旅行家集團 (TRV) 2002 Q3 法說會逐字稿

Good day and welcome to the Saint Paul company third quarter conference call.

This call is being recorded.

At this time, I would like to turn the conference over to Ms. Laura Gagnan (ph), vice president of finance.

Please go ahead.

Laura Gagnan (ph): Good morning, everyone.

Thank you for joining us for the Saint Paul Company's third quarter threw conference call.

Copies of the press relief are available on the web site.

With me on the call today are Jay Fishman (ph) chairman and CEO, Tom Bradley (ph) executive vice president and CFO and other members of the executive management team.

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 third quarter 2002 performance as well as current market trends.

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 may be considered forward looking under the private securities litigation reform act of 1995.

These forward looking statements may involve risks that could cause actual results to differ from current expectations.

They are described under the forward looking statement disclosure on form 10Q and 8K with the sec and available through our website.

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

Jay Fishman (ph): Good morning, everyone.

Thanks for joining us.

With me here this morning just coincidentally we have our monthly senior management meeting starting this afternoon, so we've got a group of other senior managers of the company.

Tom Bradley obviously was here to make some comments.

In addition, we've got Bill Hymen (ph) our chief investment officer Mike Miller, Tim Yesman (ph), our commercial lines business, Ken Ernes (ph) who runs Lloyds and we have David Reid (ph), the individual who heads up our Lloyds business specifically.

So if there are any questions at if end of this call that you would like to direct to anyone else here in the room, we'd be more than happy to take those questions and do our best to answer them.

It was once again a very busy quarter for all of us here at the ST.

Paul."

What I'd like to do is make some comments.

We've made very positive consistent progress throughout the year in building our core business over the quarters.

Since the year began.

And I'm also going to review the actions that we've taken to address our non-core businesses in the legacy development that's occurring there.

These are businesses that are in the runoff mode and the receive active and constant attention from us all very much in our focus.

I can take you through the results in the actions that we took in respect of those businesses.

First, a few comments on our core business.

Really an exceptionally strong performance in our core lines.

We reported a 92.5 combined ratio in our core business.

We've put in a new table for you on page 7 of the press release.

It's a disclosure that easily reconciles for you the reported combined ratio which was 105.8.

It reconciles it down to our core business and then further reconciles it to core at certain adjustments so that any of you who need particular data for your modeling, hopefully it will be easy for you to find the number that you're looking for at that table.

Even adjusting for the world trade center adjustment of 1.4% impact on the combined, what we actually did there was reduce our core world trade center reserves by $20 million and actually increased our reinsurance world trade center position by an equal and offsetting $20 million.

So overall no impact but our reinsurance business being in the noncore component, this obviously is an adjustment to the core line.

Even adjusting for that 1.4, we had a core combined ratio of 93.9 and that's after a .3 in the ratio due to cats for the quarter.

Some 92.6 before caps.

I would say we're very, very pleased with those results and continue to push very hard in the same direction that has produced those.

So let me take you through that.

First in the context of rate gains continue very strong and indeed we think they need to and they will continue to.

So, I'll give you the numbers but there's more work to be done here.

Rate overall was up 30% breaking that down specifically, 32% up in our specialty lines of business.

And some fairly wide divergence within specialties some of the more challenged lines like DNO experiencing gains well in excess of 32%. 25% in our overall commercial lines business.

That's impacted by the small commercial arena where the rate losses were never as dramatic as they were.

The rate gains are a bit less dramatic than they are in the middle market so the blend is at 25.

And 32% rate gains in our construction business and the new business and rate opportunities in construction are actually just amazing.

It's what's happening in that market is really nothing short of remarkable.

The push for rate continues across the board.

First we fully recognize the long-term ramification of a reduced interest rate environment and think that rates have to continue to go up, that I was reading some research actually believe it was coming out of IDR Weekly (ph).

It crystallized my own thinking and was spot on.

If we're going to be dealing with a fed funds rate of 1.75 and reinvestment rate of 4%, if you're not going to be in the low 90s, you're not going to produce acceptable returns.

We're going to push.

We envision a rate environment than is no better than it is today.

So we will continue to push for rate gains.

In fact within our individual lines of business, our commercial lines business and our specialty lines both produce combines in the quarter in the high 80s.

And I think that's where they should be.

We will continue to push rate.

It is not impossible at these kind of -- this rate environment we're working down into the low 80s.

It's entirely possible and indeed appropriate to produce acceptable returns.

The second piece that continues in the rate push, and this comes out of the recent meetings of green briar (ph), the industry conference.

It's very clear that reinsurance pricing is going to escalate in '03.

The issues that have confronted the reinsurance industry from whether it's capacity or equity losses, going in and out (ph) of business, there is clearly going to be rate pressure in '03.

I believe though actually will be capacity pressure as well in certain lines of business.

I don't think that it will be all you want and all you need.

I think it will be effectively on some portion of allocation and price driven.

We view reinsurance as a raw material, a cost to be built into our product, not as some carriers do as an allocation of profits at the back end.

The way to go to build long term acceptable relationships with reinsurers is to view their capital as attractively, as importantly as you view your own and to price it appropriately.

If that's the price of capital for producing lines of business, so be it.

That will work its way into our pricing going forward.

And I think that what that actually does is put us into the long term relationships with reinsurers where the goal is not to produce income at your level and losses for them.

The goal is to produce income across the board and have them feel you're representing their capital as importantly and significantly as you're representing your own.

So very much in the focus.

Lastly, the world of exposure continues to build whether it's terrorism or other cumulative type of injuries.

We don't know what tomorrow brings.

The pricing of a product should reflect that uncertainty and the return should also.

So we think about that as we price product.

We will continue to push rate.

We are beginning to work on one renewals right now.

It's clearly to us that that rate pressure is going to be evident in the early '03 period.

I see nothing that will occur in '03 during the year that will mitigate that push.

We continue to see that.

Retention in our business across the board is basically in the high 60s.

What I mean by retention is the, -- if you take the amount of business that's coming due in any quarter, one minus that lost business divided by the total premium will give you the retention ratio.

So if you lose 30%, you have a 70% retention rate.

This is on premium dollars not on accounts.

It's in the high 60s.

That feels just right for the pricing gains we're receiving and continue to emphasize on nonrenewing underpriced accounts.

There's a somewhat naive belief that there's a price for every account.

We actually don't think that.

There's accounts whose exposure and volatility is such that there is no right price and no level where that business should be written and so you're seeing to some extent in those retention rates a sorting out a little bit of the bulk between that which forms the core business of us going forward this business going forward and that which will not.

So that retention rate feels right.

I'm pleased with the rate gains and feel good about where we're heading.

New business, the way we measure it is we take new business and divide it by the expiring premium in a given quarter.

Our commercial book, our new business rate is in the low 20s.

Our specialty book is in the low 30s.

And our construction is in the high 20s.

In each case -- in each case in that business that number could be considerably higher than it is.

We continue to approach the market selectively.

We continue to view risk with a certain amount of skepticism.

There's a fair amount of churning that is going on in the market place.

New business flow and opportunities are substantial.

We are trying our best to be very picky and choosy about the business that we take on make sure that it's consistent with our core franchise.

And that what we end up with at the end is a properly underwritten properly priced book of business that can produce attractive returns.

So that continues to go well with this well.

On the expense front, you see in the analysis that our expense ratio was down 2.5 points.

That's a significant achievement and is principally due to basic expense reductions.

The change in the expense profile of this organization and the cultural acceptance of it is real.

You can feel it.

And, in fact, it will continue.

There are more opportunities that are available to us across the board as we begin now to restructure our occupancy real estate expenses as those leases come up and address other long term contract opportunities that don't have immediate flexibility but do have opportunity over the long term.

We will, when the process comes to conclusion, be as good as anybody else in our business at being a low-cost producer.

That's just critical for success in the market place.

You can't price your product appropriately if you're at a meaningful expense disadvantage.

On the investment front, we continue to move our portfolio out of equities and into fixed income.

Both Bill and I have talked over the last couple quarters about our view that if you're going to have become that falls below the line, the income has to be exceptional from a gain perspective to really translate into share holder value.

You do take a level of volatility and exposure in those kinds of investments.

The returns have to warrant that and, in fact, exceed it because it's simply difficult to get it -- not only earn it, you have to be paid for it.

