旅行家集團 (TRV) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the St. Paul Companies Second Quarter Conference Call.

Today’s conference is being recorded.

At this time, I would like to turn the conference over to Miss Gagnon for the Vice President of Finance and Investor Relations.

Miss, please take it away.

Good morning, everyone, and thanks for joining us for the St. Paul Second Quarter 2002 Conference Call.

Copies of the statistical supplement and the press release are available on the investor page of our website.

And with me on the call today are Jay Fishman, Chairman and CEO, and Tom Bradley, CFO.

This call is being recorded, and will be made available on our website for one week.

Because this information is time-sensitive, any broadcast of this call by any third party may not take place after that date.

Today, we’ll be discussing our second quarter 2002 performance, as well as 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 lost 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 may involve risks and uncertainties that could cause actual results to differ from our current expectations.

These factors are described under the forward-looking statement disclosure in the company’s most recent report on Form 10Q and Form 8K with the SEC and available through our website.

With that, I’d like to turn the call over to Jay.

Jay.

Laura, thank you.

Good morning, everyone.

Thanks again for joining us here on the second quarter call.

First, just in the context of agenda, I’m going to spend a few minutes giving you some overall views on the quarter, our perspective on performance, some of the dynamics that we’re seeing in our business.

I’m then going to ask Tom Bradley to come in and provide some detail, particularly with respect to some of the individual business segments and some of the results.

And then, I’ll come back on at the end, and I will discuss our reinsurance operating strategies, as well as our philosophy and position on financial strength.

So with that, let’s dive into the quarter.

This is a little unusual quarter to be actually reviewing the overall results, obviously significantly impacted by our resolution of the Western McArthur litigation, and I’m one, historically, who has typically said, “Just tell me how much; don’t tell me why.” But in this case, I do think we have to look through that, and look through to the operational and financial performance in the rest of our business, in which we had a very strong quarter.

This was a very good quarter for our business operationally, as well as financially.

Excluding Western McArthur, on an operating basis, we posted a 15 percent return on equity.

In our insurance segment, we continued to make very good progress on the execution of our strategies on the new business front, particular progress in our small-business initiative.

When we launched our National Property program, it’s meeting with success in the marketplace, and are pleased with the results that we’re seeing there.

And we’re also, obviously, pleased with the results overall, ex-Western McArthur, that we were able to generate during the quarter in our insurance business.

In our asset management sector in John Nuveen, we had a return on equity in the quarter of 30 percent, and with their acquisition of NWQ, their announced acquisition of NWQ, we continue to broaden the asset management platform, and it is now a full broad-based product platform that offers solutions institutionally across the range of investment needs.

They also posted a record quarter in the second quarter.

In fact, just interesting, as I was looking at the data, if one consolidates and simply takes a look at the total assets owned in our insurance company, as well as managed in Nuveen, the aggregate total now is approaching $100 billion of assets under management both owned and managed.

So, it’s a fairly important component of our business.

At June 30, the book value of our company, including adjusting Nuveen to its market value, is just under $28 a share.

In the context of the business itself, and to give you some insights into what we’re seeing in the underlying economics, [audio gap] on the premium front, we were very focused at the end of last year in changing the strategy of this business to get away from volume gains, and get far more focused on underwriting and the three priorities of rate, rate and rate.

The actual dynamics are evidencing themselves quite strongly in the numbers.

On an overall basis, we’ve seen rate gains in the mid 20s, and in fact, in June, across the book, we actually saw rate gains at 28 percent, obviously approaching 30 at this point.

Retention levels -- I’ve spoken about this before -- you actually know that you’re doing right in the marketplace when you see retention levels of renewal business just trending downward slightly.

It is doing that, and that gives us a substantial amount of confidence that our field organization is acting aggressively in the marketplace, leaving business behind that’s not adequately priced, or if we’re in situations we are unable to achieve adequate pricing levels.

And so I’m very, very pleased with what I see both in the premium retention, as well as in the price change.

At the end of last year, I wanted to make sure that we were taking our foot off the pedal on the new business front.

As one deals with a distribution organization as diverse as the one with which we deal, companies are –– tend to be identified as either rate companies, or new business companies.

And I wanted to shift the focus away from volume and market share gains into rate, and I was actually promoting a reduced level of new business, as our sales organization began to focus on getting rate, and in fact, that has evidenced itself.

Our new business numbers have dropped down into the low 20s.

That’s actually across our whole book, and that’s fine.

That’s a level that I’m actually quite comfortable with.

Those of you who perceive that our new business levels, perhaps, have declined somewhat, they’re very much part of our plan, very much part of our strategy, and consistent with an execution strategy of improving profitability.

On the underwriting front, a couple of things to note there.

First, I mentioned that we had rolled out the controllable income process to the field organization back in the first quarter.

That initially provided a basis for having discussions about performance.

It’s now taking on a richer dynamic, in that it’s becoming a very useful tool in analyzing the underwriting profile of individual officers, and allowing our managers to make appropriate decisions without individual business transactions and individual accounts.

And the quality of the discussion, and the richness that’s occurring about individual accounts and the proper rate needs for those accounts, given that the data is now out in the field, is really reaching an entirely new level.

And I’m very, very comfortable that the nature of the underwriting attitude, the underwriting orientation, is very much appropriate and is focused on profitability.

So we see a development in the controllable income process that takes on a richness that goes beyond simply measuring results, but actually becomes a tool for managing our business prospectively.

And the results, obviously, are beginning to evidence themselves.

You obviously see the combined ratio that we were able to produce for the quarter, as well as for the six months.

It is a very strong combined ratio as one looks at it, compared to other companies.

Please keep in mind that we do not have -- other than with respect to the Western McArthur transaction -- any incurreds in either asbestos or environmental.

