旅行家集團 (TRV) 2002 Q1 法說會逐字稿

Good morning everyone and welcome to the St. Paul First Quarter Earnings Conference Call. Today's conference is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Miss Laura Gagnon, Vice President of Finance and Investor Relations. Please go ahead.

Good morning everyone. Thank you for joining us for the St. Paul's First Quarter 2002 Conference Call. Copies of the statistical supplement and press release are available on the investors page of our website, www.stpaul.com. With me on the call today are Jay Fishman, Chairman and CEO; Tom Bradley, CFO; and John MacColl, our General Counsel. The call is being recorded and will be made available on our website through May 1. The information we discuss on this call is time sensitive and we are not under duty to update it. Accordingly, any rebroadcast or transcription of this call may contain outdated information.

Today we will be discussing our first quarter 2002 performance as well as strategic initiatives, current market trends and our future outlook. In that light, I'd 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 may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ from our current expectations. A significant current uncertainty is the potential impact of federal solutions to make available insurance coverage for acts of terrorism. These factors are described under the forward-looking statement disclosure in the company's most recent report on Form 10-K filed with the SEC and is available on our website. In addition, information relating to Platinum Underwriters Holdings, Limited is contained in the registration statement on file with the SEC.

With that I'd like to turn the call over to Jay Fishman.

Good morning everyone and thank you for joining us. With apologies to Bob Gillespiegel'sTop 10 Rules for Analysts' Calls, we've already violated one. I think one of them, Bob, was "calls that don't start on time". We were here; you all were a little bit late. I figured Hank's call this morning must have been interesting and you dropped one and came over to us, but sorry for being a few minutes late in starting. But we will, Bob, avoid the -- one of the other comments in your top 10 list, we will avoid the temptation to read the press release this morning and assume that you've all had a chance to read the release and go through the materials that we've provided.

What we'd like to do is to give you a feel for what's going on in the organization outside of what's in the press release. Tom, particularly, will share some insights into the reinsurance market and what is happening through terrorism perspective and that arena and then be available to answer any questions that you have and fill in the gaps as we are able.

First, it was a very good quarter. The company is doing very well. It strategically, obviously on the medical malpractice front we did comment that the exit continues to go well and by every account that I have it's really just going very, very much according to plan. The level of agent disruption is nil and whether that's attributable to the fact that we shared our thinking, our preliminary thinking early on with the agents and so they sought alternative markets or whether there are alternative markets available I really can't speculate, but I do know that the level of disruption is virtually nil. The shutdown of those international offices that we've chosen to exit also goes well. There are several of them that are available for sale, we do expect at very modest prices. We do expect a couple of those franchises, indeed, to be sold. The ones that are not we will conclude the shutdown of it. The operations in London and the UK and Canada do continue and we actually had profits in our international division I'm told for the first time since 1996 actually in the quarter. So rate environment, attention to expenses, disciplined underwriting, all beginning to evidence themselves.

The reinsurance transaction that we filed late last night is really the last remaining step in the initial strategic review that we did early on in the process here. My comments on that offering must, as a result of the filing, be limited, but I do want to share with you that our perspective on this is that we are converting a 100 percent interest in a U.S. based reinsurance company into a 24.9 percent interest in a Bermuda based insurance company that has all of the assets and business and prospects of the former St. Paul RE and non of the prior exposure or liabilities so we believe it's a company that is well positioned to compete in the modern arena for reinsurance and our investment in the vehicle we see as a real one and not a temporary one but indeed one that we will continue and be anxious to participate in and I will be sitting on the board of that company.

We still strategically have some work to do on Lloyd's. Those of you had a chance to go through the details in the material that we sent saw the results there continue to be poor, combined ratio in excess of 130 percent. Having said that, the premiums that we're currently doing at Lloyd's are relatively modest. At this point we have core premiums in the quarter of only $16 million, that's less than 1 percent of our total premiums. We have had some strategic reviews in the last several weeks that some of the additional franchises, the specific franchises at Lloyd's, we will be taking some additional actions to further narrow our focus and attempt to identify those franchises that are likely to be profitable. But, and this is -- there's no secret to this, it's been shared with the management of our organization at Lloyd's. Ultimately, it's about being profitable if we can't bring those operations to profit levels or identify a strategy that's likely to do so, we will take further strategic action. What's important are the return on the capital that we employ and ultimately if we can't figure out a way to provide appropriate returns we will take additional strategic actions.

On the reinsurance front, I think one thing worth noting is that if the offering is successful, we will be significantly lowering our exposures to catastrophe, that's one of the items that I had identified previously as one of the issues between being both in the reinsurance as well as the primary insurance business in substantive ways. By example, if one simply looks back at our World Trade Center exposure, in our primary business we had $900 million of gross losses, but that netted down to $200 million pre-tax. Our reinsurance business had $940 million in gross losses that netted down to $550 million pre-tax. So the level of exposure to catastrophes, weather or other, will be meaningfully reduced if the offer is successful. So our profile, our volatility profile, will change fairly dramatically.

Culturally, it's been a quarter, I think, of really terrific achievement. We've introduced the branch performance measurement system that I used in my previous place of employment. The results of this system are always surprising as well as impressive. It's really very much an example of the Heisenberg Principle truly at work, measure behavior and behavior changes and we are now on a regular monthly basis analyzing all, I think, of the important attributes of running a business that's branch driven and the quality of the conversation at the branch level in terms of profitability if performance has changed. It's changed from the anecdotal views of what's happening in the marketplace, the casual conversation of competitive dynamics to levels of performance; profit; rate retention; new business relationships; of actual pricing to manual pricing; performance of individual agents, good agents, bad agents; decisions about what's happening to individual agents; loss performance, these are very, for this company in particular these are significant changes. The quality of the information that's being provided out to the field now on a regular monthly basis, thanks to Tom Bradley and the Financial Department here that has just done Herculean work, truly Herculean work to get it to this level in six months and in fact as we just had our senior management meeting for the last two days, you can already begin to see changes in the performance of the businesses because the information is there and people are looking at it and it's interesting to see it. What I can share with you on a very recent basis is that rates gains actually continue to escalate and what I particularly liked in the last couple of days was that retention levels were moving in the right direction and that means modestly down. Modestly down right now was the right direction for retention because that means that field people are being aggressive in the field from a rate standpoint, they're willing, from the disciplined underwriting perspective, to put accounts that need rate gains at risk. If we get the account, that's terrific, if we don't we lose it, that's also terrific. We know we're doing the right things for the business long-term in it's profit streams. So having that branch perform its measurement system is just a critical component. I mean it's the foundation to how we run a business as any thing there is and it's out there and being reviewed and really, I think, adding measurably to the dynamics of the organization. We're now talking about performance, not anecdotal observations about marketplace.