We don't see those opportunities now and so we will continue to reposition our portfolio.

We describe it in this release some of the actions that we took.

We actually sold in our venture capital portfolio $125 million of cost basis of venture capital partnerships.

These were the partnerships that the company previously had invested in where we are not in control of the investments.

We are indirect investors that really doesn't make sense to us.

We sold that position for $75 million plus being relieved of a future obligation to fund $75 million into those ventures, an additional $75 million into those ventures partnerships.

So while there was some TNL pain in the quarter from that transaction, we know we're headed in the right strategic direction.

We will continue to do that, to reposition our investment portfolio more above the line.

Our asset management business has really just an exceptional quarter.

We really don't say enough about the job that the folks are doing.

Kim Shortfaiger (ph) and John and Bryan (ph) have done a great job in the product mix right in the face - the teeth of an awfully difficult volatile environment.

The sales results on the asset build are very impressive.

Gross sales of investment products in the third quarter were at a record of $4.7 billion.

Were positive net flows of $2.7 billion.

Sales of closed end exchange traded funds were $2.4 billion.

A remarkable series of transactions that we entered into in the quarter.

Sales of mutual funds totaled $400 million.

So through the nine months we've got gross sales of $11.5 billion with positive net flows of $5.1 billion for the period.

I think an asset balance at this point starting to approach $80 billion of assets under management.

They've really done a remarkable job and think they're just terrific at what it is they do.

Our Capital position book value was $27.34.

Tom is going to make some comments and observations about our capital position and where we're going with that.

In the context of where we're growing, we see immediate opportunities in many of our specialty businesses particularly in financial and professional services and our excess umbrella unit.

The DNO arena is what amounts to a bread bag at the moment of opportunities.

And we pick and choose carefully.

We do limit our exposure in the DNO arena to $6 million per name so we do not have everything else reinsured above that.

Our typical position would be $25 million position in align somewhere with 16 reinsured out.

From a volatility position we think we positioned our exposure appropriately and if we have a loss it fits within our actuarial assumptions.

The specialty in excess umbrella business is a business that might start -- Mike started at the early part of last year and the numbers are actually pretty impressive.

We're at the point now where we're actually doing about $15 million of premium a quarter.

I'll give you the numbers.

These are quarterly numbers.

Just to give you a sense of how it is you actually build business.

In '01 the first quarter we did $2 million in premiums, $4 million in the second, $9 million in the third and 13 in the fourth.

For a total of $28 million.

In the first quarter, we got $25 million.

Second and third quarters we did $15 million each, so we're at 55 million 9.

And frankly given the volume of business that comes at us, this is a business that we could effectively double in a fairly short period of time.

We've watched the underwriting carefully.

Mike kids, but doesn't kid too much.

The business has been audited in house ten times to make sure on stand alone umbrella that we know what we're doing.

We've been very attentive to it, we're deeply involved in it and go over it on a regular basis.

We're building our basis.

In construction the level of turnover and turmoil in that marketplace is quite remarkable.

The new business opportunities are actually tremendous.

I went over with Bob Mendola (ph), the person who runs that business the other day his quote rate, in other words, the number of times that he quotes on a piece of submitted business because I didn't believe the number when I saw it.

We're booking to business as I mentioned at over 30% of expiring -- the quote rate is at 12%. 12% of the number of times that he actually gets the submissions does he provide a quote on the account.

So that gives you a sense of the level of turmoil that's occurring in the construction business and in that turmoil obviously substantial opportunities.

We've been re-energizing and refocusing our general commercial lines business on two fronts.

First is simply acknowledging that it's a very important part and equally important part of the long-term future of this place.

We have a proprietary position in many cases with U.S. base agents and brokers.

That is a business that can produce, does produce very acceptable very attractive returns.

We're building an investing in it.

Maria and her team have done a great job of re-energizing that from a historical perspective of a segment of our business that was not getting top drawer attention.

We changed that focus a lot.

We've all made a meaningful investment in developing our small commercial business.

That's beginning to take some real shape.

So far this year we've actually hired 60 people to come in and be part of that organization.

Everything from local accounting to regional underwriters, building an infrastructure.

We've put up the service center in Atlanta.

It's up and running and now open for business.

We will be next week meeting 40 of our largest agents nationally in a couple days seminar to really announce and introduce the program in substantive ways.

We will be ready and willing to be open for business and have big time expectations for that in the first part of next year and ready to roll.

The technology that we have is as good or better than anybody else around.

The back-end service center is there and ready to go.

We have everything it takes to be successful in the business and are anxious to roll that out.

From a core perspective our Lloyds business.

We've moved that to four short-tail lines.

We have exited all of the long tail businesses at Lloyds.

Right now in aviation, marine, there's a personal line syndicate and property.

Four short tail lines.

We actually had a combined in the quarter of 81.

Those are the kinds of numbers that produce very attractive returns, good profitability and we will continue to focus on only the short lines.

I'll speak more obviously about Lloyds and what happened there when we get to the legacy businesses.

Reinsurance is out on the road.

Many of you have met our management team Steve Newman (ph), Mike Price, Jerry Fadden (ph).

The process is going well.

We are cautiously optimistic that we will have a transaction here.

The segment did get hit by some European flood losses within acceptable views of volatility that did kick up our cat exposure for the third quarter but we show those numbers and it is what it is.

We're excited about positioning the models (ph) in platinum and more to follow.

We announced that we hope to be pricing that transaction early next week.

All in all we feel really very good about our core business and the prospects for the fourth quarter in '03.

Just very much full steam ahead.

Things that we're trying to do are going well.

And we're pleased with it.

Want to spend a few minutes talking about the legacy businesses and what happened there in the quarter and what actions we've taken and where we are.

First about the medical business in its current year loss for the quarter.

There was no adjustment in the quarter for prior period observes and medical malpractice.

What you're saw in the quarter was a phenomenon that we anticipated and expected.

We have a legal obligation to offer tail coverage, reporting endorsement coverage when we get out of a line of business.

We had no idea how many of our customers would opt up to buy the tail coverage.

We were hopeful that there would be other markets that they could turn to in continuing coverage and not need our coverage.

August happens to be an extremely heavy seasonal period for the hospital business in particular.

We did have a number of companies sign on to the reporting endorsement.

Actually was a fairly modest number of companies.

We actually booked the loss ratio in under 350% for those hospitals.

That's the loss ratio again and that's a reflection of what has been happening in the medical malpractice business.

That truly is a one-time phenomenon.

We only have the obligation to offer the reporting endorsement once.

We did so.

I think we had less than ten companies accept it, but the magnitude of setting up the 350% loss pick on it was substantial.

We did anticipate it would happen in the quarter.

We knew this would be a seasonally challenging quarter for the exit of the medical malpractice business.

That is very much behind us and don't anticipate any further issues with respect to reporting endorsement losses.

The accounting for reporting endorsements is unique.

You do have to take the loss immediately.

You do not set it up and earn it over the premium period.

So the burden of writing these reporting endorsements falls exclusively into the third quarter and, importantly, there's no hangover.

There's no continuing tail on this into the fourth and first.

So the results in the medical malpractice business function the reporting endorsement, function of the seasonality, taken once and done and no prior period adjustment made or required to the health care reserves.

Let me spend a minute talking about that.

There is no adjustment that was taken in the third quarter to our health care reserves.

The level of attention and accounting scrutiny that's applied to that book is enormous.

We watch it constantly.

The anecdotal evidence -- and maybe even the more than anecdotal evidence is beginning to show in positive ways.

We watch importantly the trend in claim performance.

Are we continuing to see the claims are satisfied not only within the reserve position but actually below it.

And we call that internally the redundancy rate.

The redundancy rate, the higher it is, the better it is.

In 2001, the redundancy rate was approximately 20% through the nine months of 2002 we're into the mid 30s.

That's a very good and very encouraging sign.

But we're also in about the fourth inning of the game.

So it is just too early and premature to absolutely and definitively declare victory.

And we won't do that yet.

Sometime in the probably second quarter of next year we'll be able to speak much more definitively about it.

The anecdotal evidence.

This is probably more than anecdotal.

This is real.

We just hope it continues and no further adverse trends evidence themselves.

But this is real and is encouraging in the context of the ultimate resolution of our medical malpractice reserve position.