We do not have –– we had a relatively light CAP quarter and CAP six months for the period.

And lastly, we’re not trying to accrue up the shortfall in our reserve position that would adversely impact that combine.

So, we feel very good about the results.

We’re heading very much in the right direction.

Now on the expense front, our original estimation was that we would be able to eliminate $75 million in direct expenses associated with the businesses from which we’re exiting, and $50 million of corporate expenses that needed to be eliminated to improve profitability.

We are ahead of schedule with respect to the elimination of those expenses, and in fact, we expect to exceed that number by the end of the year.

And as we begin to take a look at ’02 and ’03, the more time-lagging types of expense actions, whether it’s real estate management or other things, we actually become now increasingly comfortable that we will see a continuation of the decline of the expense base into ’03, and perhaps even into ’04, given the actions that we’re beginning to take; so very comfortable with the expense profile.

You see the expense ratio.

It’s obviously impacted not only by the savings, but by the rate gains that we’re seeing in the business.

But I’m going to resist the temptation to look a gift-horse in the mouth.

Right now, the expense profile is good.

The expense culture in the organization is a healthy one and we’re very much moving in the right direction.

On the investment income front, a couple of points to make.

First, we made the decision –– Bill Heyman joined us from CitiGroup.

We made the decision to begin a process of repositioning our investment assets.

You can see that we’ve liquidated about half of our public equity position.

I think it’s actually about 40 percent at the moment of our public equity position.

We did so at a realized loss of some $17 million.

It was a little more than $400 million reduction in public equities.

We’re moving that into fixed income.

That has the benefit, obviously, of reducing our risk profile, but perhaps more importantly, it converts income that’s reflected as capital gain below the line, into operating income that’s reflected above the line.

And as market conditions permit, and we’re able to become increasingly liquid in those assets that are, in fact, classified below the line, you will see, over the next couple of years, a continued move out of those asset categories into more traditional fixed-income investment strategies.

And that actually has gone well, and we’re just tremendously pleased that Bill would come and join us, and he’s off to a great start.

I’m also very pleased with -- as I look back and reflect on -- some of the difficult names that we’ve all been reading about over the last quarter.

The exposure of this company to those names has been quite modest, not quite zero, but not far away from zero either.

And in fact, I think it speaks to a very strong credit discipline, a rigorous credit discipline, and a rigorous credit discipline applied particularly in the investment arena.

I think that we’ve managed so far to sidestep most of the issues that have confronted many of others in the insurance sector.

So with that, I’m going to turn it over to Tom to go through some details, take you through.

And then, again, I’ll come back for reinsurance and financial strength.

Thank you, Jay.

I wanted to elaborate on a couple of points.

First of all, in the Western McArthur settlement, as we announced back in May, it is a gross settlement of $987 million, and a net after-checks charge of 380 million.

Some of the details in there that are in the press release, but then I’ll pull together here, are we are recording a $250 million reinsurance recoverable on that.

It’s an amount of which we’re very comfortable with, and are highly confident of collecting.

We had reserves available for the claim of $150 million, leaving a pretax charge on the claim of 587 million, leading to the after-tax charge of 380.

In terms of cash paid towards that 987, we made a payment in June of 247 million.

The remainder is expected to be paid in late ’02 or early ’03.

On the subject of A and E reserves, Tim Yessman and his claim team to have completed a case-by-case review of all of our A and E claims, and are comfortable with the established reserves.

As we’ve talked before, we’ve always managed the A and E reserve jointly, kind of as a bulk, but as you also know, GAAP requires separate disclosure of the amounts and the activity.

So, as part of that review from Tim and his team, we reclassified $150 million of those reserves from environmental into asbestos.

And as Jay mentioned, excluding the Western McArthur claim, there were no incurred losses for A and E in the quarter.

Update on the World Trade Center catastrophe reserves: as we mentioned in a press release last week, we have completed another review of those reserves from the World Trade Center event, and remain very comfortable with the $941 billion incurred loss that we announced in December.

Save [indiscernible] for this event were $63 million for the quarter, compared to 85 million in the first quarter.

On the subject of cash flow, we’ve been monitoring and reporting the negative outflow from the healthcare runoff operations of $179 million negative in the second quarter, compared to 146 million in the first quarter.

If you take that number, along with the Western McArthur and World Trade Center outflows, excluding them from cash flow from operations, that cash flow was positive $315 million for the quarter, compared to 290 million for the first quarter.

Finally, I just want to give a quick update on our holding company liquidity profile.

In June, we finalized a new $540 million bank line, which is a split 5-year, 364-day facility.

Our commercial paper balance as of June is down to $100 million, from 240 in March, and that’s out of a total $800 million facility.

Free access at the holding company at the end of the quarter exceeded $200 million, and our long-term debt, the maturing over the next 12 months, is about $50 million.

Back to you, Jay.

Thanks, Tom.

Let me turn my attention to two topics that I know are of great interest.

First, our reinsurance segment.

First, in the context of the business, it has enjoyed a very good, a solid second quarter, and a very strong first six months.

We have added to the members of the management team.

I’m sure many of you saw the announcement that we made that we’ve added a new CFO and a new General Counsel to the reinsurance segment.

The business, in anticipation of the IPO that we were planning, had significantly narrowed its product lines, and significantly reduced its own property catastrophe exposure compared to last year, because it obviously was anticipating being very much out on its own.

And in addition, as I mentioned in the first quarter, the company as a whole -- because this St. Paul Re is a division of the company purchased for this year -- an additional $100 million of property catastrophe coverage above and beyond the levels that we had last year.

So, we’re comfortable with our property profile.

The business is doing well.

It is on track, barring any serious property catastrophe events, for a underwriting profit for the year.

