive Vice President of US insurance operations in the Commercial Lines Group. Marita...

Thanks Doug. I am glad to be here and I look forward to meeting with all of you in Houston in the very near future. I know that the Commercial Lines Group as a representative standard commercial book is one measure for many of you to assess flatter industry trends. At this point, I am glad to say that those trends remain favorable and pricing does continue to accelerate. The Commercial Lines Group premium grew by 10.1% in the second quarter and that was predominantly driven by price. We told you last quarter that our retention rate on standard business had increased indicating to us that we could push additional price increases and that is exactly what we did. In fact, we pushed the average price on standard commercial book business up to 12.5% from 11.6% in the first quarter with middle market pricing increasing from 12% 13.2%. Our retention rates however have not dropped, indicating to us that the overall marketplace is still firming. Standard commercial premium retention is up to 84.5% year-to-date and that is up from 81.9 at prior yearend. At this point, we see no slowdown in overall market momentum and we would expect to see overall price increases continuing to accelerate. The combined ratio of COG at 91.7 appears to have deteriorated from the first quarter combined ration of 79.7, but the first quarter had a large amount of one time favorable reserve development. On an accident year basis COG does continue to improve with paid in case losses not only running better than last year, but better than originally expected. At this point in the cycle, it is critical for us to retain our underwriting disciplined focus and that is exactly what we are doing. One last note is I know that we will all miss Pete Lilly as all personally, but to his credit we built a strong and seasoned leadership team and we are moving forward. We will not miss the beat. Doug.

Thanks Marita. Just winding this up there is not much really to say about our non-property casualty operations. John Nuveen continues to perform very well. The total market value of our holdings there reached 1.4 billion pretax at June 30 which added $2.94 after tax to our per share book value. In fact, Nuveen’s market value has appreciated an additional 10% since the end of the second quarter. In addition Nuveen contributed $20 million operating earnings during the quarter, up a small amount from the second quarter of 2000. On the Life Company side we expect that to sale of our Life Company to close during the third quarter of this year. Before we now open this up for questions I want to answer one thing, which I think is probably on most of your minds, where does the St. Paul go from here. Well, it is our belief that price increases will continue to decline modestly and we expect them to stay at mid-teen levels through the rest of this year and next. Retention rates may continue to increase, but even at stable levels, the price increases combined with stable retention rates have the potential to leave us with a net written premium growth for the year of plus 20-25%.

Loss costs trends in every segment except healthcare are behaving favorably indicating that margins should continue to increase in those business lines. Our expenses remain fairly flat which should continue to result in increasing productivity and our declining expense ratio. Investment income has been declining, but extrapolating current cash flow trends would indicate that the component of income will stabilize over the remainder of the year and should begin to grow sequentially in 2002. With respect to Healthcare, I think we have been exhaustive in our analysis of this issue. We have and will continue to take aggressive corrective actions where needed and we will continue to monitor all of our extensive available data. We believe that over time, our current book will help us to recoup the earnings damage of the late 90s-underwriting year. Last week we revised our estimate of full year operating earnings to $2.50-3.00 per share, representing growth of 4-14% over the comparable number in 2000. Over the next three months, we will be constructing and reviewing detailed operational plans for 2002. But based on all of the trends that I have just reviewed, our preliminary analysis of those plans, we see price increases accelerating, strong premium growth, expense ratio declines and margin expansion, and improving cash flow and investment income growth. We continue to believe that 2002 will be a very good year for The St. Paul. Upon completion of our operational planning process, I will be able to provide you with more formal guidelines and that probably will be at our next conference call. With that I would like to turn the conference call back to Laura for additional comments and open it up for questions. Laura?

We will be taking questions one at a time in the order they are placed in the queue and we will take one question per analysts, which has been suggested actually by you. Andy?

Thank you. At this time if you would like to ask a question please press *1 on your touchtone phone. We will pause for just a moment to take _____ 00:27:17. And we will take our first question today from Michael Lewis with UBS Warburg.

Good morning everyone. Doug, that was a very exhaustive overview and I think you did an excellent job. However, my question has nothing to do with your underwriting, but has to do with the management succession issue, maybe you can bring me up to date, there has been a time that you have been looking for someone to replace you, you have been looking inside the firm and outside. You have lost a couple of good key executives who obviously were not given the opportunity to succeed you, what is taking so long to coming up with a name, what do you think is the timeframe that it will take before someone is announced and what is your plan going forward as far as running the company and looking for someone to succeed you?