So that's where we stand on health care.

Sorry I'm taking up as much time as I am, but I do think these things are important and meaningful for an understanding of our business.

On the reinsurance front transaction going forward.

What we did do.

I don't think I shared this with anyone yet.

We obtained William and Robertson to do a 100% review of our existing reinsurance book.

That review was -- has been completed during the quarter.

It was done as of December 31st of 2001.

When the data was available.

And we actually got the cleanest bill of health on our reserve position that I have ever seen.

It essentially says our reserves are spot on.

We have gotten permission to share that information and the report with the board.

We will do so at our upcoming board meeting.

We have a significant level of comfort with respect to the prior period reserves in our reinsurance book.

That position is consistent with our own internal review.

I really wanted particularly in the context of this transaction to go out and get an independent perspective and we did.

It was a 100% review.

No books excluded.

So we feel pretty good about that.

Lloyd, in the early part of '02 we made a strategic decision to exit a series of syndicates in Lloyds that were predominantly long tail business.

And a number of those syndicates we completed a review of the reserve positions of them late in the third quarter.

Now, our total Lloyds reserves are about $1 billion.

And the syndicates that we had shut down before the adjustment that we affected in this quarter represented about $450 million of that billion dollar position.

Because of the shutdown of those syndicates, we sent in a team.

We did a fairly exhaustive review.

We looked at it carefully.

It is now a runoff.

The principle problem there is a financial and professional service syndicate that will insurance to financial institutions.

So the insurers are names in the financial services arena that you would know and recognize easily.

And whether it's a manifestation of the recent environment in which we find ourselves or some of the corporate problems, frequency was up, severity was up and it was clear to us that we were not going to be able to pay out the claims of that book of business with the reserves that were in place.

We took a $75 million prior period charge in Lloyds to strengthen that $450 million position up to 5.25 and we feel confident now about our ability to run off those syndicates within that existing reserve position.

I know that's a disappointment, certainly was here to us as well.

I'm telling you we're committed to running a clean and a strong balance sheet and address the problems that confront us head on and get the problems behind us.

That's the only way that I know as a manager to pave the way for consistent and strong performance over time.

And we only have two choices and frankly within those two choices only one is acceptable.

One is to deal with the problems take the reserve issues that have to be dealt with and get the problems behind us.

And the other is to stick your head in the sand and hope they go away.

If they do, you've gotten lucky.

If they don't you've created a mortgage for the future.

I don't know how to run a business that way.

I only know how to deal with the problems that come at us, get them behind us and speak to you about the prospective capacity of the company to generate earnings and returns.

So that's what we've done.

And again, David is here, if anyone wants to speak more specifically about the Lloyd situation.

But that's where we are and that's what's created the $75 million charge.

Just two more items then I'm going to turn it over to Tom.

Our surety book.

We did make a press release on the legal case.

It was a surety claim going back to 1995.

Related to support of the oil rig construction in Brazil.

We did take it to court.

We are heavily reinsured in that.

The reinsurers are names that you would know and recognize.

We are all participating in the appeal of it.

I have no idea whether an appeal will be successful.

We booked the amount assuming the appeal will not be successful and we have also not recorded any subrogation recoveries that might be available to us as we move through our various indemnity agreements.

It was a $35 million pretax loss.

We've taken that charge.

It really was in the core business of surety although more specifically it was in the commercial aspect of surety, particularly geographically where we decided to exit.

I think it is in our core.

No side stepping it.

But that's what happened there and that was the story.

Asbestos, we think that we've addressed that before with you.

The situation in western McArthur (ph) is going just fine.

We continue to feel very good about our own asbestos position.

And I'm not talking about using a phrase (ph) like adequately reserve.

We actually feel very good about our asbestos position.

We have 13 cases in litigation in our asbestos book.

We know them inside out and upside down.

We are all fluent with them.

There is no way that we could have dealt with the western McArthur (ph) situation the way we did without having a comfort that it was unique and a one and only.

We continue to believe that.

There was no provision or asbestos reserves in the quarter.

And we continue to believe that we will be able to deal with the reserve with the existing asbestos cases that we have within our existing reserves.

So we feel good on that front.

And I think that's it.

With that I'll turn it over to Tom for a minute and we'll be available to take your questions.

Tom Bradley (ph): Thanks, Jay.

Just wanted to cover three items quickly.

First half position you saw that the total capital of the company increased from $8 billion to $9 billion in the course of the quarter.

Obviously mostly due to the $850 million of capital raised in July.

Looking at the balance sheet and the press release, you see that even in spite of that, that capital raise, the debt to total cap ratio increased from 26% December to 28 -- I'm sorry, 26 percent in December to 28% in September.

Recall that half of the capital rates in July are $425 million.

It was in the form of mandatory convertible securities.

These securities are appropriately classified as debt on the balance sheet but obviously have a high equity content giving that they mandatorily convert in three years.

If you assume they are equity in that calculation the debt to total cap ratio drops to 23%.

Long term our goal is for this ratio to be in the very low 20s consistent with our rating desires.

Second issue is cash flow.

And this is a terrific indicator of where the core business is turning around and our pure underwriting cash flow for the quarter was a positive $100 million.

This is everything.

This is core, noncore.

It includes $250 million of negative cash flow on the health care business.

Includes $60 million of payments on the world trade center.

But again, shows that the strength of the core business in overcoming if you will these outflows from the noncore businesses.

Total operating cash flow for the quarter including investment receipts is about $315 million.

Final item update on the world trade center reserve last quarter we reaffirmed our world trade center loss at $941 million pretax.

We are again reaffirming that reserve at $941 million.

We trued up some of the business segments for that loss as Jay had mentioned.

We decreased our net reserves in the core commercial business by about $7 million.

Decreased the reserve about $13 million in the core Lloyds business and increased by $20 million in the reinsurance business.

This true-up (ph) did consider also the favorable impact of the Silverstein (ph) case where we received in September.

Regarding one event two event for the world trade center.

That's my update.

Jay.

Jay Fishman (ph): We'll turn it up for questions.

Tom Bradley (?): Before we do, make one other comment as I look forward.

The one area of our business we are planning for in more challenging years is the surety business.

It is a credit-driven business if the economic environment continues the way it is, we would anticipate a more difficult market in a surety book going into next year.

We are doing three things.

First watching underwriting and underwriting and surety not only means account but means term conditions and collateral.

We have tightened up our underwriting profile going forward.

And then the second is reducing expenses which is watching nickels and dimes and trying to make sure we work through the economic environment with an acceptable profile.

So we're sort of heading that way.

We're taking that one head on.

With that, open it up for questions.

Today's question and answer session will be conducted electronically.

If you would like to ask a question, please press the star key followed by the digit one on your touch tone telephone.

We will proceed in the order that you signal.

If you are using a speaker phone please make sure that your mute function is turned off to allow your signal to reach our equipment.

Once again, if you would like to ask a question, press star one.

We will pause to give everyone an opportunity to signal.

We will take our first question from Charlie Gates from Credit Suisse First Boston.

Two questions.

My first question, did the underwriting results reported for commercial lines and specialty commercial where you reported combined ratios in the high 80s.

Did those results benefit any way from the reductions in reserves for earlier losses?

No, sir, not at all.

My second question, could one of you elaborate on the accounting for the venture capital investment?

We did -- there were really three pieces to it and the last bill to - after I lay it out -- the first is approximately $50 million realized loss from the sale of the $125 million of partnership investments for about $75 million in proceeds.

That's the first piece.

The second piece is a mark to market that occurs within the portfolio on a regular monthly quarterly basis.

Bill, why don't you speak to that?

Bill Hymen (ph): The quarterly evaluation of the portfolio is done according to written procedures which we've compared with competitors and we think are reasonably hard nosed.

There are three elements.

The first is the business is written off if it's abandoned.

There were some of these that quarter.

We view that as a sign of credibilities and venture capitalists who are unwilling to abandon any investments are unlikely to get to the current situation in the industry.

The second is if value is for subjective reasons are being impaired and there were some of those as well.

And the third is investments are written down if a finance is anticipated in the next six months actually we've gone out a year at a valuation lower than the evaluation of the last financing.

And there were a number of write downs for those reasons.

I would add the third category doesn't necessarily bear on the ultimate realizable value investigate investment but we think it's prudent and, therefore, we do it.