And we’re pleased that Steve and Jerry are there, and that they’re keeping their eye on the ball, and in this interim period, we’re very much running the business in the ordinary course.

As it relates to the IPO of platinum, this is a transaction that we envisioned early on after I joined here.

It was something that we spoke about in December.

Strategically, it is absolutely the right thing for us to operate the reinsurance sector in a different way than we do.

It should not be a wholly owned U.S.-based subsidiary of our company.

Strategically, it simply doesn’t make any sense.

And it is important that we execute on that strategy, so that we can turn our attention and our resources to areas where they are far better served in the context of our strategic profile.

We will continue to be focused on the execution of the IPO, and we will do so as soon as market conditions allow.

So, that’s where that stands.

A couple of comments on our financial strength.

We are, indeed, nearing conclusion of our discussions with the various rating agencies.

And I think it’s quite obvious that capital actions are going to be a part of our future, and we are still fussing with how much and what the timing of that will be.

But as a management, let me make it clear that we believe that it is appropriate to strengthen our financial position.

This is a company that will operate with conservative financial leverage, broad access to capital markets, and we have as our goal to have improved ratings over time.

And we are a company that has suffered a series of shocks over the last six months, and that has had an impact on our financial position.

And we think that it is appropriate that we go to the capital markets, and to replace that capital as contributed down into the insurance company to bolster the financial strength of the company, to support not only the operations that we have today, but where we propose to take those operations tomorrow.

As I did note in the press release, I do want to make it clear that we do not believe that any capital actions that we would consider here that would interfere with our goal of meeting or exceeding a 15 percent return on equity; and while I know that many of you would like us to say more at the moment, when we have more to say on the matter as to amounts and timing, “We’ll have more to say”, to quote Yogi Berra.

But we are absolutely committed to a strong balance sheet that we know will be positioned to absorb the shocks that are inherent in our insurance business.

So, that’s where we stand on the capital front.

So with that, I’d like to turn it over to questions, and we’ll try and be helpful in any way we can to the issues that you’d like to raise.

(CALL INSTRUCTIONS).

Rob, are you still with us, just to make sure we haven’t lost you?

Yes, sir.

We’re just going over the Q and A right now just to get the questions lined up for you, sir.

Thank you.

Sir, your first question is from Michael Lewis from USB Warburg.

I have some –– I guess we’ll start with the capital issue right now.

Could you define –– a few things, could you define what prudent leverage ratios are, and where you stand on the measurements that we should be watching for?

And in the same vein, can you go into the comfort level you have with the medical-mal runoff?

And are there no possibilities this year of any shortfalls in that, according to what you’re saying seeing?

And in the same vein -- it’s all in the same question -- you mentioned selling, possibly, some of your assets that held up in the parent company.

Can you define a little bit more how much those assets may account to?

And I guess what I’m really saying here, I know you can’t tell us what capital actions you’re going to take right now, but maybe give us a little bit more comfort on how you kind of watch what adequate capital is and comfort that we won’t have any other further shock effects on the runoff business.

Yes.

There’s a lot of questions in there.

I’m not even sure I can remember them all.

But first, in the context of defining leverage, I’m not sure that I’m ready yet to tell you what the absolute number would be, because I actually think it changes over time.

And the goal, again, is to have improved ratings over time and improved financial position, and obviously, right now, we’ve been moving in the opposite direction.

And so, our first step is to take the actions that are necessary to put the company on a firm footing.

We intend to do that.

I’m hopeful that those actions will be sufficient to retain the ratings such as they are.

We are yet to have reached closure completely on those discussions, but I am hopeful.

We continue to be focused on balancing those obligations with the obligation to create shareholder value, and I don’t think that anything that we would do in that regard would interfere with our ability to meet or exceed a 15 percent return on equity.

So, I’m not ready yet to state it.

I’ve certainly looked at our leverage profile, and I’ve compared it to other companies with whom I view us as being in competition with, and companies that I think are well run, and I think are appropriately capitalized.

And we’re higher than they are, and we should drive it down to lower levels; more to follow as we really get to understand and see the dynamic better.

I think if you do a spreadsheet, Mike, you’re good enough that you’ll be able to see those leverage statistics, and my guess is, is that a number would actually jump out at you pretty easy.

You’re pretty smart at this.

In the context of selling assets to parent company, that’s actually not what I said.

What I said was, was that in the insurance company, that we had assets that were accounted for as capital gain assets; meaning they were assets whose return was accounted for below the operating income line.

They would include things like public equities; that would include things like private equities.

And I think that the investment profile of this company should be more conservative.

I think that the return should be more recurring, and more predictable.

And as a consequence, I think having a billion dollars of public equities was not appropriate.

So, we’re liquidating out.

And this is, again, not at the parent company -- it’s at the insurance company -- liquidating out of those positions, and moving them into fixed income portfolios in the insurance company.

In terms of shock losses, look, I know enough in this business to be humble, and I don’t want to sit here and sound silly, and tell you that in this business, given the history of this industry, that I can give you 100 percent assurance that there won’t be any shock losses going forward.

I can’t do that.

We try our best to stay on top of the data, to understand the trends that are going on, and to react to them to the best of our ability.

I think we’ve done that.

This is a company that, before I ever got here, had a longstanding history of a conservative approach to managing its balance sheet, and I’m certainly not interfering with that.

That’s the right way to run things, and we’re trying to do that, but I don’t certainly have the ability to give you comfort 100 percent that there won’t be another terrorist event, or that there won’t be a windstorm of magnitude, or some other problematic event.

So that’s where that is.

In the context of the healthcare runoff, things are going very much as we hoped they would, and planned that they would.

So, at least in that regard, we feel, so far, pretty good.

Our next question is from Michael Smith.

It’s Mike Smith at Bear Sterns.