We have also introduced, as a result of performance measurements system, a change in the basic compensation structure of the organization. We've rolled it out. It will be, you know, no surprise, a highly performance based system. It will be very similar to what we utilized at Citi Group, which will reward in very significant ways the best of our people measured by performance and ultimately one can only do that if you have a reliable performance measurement system, so it's very integral to the process. That followed the resolution and compensation discussions for 2001. That was a very difficult year for everyone, our shareholders, our employees and we as a management team came together and decided as a group that one leads by example and by reference to the proxy statement for last year you'll see that no one in the senior management team was rewarded with bonus compensation for last year. That was a collectively arrived at decision as recognizing that that's what we could do to demonstrate that our view was the shareholder comes first. That happened -- that set the stage for making a fairly aggressive decision as it relates to bonus compensation. Last year within the organization our bonus pool as a whole was down significantly, it forced managers to make decisions even in the difficult environment as to those individuals who really performed exceptionally well. The bonus dollars went to those people. We dealt with it very publicly in an open kind of way. I think it was -- while everyone, I think, feels a little bit poorer at this point, I think the truth is that everyone actually feels that we've done the right thing and while the pocket is a little emptier, the pride that we feel is actually pretty good. We know we're acting the right way. I also think culturally that we've achieved a different level of expense consciousness here. It's really being adopted and absorbed throughout the organization. The level of detail that's now being examined, we used to talk about expense components being insidious in an organization, you don't even know it's there until you actually start to look and questions such as what professional associations we belong to, is it worth spending $100,000 to be part of a professional association in a state in which we do very little business; do we really need some of the outside help that we get in some of the events that we do. Well, you look at these bills and your 20 or 30 or $40,000 and it's easy to simply sign them and pass them on. The environment's changing and people are now beginning to ask themselves the question, gee, is this really necessary, should we spend it or should we save it and that's the beginning of the adoption of an expense consciousness that goes beyond the policies, the policies are very much out. We certainly put them out in place and now it's up to the employees and the leadership of the organization to really adopt it and make it part of the way we do business every day. I know that the expense savings are more than we anticipated. Someone will ask me how much, the truth of the matter is, I don't know yet. This is still very much a work in progress. We're dealing with rental space; we're dealing with excess space. Andy Bessette and his folks, our Chief Administrative Officer, are doing nothing short of remarkable work in beginning to restructure our expense profile in a fairly dramatic way, so it's, I don't know and more to say about that in the second quarter. We are also, and again, you'll understand the openness of this comment and we certainly have shared it with the employees, our analysis of our benefits structure here revealed that we are significantly higher than even the middle of our competition and I've addressed it with the employees head-on, I said, "Look we can't afford that. We need to be at a place that puts us in the middle of the pack. We cannot be at a competitive disadvantage from a benefit perspective", and we have begun a comprehensive review of our benefit profile. Out anticipation is that we will have a new plan in place to be announced sometime in September for the employees, but there's significant evidence that that change will produce substantial savings and still put us right very much in the middle of the competitive pack and yet do the right thing for the shareholders. So we hope that we can do the right thing both for the employees as well as for the shareholder and that will add significantly to 2003.

So it's been a good quarter. I think I'm going to let Tom take you through the numbers and some of the other financial dynamics that we have and then I'll come back to close it up.

I'd like to talk about a couple of topics.

The first is our property reinsurance program protecting the St. Paul's Company's primary writings. These programs renewed April 1st and as you might expect was in a very difficult reinsurance buying market. But the program consists of two parts. The first is our Property Per WritsProtection, which is what backs up the primary underwriters in their day-to-day property writings. In the past we've had coverage of $119 million excess of $6 million that we retained. We were able to renew that program under basically the same terms, conditions and coverages except for that the program now excludes terrorism. The cost of that program was up about 40 percent rate-on-line, which was within our expectations. We then went our and replaced a type of parallel program, which is a terrorism carve-out, which does cover terrorism on a similar level, the $115 million -- I'm sorry, $110 million excess of $15 million up to a total -- a similar total of $125 million. So it's now a separate program, which covers the terrorism only exposure that allows our primary underwriters to stay in that business. Obviously now we're not going to use this to target terrorism exposed risks, but enables us to move forward under a fairly reasonable and broad property reinsurance, property underwriting profile. We secondly have our main catastrophe property program. In the prior year that was $450 million excess of $100 million retention. We obviously utilized all of that in the World Trade Center event. We have also renewed that under -- again, under similar coverages. In fact it filled that program out more and added $100 million of coverage at the top so we now have $550 x $100 not because we think we have additional property exposures, but to give us and our investors an additional level of comfort of our ability to contain any potential volatility in our business. That program also excluded -- excludes terrorism as a covered event and we've purchased a separate alongside coverage of $200 million excess of $100 million terrorism specific coverage. The property -- the catastrophe program I mentioned first, rate increase about 45 percent, again, around our expectations. When you add in those rate increases plus the cost of the alongside terrorism coverage our property reinsurance costs are up probably about 80 percent year-over-year but again, within the expectations that we were focused on in terms of being able to renew these treaties.