There was also in that second area for impairment we had a very disciplined approach here.

If the business itself.

That's what's nice about not only being a direct venture capital investor not being an indirect.

We control the process.

If the business is not meeting its plans, if it is not hitting its own operational hurdles of consequence, we do take an impairment recognition.

So it's not like we wait until everything ends for us to do that.

We get some important discipline here.

Bill Hymen (ph): We think the process is reasonably hard nosed, probably the best proxy for evaluation in the industry is the NASDAQ.

And appropriately the valuations for this quarter in part reflect move in the NASDAQ.

But that's a broad summary of it.

Thank you.

We will take our next question from Bijon Rasami (ph) with FDR.

Bijon Rasami (ph): Two questions for you.

First of all, have you guys had outside actuaries review your entire reserve position, in particular your $2.4 billion medical malpractice reserve?

If the answer is yes, could you share some of these findings with us?

And second question is how have you been hedging your fixed income portfolio to protect book value in case interest rates go up.

First on the first one we have not done an outside evaluation in our medical malpractice book.

And the only reason is that with Tim Yesman (ph) joining the company and changing the claim profile and dynamic that there's a fair amount of noise in the data that makes it very noncomparable to historical trends and an outsider would simply take those trends and project them forward.

This is really -- this is not anecdotal, but do natural expand this that will give you a sense of the nature of the change.

Tim shared with me some data from the southeast region yesterday medical malpractice.

In 2000 we had taken, there were 51 cases that were tried, ultimately went to trial.

There were 11 plaintiff verdicts for those in those 51 cases.

For those 11 plaintiff verdicts we have $4.1 million of reserves set up at the time.

The verdict awards were $46 million.

So that gives you a sense of what happened in 2000.

So far this year we've taken 36 cases to trial.

We've had, I think, seven or eight plaintiff verdicts.

Reserves for those eight were $2.4 million, the awards were $2.1 million.

So, I mean, we sit back and understand the magnitude of that.

That means that we've now begun, we are effectively sorting out which cases to take to trial and which cases you don't take to trial.

And it's that sort of change that will produce what we hope will be a significant -- will have a significant impact on the adequacy that reserve position.

We've not done it on med mal.

We did have -- I talked about this in the first call.

We had Newman Robinson (ph) do a review on our reserve position with the exception of domestic only.

I'm going to give you a bunch of caveats.

I think it's indicative of the discipline here.

Domestic only and at the time we didn't include asbestos and environmental.

And their indication was actually $200 million more positive than the company's own inside actuary review.

Now, we didn't book that as income but it was pretty good support as to the second question of the reserve position.

So we did do that.

Now, and your second question about hedging.

I'll answer that one, too.

We think the best way to hedge is limited.

Our fixed income portfolio had a duration in extent of what we estimated as the duration of our insurance liabilities.

That access has come down as rates have come down.

Currently the duration is under four years. 3.8, 3.9 from which you can easily commute what our exposure would be.

And we think it's within reason.

We try to keep it within reasonable limits.

Bijon Rasami (ph): Thank you.

We will take our next question from Michael Lewis with UBS Warburg.

Good morning.

Jay, if you run your firm anywhere nearly as thorough as you run your conference calls, it's saying something.

Jay Fishman (ph): We try our best, Michael.

Wish the rules were better.

I think you're on the right track.

Talking about results, I think it's quite easy for us to follow what's going on in the core business.

I guess what's a little more difficult is what's going on in the runoff business.

Is there any way of you giving us some kind of idea on how the firm looks, how that runoff losses will run out and should we expect that to run out pretty much over a two-year period?

Give us an idea how the reserves are set up.

I'm trying to get an idea of how the business runs off.

Jay Fishman (ph): First on the medical mal business, I think we -- our original estimate were losses next year would be inconsequential.

Premium running off into '03.

That's going to book at a loss.

What would you guess?

It's probably for the full year maybe 50 million, 40 million, 50 million.

Underwriting losses in the medical malpractice.

I was asking basically you can go line by line, but I was trying to get an idea of what the runoffs were.

Where everything else, nothing else will have earned premium of inconsequence.

Everything else will now be behind us.

So it does come down to an issue of reserve adequacy.

There are two issues.

On an operating business the only business that will have any earned premium, it will be a tiny bit of reinsurance in the third quarter.

Because of the way the -- that a couple of the contracts were written.

But that will be gone.

Med mal, I don't know if your number is high or not.

The only thing that we -- the only issue as we get into next year that really looms as a risk is reserve adequacy.

The rest is fairly predictable.

What we owe you is over the next few weeks is putting pen to paper on the magnitude of the runoff losses.

To answer your question without making up the number but to be more specific and see if we can distribute it to everyone.

The reserve adequate position -- I actually do everything that I know how to do identify the issues and get them on the table.

I don't hide from anything.

I don't ignore it.

We tackle these issues absolutely head on.

That is sort of what it is.

We'll get the better answer on the form of runoff.

That would be probably a good estimate.

Good.

Just one more quick follow-up.

On the retention that you were talking about running the upper 60s retention, for a layman like me, that doesn't seem like tremendous retentions and would get me nervous about your ability to continue to get the rate increases you want without, you know, without maybe upsetting that retention level, driving it down lower.

What I'm trying to understand is of that 60%, upper 60s, what percent of that is business that you don't mind losing and are you losing any significant business that you'd like to keep because of the rate actions you're taking?

Jay Fishman (ph): That's a good question.

I can answer it in a historical context.

There's probably 10% to 15% of business that comes up each and every quarter that once you look at the business and you analyze it, you say gee, we don't want to be here.

For example, I have never been a fan of fast food organizations.

I think that many of them whose names you know, they look like restaurants and they feel like restaurants but inevitably by the end of the year they become locations for mayhem.

There's theft, robberies, injuries.

There's always a murder or two, homicide or two.

And you think you're running a restaurant and you're not.

So there's a certain amount of business that there's no price.

I'm happy to put that into the market.

What I try and do is to look at the trend of retention.

You want your field people to be as aggressive as they know how to be.

You know, it's easy to be -- again, this isn't like a New York stock exchange.

You don't post a price and see who takes it.

This stuff happens because an account executive is sitting one on one with a tough-minded agent who's representing your customer.

If you never lose an account, you know you're not charging enough.

That's a fact.

If you never lose an account, you know you're not charging enough.

So I'd like to see about -- if you said pick the number that's ideal, it depends upon the ratings.

You're getting 30% rate gains.

High 60s retention is great.

Those economics I'll take all day.

If you had a high 60s retention and you're getting a high teens price, you're being -- probably at that point even getting adversely selected against.

You're probably keeping the most underpriced business and losing the best price business.

So the answer to your question is, the retention's good but compared to what rate level?

I tend to look at the sum of retention and price and, to me, this is way too absolute a rule because you would never want to see a 50% retention and 40% rate gain.

Bad combination.

But within a normalized band, when the two of those are around 90%, it sort of feels right.

It sort of feels right.

And in fact one of the things that's interesting about it is that I see it this year.

The current year underwriting trends weren't very good.

There is every indication that they met with the folks from KPMG about this.

There's every indication that we're building -- I don't want to say margin, but that our current year provision is a strong provision.

That comes from bringing the right, bringing the right underwriting, mix of retention and rate to the field.

That's sort of the answer.

Thank you very much, Jay.

That was very, very thorough.

We will take our next question from Jay Cohen from Merrill Lynch.

Thanks.

Couple of questions.

The first is, in the core business, was there any favorable prior year development flowing through that to help the come bind ratio?

The only thing there was the 1.4% world trade center favorable which actually was dollar for dollar reclassified into the reinsurance book.

You can see that on page seven and that reconciliation of the combined years.

That was the only ratio there was.

So those are representative of the act in your numbers as well?

They are, that's correct.

They are virtually the same.

Again, the only adjustment for the prior period was that 1.4 world trade center which was $20 million.

Second question, in Lloyds, you mention part of the business you're doing is personal lines.

If you could talk about that, why you want to be in that business.

It's not so much personal.

It's actually an ace line.

You're going to let David answer the question.

David Reid (ph): It's a mixture of various lines.

Related to the individual but total accident rates and insurance.

Also Creditor insurers -- creditor insurance.

Credit means what in US terms.

David Reid (ph): Creditor in short means loans.

