旅行家集團 (TRV) 2003 Q2 法說會逐字稿

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Good day and welcome to the St. Paul Company quarterly results conference call.

This call is being recorded.

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

Please go ahead, Ms. Gagnon.

Good morning everyone and thank you for joining us for the St. Paul Company second quarter 2003 conference call.

With me on the call today are Jay Fishman, Chairman and CEO, Tom Bradley, Executive Vice President and CFO, as well as other members of the executive management team.

On the call, we will address second quarter 2003 results as well as review market conditions.

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

The press release and statistical supplement provide reconciliations between GAAP and non-GAAP numbers that may be discussed today, as required by regulation G. Both also provide detailed financial information that may not be discussed on this call.

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 plates after that date.

I'd also like to remind you that any comments made regarding future expectations, trends and market conditions including pricing loss cost trends as well as other topics may be considered forward-looking under the Private Securities Litigation Reform Act of 1995.

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

These factors are described under the forward-looking statements disclosure in the company's most recent report on form 10-Q filed with the SEC. and available through our website.

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

Laura, thank you.

Good morning everyone and thanks for joining us this morning.

This was a very solid and very encouraging both operational as well as strategic accomplishment quarter, obviously impacted financially by our outside surety claim and surety loss that we experienced.

What I'd like to do this morning is to just cover a couple of the key financial highlights, and then turn more importantly to our strategy and why we see in this quarter some very encouraging signs as to the success of that strategy, share with you some data that really gives us a real sense of encouragement, and then we'll turn it over to Tom to cover more of the financial information.

He'll obviously address the surety issue and then take whatever questions that you might have.

First, just in the context of a couple of the financial highlights, notwithstanding the surety loss, we had a 13% operating earnings return on equity for the quarter.

That brings us to 14.5% for the six-month period.

We had very solid growth in net written premium of 26% for the quarter and we're going to talk about that more later in the context of our strategic initiatives and the success we're having in the marketplace.

In the context of a progress that we're making and building our financial strength we made very good progress on that front.

Book value rose to $31.27 per share, adjusting for our 80% ownership of Nuveen Investments.

That’s up from $28.82 at the end of the year, a growth of 8.5% over the 6-month period.

And importantly, we experienced continued reduction in our financial leverage.

Our conventional debt leverage, which simply excludes the debt which is mandatory convertible that we issued in connection with our equity offering, is now down at 21.6%, that’s down nearly 300 basis points from the beginning of the year.

As a consequence we feel very good about our leverage position.

We will continue to drive it down and continue to build our financial strength.

So in the context of our financial goals, financial and strategic goals, it's been really a good solid quarter.

What I'd like to do now is to turn my attention more importantly to where we are strategically and to give you our insight as to the success we're having in that regard.

We started with a view, and our view of the business was based upon what we saw happening at the agent and distributor level.

What's occurred there and occurred very dramatically is very aggressive significant consolidation having implications we think for every insurance company that does business at the agent level.

And tongue in cheek a bit but it's a little bit about the Willy Sutton line, when they asked Willy, “Why do you rob banks?” Willy said “because that's where they keep the money.”

We really knew we had to get our product line and our orientation focused to better match up with this increasingly powerful consolidating agency platform.

We actually had a very successful one.

It was based upon a very strong industry-specific insurance practice which we have sometimes called the specialty businesses and 150 years of being in the business and doing so successfully.

So it's not as though we were starting from zero.

We were starting from a point well along the spectrum.

But we perceived and understood that there was a terrific opportunity for us.

And it would be based in broadening out our product line, introducing a competitive set of general commercial insurance products, which for a whole variety of reasons that I've spoken about previously, this company had really made the decision that it did not want to be at the forefront of the competitive edge in that arena, and attempt to leverage the existing relationships to gain our share of business.

Now, let me be very, very clear about this.

It was not based on rolling books of business from other carriers.

It was not based on aggressive pricing.

It was not going to be by trying to replace existing insured relationships that aren't broken.

Most agents do believe in the philosophy if it ain't broke, don't fix it.

And we weren't about to attempt to replace existing relationships that were sound and solid and met the need both of the customer as well as the agent.