Secondly, I'd like to cover just an update on the World Trade Center reserves. As you know, in the fourth quarter we updated that to $941 million net exposure. We continue to review that and see no reason to change that reserve. We watch bits and pieces of it move around among different lines of business but feel there's no need to change that up or down. We're watching the paid loss activity very carefully. We've paid net losses of $150 million since the event, $85 million of that in the first quarter. We've been billing our reinsurers and collecting from our reinsurers without any problems to date so we're -- obviously something we're going to continue to watch very closely, but that's just an update on the numbers. And, finally, wanted to talk about our cash flow for the first quarter. Our all-in cash flow including investments receipts, investment income for the quarter was about a breakeven compared to a negative cash flow, about $135 million in the first quarter of last year. Included in that breakeven for the first quarter is the $85 million of World Trade Center losses I mentioned previously and about $145 million of negative cash flow related to the Health Care business, which we're obviously exiting. Adjusting for those non-coretype losses we have a very significant improvement in our cash flow position compared to the first quarter of last year of almost $375 million, obviously a (indiscernible) driven by the focused underwriting approach that we moved to and the significant rate increases experienced across all these lines.

Jay?

On the sort of new horizons front our effort to develop a true small commercial platform in Enterprise continues very, very well. We've hired some additional folks in the last quarter beginning to staff that up in significant ways our hope is -- expectation is that we will be rolling out the program at our agents by the end of this year for meaningful new business in 2003. That project continues to go well. We are also in the process of reorganizing a bit internally to identify a true national property separate business unit; the placements of the reinsurance that Tom described were successful. The underwriting talent-to-property in this organization is exceptional. It really just takes a focus on the marketplace and the disciplined approach in leadership and I think that we can do meaningful business there so we are going to be organizing with that in mind so we feel very good about where we are in the quarter and its prospects. We had an all employee meeting must be a couple of weeks ago. Someone in the audience actually asked me was I having fun and I answered honestly, you know the first few months weren't, that they were difficult months. While these are easy economic decisions and easy shareholder decisions, they're difficult human decisions. You understand what these -- I certainly understand what these decisions do to individuals and their lives, but we also know what our jobs are and what our responsibilities are and we're going to continue to move forward doing the things that we know are right to do. I believe we've turned the corner. I really do think that the place feels differently; that there's a different level of responsiveness, I think that there is a level of enthusiasm building in the organization, but you know, all of us everyone on this call knows that -- the fact that nothing will breed confidence and pride like success and this is the first quarter we can look at and say, job well done and the beginning of building platform and it's a really good start.

With that we'll open it up to questions, take whatever questions you have and do our best to answer them.

Mr. Ron Frank, Salomon Smith. A quick one for Tom and then maybe a longer one for you. The quick one for Tom is, there was a reference to a $20 million commutation or something on the Health Care side in the way of a benefit. Should I -- what side of (indiscernible) should I interpret that to mean that there was essentially a non-recurring $0.06 good guy in the first quarter earnings?

Beyond that, for you Jay, you partially answered this by referring to retention being slightly down, but I was struck by the fact that, for example in Tech you have premium growth of 6 percent, I assume lagged well behind price increases. That's been a big growth area for you and it seems like you've really put the breaks on exposure growth there significantly and to a lesser extent in commercial lines and I'm wondering if you could expand on how that relates to you risk appetite and on Tech in particular, beyond wanting to push the envelop on rate given that premium growth was so low, did you also change your view of the business in any sense?

Ron, we're going to swap the questions. I'm going to answer the one you directed at Tom and Tom will handle the one for me.

The reason that we disclosed the $20 million in particular really has very little to do -- we're not trying to broadcast that there's $0.06 of non-recurring in a business of this complexity. There are always non-recurring items, good and bad and this one was a modest one and offsets other bad ones that we had so no comment on the quality of the earnings in the aggregate. The reason for disclosing it is that we thought it was material to the underwriting losses in the Health Care business and that if people would look at that number, they would come to a conclusion that the underwriting losses in the non-core lines were less than, in fact, they are and that you could end up with a material error in one's modeling so we decided to disclose that $20 million to allow people to make a better judgment about the size of the underwriting losses, the ongoing underwriting losses in the non-core business but don't any -- don't draw any conclusion from that as to how we feel about the quality of the earnings. They are substantive and real.

To extend a little bit on it, a half of that was commutation of an old casualty reinsurance program, which is fairly routine, it's specific here since it all related to Health Care it went to that line of business so it shows up. Again, commutations happen, but this being $10 million and being on the line that (indiscernible) had we focused on, we did talk about it.

The other half of this benefit comes from previous efficiency reserve that will come down as the business gets smaller. There may be some future benefit out of that, but again, with so much else focused on Health Care we wanted to disclose that separately.

And on the exposure issue?

COMPANY REPRESENTATIVE??: I didn't even get these from the gross numbers are -- you know with premiums up 14 percent and prices up 24 percent exposures are obviously down on a year-over-year basis.

What I wanted to explore with you was, let us take Tech as an example, that's been an explosive growth business for the St. Paul. It's one that quite frankly the company is pretty consistently boasted to be a great specialty, you know, the $0.06 growth is a real breaking of the growth. It just seems to me exposures must have been significantly down unless price increases slowed way down and I know you're pushing price and the growth comes out where it comes out, but is there also a change in risk appetite we should be focusing on in that line in particular?

No, there isn't, Ron. The, the -- to give you a sense of it that the price gains that we've experienced in technology were, and again we're getting down to the, you know, that I can answer this question crisply and easily, we got 92 percent in March, we got 17 percent in January and February. Retention has run since January 72, 78, 75. And so I think what you're seeing is an attempt to begin to move that rate in a different direction. A richer answer, let me go back to December. I think this will be helpful to you and again this really gets to this performance measurement systems and the importance of the data is less than the direction of the management of the business. December price gains were 15, November was 11, October was 11, so it was a business that was lagging from a pricing perspective. The new business percentages were bigger than I wanted them or would have liked them to have seen, they were going that December they were 18, 26, and 32 percent respectively in the previous 3 months.

This is all tech?