Okay.

It's not homeowners.

It's not auto.

It's not life.

It's a bunch of categories of insurance for the individuals that are -- have been historically written under the name Kathy Davis in our Lloyds business.

Have been under written profitably for years and at the current environment are performing very well.

It's about 200 million in net premium.

What happens is you're in Lloyds, you have a presence, you see the growth where you've got a position in a particular business.

It's been long term exceptionally profitable.

It's not -- It's not UK motor, UK homeowners.

These are businesses that have produced very consistent predictable returns over long periods of time.

So we've stayed with it.

That's great.

Just one final follow-up.

The reporting endorsement accounting, you said the losses are booked immediately.

Are those premiums earned immediately as well?

Jay Fishman (ph): Yes.

Okay.

Jay Fishman (ph): Which is why the earned premium and the loss goes away after this quarter.

You hate -- I don't like to use the phrase one time because any time you say that people tend not to believe you.

Reporting endorsements really are a one time phenomenon.

Great.

Thanks, Jay.

We will take our next question from David Havens (ph) from UBS Warburg.

David Havens (ph): Thanks.

I guess in looking through your results obviously it's not the most optimal thing to be reporting core results and then actual combined ratios for the overall enterprise.

How long do you think it will be until we begin to see the core results really converge with the reported rules?

First I would observe that we don't dart the issue of noncore.

We report it.

We take responsibility and accountability for it.

What I'm always asked to do with all these calls is give analysts enough visibility so they can look out a year or two and make whatever assumptions they have.

I'm not ducking them.

They are as we own them.

In this case, I would tell you that we plan for the medical malpractice provision.

The surprise -- the disappointment was Lloyds.

That was the $75 million charge to Lloyds was a real disappointment.

Now, having said that, the noncore underwriting losses we talked about that with Michael Lewis' call - question a few minutes ago.

We'll have a number out as to what we think.

That's hard for you to estimate.

We have the best insight to that.

I think we owe you some information.

I think Tom's number is a $50 million underwriting pretax loss is probably not a bad one.

Beyond that, the only area of exposure that we have once we get into '04 is reserve development. '03, rather, is reserve development.

One could not be more pro-active on the reserve than we are.

You could not be.

I also believe for what it's worth that in the context.

And I'm sure every CEO would tell you this.

You can take it with whatever skepticism you like.

I'm one of the few that's been at more than one company.

I'll tell you, I actually believe that this company's reserve position is actually better than any other main stream property and casualty company around.

I do believe that.

I feel very good about it.

We're going to continue to maintain that position.

The only way you do it is by tackling the problems head on.

I'm hopeful there won't be any more.

I don't have a crystal ball so I don't know.

David Havens (ph): Okay.

Appreciate the response.

We will take our next question from Bill Wilts (ph) from Morgan Stanley.

Bill Wilts (ph): Want to stick with the loss reserves.

Jay, if you could revisit with your opening remarks you commented or described redundancy ratio in health care.

I didn't understand that and I guess I was thinking of it in the context of reserve increase in health care that came through last quarter.

Jay Fishman (ph): I'll let Tim speak more to the point.

What we actually measure, we have -- there's a practice here.

The basic case reserve practice the estimation of an individual case not really talking now.

Forget the overall book.

I'm talking about a single set of litigation facts that are being dealt with.

The historical practice has been to have is a fairly conservative view of the amount of dollars that it will take to resolve a case.

Historically the company has settled the cases for less than -- for less than the actual reserves that were up on the books.

We called it internally the ratio of the savings, if you will, against the case reserves.

We've come to call that the redundancy rate.

In its strongest period in the med mal business it was not unusual to see a case set up for $10,000 settle for $6,000 a 40% redundancy rate.

And as the medical malpractice business became increasingly challenged, that rate went down and down.

And last year, in 2002, would hit a low of about 20%.

And when you convert a book to runoff, a bunch of things happen.

I have talked about this before.

You take a very different posture with respect to your legal rights because you're no longer in the business and your sole fiduciary responsibility is to the share holders and performance.

And many things that this company did were done in the context of being in the business on a continuing basis.

I have talked about the fact that in many states we have the unilateral right to settle cases.

This is a company that really exercised that right.

It would defer to the practitioner of a hospital, if the hospital wanted to defend the case, we would.

You'd end up talking about the finds of loss and outcomes that I mentioned in 2000 where we have $4 million in reserves and $46 million in judgments.

That's handling that's produced to -- what we were hoping to see was an increase as we began to develop more aggressive profiles in the handling of the case.

And indeed that's happened.

Year to date a redundancy rate has gone up to 20 to about 35.

And in fact while it's not a perfectly straight line, it's pretty close.

It bounces around a little month to month.

But there is a real trim line there, a trend line.

That is a very cautiously optimistic indicator.

That shows in fact converting it into runoff will over time produce superior case results.

Now, there's other noise in the system.

How many claims are coming in, how long the claims come in for, what's the frequency of them.

Those are all the factors that go into reserve adequacy.

When you put all those factors in, I would tell you we're cautiously optimistic but still in the fourth inning of the game here.

Bill Wilts (ph): Okay.

That's clear.

Second follow-up still on reserves.

Could you just hit on the valuation date of the last in depth study for the different runoff segments.

For example, it sounded like on reinsurance seminars evaluation which was recently completed went back to data valued as of the year end 2001.

Jay Fishman (ph): Correct, 12/30/01 was the reinsurance analysis.

It takes them four, five months to do it so you're always, to some extent, looking back.

Bill Wilts (ph): Med mal?

Jay Fishman (ph): The med mal has not been done by an independent third quarter.

We do it internally.

The most recent day that we've looked at is June.

We've obviously looked at the recent trends though September, so it's the only middle of October so it's hard to see anything on a real-time basis.

We have looked at it as of June.

The prior period, the noncore -- I'm sorry.

The core reserves prior period we look at it every quarter.

So again we've looked at it most recently as of June.

But we had known that.

We looked at everything but the domestic nonasbestos and environmental.

I think that date was September.

Was it also December?

December of '01?

It was December of '01.

Bill Wilts (ph): That last part, December '01 covered?

Jay Fishman (ph): That was the domestic historical reserve position core book.

And non A&E.

We haven't reviewed those lines.

We did that as of December of '01.

Bill Wilts (ph): That was core?

Jay Fishman (ph): Correct.

Bill Wilts (ph): And the Lloyds noncore?

David Reid (ph): Lloyds noncore we just finished.

We look at core and noncore.

Also there's an independent sign of external actuary.

That was done 12/01.

Bill Wilts (ph): The Lloyds noncore, this quarter came from data -- study of data valued as 12/31/01.

Jay Fishman (ph): It came through June.

We looked at data in the analysis trends and incurred through June in that analysis.

Bill Wilts (ph): Perfect.

Thank you very much.

Jay Fishman (ph): The or thing I'll mention on reserves and this is -- for those of you who have been involved in private companies, you'll know this.

The outside auditors KPMG obviously look at reserve positions on a regular monthly basis.

They bring in the head of their practice, a woman by the name of Pat Tofle (ph).

She works with Tom extensively.

I have met with her on a regular quarterly basis.

And the change in environment may be -- I'm speaking about the auditing environment manifests itself, I think, most dramatically here.

The level of examination, the depth, the in depth analysis, the questioning and the probing that goes on with respect to the adequacy is at a level -- I have been in public companies for 30 years.

I was an auditor for six.

The level of inquiry, I have never seen anything like it.

This is of a different nature.

We will take our next question from Michael Smith with Bear Stearns.

Good morning, Jay.

If we go back to the -- can you hear me?

Jay Fishman (ph): Yes.

Just fine.

If we go back to the second quarter, your written premiums grew 21% your core business while price increases averaged 6% a five point differential.

At that time you said that you 'owe.

Jay Fishman (ph): Something's wrong with those facts.

Ask the rest of your question.

Pricing gains were in the mid 20s.

That's what I said 26%.

Jay Fishman (ph): I'm sorry.

We thought you said 6%.

You made the objector (ph) is vague that it was your perception that last year the company left some rate on the table emphasizing growth that you were going to back off of that growth and emphasize rate.

This quarter, you're showing 28% growth, 30% average rate increase which would seem to say that you did not do what you said you were going to do.

I was wondering what might explain these numbers.