The designation of the reinsurance operation is a runoff; clearly gives a signal of Western full commitment to the business from St. Paul Corp.

Has this hurt the operation in the marketplace at all?

Are you seeing any signs of adverse selection?

Well, first, it’s not a signal.

We’ve been very public about the fact that strategically, we don’t think the way that it’s operated is the most intelligent way to do it.

So, it’s not a signal.

We’ve been spending time with the employees; we’ve been spending time with the agents; we’ve been spending time with the customers.

And I just got an update as to how we stood on the July renewals last week, and things look good.

I don’t see anything in the numbers, or anything in the trends, that cause me to believe that the business is suffering because of the perception of lack of a commitment.

I actually think that the employees are enthusiastic about the notion of being off on their own.

I think they feel pretty good about that.

We continue to work on the execution of that.

I –– to make two observations: the first is that the model of conducting a reinsurance operation out of Bermuda is the one that’s the most compelling today.

It’s impossible.

We don’t have the capital of Genre [phonetic], and I don’t have Warren Buffet’s pocketbook, and we can’t compete with it.

And we don’t have the advantages of being a Bermuda operation either.

So, we sort of have the –– a challenging situation.

Getting into Bermuda is important.

I’d like to be an investor.

My goal is to actually own 24.9 percent because I think that that actually does make sense, and I want to –– the reason 24.9 is because that’s all one can own in that structure, but I’d like to be an investor.

Well, you also mentioned that capital markets are a challenge at the moment.

Suppose the capital markets continue to bump along the way they are.

How much longer would you ride with this before you choose an alternative action?

Well, look.

First, heaven forbid that we should be in a position where, for a long period of time, a company that’s appropriately capitalized, without a historical tale of any issue, that’s well managed, that has a strong management team of great reputation, that has a good corporate sponsor and support, should not be able to attract capital in the public markets.

If that condition last for a long time, I suggest that we all might want to think about alternative lines of work.

So if, in fact, I have to perceive that the market will never be open to that kind of activity, we will have to obviously pursue alternatives, and those alternatives are available to us.

It is an attractive franchise.

There are alternatives available, and if need be, we will pursue them.

But I’m -- you know, maybe it’s foolish, but I’m an optimist, and I do believe that eventually this market will allow us to take a smart business strategy that’s well capitalized and fairly priced to market.

So, that’s the best I can answer you.

Well, on Wall Street, sometimes long-term is Friday afternoon, and I’m wondering what your timeframe might be?

Longer than Friday afternoon.

Your next question is from Mr. Ron Frank.

Number one, even allowing for the philosophy of raising rate, and sacrificing some new business and retention as a deliberate strategy, tech has come to a screeching halt here.

And I’m just wondering what comfort you can give us that the growth at the peak wasn’t excessive, and there may not be a payday for that.

Second, there’s a reference in the press release to $100 million addition to healthcare loss reserves.

And the loss ratio did surge a lot to a very high level from first quarter, and I’d like to try and figure that one out.

Sure.

First, on the tech side, the price increase during the quarter was 21.9, and premiums fell 6 percent to a little over $100 million, mostly due to underwriting.

And what I mean by that is, is that the warning signs went up in this company a long time ago about what was happening in the tech sector, and as a consequence, this business honed in its underwriting profile pretty aggressively some time ago.

So what you’re seeing is when you say, “Came to a screeching halt,” I’d actually just say it a little bit differently.

The tech sector, not our insurance sector, but the tech sector, came to a screeching halt.

And as a consequence, the attractive business opportunities that were there, you know, perhaps three, four years ago, are simply not there in the same abundance today.

So, I think that this is a very appropriate strategy designed to react to the changing marketplace.

This is a business that can have a little bit of credit sensitivity, and you got to be careful with it.

And I think that Mike and his folks are doing just that.

Having said that, there’s nothing that we see that causes us to believe that there’s any kind of brewing problem in our technology book.

I think, by the way, that the quality of the rigor that goes on here in terms of looking at data and analyzing it, and trying to understand trends and circumstances and conditions, is exceptional.

I think that Paul Breem [sp] and Scott Anderson, and the folks in the actuarial group, have done, and continued to do, an outstanding job of being –– of having a high degree of integrity, and calling it the way they see it.

And, no, I don’t see anything in the technology book at all that’s problematic.

I’m pleased with the profile, and I like where that business is heading.

On the healthcare front, we were carrying $2.4 billion of healthcare reserves that were in a runoff, and we analyzed that data.

We look at it every month.

We analyze it closely every single quarter, and I would characterize –– what we did was we added $100 million to that 2.4 billion -- what I would characterize as a fine-tuning adjustment to an overall balance -- and in fact, I would tell you that we don’t see anything in the data.

We don’t see anything in the data that would lead us to believe that the –– that there will be any problem in the context of running that book off within the reserves that are established.

But particularly given the environment that we’re in, we thought it was prudent and appropriate to make this fine-tuning adjustment.

Jay, I understand that, but I guess what it –– what I’m wondering about is, it does follow reasonably closely the -- what I think was some -- was it 700 that you initially added for healthcare?

It just seems like a meaningful increase relative to, you know, an estimate that was made six months ago.

Does it concern you that the required addition increased significantly so soon after the initial setting of the charge?

Well, I would say it a little differently.

First, I don’t see that anything was required.

I want to make that clear.

I don’t see that anything here was required.

Again, we analyzed data.

We look at trends.

We’re dealing with $2.4 billion of reserves.

And in fact, the numbers move around and bounce around pretty good on a regular monthly basis, and you’re always trying to interpret and perceive and understand what’s going on.

I think the work that Tim Yessman is doing in the runoff area is positively first-rate, and actually believe, although not yet incorporated into the numbers, that as a result of converting this book into runoff, that we will actually produce real meaningful savings over time.