This is all tech and what I really wanted to see in the business was a movement of that rate into a different domain. I really wasn't satisfied with 11 and 15 percent knowing what was happening in the marketplace, knowing what was happening with some of the competition and having this data -- to give you a sense of what's happened since people begin to have the data, we went from a 11- 15 November and December to 17, 17, and 19 and the retention, which was 91 percent in October went down to 81 percent November, 75 December, down to 72. So, getting back to my original comment, what we're seeing is as people begin to move into the market focused on rate, what we're abandoning, if the information is correct, is the most under priced business and this way we can get to having this information, having it in the field and enabling people to understand what to go to agent with, so no change in appetite; no change in business enthusiasm, actually quite the contrary, I think that Micron's a wonderful technology business. I think it's thoughtful; the level of the -- at the home office level the quality of the thought in underwriting is just exceptional and now that we have the data and it's out in the field, I think you're beginning to see the reaction in the field to having this data and we're moving now very much in the right direction. It's -- you should not characterize it as re-underwriting because it's not. What we are doing now that the data is out there is moving the book in a much better direction and in fact, the new business, which was, I'll go back to a year ago, this was January, February and March and these are significant numbers I'm about to mention, they're candidly too big, they were 34, 47 and 42 in March of last year; they were 24, 25 and 22 this year. Those are numbers that are much more balanced. It's a much better balanced underwriting profile so I'm not sure I've answered your question strategically, but I've given you a real sense of the operating dynamics in the business.

Charles Gates, Credit SweeseFirst Boston. Two questions. Could you define what you mean by small business and could you elaborate on your strategy of growing your small business penetration?

Yes, small -- because we actually do talk about small business here and we characterize it but it's different from what I'm really focusing on. To me, small commercial is the true mainstream business and you would identify that as accounts with premiums of less than $25,000 per year and experience would suggest that you're actually talking individual account premiums of, let's call it $7,500 to $8,000 per account. It's extremely automation driven. It is a high technology business. The costs of running it can be problematic and the secret to success in the business in front-end technology that's available in the agent's office and back-end technology that can take on the service obligations because the agent truthfully can't afford to manage a relatively small number of accounts at that level of premiums. Put it all together and you have a large number of accounts and the ability to manage it much more efficiently than the agent and the agent can. We're really a very good underwriting company at the moment from let's say $50,000 in premiums I'm just going to call small commercial as we call it here, from $50,000 in premium up to about $250,000 and the company while it was heading in the direction of developing this technology platform, at least when I got here it was not doing so with the strategic intention of moving it into the agent's office. It was a somewhat kind of hazy, electronic commerce strategy that we would develop this platform to allow small commercial folks to access directly, that's not going to be successful, we took the resources, we moved them out of that sort of e-Commerce domain right over into the agent arena. We already have the service centers. The service centers are here, there, there, at the moment almost as good as the competition, they're not quite as good but they're almost as good. Our focus has been to fully develop the front-end of the corporate and issue system. We're right in sync, I'm quoting in writing; we're not in sync on the issuing component. We believe that we will have that done by September in pilots in the fourth quarter, rolling out to the agents in the first quarter of next year. The service center is just nuts and bolts at this point and what I mean by that is if the structure is there, the people are there, the talent's in place, moving that ahead and developing it is an important component of the success. What we did was, there was no person here who was responsible for what I would call operations technology across the place. The efforts were somewhat diffused and there was no ability to look for one person to drive that to conclusion so we took Kay Lovusfrom her P&L position and we asked her to take over this operations technology position across the whole place and she's up to her eyeballs at the moment trying to drive it forward and with a fair degree of success. It is a big business and the reason I'm so enthusiastic about small commercial, it's still two-thirds of the employment of the United States, it's were the engine of economic growth will be over the next 20 years I believe; there's plenty of market share that is not controlled by the two dominant or the three dominant players in that business at the moment Travelers, Hartford and Zurich. There's plenty of share if it's available; our geographic presence will help that. Strategically everything lines up. It can be down the road a meaningful business for us, it is my expectation that it will be.

The only follow-up question, Jay, I didn't understand the distinction between in your answer: $7,500 to $8,500 and with $25,000.

Oh. You know what I'm saying is that if the premium is under $25,000 -- let me try it this way. The account Charlie in two small commercials is not underwritten on an account basis, it's underwritten on a class basis. You fall into a class; you are a small retail and your rating is at small retail; you're an electrician; you're an artisan. It is not individual account underwriting, it is class underwriting, that's the distinction. If an account premium exceeds $25,000, you're beginning to look at an account that has to be underwritten, loss controlled, it has to be specifically underwritten on an account basis. Under that level, it would typically fall into class ratings dynamics and just my experience has been that when you actually look at the book of business that if you're running it right, the average premium will be about $75 to $8,500 but up to $25,000 typically would be a level that could be class underwritten.

And again, what was the size of this market that you said existed? You said it was like two-thirds or something?

Oh, no. I said it was that the employment in the United States, that aggregate employment in the United States two-thirds of the employment is in -- considered small business. That's just an SBA statistic that's useful. I don't have the commercial multi-perilmarket, I certainly have the (indiscernible) data, I don't have it sitting here at my fingertips, but if you look at the C&P data in (indiscernible) that will be a pretty good indicator of the size of one component but you've got to add there's workers compensation that goes beyond it, commercial C&P is multi-peril, it's the -- think of it as the homeowners of small commercial business, it's a combination property and liability policy and that class rating level, most policies are written in that form and then there'll be auto that will be written above it; there'll be workers comp that'll be written above it. I have the data around as to what we think the average size is, I'm happy to get it to you.

Mr. Michael Smith, Bear Stearn. I want to talk about the retentions for minute. St. Paul companies have been one of the early players to put the foot down on rates. Going back to 1988 there was a sharp drop in retentions and then some recovery last year. Now you're going the other way. Is this a statement that perhaps the job was incomplete to begin with or perhaps that St. Paul was overly aggressive last year?

I'm trying, Michael, to link up your comment to the actual facts. My experience was not and my review of the data was not as you described it.

I'm sorry, I thought we had heard last year that there was a slow and gradual recovery of the retentions.

Well, no. I was actually at commenting (inaudible) I think this is what I was making reference to. I thought we were moving in the right environment that we were in the wrong direction. Why is it important to have retentions going down and because you say well, gee, that's business, why would one want to lose it. The only way to really evaluate in a field organization, whether they are being sufficiently aggressive, attempting to get rate on an account, is occasionally to lose. I don't mean that one likes to lose but if you always win, if you have a count and your accessing it and it needs 25 percent rate and you go to the agent and you get 25 percent, that's fine in that account. If that's happening all the time, if you're never putting accounts that are sufficiently under priced at risk, if the agent doesn't say, gee, maybe I can do better in the marketplace, then you would come to the conclusion that your field force isn't being aggressive enough and my take as I looked at the data last year was that while price gains were going in the right direction, I believe they were lagging the marketplace. When I look at the price gains here I don't believe that they were at the same level that other companies were experiencing and when I looked at the retentions, they were modestly moving up, so my perception of that was while we were doing an okay job, we weren't doing a great job.