Thanks Mike. Let me be very clear on this. I have said on numerous occasions to many, many of you on this call that this was said sometime ago, that it was my intention to retire in May 2002. The Board of Directors had been well aware of that for sometime. I have also said in response to a request from the Board that if needed would I be prepared to stay on a little bit longer to assure an orderly transition or to if they just had not named a successor prior to that time or to help in the transition. I had told the Board that I was prepared to do that. But the Board has taken this very seriously, they are working on this process and at the appropriate time they will make whatever announcements that they need to do, but this is taken very seriously and as a very high profile level at the Board and the Board is perfectly aware of what my stated intentions and desires are, serious.

Okay, I guess that answers that, thank you.

We will take our next question from Bjorn Mozami with Friedman, Billings, Ramsey & Co

Yes, the question has to do with your healthcare business. Could you put some numbers on the severity trends for your healthcare business and what percentage of reserves the $100 million, which you are presenting, thank you.

I am going to ask Mike Miller to respond to that. Bjorn, I am glad that you asked that question, because really sometimes people forget about the amount of reserves we already have sitting there to pay future claims. Mike?

The severity trends on the physicians and surgeons business first of all, as we have told you before, the severity trends on that have remained consistent and on average had really been a sort of predictable loss trends in a level that would be roughly about $300,000 on a per claim count basis 2001 which compares as I said relatively consistently with previous years. On the large hospital business where we pointed to you the difficulty … the severity trend from 1997 compared to 2001 has moved from roughly $480,000 per claim to over $1,000,000. So, I think that points out the significant severity increase that we have seen on that segment of the business. In response to your question about the $100 million, the overall reserve portfolio that we have in healthcare business is over a couple of billion dollars. So, the adjustment that we are talking about obviously of $100 million would be less than 5% and the significance of that reserve portfolio given the premium writings that have historically run in the last couple of years around $500-600 million is quite significant.

Thank you.

We will take our next question from Charles Gates with CS First Boston.

Hi, good morning. It appears that in the second quarter of 2001 you have repurchased more stocks and I suspect other property ____00:31:46 combined. Could you speak to the likelihood or the prospects for further share repurchasing?

Hi Charles and thanks for the question. Yes, I gave the numbers. We have been very active in first six months and the second quarter, just to remind you that we bought 4.1 million shares in the second quarter and we have bought over 8 million shares so far this year. And as I said that we review the current price as an excellent buying opportunity. I am not going to tell you exactly what danger we are going to be in, but at today’s price is, I would point this to be, a very attractive use of our capital resources, which remain very adequate, and we have, as you know, a significant amount of unused authority from our Board to repurchase shares. I think our last authorization was another $0.5 billion and we have barely touched that.

We will take our next question from Ron Frank with Solomon Smith Barney.

Good morning, Doug. My question relates to what seems to be your enthusiasm for the international and reinsurance segments. If I am not mistaken, the reinsurance segment benefitted from its ____00:33:11 agreement so that the combined would seem to be more or less a normalized number, having capital offset by the stock loss, and the international segment at 119 showed virtually no consecutive quarter improvement. So, in light of those observations could you tell me why you are optimistic for those segments, just from, you know, the outside view, it just seems like they are still kind of mediocre frankly.

Yeah, let me take reinsurance first, the first quarter … remember we had a combined ratio just under 100. We got a 17% price increase on business on January 1 that we renewed. We got 30% on the Japanese business in April. We averaged between 20 and 25% on the casualty business, which is problematic for us, on July 1. So, I see price increases right across the book of business that … and it is added to the fact that the primary business is continuing to see strong price increases for most of our customers. So, I look at that kind of pricing momentum that we have, that you have going for us, recognize that we have a little more backlogs than I would have expected in the second quarter, but I am still very optimistic about the results for the full year here and I am encouraged about this business. We have a lot of money in this business during the 90s. The last couple of years Ron, as you know, a little difficult, but I feel very good about where we are right now in terms of price increases. Let me turn to the international business. There you see markets have been a year or two behind the US market. We see price-firming taking place all across the primary marketplace … perhaps all countries that we operate in with the exception of Germany. I see the Lloyds pricing has moved up around to above plus 25% in the first six months of this year. We have a little more focussed operation. I think we have got some of the bad stocks that we have inherited behind us in the Lloyds marketplace and I am very optimistic about the numbers in 2001 and international will be better than 2000 and 2002 will show continued significant improvement. I expect, as I said, reinsurance barring any unusual catastrophic activity to have a combined ratio in the last half of the year somewhere around the 103 or 104 level.