I’ll give you just one example, and it speaks eloquently to the opportunity that exists here.

When the business was not in runoff, even though the company had the unilateral right in many states to settle medical malpractice claims without the consent of the policyholder or the institution, this company routinely did not do that.

It actually deferred to the desires and the wishes of the insured or the institution to defend the case.

And in fact, what happened was, we were defending cases that should not have been defended.

We were spending money in the expense arena that should not have been spent, and ultimately, settling for more dollars than what could have been settled for, if one had simply taken the approach early on.

We’re not doing that anymore.

We are taking the interest of running that book off with the most efficient approach that we possibly can.

That’s one of several types of things that make a meaningful difference in converting an ongoing book to a runoff book.

And ultimately, that will produce meaningful savings here.

We have not incorporated that into our analysis.

As we look at the data bouncing around, particularly in the context of a conservative environment, where everybody seems to have 20/20 hindsight on what should have been done, we just felt it was prudent to do this.

And again, I’ll state it very clearly: we don’t see any trends in the data that cause us to believe that this is not going to be sufficient.

This really was a fine-tuning adjustment to a $2.4 billion balance.

Our next question is from Greg Lacraft [sp].

Can you expound more on the tension, the current tension, with the rating agencies, and a little bit more on the timing?

In other words, you’ve laid out, I think very explicitly, what the actions you’d like to take are, but what if we’re sitting here in December, and there’s still actions that you’d like to take, and not actions that you have taken?

Have –– will the rating agencies, do you think, act by then?

I mean, can you give us a sense as to what they want to see, and by when they want to see it?

First, I don’t find there actually to be any tension with the rating agencies.

I think that they’ve been good listeners, and they’ve understood the issues that we’re facing.

And they’ve allowed this company to put its best foot forward, and to make its case.

And I think the quality of the dialog, virtually across the board, has been good and positive, and I appreciate the time and the attention and patience that they’ve given us.

It’s been real good.

We’re going to –– I’m motivated more by the financial strength position of this company than I am directly about the ratings.

I do think that that’s a derivative concern.

What I mean by that is, is that our motivation has to be to protect the policyholders [technical difficulty] the creditors of the company, and allow the ratings to follow on in that context, and we’re going to do that.

And the rating agencies will make the decisions that they’re going to make.

And I think that they are describing to us the conditions under which they’ll act, and the conditions under which they’ll act differently.

And we are trying our best to be responsive, consistent with running a conservative financial profile and a strong balance sheet.

So, no, I’m not going to give you any more commentary on timing or specific issues.

You can address your questions to them in that regard.

And then, the second question is, why wouldn’t you choose to monetize the Nuveen stake in order to get yourself out of this pickle?

Well, Greg, again, I don’t think that we’re in a pickle.

I like this company.

I like both segments.

I think that Nuveen is a terrifically performing asset that we have the ability to build and develop, and create shareholder value.

I think if I can create financial strength, if I can go to the capital markets and do what’s appropriate, and still produce a 15 percent return on equity, I think I’m living up to all of the constituency’s concerns.

I note with some attention that, if you look at the rest of the property casualty industry, you won’t find too many companies that actually produce a 15 percent return on equity.

I think we’re doing our job in balancing all of the constituencies, and think we can do so without liquidating what is a pretty good asset.

Now if ultimately something dramatic were to happen, and it became necessary for us to do that, we would certainly consider it, but we are not anywhere –– were not even in that same city, forget in that ballpark.

We’re –– it’s just not even a concern for us right now.

Can you just –– and this is the last one -- when you say something dramatic would need to happen, what do you define as dramatic?

I don’t.

I just –– I’m answering your question.

You said to me, “Why don’t you monetize,” and I tried to answer it.

What I’ve said is that I don’t want anybody to think that, you know, that that would be something that we would stick to pending the demise of the company.

We obviously wouldn’t do that.

We would do what’s appropriate, but right now, there are lots and lots of other alternatives that are available to us, and capital market actions that we can take, that both meet the needs of building financial strength and the appropriate balance sheet and create shareholder value.

So, that’s where we’re going to go.

(CALL INSTRUCTIONS(.

Your next question, sir, is from Bob Glash [sp].

You say that you think you can get to 15 percent ROE after the capital raising.

It looks like you’re –– if you take out Western McArthur, you’re only at 14 this quarter.

Do you have a timeframe on that sort of 15 percent ROE?

I think from operations, we’re actually like 14.9 and change, or even 15.1, depending upon how one pulls it out, but –– and that’s why I say that the operating return on net worth, I think we’re, ex-Western McArthur, where they’re now.

The question that I was trying to respond to is, to the extent that we access the capital markets and raise capital, and obviously, had whatever reinvestment rates on a fixed-income basis we would have for that portfolio, did we think that that action would materially impact what I said was our goal of producing a 15 percent return on equity from operations, and I don’t believe it will.

So your goal is to be there third quarter, fourth quarter and into ’03, with or without whatever capital that you do?

You know, I mean, I would say as I look at it, we’re sort of there.

Again I, you know –– but if I could just make Western McArthur disappear -- don’t misunderstand me, that’s on our watch, that’s ours.

But for Western McArthur, we’re there now.

And I’m simply telling you that I don’t believe that that will diminish our ability to continue to meet that threshold.

Okay, second question.

Your December meeting, you gave some guidance on runoff profitability, you know, this year and next year, you know, what drain it would be.

You’ve changed the component of runoff a little bit, and we have half a year timetable.

Are you willing to give us sort of revised guidance, or do you stick with what you gave us in December?

Tom, you’re the one who gave the guidance.

Can I turn that one over to you?

Yes.

We don’t have, you know, kind of redone numbers.