I should clarify. By overly aggressive last year I meant overly aggressive in getting business, that is, perhaps not getting enough rate, that's what you're saying.

Well, I don't know that it was aggressive in getting business in new business although in some lines I even saw a little bit of that. My observation was that the field force was not pushing aggressively, as aggressively as it should have been to get rate and we've been talking that here for six months. There isn't a meeting the people don't come together when we don't talk about rate adequacy and profitability and returns and I think were seeing that in the data now. The field force has got it, you know it's -- this is an interesting dynamic. You're talking to sales people who like to win. The last thing a sales person wants to do is lose an account he worked hard to get. Making them feel comfortable that that's the right thing to do, that it's okay, that they're not going to do the right thing for the company and put themselves out of work because their account goes down. That's not something that one can change overnight but I think we've done a pretty good job here in six months giving the field organizations the confidence that we know what's right, we're going to measure it and we're going to look at it and we're going to give them a hold harmless. You're not going to take people who are doing the right things for the company and in fact acting in a difficult way that relates to their own job security. It gets down at the end to an individual desk underwriter with an account that he or she knows is under priced and what actions they take and the agents office to do a better job and you've got to give them a sense of confidence. My take was, was that the organization last year was not moving as aggressively as some of our competition. So I've been trying to raise that urgency in the organization and the dynamics I've seen in the last three months look much better to me than they did a year -- than they did six months ago.

One other thing, could you discuss the business that Platinum is going to reinsure from St. Paul after the closing of the offering?

Well, it's a -- let me see if I can describe this. What we're going to do is convey via a reinsurance transaction, the contract that St. Paul RE wrote in January 1, 2002 and beyond. Now, the reason that it takes the form of a reinsurance transaction is because those contracts were written on St. Paul Fire and Marine paper. St. Paul RE is not a stand-a-lone entity so the business that's going to be conveyed via a reinsurance transaction are the transactions that were entered into January 1, 2000 and time so Platinum only has business that was, again January 1, 2002 and was the, I want to say beneficiary to that work, was the -- in fact beneficiary of business that was being written with fairly aggressive profitability thresholds and that's what we're conveying into Platinum.

Alice Schroeder, Morgan Stanley. Couple things, one is could you tell me what is in the other expense line other than the amortization of intangibles, the $20 million?

We -- There's some corporate reserves changes that go through, the biggest frankly is reserved for extra contractual obligations. These are non-claim litigation expenses and a -- you know, we just keep a reserve there. There's probably about $10 million of that in the quarter. I wouldn't call it, call it unusual or just as we re-evaluate cases as they come through, but that's the biggest drivers. Also some severance that went through in the quarter that was not able to be accrued in December related to some of the ongoing restructuring that Jay has mentioned.

And you gave the a -- you gave a discussion of your net reserves for 9-11 and so they haven't changed. Has anything happened to your gross estimates?

No. I mean no.

Also, I just have a follow-up to Ron's question about the $20 million commutation benefit that was worth $0.06 a share. It's more of a comment but I guess, you know you said that it offset other bad items so it wasn't really a comment on the quality of earnings and you're always very straight forward about it so I just would like to take this opportunity to react to this comment candidly as well. You know, investors don't know how to assume away an item like this if we don't have those other offsets and we really have to assume that all the material non-recurring items that would affect an earnings trend are disclosed because it's risky for us to assume otherwise. If we do, we might be sorry and there's an excellent example of that in your own press release where you had to indicate this quarter with a $100 million workers comp reserve release that took place last year, which I guess former management did not mention at the time and those non-comparable items sometimes many companies point those out only when it's convenient for the management so it's really hard for investors to take the risk of tilting the playing field any further in the other direction by how we score keep items that are disclosed. Instead, what we really love is for you to tell us all the one opsso we can really understand the trend better.

First I'd -- a lot in that comment. I think that the -- even before I came here I think that the quality of disclosure here in the candor was just exceptional. You can go into the 2001 annual report and you can see exactly what level of prior year reserves were released or not, I mean right down to the nickel and.

But you can see that in every annual report, Jay.

I beg to differ. Having -- and again, you may read more than I do, it's possible, but you can't in every report. You can potentially go through the triangles and the 10-K and make assumptions but I will tell you that companies that age their deficiencies or excess and roll it from one year to the next and that happens in this industry a lot. You can't tell beans from that schedule and many of you make fairly aggressive conclusions from those triangles that are candidly just not right. You know, I think the quality of the -- and discussion here, I also did ask, by the way as it relates to the $100 million reserve release. Was it discussed in last year's conference call and I'm told it was so, I wasn't here and it obviously wasn't in the press release but I'm told that it was discussed in the analysts call. My -- you know, I'll stand on the earnings as presented. I think we've done a very good job of providing people of an understanding of the earnings and their trends and the reason for disclosing this $0.06 a share item was to prevent people from coming to the conclusion that the underwriting losses in our business were running off faster than they were. This was an attempt to avoid a conclusion that in fact, things were getting -- they were running down faster than they were so I will tell you that this was, this was done with completely the right intentions. Now again, Alice, you're going score it anyway you want to score it and you'll do an excellent job as you always will -- as you always do. We're trying our absolute best to provide any material disclosure that we think would in any way relative impact anyone's assessment of our performance or their models and I think we've done that so when your comment that we want to know every non-recurring material items that's happened, I think we've done that.

No, that's great and we're glad you disclosed it, it's just that it sounded as though you were saying there were some specific things that went the other way and that we should sort of, you know, put this one in the pile of there's something else that offsets it and I've just kind of generally commenting you know, if there is and we'd like to know what that is, too so that we would be more comfortable not counting this one as a runoff benefit.