Doug, it is my observation that the second quarter reinsurance result is incorrect, i.e. that the stock loss basically offset the capital losses?

That is about approximately correct.

So you view the 1:11 as an aberration?

That, I think you will see over price increases that we have got coming true here, Ron, so one of the primary issues we have had is that the casualty book of business has been a little more problematic than the property business. The price increases are coming through very strong here and with more careful underwriting, I feel pretty good about this. I think that the second quarter was a little worse than what we would have expected, but as we have looked at the third and fourth quarters, what we expect to see, we feel pretty good about this.

Okay, thank you.

We will go next to Ken Suttenburg with ____00:36:42.

Good morning everyone, Good morning Doug. Looking at investment in common, maybe this is a question for Tom Bradley. Obviously you are pointing to the uptake or higher paid losses and pressure on casualty as perhaps one reason along with lower yield. Just wondering if the strong decline relative to 1Q 2001 had any distortions from partnership income or any other factors?

Yeah, I am going to let Tom in for that one. Tom?

Yes you may recall that for the first quarter we had a one time benefit from real estate sale activity in our property development. Our golf course community in the first quarter had added 22 million through the first quarter, so outside of that is I think it is a pretty steady trend.

Tom, thanks for reminding me of that, was that actually one of the golf course properties acquired with the US FMG transaction?

Yeah, that is correct. It is the golf course and other land properties.

Okay, so the bad news is no free rounds, the good news is you got good value for …

Well, some of you know how I feel about playing golf, so the sale of golf properties should have been expected.

Thanks very much.

We will take our next question from Paul Nelson with Lehman Brothers.

I was just hoping you could kind of revisit the commercial lines and other segments other than healthcare on the reserves, we see a lot of favorable developments in reserves at the Commercial Lines segment in particular, and whether or not to expect in the future some of the things that we have seen in prior quarters and kind of give us a general sense of how comfortable you are with those reserves, how close they are to the actual assessment that you, I am sure, are doing around the basis?

Okay, I am going to ask Tom Bradley to come in first and then I will ask Marita to add some commentary as well. Tom on the numbers?

Yeah, thank you Doug. First of all I think on an overall development basis if you are at the Healthcare negative development we have what I would call normal, modest, positive development across our other business units, particularly in the Commercial Lines and the Construction segment. In fact, on an overall book of business our paid to incurred ratio is below 1 for the first time in many number of quarters, so I think the loss cost trends that were seen in our other business are pretty much as expected, roughly you know inflationary type adjustments that are being very relatively easy to predict and again the modest positive development that we see, you know, is a kind of normal for us over the course of year and in fact in even the net paid to incurred ratio that I mentioned we talked about the claim initiative that has been in place at the end of the year, we should accelerate the claim payments to $275 million for the first six months. So, even with this campaign to that easy acceleration of some claims, the paid to incurred ratio remains under 1 leading to good reserve news across those lines of business.

Yeah, thanks Tom. I would say moving forward everything is very positive on significant improvement in the paid in case. Our accident year is trending very favorably, and nothing is new on the horizon to be worried about, and I think our underwriting initiatives moving forward will keep that positive trend going in that direction.

Thanks.

We will go next to Jay Cowen with Merrill Lynch.

Actually my question was answered, thanks.

We will take our next question from Phyllis Gowan with ____00:40:38.

Thanks my question was answered.

We will go next to Peter Monocco with Tudor Investment Corporation. Mr. Monocco, your line is open.

Okay, next one …

moving on we will go to Michael Lewis, UBS Warburg.

Doug, you seem to be growing the fastest of any of the commercial line writers that I follow and maybe we can have some breakout on what is the rate increase versus unit growth, can you define that by your line of business at this point of time and maybe clarify the reason why you are growing so rapidly both in lines that you have under control and the lines that you are still fixing?