Jay Fishman (ph): I would argue quite the contrary.

What we saw and I saw in '01 from my analysis of the ST.

Paul's rate gains, compared to industry data, which everyone publishes it now.

I thought we were lagging the market place by somewhere between 3 and 500 basis points last year.

Retentions were higher than they should have been.

They were in the 80s.

Our new business was higher than it should have been.

When I said I wanted to see happen was a gain in rate and the only way that happens is to become more aggressive in the marketplace and so compared to last year our retentions have gone from the low 80s down into the high 60s.

It's exactly what we wanted to see happen.

Our new business percentages which were running in the low 30s last year are now down in the low 20s.

This is a meaningful change in the field profile compared to last year.

Meaningful change.

I think Maria and Mike and Bob Mendola (ph) honestly have done nothing short of a remarkable job.

This is -- when you talk about changing the profile of a company, you're talking about changing the behavior of 6500 field people.

They understand on one day that their mission is volume and growth and bill to book.

And on the next day, no, that was wrong.

Now we're going to focus on profitability.

Making that change, if you make that change too hard, too aggressively, can blow up a field organization.

In fact the execution here has been just absolutely flawless.

And it's evidenced by the ease of which we've gone out into the field and hired 60 people to build our small commercial business.

I think that the business in the market place about how this company has turned in the past year really is amazing.

Was this change in profile something that was initiated at the beginning of the year or was it something you were doing at the middle of the year?

Jay Fishman (ph): Well I joined in October of 2001.

And realistically at that point the 01 renewals were already very much under way.

So I look at the data that was occurring in March and April and May as the first time where the evidence of this change manifested itself.

If you look at the monthly data it shows that as a virtual trim line.

Okay.

What would explain then the closing up of the difference between your premium growth rate and the average price increase?

Jay Fishman (ph): You lost me.

Try that part of the question again.

What I do is look over time.

I see retention's down from last year.

I see new business growth rates down.

And I see pricing way up.

Those were the three trends that you deal with and they were all heading now, they're all where they should be.

That's why I'm saying if the retentions are dropping and the new business is dropping then shouldn't the spread between your premium growth and the average price increase widen instead of close up?

Jay Fishman (ph): The rates have gone up almost 1,000 basis points from last year.

We were running in the mid teens and now we're running on a year-to-date in the mid 20s.

Again, you can't -- you got to look at where we are this year to date compared to last year to date to see the trend difference.

Okay.

Thank you.

We will take our next question from Ronald Frank with Salomon Smith Barney.

Jay I want to take a step back from the trees on the runoff business and look at this a different way.

When you met with us in December you projected underwriting losses for the runoff operations by line for 2002.

The figure for medical mal was $121 million underwriting loss.

We're at as nearly as I can tell about $170 million for the nine months.

I think that included $100 million of prior period we booked in the second quarter.

The main surprise would be the prior period development not the endorsements in the third quarter.

Correct.

Okay.

If anything the actual underwriting losses in the med mal book are somewhat better than we had thought they would be.

Okay.

So perhaps what some of us underestimated was how that would be seasonally concentrated although if you signaled that I apologize.

I was brand new here, but I remember Tom talking about some of that seasonality in the analyst meeting that we had.

We got to try an give more visibility to it.

What you're telling us is you're done offering those endorsements?

No, no.

They there still be some in the fourth quarter.

By the time we get to the first quarter of next year -- we'll come back with a number based upon what's left.

I don't like to do guidance and directions, but because it's such a unique area, we owe you an answer.

But you're aware that that 50 million whatever sort of benchmark or ballpark number you threw out is about what you were projecting last December.

That would not represent much of change.

Does that sound right to you?

That's where it comes from.

We talked about that then.

We need to update it.

We shouldn't make up a number and put that out as definitive.

We'll have, before the close of business tomorrow, a real view on where we are for you.

We'll try and do it today.

We'll see if we can get a real view on what next year's underwriting loss will be driven mostly by reporting endorsements.

The business runs off very quickly now.

Jay, two more follow-ups.

I think it was asked before, how do I reconcile this improving redundancy ratio with the fact that you saw fit to add $100 million to IBNR in the second quarter?

Jay Fishman (ph): In the second quarter, I -- I described it as fine tuning.

I tried hard to say that -- and I actually attributed it, if you remember to the level of scrutiny that was going on from an auditing perspective.

There's a tendency to discount any evolving positive information and to incorporate and grab on anything that might be viewed as negative.

So -- that's what we went from 2.3 to 2.4.

I think I described in that call as fine tuning.

I described it as a reaction to a different kind of auditing environment.

Six months ago I don't think there would have been that adjustment.

I think that it was environmentally driven.

And we would have been able to say look there's a developing trend here that's positive.

Let's -- at that point they knew we were in the second inning, but it's positive and let's see where it goes.

It's a different game now, Ron.

I have a similar question on Lloyds.

When we met in December, you projected a loss for the runoff of 21 million.

The nine month runoff loss is 138.

It's 61 or three times that number even if I give you full credit for the 75 mil on the syndicates that were subsequently put in runoff.

So could you give us some color on what has developed adversely relative to your initial expectations there and why you're confident that you'll head into '03 without a further burden.

Ken Ernes (ph): This is Ken Ernes (ph).

One thing to make note of right at the beginning and that is the extent of the (ph) segments that we have isn't exactly -- we have a Lloyds core business in there that doesn't exactly equate.

I think there's -

I don't want to interrupt but I'm pretty sure I did that math.

I did the subtraction.

Ken Ernes (ph): Okay.

Unidentified Participant: In terms of the Lloyds reserves, it was $75 million in the quarter.

I think 65 of them were from the Lloyds business that we're managing.

We had, in that business, Lloyds core, had through nine months it was about $300 million worth of business at an 88 combined ratio.

The noncore business at Lloyds was -- through nine months was $100 million worth of net written premium and a loss of $100 million in reserves.

You can answer the rest of that question.

Looking at your number, for the full nine months, 106 million of that relates to the business that Ken and David manage.

And as you said earlier, about 70 million of that merged with this review this past quarter.

And I think we would call that review unplanned or that adjustment unplanned.

We were expecting some run of normal underwriting losses during the year.

The other 30 million comes out of the runoff of our union America subsidiary which frankly we had not -- that's a variance.

If we hadn't considered that level of runoff expense in the American business which as you recall is a subsidiary.

It has some of its own Lloyds investments.

So the primary difference that I'm stripping out here is union America.

Then could you express a level of confidence as to whether or not we've seen the last union America?

Most of this relates to their minority investments in some Lloyds syndicates.

We have gone to a similar review this quarter.

With some of the other minority partners have forced the closure of some of the syndicates.

We thought a similar review for the UA (ph) component this past quarter and have the same level of comfort.

Okay.

Thank you very much.

Sure.

We will take our next question from Bob Glasspeigel (ph) from Lehman Accounts (ph).

Bob Glasspeigel (ph): Good morning.

Core operations, I think you said you think you're somewhere around 94 run rate getting 30% rate increases.

Is there any reason why core operations couldn't have underwriting ratios in the 80s next year?

They do now.

Two do now.

Literally for the third quarter, our general commercial book was at 88 and change and our specialty commercial book is at 86 and change.

Lloyds is 81.

The issue actually is a core business.

It accounts for its core.

I think the combined surety business was 135 for the period.

We're very much already there.

Bob Glasspeigel (ph): So it would be ridiculous to think combined ratio in the 80s is attainable?

It is not ridiculous to think that.

Bob Glasspeigel (ph): Okay.

On runoff, I would have several questions on it.

The question I have is, how long of a grace period should we give you for which if negative surprises keep happening you should be held responsible as opposed to the prior management team?

I'm responsible now.

I'm responsible now.

And I don't duck any of the issues.

All I do is do my best to tackle what comes at me and move it behind us.

What I'm trying to do in these calls is to give you as much visibility and understanding of our operations as I know how.

And the board holds me accountable, and you should, too.

Bob Glasspeigel (ph): I think you said in medical we should still think we're in the fourth or fifth inning of the development of those reserves and I think if there was some volatility in that reserve going forward, it shouldn't be an enormous surprise.

Or did I misread that?

Look, I'd be disappointed, but it's funny.

People asks all the time how do you feel about reserves?

And the answer to that question is always in the context of the spectrum.