We think our total profile, including the current operations, is actually running better.

I think the third to fourth quarter numbers that we previously gave are still intact.

We’re obviously running a little bit higher on medical, given the issue we were talking about earlier, but we’re also running a little bit better on current year core operations.

So you know, in terms of where we would end up at the end of the day, it’s probably pretty similar.

If I could just follow up, I think the ’03 over ’02 increment from less runoff loss, this was about 30 cents per share.

Is that a rough ballpark, sort of positive in ’03 versus ’02?

I was remembering the dollars.

I think that, you know, the third quarter was like 40, and the fourth quarter was like -- excuse me -- was like 30.

It was like a hundred –– I think it was 160 for the whole year, and it’s going down to about 50 next year.

I think that’s the numbers we talked about back in December.

Okay, that sounds like you’re in the ballpark.

And you still think those are reasonable even though we put more into runoff?

Yes.

I think to the extent we put more in, I think we’ve done better in the core ops.

Well, actually, you put profitable stuff in, right, because you’re putting platinum stuff into runoff ––

Yes.

And platinum’s going to run off, you know, at worst, underwriting breakeven.

Yes.

And I’m not sure how we treated the reinsurance sector back when we did that analysis.

Yeah, actually, we weren’t talking about platinum because it wasn’t a negative at the time.

Right.

We were talking about the medical and the international and the [indiscernible] ––

Right.

So, your commentary is sort of ex-platinum when you say you still feel comfortable?

Right.

And again, I don’t think it’ll change that dynamic either, because it isn’t going to throw off in our expectation and underwriting loss.

Your next question is from Jay Cohen.

Jay, just a question on the new business.

You’re pulling back just in that regard on purpose, but given the dynamics, given that prices are going up, I’m wondering what’s the problem with the new business?

Well, there isn’t a problem, Jay, with new business.

Let me give you a perspective on dealing with an agent, because understand that these things happen at the point of sale.

An account executive, a field person, is sitting out there with an agent.

Agents tend to classify companies as interested in rate, or interested in new business.

And they perceive the companies have trouble, insurance companies, walking and chewing gum simultaneously.

And so, that doesn’t mean on any specific individual transaction, but over time they will tend –– if you ask an agent, “Tell me about that company,” they’ll say to you, right now they’re very focused on underwriting and rate; or they’ll say, right now, they’re focused on gaining share and new business.

And what I wanted to do was to make to sure that the profile here was on underwriting and rate, because as I looked at the rate gains last year, it was my own judgment -- and I think I can prove this, but I’m not 100 percent certain -- that the rate gains that we were experiencing in ’01, in the early part of ’01, were lagging the market by 4 to 500 basis points.

If I simply take what everybody was saying publicly as the rate gains that they were experiencing, and I’m assuming that they were being truthful, I think that we were lagging by that kind of order of magnitude, and I thought that it was appropriate to bring a different philosophy to the place.

Now let me share with you some data, and this is across the entire insurance book, so you’ll understand what happened.

Now I joined here in October.

The rate gain in October was 17 percent.

It was 18 in November; 19 in December; 23 in January; 23 in February; 28 in March; 27 in April; 25 in May; and 28 in June.

And I would tell you that I no longer believe that we are lagging the market by 4 to 500 basis points.

I believe now that the pricing gains across this book are as good as anyone else in the industry is getting, and we have watched the retention go down slightly, which is an appropriate thing to have happened.

Now the new business because again, agents tend to think that you’re either a rate company or a market company, I sent out a message and in fact, Marita Zuraitis, who runs our Commercial Lines Group, was giving me a little bit of a rough time last week, asking me to begin to let up on this notion of being a little restrictive on new business.

But let me give you the numbers, because it’s still pretty healthy growth.

In April, we booked –– and this is ex-rate -- what I’m talking now is, it’s new business as a percentage of expiring premium.

So, you’ve got to be careful when people give you numbers that you really understand what’s in them.

Is it on expiring, or is it on renewal, which includes rate?

And then you can get all different kinds of numbers that are incomparable, so ours is based upon expiring.

We were 27 percent in April; we were 25 percent in June; and 22 percent in July –– I’m sorry, I can’t read the columns –– 27, 25 and 22, respectively, in April, May and June.

So, we’re hardly off the pedal.

That’s still some pretty healthy growth, but that’s down from sort of the high 20s, and even low the 30s, where I thought that the focus was more on new business, and less on rates, and I wanted to change that focus.

A dollar of rate gain is worth a multiple of retention in new business.

Every dollar of new business, you know, if you’re lucky, you get 5 cents to the bottom line if you’re writing in a 95.

A dollar of rate, other than 15 cents going out in commissions, 85 cents falls to the bottom line.

So, the amount of leverage, the amount of return leverage, that exists in getting the sales force of this size focused on getting rate is enormous.

And it was important not to have that message be mixed.

I want people to wake up in the morning and know what they’re supposed to do.

Not they’re to be no [technical difficulty] and so we have focused very hard on getting the place going in the rate direction very successfully.

So, there’s no problem with new business.

That was very much the articulating strategy to widen the margins in place.

When you’ve got loss trend that’s single digit, and you got rate gains that are running in both mid-top to high 20’s, look what that’s doing to your margin over time.

I mean, that’s why you can produce a combined ratio as well as we do.

That’s what’s happening here.

Your next question is from Paul Newsome [sp].

I just had one quick, almost a follow-up question, to some of the other questions asked.

Are there going to be –– do you foresee any additional changes to the portfolio beyond getting out of equity?

Would you reduce duration, or do you have a little different philosophy on your credit quality?

Just thinking broadly, are there businesses that you might transfer over to Nuveen?

First, in the context of –– what you’ll see over time decides a reduction.