I think most of the lines are in pretty good shape. Why not I have Laura give you, we have got the details here, rather read out a long list of numbers maybe Laura could fax those to you or e-mail them to you or give them to you off-line. I think the reason that we are growing more rapidly than many others is certainly we have become the insurer of choice of a lot of agents and brokers. It comes about for several reasons, one, we have a very, very smoothly running infrastructure, we are easy to do business with, agents and brokers like doing business with us because we are very focussed on what we do, they know exactly how to access us, how we will respond to them, and the service levels are pretty high. Secondly, we bring in an unquestioned strength in terms of our balance sheet. We are a quality company and we find that people like to have their trust placed with that kind of company. There have been enough people who have gone out of business that financial security and integrity is important. And having said that let me ask Marita because she is on the firing line here what she will respond to that.

I would absolutely agree. I think it is clear to our agency plans that we are an individual account underwriting company. We have taken consistent approaches to the business. We are not changing anything. We are a stable platform. We have the infrastructure in place in the field to bring everything that The St. Paul has to bear to the agents in one place and we are growing our specialty businesses. We are doing the right things in the marketplace, and I think that the agents find us as a very consistent player with nothing major going on and that is going to continue well into the future.

Thank you Mike.

Thank you very much.

Once again, that is *1 for questions, we will go next to Ron Frank with Solomon Smith Barney.

Yes this is actually a followup to Mike’s question. The Commercial Lines Group in particular at 10% had much slower growth than in first quarter and if I am reading this right you had average price increases of 12.5 and the renewal retentions were up, which would seem to imply given the premium growth number that new business virtually evaporated. Is that a correct interpretation, and if so how should I view that?

Well, our percentage of new business in the second quarter was around 24% which is pretty consistent with what we have been seeing with the book overall. We had seen some new business in the areas that we are growing and I would say we will continue to see that level of modest growth moving forward and you have to keep in mind that our retention number does include price.

Okay, all right, thank you.

You are welcome.

Next followup from Ken Suttenburg with ____00:44:37.

Hi, not to beat a dead horse on pricing and interpreting how that relates to premium growth, but I guess when we see the stated nominal price increases in the press release are we talking about portfolio price increases or are we talking about price increases on new business?

We track price increases on renewal Ken. We also do track how we are trying to run new business versus the renewal. I think that the only actual price change that we can track to make sure we are comparing price that we happen to have is on a average that we actually had last year.

Okay, if we are talking about not indicated rate on a comparable risk, but rate change on a piece of renewal business how are these adjusted for, I guess, terms and conditions and I guess, Laura, from thinking about it. I know last year or so you sent out some clarification on the rate of change on prices and whether or not that was based on premium, whether that was adjusted for changes in exposure, I guess, I just want to get.

We do our best to hear rate, but there is some exposure increase, so for instance, if there is another house or another building we can adjust for that. So we would not be able for the value increase of the building that is going up. Marita?

Yeah, there are two things I would add to that. First, from a renewal pricing which is really the only thing we can truly track on a pure number basis and to your question you cannot quantify the term and condition change so the number is actually much better. If you are increasing a deductible or decreasing coverage, we have a hard time tracking exactly what that would quantify to. So, when we say that middle market pricing is up to 13.2%, it is actually much better than that because of changes in conditions that were also pushing and making and that the market will bear. I will also say that on our new business we very meticulously track actual to manual pricing so that we can make sure that the business we are putting on the books is just as adequately priced as our renewal book and we monitor that quite closely and keep track of that. That is the best we can do on the new business.

In our specialty businesses, again I am trying to give you the price numbers we can have is that we put some of the segments we have made such as in health care some significant additional term changes. The pricing is a pure price in addition and beyond that are the terms and conditions changes.

Thanks very much … that was helpful.

Okay, next is Bob Glaswegian with _________00:47:33.

Out of the few numbers here, could you quantify what the goodwill accounting benefit will be in 2002 and what are the after tax proceeds in the _____00:47:43 sale is expected to be and should we put that in investment income or spend it on buyback where do you think that should flow.

Two questions, of last term, my chief financial officer accounting, in terms of the proceeds in the _____00:48:03 that it is not specifically earmarked for editing but obviously we think that today our share is represented by this split in investment we could make. And I would strongly suggest that those funds would be earmarked for share repurchase.

And are the after tax proceeds going to be good?

We will be giving you the after tax proceeds after closing. We have not closed that yet.