When reserves are developed and they're not green and you see them and you understand them, you can express a level of confidence about it because you have enough rich data to come to that conclusion.

Right now, the medical malpractice reserve position, it's just young.

The dynamics and the trends all look pretty good to us.

But if claim activity takes a jump for some reason that we don't understand or don't anticipate, that would be a disappointment.

We actually came in here thinking and we've not incorporated this into the numbers, but we actually came in here thinking that if we do a really good job in med mal, it is possible that we will end up with a redundancy position there.

I mean, the kinds of things that I mentioned about this litigation change.

You magnify that out to a whole book and the impact is substantial.

It's just too early for me in all conscious and candor to say to you, relax.

There are no potential for problems.

This is clearly still a risk.

All of the evidence that is a lot of evidence that points to good things happening there.

But it's just new.

Bob Glasspeigel (ph): If you could allow me one last question.

You've been putting up the tail business at 350 combined.

Is that consistent I assume with the severity levels of your assumptions implicit in your current reserves?

It's a dynamic relationship between how you reserve in the current business and how you put up the prior reserves?

I would say the concept is right but tail endorsement is priced expensively and if people have other markets, they opt for it.

So there is by definition adverse selection that occurs there.

We've not booked our hospital business at 350% loss ratio.

But the accounts that are buying this are the accounts that are unable to find alternate cover somewhere else.

So we're assuming 3 1/2 dollars (ph) of losses for every dollar and premium collected which would be as bad as we've ever seen it in any account.

Even the doctors.

The doctors alone are booking at a 146 combined.

The doctors who opted for a tail endorsement.

The overall blend on the tail endorsement is about 200.

But we got 146 in for the individual practitioners and by the way, if you say why 146 and not 150, I have no idea.

But those are the kinds of numbers that are being recorded.

It's consistent with the trends that we've seen in the poorest performing segments of the book.

Bob Glasspeigel (ph): Thank you.

That's very helpful.

We will take our next question from Paul Newsome (ph) with Lehman Brothers.

Paul Newsome (ph): Good morning.

Just a couple of unrelated questions.

The first one is, I have heard speculation about reinsurance recovery broadly for the industry and specifically for the reinsurance against the western asbestos claim.

Anything we should be thinking about there at all or are we fine?

The only thing you should be thinking there is we feel very good about our position with respect to reinsurance and actually we will be beginning what amounts to in depth discussions on this thing in another three weeks.

We're well on our path.

Paul Newsome (ph): Fantastic.

The other question is, wanted to know a quick comment on -

By the way, we've not disclosed how much we'll realize but the information is out there that we've booked a net of a recoverable allowance.

In other words, the amounts that we've set up we feel very good about the collectability and we'd be disappointed if we didn't exceed it.

Paul Newsome (ph): Great.

Unrelated question.

What do you think the terrorist bill would mean for you and should it have an effect on what we think would be premium assumptions in 2003? 2004?

We don't write stand alone terror cover.

The people who do will actually be adversely affected by this in a funny way because that market will go away for many.

We don't write that.

That's not our business.

If I understand the bill correctly, what that will allow us to do is reduce certain aspects of reinsurance that we buy some fairly rich prices.

I mentioned to you before we weren't going to write our property business without terrorism coverage.

We write our property cover has always been 119 million reinsured above a $6 million retention.

We were initially unable to get terrorism coverage on that property cover so we went out into the market place and bought two pieces.

We bought 110 (ph) 15 specific per risk terrorism coverage and we bought 200 million (ph) of terrorism coverage on a catastrophe basis.

We wanted to continue to be in the property business and didn't want that terrorism issue.

We don't want to put the franchise at risk.

Those were both very expensive policies.

We would be able to scale back.

That would be off set in the rate side on the direct equation is an interesting question.

I just don't know.

Paul Newsome (ph): Thank you.

We will take our next question from Felice Gelman (ph) from Nova Capital.

Felice Gelman (ph): Thank you very much.

Unidentified Participant: Just in terms of reinsurance recoverables I wonder if you can give us a little commentary on that?

We've seen some kind of bad news out of some of the large reinsurers.

Can you give me an idea what your reinsurance coverables look like --

We have an improved committee list.

It's -- there's a committee that meets and goes through on an annual basis approved reinsurers both from a treaty perspective as well as from a facultative perspective.

I think 85% of our balance is for reinsurers rated A or better.

Is that a number I remember?

Might even be higher than that.

We feel good about our rate insurance recovering.

We do have a modest exposure to girling.

We've got 20 million of recoverable there.

Just because they're going to stop writing (ph) doesn't mean they're going to play the claims, but if anybody is interested in what our exposure to girling is, e got a reinsurance recoverable reserved more than offset that.

So no issue there.

We will take our next question from Jonathan Cheehan (ph) with Toscasan (ph).

Please go ahead.

Jonathan Cheehan (ph): Hello.

I wondered whether you could give us just a bit more breakdown on the split of the insurance reserves between core and runoff and also the investment income split between core and runoff.

There's a press release.

I think you can see page six as I recall correctly.

We give you a breakdown very specifically at the reserves in each of the health Care lines (ph) as well as the duration.

The reason we gave you the duration was to allow you -- we don't manage the portfolios on an individual basis so there's no way that I can identify exactly how much investment income goes to which.

We have given you the duration.

I think it's pretty easy for you to make a presumption about what the investment income would be.

Now, what's interesting about it and I find this very encouraging.

Sometimes the connections aren't always made in the right way in these calls.

Our underwriting cash flow is $100 million positive for the quarter.

It's saying the premiums that we're collecting in our core and the premiums that we have been receiving in our noncore businesses such as they're running off right now are paying for the claims of both the core and the noncore and all expenses to run the business.

Now, I wouldn't anticipate that that will go on forever and that will ultimately change.

That's the reason we've given you the disclosure on page 6.

But at the moment we don't anticipate any meaningful change in our investment portfolio size next year.

As we think about investment income we do not anticipate any meaningful change in the portfolio.

Jonathan Cheehan (ph): As a follow-up, don't know whether you could comment on what the total capital backing the runoff business is and what your thoughts is going forward.

It gets relief to support other businesses.

We've got $3 billion in reserves in our reinsurance business.

I don't know how much capital one would think about.

To me it's at least $1 billion of capital if those reserves run off.

Our health care business is about 2 1/2 of reserves.

That's probably another 4500 million (ph).

We have 1.5 billion in capital freed up.

We do think of it as the reserve reserves runoff.

I think the most important thing in it, Platinum (ph) is actually raising $1 billion of brand new capital supporting it.

So the capital that we have has been supporting the probably maximum loss that's the platinum.

Now in a much more modest way it becomes available for growth for us.

For example, we can write significant accounts that have modest amounts of catastrophe property but from a policy standpoint we're at our max.

As those PML dollars become available we were able to direct them to gather business that has incidental catastrophe exposure and add new business in a significant way.

So that's sort of in the plan here.

Jonathan Cheehan (ph): But in terms of the time before that capital is released would you consider a deal that would release that capital sooner or you happy to hold on to it?

We're still in a capital building mode.

Our goal is to build back to where they were.

We think we should be an A plus invest company.

We think that we should have double A type ratings for financial strength from standard and poors.

We're an insurance company.

We trade on our promise.

And not having those ratings long term we think is the wrong way to run the business.

We are very much in a capital building business which is why I said that the capital that gets freed up will be re-deployed in a much more modest way.

Not cat exposed property (ph), but property limits, property lines that have incidental catastrophe exposure.

We're confidence about reducing that in a meaningful way and putting the capital to work in positive way.

Jonathan Cheehan (ph): All right.

It wasn't so much returning capital it was releasing it to the existing business, rather than --

Again, to the extent there are growth opportunities, we'll take them.

You bet.

Jonathan Cheehan (ph): Thank you.

We've got time for, I think, two more questions then we'll call it a morning.

We will take our next question from Angelo Grassi (ph) with Merrill Lynch.

Angelo Grassi (ph): I just have a couple questions.

We can look at the investment portfolio in a little more detail.

In particular can you provide some information regarding investments in CDOs and the ratings breakdown of those investments?

We have some facts but no CDOs.

Angelo Grassi (ph): No CDOs?

No.

Angelo Grassi (ph): Can you provide additional detail on investments in some troubled sectors, in particular telecom, energy utilities?