I’m going to let Bill talk –– Bill Heyman is actually here.

I’m going to let him talk about the fixed income portfolio.

But in addition to the reduction in public equity, you will see a reduction in private equity over time as well.

I think that for the company to have the size of private equity that it does, is –– I’m not comfortable with it, and we will drive that down over time.

From a fixed income perspective -- why don’t you give your perspective?

I think we look at the portfolio as being two portfolios: one, a fixed income investment, which de-fees our liabilities, our insurance reserves; and another, of what we would call risk assets, in which we seek enhanced return and attempt to build equity for shareholders.

We’d like to focus on, even in our risk portfolio, in results which come in above the line, and we think are better recognized by the stock market.

On the other hand, there are assets, and they do include public equities and some equity-like strategies, which are –– which will be appropriate for us.

However, in order for them to be appropriate, they ought to promise, or hold out the promise, of returns which exceed fixed-income returns by a considerable ratio.

And each company arrives at different ratio.

I suspect it’s 2½ to 1, or even greater.

So, in allocating our portfolio going forward, what we want to do is use every risk dollar, because risk dollars are limited, in as efficient a manner as possible.

That may lead to some allocations, to some alternative strategies.

Again, frankly, we’re looking for absolute rather than relative return.

We don’t like indices, which are benchmarks that can go up or down the given year.

And we’re looking for strategies which, again, hold out the promise of making money almost all the time.

Are you comfortable with the duration of your portfolio?

Yes.

The –– again, if you look at the fixed-income portfolio, which exceeds in notional amount the discounted value, the insurance reserves, you can envision it as two portfolios.

You can carve out a portfolio which exactly matches the discounted amount.

And what we estimate as the duration of our insurance reserves, and the residual portfolio that is left, is one of longer duration and, obviously, a much smaller amount.

In our case, the so-called residual portfolio is a duration of about 7.8 years.

The insurance, the reserve portfolio, is about 2.7 years.

So, I think one is better in the so-called residual portfolio and taking slightly more duration.

(CALL INSTRUCTIONS).

Our next question is from Ira Zuckerman from Nutmeg Securities.

You’ve given us some numbers on the runoff operation.

Is there any way of segregating out the assets in reserves, and attributing an investment income number to that portfolio as well?

Sure.

We can ––

No, I mean it –– when we talked in the past, had like for the medical reserves, for example, on –– as they run out, it’s been an average 3½, 4-year duration on the reinsurance side.

Reserves are in the press release.

The reserves on the healthcare, and the reserves on the runoff lines, are actually right in the press release.

But could you give us an idea of –– have you segregated out assets to meet the runoff needs, given that you have a pretty good idea as to the duration?

And if so, what kind of investment income is being generated off of ––

Well, we manage –– I mean, I even think, actually, that if you look in the press release, you’ll see that the duration of the runoff liabilities is actually included in there.

And what Bill does is manage the investment portfolio to match the underlying duration of the liability.

So I think offline, if there’s any confusion about that, happy to give it to you, but ––

It’s not a question of confusion.

It’s just an idea of, basically, because we know that business is going away and hopefully ––

They’re not run as separately segregated identifiable portfolios, but you can ––

Yes.

–– the amount of the liability, the amount of the liabilities are there ––

Yes.

–– the information is there.

I think you can make whatever assumption you’d like about spread to treasuries for that duration of liability, and you can make an assumption.

Now let me just share –– because I –– one of the things that I’ve seen happen in some analysts’ models is an overreaction to the change in investment income perceived by some of these runoff lines.

And I think it happens because a perception that every last dollar that we have is invested at what amounts to the marginal yield.

And that, of course, isn’t the case.

There’s a fair amount of liquidity in the investment portfolio at fairly modest levels of returns.

And so in fact, these kinds of issues are really handled at fairly modest -- particularly with a Fed funds rate of 175 -- at fairly modest changes to the investment income.

So, while the information is there, I would just caution against over-calculating the presumption that the marginal return is applicable to each of those portfolios; that some of the analysts who have done that actually make some, I think, poor judgments.

The next question is from Ron Frank from Salomon Smith Barney.

Just one follow-up.

The reinsurance operation, although for this six months, it’s still at the underwriting process, as Tom mentioned earlier, it did pick up considerably from first quarter to second.

Should I just interpret that to be normal volatility, or was there a seasonal aspect, or did something, indeed, deteriorate from first quarter?

We had a $14 million underwriting profit in the first quarter.

We had a $4 million underwriting loss in the second quarter for a net of 10 for the six months.

It was purely timing that you’re seeing.

It really –– don’t read anything into it; it’s just normal.

I mean, those are relatively small numbers, and just timing between the respective quarters.

So you would view the six months as reasonably representative then?

I do, although recognize, obviously, that the catastrophe season is in the second half of the year.

Now, I’ll say the win season, excuse me.

The win season is in the second half, but the answer is yes.

Okay.

Since you mentioned win season, Jay, what color can you give us on PMLs at this point?

They’re down.

First of all, we have the data.

And we know what we have, and that was not always here.

It’s not always the easiest, because when you have a reinsurance book, it’s derivative exposure.

We did buy up the reinsurance by $100 million.

We also bought separate terrorism coverage.

We are, Ron, debating ourselves, whether to begin to provide that information.

I haven’t made a decision yet.

What I can tell you is that, you know, half to 60 percent of the PML is tied up in the reinsurance operation; so that should we be effective in the IPL or platinum, the amount of the PML becomes a -- for a company of our size -- a very modest number; not that it’s not been so large now.

It’s actually –– I wouldn’t call it modest, but it’s not oversized and we watch it carefully.

Jay, what was that percentage again?

I would say half to 60 percent.

Now, it varies.