Keep trying on that.

You had another question?

It is the question on goodwill. With the change on the goodwill accounting effective on 01/01/02 our current annual goodwill amortization approaches $40 million per year, as you know there is some part of that announcement that will require you to reclassify from your current goodwill other intangible assets and that process will not be done until the end of the year. So, we will have a net reduction, but I cant say how much of that and need to continue to be amortized or reclassified as other intangible assets.

That sounds like in addition to underwriting we have a few more fussy numbers in the projections.

At least until the end of the year …

Okay, I appreciate this.

We go next to Tom Price with MSP Investors.

Hi, thank you. Could please review for us historically what has been your specific exposure, what has recently been your claim trends; where are your reserves today, and have you reviewed that liability recently?

Let me comment in general and then I will ask my number guys to give you some specific numbers. We have had relatively small exposure to as fast as in relationship to others in the industry. And that occurs Tom, primarily because at the time that these exposures were being created that we were still primarily a midwestern company writing small commercial business. So, we did not fortunately, in hindsight, we did not write much of this business, we did not have much exposure to it. So, we started out with a very small inventory. Secondly, we think our reserves look more than adequate, our _____00:50:26 rate so to speak is published as … I think Beth did a big study on this recently and their objective was to get company to something like 12 times. Very few companies made that and we needed … I think about $60 million under what we needed to get to that level. I regard that level as a very, very conservable investment. In relationship, to most other companies we looked exceeding well reserved. And this is really not a major issue. Tom, do you have some numbers that we could help with?

Well I don’t have the numbers on my fingertips, but they are well documented in the quarterly and the yearend for _____ 00:51:11 and environmental reserve levels and _____00:51:17.

Got it. Let me just jump in here and add that I still think from an industry perspective this is a very, very significant issue and it is one of the big holes that exist in the industry balance sheet in terms of reserve adequacy. Some of you who have heard me speak about the fact that there is at least $50 billion and may be $60 billion reserve in adequacy in terms of industry numbers and clearly this accounts for a very high percentage of that and that of course is one of the reasons why we believe is that this pricing … very positive pricing environment will continue throughout this year and next year. We think that it is one of the reasons that is driving prices up. So, quarterly I think that this is very much an industry issue, fortunately it is not a St. Paul issue.

Okay, thanks.

We go next to Ron Frank with Solomon Smith Barney.

Yes, on the healthcare segment, coincidentally, or otherwise the loss ratio was nearly identical to that of the first quarter not withstanding the reserve strengthening and I was wondering if you could characterize that for us … whether it was relative for the first quarter, was there an offsetting improvement related to the more recent accident years or was there some significant prior period reserves strengthening in the first quarter as well or …

Yes. You recall in the first quarter we did do prior reserve strengthening Ron and secondarily what I would tell you though about the second quarter, and again recalling that the first quarter was again the same as the second quarter … regarding the loss ratios I mentioned to you the patent case indicator improvement which I think is important and an additional factor I would add to that is that our new rising through the first half of this year in healthcare are down 12%.

As long as you brought that up that new paid or that case and paid indicator improvement that went by me a little fast. Could you describe just what exactly that means?

Basically, what we are saying is that our paid in case, okay, which obviously is the earliest indicator about plans we are resolving and looking at the early stages of the plans and resolving generally speaking those in the early stages that can be resolved quickly is down 6% and that is an important factor because the earliest indicator we see when we would add our additional development factors on top of that and we looked at paid in cases as the early signs of what is going to develop with the clients on the portfolio.

So, it is an early indicator of the development of the case reserves.

Right. Thanks a lot.

we go next to Charles Gates with CS First Boston.

I answered my question myself. Thank you.

Once again is there any final question, press * and 1 on the touchtone telephone. As is the time, we have no further questions. I would like to make an announcement at this time. We are currently planning to hold an investor conference in New York to take place at the _____ 00:54:50 Hotel on Monday, 08/20/01 from 3:00 and 7:00 PM. Each hold that date on your calendar and we will be getting you additional information shortly. Thank you.

Thank you.

Thank you all for being with us. Please mark the calendar, it is important that we have an opportunity to visit with you directly and we thought the easiest way to do this was to move the senior people to New York one afternoon and we will have some brief presentations and we will answer a lot of questions. Hope to see you soon.