I understand and if there were anything individually material that were, you know, of this magnitude, I would. Your dealing with a business that has billion dollars of flowsin the context of a quarter and the ability to assess every individual transaction between recurring and non-recurring is a virtual impossibility. It -- when things arise we looked at the numbers from the underwriting losses and we said, gee, that's less than we thought it should be, what happened and why and we began to explore it and we said, gee, this isn't material fact this is something that could give people the wrong conclusion about how rapidly we're running off those underwriting losses so we're trying our best. I'm sure you'll help us figure out where we can do better and we are trying our best and if we become aware of something, believe me, you got our word, we'll communicate it.

Now I, you know seriously, I'm not trying to give you a hard time, I'm just saying, you know, we're -- we get immunized to the, you know, it's always but for this and but for that and so it's always helpful to have as much information as possible so I really appreciate it.

It's a pleasure and we agree.

And one other point, on that $20 million as I mentioned before, about half of that is this premium deficiency reserve, which isn't necessarily non-recurring it's just not very predictable as all the reserves of this book runoff this is one we may see some future benefits but the commutation was a pure one-timer of an old contract.

Bob Glasviegel, Langin MacElaney. You did disclose the $100 million of reserve release last year and I think it was offset by a similar addition in medical so there were some pretty good disclosure last year's first quarter. Question on runoff. It seems like the written premium decline of 23 percent is a little less of a decline than I had been looking for. I suspect there's more rate than we're looking for. Looks like the underwriting loss x the commutation and the cash flow are coming in generally inline with previous guidance. Anymore color on the outlook for runoff for '02?

It's frankly going according to expectations. We've already issued non-renewal for 94 percent of that business and by the end of the year we expect the in force to be about 15 percent of what it was at the end of the year of '02 but you know, what is staying and what is requiring to be renewed is getting substantial increase so 16 percent written decline, my guess is the exposure decline is 40 - 45 percent or more.

Any outlook for what the premium on runoff might be for '02 roughly?

Bob, this is Laura. It's really hard to predict the number of policy holders who are going to want the endorsements.

That's, that's the variables. If to the extent that there are other markets that emerge that write the business at competitive rates, believe me, they'll turn away from the endorsement at the rate that we're providing it at. But we just don't know, that's a competitive dynamic that's still emerging. But one observation I will make on rate generally is that it does seem to continue to be accelerating. I get nervous certainly predicting but every indication out in the marketplace suggests, and I think it's a lot of things, I think it's a factor of interest rates continuing to be at this relatively low level. I think it's a fact that all of us in the industry continue to be anxious about lost development particularly, you know, in terrorism and all sorts of things that are occurring that we just don't understand and can't think about. So -- not we can't think about, we can't resolve from an underwriting perspective so all of us, I think, and I'm not saying that the industry accident (indiscernible) aggregate way but you sit in at meetings that you all have sponsored and you hear all of these people talk about terrorism and the exposures and such so everyone understands that rate is what it's about right now and it does seem to be continuing to accelerate.

So you're getting rid of more units than you thought you were going to be able to, is that what you're saying?

I think that, I hope, again this is all three months into the data, I can look at the numbers and then in a few months we'll be able to look back more specifically but it does look like that the field is beginning to say, alright this account needs and you know what, it's so interesting, Bob, you look at individual accounts and we've not made money on them in 4, 5 years and you actually ask the question, why are we still on it? If you can't make money in an account today, when will you? And so simply asking those kinds of questions and getting people the data, they begin to act in rational, reasonable ways. I think what we're seeing is the field beginning to say, okay, I got it, we know what to do and the account needs 30 percent and if I can get 30 I'll keep it and if I can't I'm going to be happy to let it go, it's just fine. And my instinct tells me that, but it's only instinct, that the underwriting results are going to improve faster than we anticipate because I see the beginning of a cleansing at the bottom a little bit and so we'll see, we'll see if it actually happens, but I like the direction that the organization's moving now.

Michael Lewis, USB Warburg. One of the things that you also mentioned, I think recently, is you made some good hires, not only for building up your small commercial but also to handle your claims and you expected some real positive developments there. Can you tell me what, I think the fellows name is what, Yessman?

Tim Yessman, yes.

Exactly. Can you tell me what he's uncovered so far and how optimistic are you that they screen the claims handling will even prove as productive I think you gave us early indications?

Yes. I really don't have anything to report yet. I mean, claims obviously come through the system, they take a long time to develop and a long time to mature and be dealt with so the fact that Tim has been with us for 5 months, you know, don't look for any dramatic improvement overnight. What I do see is first a fairly aggressive approach on loss adjustment expenses. Tim has taken a look at the organization, he has eliminated a number of layers of management, sort of checkers, you know, people who check the checkers and we've gotten down into a different mentality in the claim department. I mean, Tim walks around -- in his brief case he's got a listing of every claim filed, you know, in excess of $1 million and he's knowledgeable about them and speak to them articulately. He's deeply involved and engrossed in them and feels responsible. His philosophy is, and he actually said this and said it to our board, that he views his job as making history, not headlines and he's really going at it. So I love what's happening in the claim department. I love the feel, I love the sort of level of it being about business and I think he's doing a great job. Whether it evidences itself as much better claim performance we'll see, I don't know. What I hope is, and it's just a hope, I've no evidence yet that it's the case but having worked with Tim for as many years as I have, I certainly know how he runs an organization that running off the balances the old balances which you know have challenges associated with them that we will end up with a different performance than we had anticipated, that, that would be my hope. I don't know, we'll see but more to follow.

Tisha Avalone, U.S. Trust. I have two questions with a couple parts. The first one is, human nature finds change difficult so how is the morale at the company and have you been able to retain the employees that you want as well as the, you know, the sales people and all of that?

And my second question is, could you give us some more color on the steps you have taken to improve your MIS systems? It's amazing that you've been able to improve the granularity of the results that you can really see, you know, what's profitable, what the losses are and what do you think you still need to do?

You have two good questions. First, the, the -- there was-- there had been when got I here a not insignificant departure of talent and I can't recall since I've been here losing someone. Our treasurer left and that was a disappointment but I'm not aware of any field person, I'm not aware of any person who rings the cash register here or claim person in the senior level that's left us. I'm sure there are, but I'm not aware of it, it's not an issue, it's not a problem, I think the people feel reasonably engaged and connected.