It depends whether you’re looking at 1 in 100, 1 in 200, 1 in 250.

Right.

As you move down the spectrum, meaning a 1 in a 100, they’re a 100 percentage; and as you move up the spectrum, they become a lower percentage.

But I would say across the book, about half to 60 percent of the property PML is tied up in the reinsurance operation.

Your next question is from Steven Gabios [sp] from Dreyfus.

I’m wondering if you could help us understand how important executing the platinum IPO is to your capital plans and hopes?

Well, it’s extremely important to my strategic plan, and it was important enough so that I joined the company on October 11th on –– after having spent a couple of months doing due diligence -- on October 12th, I was talking with the group about restructuring the reinsurance operation.

So strategically, it is absolutely the right thing to do.

When we originally envisioned the IPO at the kinds of values that were out there when we started the process, it was going to produce a capital gain, and I’ve disclosed that previously.

We talked about, perhaps, $100 million dollars of capital gain.

And of course, over time it would free up a certain amount of capital that’s tied up associated with the liabilities themselves.

I would say that the principal issue to me is one of strategic priority.

To the extent that it does have an impact on our capital position, there are alternatives in the context of capital market actions, and other alternatives that we have, that would deal with that issue.

I would remind everyone, because there seemed to be some confusion about it, there was never any cash to the St. Paul Companies as a result of that IPO.

What we were doing was investing in a new company, and contributing the infrastructure and renewal rights.

So, there was no cash, not 5 cents of cash, that was coming back to us.

And so, it was not a capital in the traditional sense of George Washington-type capital, you know, single dollar bills, obviously.

It was not a capital-raising enterprise.

It was a strategic initiative that was going to have capital implications, and we will seek the alternatives if we need to.

Your next question is from Ken Zuckerberg [sp] from Zaird Asset Management.

If it’s okay, we’ll give Tom a little workout here.

Go ahead;

I’m tired.

Tom, I have about 20 reports in my inden here regarding stock options.

So, I just wondered, to the extent that you guys have done any diligence on SFAS 123, and if you can share any conclusions as to whether or not you’re likely to expense, and if so, the EPS impact?

And then a second, unrelated question is, just on Page 5 of the press release, as regards med-mal reserves, I notice that the weighted average life of healthcare reserves was 2.2 years.

It just seems to me that that tail seems a little bit low, and I just wondered if you could clarify that for me?

Yes.

It –– one thing you remember is most of the medical-mal is claims made; then you add the reporting endorsements on it.

As reporting endorsements come on, it actually ends at that light’s out, somewhat.

So I think all in, it’s probably going to end up more like three to four years.

But they are, basically, claims made policies.

Yes.

And that’s an important distinction.

This is not the policy that goes on forever.

Right.

And I’m sorry, Ken, you have –– do you have a piece on the options?

The other one was on the options.

Ken, we have looked at it.

And Tom, tell me if I’ve got the numbers right.

I think that other than with respect to last year, principally driven by the option grant that I received when I joined the company, I think that the charge for the last several years of [indiscernible] to expense, it was about 4 cents a share?

Yes; 4 or 5 cents a share for those years.

And I think last year through a combination of the million-and-a-half options that I was granted, as well as grants that I recommended to the Board for certain of the senior management team here, I think it came to 20 cents for 2001 or so.

We haven’t made any decision about what we’re going to do about expensing it or not.

It’s not an overwhelming or important part of our compensation structure.

I might add -- and I think this is true just in context of governance -- I’ll volunteer a question.

I think we’ve been through the New York Stock Exchange recommendations with respect to governance and governance-related issues, and I believe that the only thing that we will need to do to be in full compliance with that is that I will resign from the Governance Committee of the Board.

And the only reason that I went on to the Governance Committee, which is the committee that’s responsible for appointing new Board members, is because we were in the midst of a fair amount of Board member transition because of mandatory age retirements, and the Board thought it would be helpful for me to be involved in that process, but I’m just as comfortable stepping aside.

So, from that perspective, we’re in very good shape.

Your next question is from Jonathan Adams from Brown Brothers Harriman.

You made an adjustment on your net premium line to show quarter [indiscernible] premiums.

Did you make that on the earned premium line?

What are those numbers for first and second quarter?

Jonathan, that is the laid out in the supplement.

There’s a fuller income statement.

That’s in the supplement?

Yes, sir.

Your next question is from Angelo Gracie [sp] from Merrill Lynch.

I have a quick question regarding your investment portfolio.

Can you provide some detail regarding the fixed income section, how much of it is in corporates, and what are the characteristics of the corporate bond portfolio?

I think that there actually is a footnote in the press release that describes the average credit quality.

And let’s see -- I’m reasonably certain that it is there.

Here we go, the long-term fixed maturity portfolio, an average maturity of 7.8 years and an average yield of 6½ percent.

At June 30, the yield was 5.7 on taxable, and 2.83 for tax exempt.

Credit quality, 86 percent of the bonds are rated A-minus or better, and unrealized appreciation increased 300 million over the quarter.

So the only thing I think that’s missing from that is a split-out between the taxable and the nontaxable.

I thought it was two-thirds, one-thirds, but then that’s just the number I remember, so Bill ––

Jay, that’s correct.

It’s two-thirds taxable.

Yes.

Do you have any information regarding how much of it is in high yield, and in particular, how much is in telecomm?

Very little.

High yield is between 200 and 300 million, and the telecom exposure, both high yield and investment grade, is small.

I don’t have the number in front of me, but somewhere between small and extremely small.

(CALL INSTRUCTIONS).

Sounds like maybe we’ve exhausted you.

Laura, you can close it up.

Thank you all for joining us.

I will be in my office if you have any further questions.

My number as 651-310-7696, and have a great day.

Thank you, Laura.

Thanks, everyone.