Our telecom exposure has been very low.

That's been reflected in our credit experience.

Our investment in utilities have been somewhat larger probably underweighted to their place in the indices.

In general, we have attempted to diversify the portfolio by not keeping it in line with the indices because we don't believe the distribution of adverse credit events coincides with the ratings and the ratings would expose us to single issuers.

But in the recent quarter, there have been, couple of our new counties (ph) have been utility related.

You do have some telecom exposure in our venture capital for the portfolio.

You might want to talk about that just for a minute.

About a third of our venture capital investments are in the telecom space principally in wireless and voiceover internet protocol.

But our credit exposure has been we think, minimal.

Angelo Grassi (ph): Great.

My second question, can you provide some guidance to some extent on where you see the risk based capital going at the end of last year I think ST.

Paul had 159 rbc.

A lot has happened over the year.

Where do you see that ratio going?

It's actually, from a regulatory perspective, we're actually under an obligation not to disclose or discuss our risk based capital numbers.

You can get them and you can see them, but that's the way it works.

The NAIC does not want companies utilizing their risk base capital position as an advertising position.

So I really can't answer you.

Angelo Grassi (ph): So you couldn't discuss any impact from the capital raising activity?

Well, any time you raise capital it's going to help your risk based capital position, obviously.

I can't speak about the specifics of it.

Angelo Grassi (ph): Okay.

I'm willing to.

It's just a prohibition from the NAIC.

Obviously the capital we raised in July and we raised 850 put 750 into the primary TNT (ph) company that will have a dramatic effect going forward.

We obviously don't know yet, but that's the big single impact, along with just the operating results.

Angelo Grassi (ph): Okay, great.

One last question.

What was the interest expense during the quarter?

How high did it increase?

Quarter was 55 million and others were scrambling here to give you the answer.

Hold on a second.

External interest for the quarter, $27.9 million.

Capital expense of 17.537.

Angelo Grassi (ph): Okay, great.

Thank you.

Okay.

We will take our next question from Tom Khilnoki (ph) from Goldman Sachs.

Tom, you're the last guy up.

One more.

I'm told we have one more in line.

Tom Khilnoki (ph): I don't know.

Most of my questions have been answered I guess.

When you gave us the duration of the liabilities for med mal and the reinsurance what about the Lloyds runoff business?

I don't know.

The oil reserves are about a half a billion.

It's three different syndicates.

And they tend to be -

-- The more syndicates the total runoff for the -- the total reserve position for the runoff syndicates is 523 million.

That was the 450 before 75 brings in 523.

We will get you an answer, Tom.

We owe you that.

Tom Khilnoki (ph): That's fine.

Just in terms of the impact on investment income as these Verves run off, should we think of any other assets that are backing up these businesses that could be greater than the reserves?

I'm not sure I understand the question.

Tom Khilnoki (ph): In other words should we just think of a one to one relationship between the reserves running off and the assets backing up those reserves?

Or are there any other -

-- yes, there's nothing else going on there.

Again, I would tell you as I look to next year and I think it's a pretty safe assumption that our total invested asset position will be about flat.

Tom Khilnoki (ph): At the end of next year?

Yeah.

We go into January one with what we have.

I'm -- we're anticipating getting rate of cash, everybody tends to forget the fact that when you get rate gains like this, they're cash.

The underwriting cash flow rates of this magnitude is just enormous.

We are hopeful that the underwriting cash position will remain positive for a time to come and that as a consequence the invested asset position will be flat.

Tom Khilnoki (ph): So barring any moves in interest rates investment income should be relatively flat?

We certainly don't see it going down.

Tom Khilnoki (ph): Okay.

That was it.

Thank you.

Okay.

We will take our last question from Ken Zuckerburg (ph) with Lasard Asset (ph).

Ken Zuckerburg (ph);

This is an alphabetical call.

Hi, Jay.

Two questions if I could.

The first would be on the runoff in general and question is had you all looked at loss portfolio transfers?

Were there any interesting/compelling reasons to go that route.

Second question is, with respect to the adverse (ph) development at Lloyds, could you just clarify again what specific financial lines that that involved?

Thank you.

Jay Fishman (ph): On the first question, we have gone out and tested the market for runoff covers.

They're very expensive and they're really designed -- they presume a level of risk that given the level of focus and attention here just doesn't make share holder sense.

A couple of times we've been asked by owners gee, it would be terrific if only a statement of confidence, if you went out and bought 100 million or 200 million cover on top of the given reserve position.

If it's long tail you will pay at least $30 million for $100 million of cover.

That's what the market is.

It's at least a 30 rate on line.

That's where the discussion starts.

Basically what amounts to a finite cover.

And that just strikes me as a tremendous waste of share holder value.

I have trouble getting there.

The other thing Ken as you know, the accounting results on these perspective covers isn't great.

You don't get a match of your actual expense with the amortization.

Our view is they're generally used by balance sheets.

Jay Fishman (ph): Where we have liability concerns it may make sense to explore true surplus relief policies, true ones.

We're looking at that.

It would not have a PNL impact but it would have a surplus relief aspect.

If we can find them at a price that we can make sense out of.

I don't mean in that regard that you win and the reinsurer loses.

That doesn't make any sense.

Reinsurer's got to make a profit too.

You have to approach it in that context.

If we can find them in areas where we think there is a real surplus, we would do that.

We would continue their discussions.

Your second question was?

Ken Zuckerburg (ph): Lloyds.

Jay Fishman (ph): Besides the numbers, besides 14-11 which was the financial and professional services syndicate and that's the one that many of your firms who were on this call today, we are currently in the middle of claims on.

In fact, most of your firms have claims that have run through to 14-11.

We're handling your claims crisply.

We promise you.

The truth is, there are three or four syndicates.

They all have varying degrees of the same sort of original exposures which is the U.S. casualty business.

It's predominantly to the effects of the slow U.S. economy the corporate scandals and troubles that are affecting the banking and investment banking area.

And so losses are there to accrue (ph).

They're affecting those three syndicates to varying degree. 1411 is the syndicate that wrote most of that business.

The other syndicates are all affected.

One wrote reinsurance of that business as well.

Ken Zuckerburg (ph): I guess just a follow-up question would be then has this reserve essentially contemplated maximum limits on the exposure or just most probably estimate of -

We never have maximum.

The loss is maximum.

We never do that.

We've got -- this is -- when we stopped underwriting at Lloyds in these casualty syndicates, the reason we stopped is we didn't like the trend.

After we stopped we said let's take a good hard look.

Let's have a complete review.

We had corporate headquarters review as well as the actuaries within Lloyds.

And this is what we thought was our best estimate of the reserve.

Ken, like all of our reserves management's best estimate of the ultimate liability.

Jay Fishman (ph): But this does assume a continuation of these trends to ultimate -- in other words what we've not done is assume that what this is a breath and it's going to get better.

We've assumed a continuation of the poor trends that we're seeing now.

Ken Zuckerburg (ph): Okay.

Fair enough, Jay.

Just one point of clarification.

The policies that were written I guess are occurrence policies, I would imagine?

And are they still enforced or was that policies that actually are now officially not renewed?

I guess what I'm wondering is, are they things like multi-years beginning in 1998 or are they concerning policy years '97, '98, '99, 2000?

Just want to get more color.

David Reid (?): As far as the problems relating to the financial arena.

Ken Zuckerburg (ph): Correct.

David Reid (?): That's all claims made.

There are some long term policies in there.

They're mostly coming to the conclusion in 2002.

The years affected are really '97 through to 2001.

They're the real key areas.

Jay Fishman (ph): Again in the 14-11 they are claims made policies.

Ken Zuckerburg (ph): Great.

Thank you very much.

This will conclude today's question and answer session.

I will now turn the call back over to today's speakers for closing comments.

Jay Fishman (?): I simply want to thank you all for your time and attention and focus on our company.

We appreciate your interest very much and always try our best to answer all of your questions to the greatest extent.

We have is a couple follow-ups we promised immediately response on them.

We'll see you next quarter.

Laura Gagnan (ph): I'll be in my office for the rest of the day.

If you need any additional answers or follow-up clarification, please call me 651-310-7696.

Thank you.

This does conclude today's conference call.

We thank you for your participation and you may disconnect at this time.