How's morale. I'm sure it was lousy in the early days. I, you know, you don't make (indiscernible) any bones about it, you come in and you say, look the business is not performing at the right levels and we're going to reduce headcount significantly and we're going to close a bunch of businesses and that's -- when you work in a place you take a lot of pride in it and someone from the outside comes in and says, you know I'm going to change things around, I'm sure it was lousy, it didn't matter. It's not that it wasn't important, it is important, but it didn't matter, we knew what we had to do. I think if we have a good year the morale will be much better. It'll be problematic, we have benefit changes coming, that'll be an issue here. They're all issues and they're all tough management issues but my experience is that, again I said this earlier, nothing builds morale like success, that having a successful organization that people feel good about and proud about, you know, when they suddenly say, gee, I work at the St. Paul with great enthusiasm and pride at being associated with the place, then you know you got it right and it's -- it becomes less, you know, it's really an issue of the success of the company and I think we'll get there. I'm confident we will.

On the second issue, I'm actually -- I'm surprised also at the speed at which this came about because I know how long it took us to do it at the Travelers. I know how difficult it was and this has been exceptional and it's really for two reasons. First, the quality of the data underneath was actually terrific. The information that was available here surprised me. It just never got compiled and assembled in a way that allowed people to review it crispy, cleanly and being able to pull data together in an organized, methodical way. So, it wasn't as if we had to go through great, great leaps to begin to capture data that we didn't have. I mean, I can now go back to the year 2000 and tell you what the retention in line of business was, I can tell you what the price gains were, I can tell you what new business was, I can tell you what the ratio of actual to manual pricing was all the way back to 2000 so the data was here. The repository was pretty good, the compilation was lousy. We're doing an outstanding job of it. The commitment of the financial organization, I've been very public about it here, has impressed me in ways that I've never quite seen. I think that they've done just a remarkable job. The stuff is online, it's available to field people, you know we're not printing pieces of paper, it's available by the, I think, the 15th day of each month now to the preceding month now that's the first month we did that, but it is the first month we did it. It was available in December and then we did April for March and we're, and we're off and running. Now, this is a living document that MIS system. My experience was that it constantly changes.

You begin to understand different dynamics and different regions, different lines of business, what's important, what's necessary to look at and there's a team of people, this is their job. Their job is to, is to produce performance measurement system data that allows a few things, it allows people in the field to know what's going on, make the right -- take the right actions and secondly, it allows an evaluation of performance so that we can make sure that we're compensating the best of our people in the best ways and those two things go hand-in-hand.

So I'm impressed at where we are, if you, I think many of you did say, how long do you think it'll take it to do this? I used to go to many of the analysts meetings I had with many of you and I would bring the control we call the controllables with me and I would show it to you. I would share with you how we analyzed it. This is the controllables, it just has a different name to it yet I said I thought it'll take us a year, that's really what I believed, it would take us a year to get this up and running. Not only are we up and running 6 months into it but culturally it's actually been accepted much more rapidly than I thought it would. Insurance organizations are notoriously just convinced that we look at the way we look at because that's the way we've always looked at it. You know, gee, that's -- we don't look at monthly numbers because monthly numbers don't mean anything in an insurance business, well that's nonsense, then you know why and you can evaluate and make decisions and take actions and move on so this place has accepted it and we're moving ahead.

Then you're pretty confident that you're avoiding adverse selections by raising prices and all of that?

Always, yes. We talk about it a great deal, you know the best field people, what's adverse selection? Adverse selection is when you, you can get in a few ways, you can have a home office standard that says every account has to have an x percent rate increase. You always end up with the wrong answer. You lose the accounts that are most -- that are best priced and best performing and you don't get enough rate on the accounts that are most under priced so step 1 is, you got to leave it to the field. You have to leave it to them to make the judgments at the point of sale about how much rate is necessary but on top of that is you got to give them the data to be able to make those decisions. You got to give them the information so that they can make intelligent, thoughtful decisions day-in, day-out. What I believe is that we now have both of those. We have that information and we have an understanding. I hope that our people are acting in the most responsible way. I believe they are but you know, you hope and we'll see but my -- everything I'm looking at so far tells me we're heading in the right direction.

Ira Zuckerman, Nutmeg Securities. Jay, just a couple of more general questions. First of all on the Platinum transaction, how much is involved in terms of personnel space, etc., as part of the transfer and how much more expense do you have to cut out that's after the bill?

I can't comment on the first, it's -- you know I can talk about what we have to do, I can't talk about them. They're in registration, you got to look to the S-1 for information about what they do. In our case, there's actually very little corporate expense that had been allocated to the reinsurance business so there's very little that we have to take out here. They're really a stand-a-lone entity in most respects.

Yes, but are they, there is some of your business written after January 1, but how about personnel space, etc.?

They're going to be assuming the people in the business and they're going to be assuming most of the leased space that we have. Some of the international offices that we have already made the decision to close, we will be retaining and run those down, but those that are going to continue in operation, they will succeed to.

And who's handling the -- since you're retaining the old business, who's handling the runoff?

Tim Yessman and a team of people deputized to do that. Tim actually has had experience in running off assumed reinsurance books, so we're in good hands.

The other question is asbestos is starting to rear it's ugly head again in terms of loss activity, etc. How much exposure does the St. Paul have left and do you envision any further problems as we go along?

We continue, you know, everything we know today we continue to be comfortable with our asbestos and environmental position and again, you're right, article in the newspaper today, in fact, about asbestos, the left side of the front page of the Wall Street Journal. Things do change and circumstances do change, but we feel comfortable about our position.

Jay Cohen, Merrill Lynch. Yes, Jay, I wonder if you could comment on Nuveen. Initially you, you had some thoughts on that business, obviously the focus has been more on the insurance side, but what's your evolving stock prices on Nuveen, where that goes?

Jay, Tim and John, Tim Schwertfeger and John Amboian run, I think, an absolutely terrific organization. I've been there, I've spent time with them. They're businesslike, they're professional, they run the business like it's their own and I don't say that in only the positive ways, only the most positive aspects. I think that they, you know, and they're going to help manage my money. I think they do a wonderful job and thinking about that franchise and what they do, to help them develop, to help them grow, to help them build their business is a terrific use of the capital in this place. So, I've been feeling public about it, including comments in this press release to the extent that there are opportunities to build and develop and grow the asset management business in the broad sense, you know, it may not just be in their narrow sort of field, but we do think our beyond it. We've talked about annuities, we've talked about distribution of other products, putting our capital work behind them is something we fully intend to do, so we like them and glad their our partners and happy to have -- Tim comes to most of our senior management meetings and participates, raises the quality of the dialog. He's good and he's a terrific partner.

Ken Zuckerberg, Lazzard Asset Management. Jay, I actually had the same thought of the other Jay and I just wanted to ask sort of a hard question in a soft way. With respect to Nuveen, rightly or wrongly, I got the sense that under the last administration they were not as excited about maybe being part of the organization. I didn't see outwardly a lot of interaction between Doug and Tim and I guess I'm just wondering, you know, have you sort of ascertained that they are, you know, sort of a willing and interested partner in terms of the St. Paul franchise and then I just have a separate question.

I'll make two observations. First, I certainly don't detect anything but the best and warmest of professional as well as personal relationships between Tim, John and Doug. I think that they respected each other and each other's organizations terrifically. I'll tell you something and I hope Romidoesn't get angry with me for telling the story a little out of school. We were together at the AIFA conference and I complimented him on the life business that he built. I think they've just done a remarkable job in a, I said you did -- whatever you did I said it was just unbelievable. He said listen, I'll tell you a secret, what I did was nothing. I just left those guys alone, they know how to run their business. I think that's some of what you saw. I think that Doug let the guys at Nuveen run their business and do a great job and they have. Look at the market CAP on the thing, it's trading at an all-time high. Just -- they know what they're doing, don't -- they certainly don't need any advice from me in the asset management business. I am all ears to what they know and they're helping me learn so it's terrific. No, I detect nothing of that and that's really our philosophy here, too. I ask Tim all the time, how can we be helpful to you, how can we be helpful to you. I hope, I mean, Tim does his own conference calls. Join it sometime. Ask him how he feels, you know, gee, are you okay being part of the St. or maybe I'll do that, I'll call in and I'll pretend to be somebody else and I'll ask him how he feels. I have and he tells me, unless he's lying to me, tells me he's happy to be part of the place. You know, he's got some of his own currency that he can use to compensate his people, we leave them be, we provide them with whatever resource and asset we can help them with, you know, it's a pretty good life, I think. We'll ask him together.

I wish, Ken, I wish we actually had a life company, I do. I'm sorry that we don't have one. I think that the ability to think more broadly about the investment management business and where it's going over the next 5 years that it would be good to have that whether F&G life was the right one or the right component, I don't know, I haven't spent like 2 minutes with that, but it would be a plus for us.

I appreciate the color, Jay. The other question is just in terms of management ownership and I guess I'm thinking here about direct management ownership. I know you had suggested a few months back that there was a bit of camaraderie where you wanted that people focus on owning the stock from a direct basis thinking about portion comp being directed that way and I'm thinking about just management ownership in general and your philosophy and anything you could help us in terms of update that would be helpful.

First, we did introduce a capital continuation plan here for 2002 bonus payments. 25 percent of an individual's bonus will be paid in the form of restricted stock, which will be conveyed to them at a 10 percent discount subject to 2-year vesting and so that's been introduced and will be part of an individual's compensation program. Secondly, we did get approval through our Board of Directors to introduce a reload program on stock option grants that were done back in February so what you'll see over time if the stock appreciates, is that you'll see people beginning to convert option ownership onto share ownership and I think that's a good thing, so that's the second.

Third, we do have ownership targets here. We actually spent time yesterday discussing them, I think, at the Vice President level, your, your -- again, there's time issues, how much time one's getting to accomplish this, but if the Vice President required to own 2 times you base pay in the form of share -- one time with the Vice President and at the Senior Vice President it's twice, twice, okay. So I got -- and that's undergoing and on the way and we're measuring that and evaluating it and then, you know, personally I own 145,000 shares, so I got a pretty good investment in the place, too. So that's, you know, that's what makes it fun when you come in in the morning, I think anyway, and you say, hey, you know what, I actually do own the place or at least a little piece of it, that's pretty good.

Alice Cornish, Prudential Securities. Jay, I think you said on a previous call that in a normal interest rate environment, whatever that is, that you should have a return equity of around 12 - 14 percent and you based that on a book value, excluding unrealized gains and losses. Is that still a valid observation and what is that book value number that you're focusing on? I assume it's not the 24-26?

That comment actually cost a lot of confusion and so it caused me to go back and really think about what was I saying, because it was an instinctive answer. What I really meant by that was that in the property casualty business, on an un-leveraged basis, that rates where -- that rates over time should get going -- in the PC business only, should get going into that 15 percent return on equity range. Now our asset management business froze off a higher return than that, obviously and we don't operate on leverage. So that created some confusion, could have been some shorthand. What I tend to think of is that over a period of time in a normal rate environment this industry has indeed produced that 15 percent threshold. There have been precious few companies that if you think about accident year return on equity, that have done better than that for any sustained period of time. It just -- the (indiscernible) of the business is tended to move it away once it reaches that level. We're getting to that level right now.

Now, what level was I thinking about? Truthful answer, I don't know. I wasn't answering a financial question, I was really answering an -- a financial management question. I think that, obviously our business last year with all of it's warts, on a core basis, on a pure core basis produced us over 13 percent return on equity last year x World Trade. Again, lots of bucks for us. So what I mean by that is is that do I believe that we're capable of producing more than a 15 percent return on equity, I do. That's different from the question that I answered and I'm sorry for the confusion that I created on that, I know there was some. But, what I will do is give that one some more thought and get back to you with it because, again, I'm reluctant to just shot an answer and create more confusion. So that's, I'll try and get back to you on how I think about book value and related returns.

Ron Frank, Salomon, Smith, Barney. Jay, you'll be delighted to hear my question was asked.

And ladies and gentlemen we have no further questions standing by. Miss Gagnon, I'll turn it back to you for additional or closing remarks.

If you have additional questions I will be in my office available. That number is 651-310-7696. The analyst pack and copies of the press release, of course, will also be available on the website. Thank you very much.