But more importantly, it was based upon being in a position to take advantage of the very dynamic growth that the -- that these agency groups, the ones that have come public, the ones that will come public, the ones that have consolidated and rolled up other agencies, the very dynamic growth opportunities that they are experiencing.

And you can do the research on those companies and you can see it yourself.

And our goal was to be in a position to gain our fair share of their business growth, and to be a company with whom it was important to have a relationship.

And we knew that we could reach that stage by having solid competitive products, by being aggressive in our behavior, by asking for the order, by broadening our existing relationships, by having talented people out in the field, by developing first rate systems and technology to support those people in the field, and to basically conduct business in an aggressive straightforward way.

We knew we had a vision that we could leverage those relationships and broaden them out into these more general insurance areas.

And as we've seen, success tends to build success, and it wasn’t going to surprise us that if we were successful in building in this general commercial area that, frankly, it would feed further success in our specialty businesses as well.

Now, you could certainly argue that there's a product element to this strategy but that's not how we think about it.

We think of it as a distribution based strategy of having the tool kit of products that meets the agent's needs as broadly as anyone else and to do so successfully, aggressively, and competitively.

I don't believe at this point that there is any other insurance company that can better meet, this is agency-based companies, companies that sell products through and around agents, that can better meet an agent's needs than the St. Paul is now cap able of doing and we have become a company, not that we were unimportant before, but I would argue now, that we are a company that it is very important for agents to have a relationship with.

And in fact, what's been so interesting to us is a side note of the Kemper transaction, is actually the number of agency relationships that we've been able to expand that had strong Kemper relationships that we had no presence with.

And the ability to take our product line, and begin to expand it into those agencies as well, has been actually a neat surprise of the Kemper transaction.

And the results, the specific results of this quarter in particular are really very encouraging, and just let me share some of the operational data with you, so you can get a sense of the level of success that we're having.

First let me cover the small commercial arena.

When we first got here, and Mark Schmidtlein,(ph) and Scott Shader, and Dennis Crosby, and Marita Zuraitis have done a remarkable job building this business.

When I first got here we had a grand total of 5,000 registered users of the system that we had for doing small commercial businesses at that point, that was then called SPC quote.

Our new system is called SPC Express.

We began a nationwide rollout of that product in the first quarter of this year.

We have 25,000 registered users of SPC Express, that is individual CSRs, individual agents, individual people at agencies who place business, about a full five-fold increase in the number of people using this system.

So let's check the box off in term of deployment.

But I would also tell that you we are really still very much in the early stages of this effort.

This is not something one does in six months, but the early-on success of deployment has been really remarkable.

In terms of actual quotes per month because now we're getting to how much business do we do, if you take a look in January along this system that really at that point had not fully been rolled out nationally we actually did 6400 quotes of business submitted to us.

Now, we didn't bind them all.

We didn't write them all, but those were the number of times that people went on the system and asked us to quote a particular transaction.

We've had really remarkably steady growth in that quote rate to where in June, we did 10,400 quotes in the month.

And it is still growing and still growing fairly aggressively.

Now, that's an increase of 60% over six months.

I happen to have an insight to the July numbers and it continues to be very encouraging as to the acceptance and the growth in the quote rate.

Now, you get down to actual business booked.

And this is a number that is just very pleasing to look at.

Over the first six months of this year we've done a little over $93 million in new business in small commercial. $93 million of new business in relatively small ticket items.

Now, if you asked how did that compare to last year, the actual number that we had last year was about $70 million so it's a 30% increase.

But as we look at it, because this product as it currently exists today was not in the marketplace, I would tell you that that $93 million compares to something very small, very modest.

I don't know what the number is precisely, but I know it's a lot less than 72, in the context of the kind of business that we're seeking, and the business that we're booking.

Now, most importantly, we have watched the quality of the business that's being booked, the cost of business, the kind of business that it is, we've been watching it like a hawk.

And frankly, it's been extremely encouraging.

We are in no way aggressively trading on price, but importantly and something that few people ever ask, we are not aggressively trading on class of business either.

This is sound, stable, well underwritten, good experienced business that our relationships with our agents allow us to broaden and take on flow that frankly a year ago, we simply didn't have the product, the people, the technology, the service, to ask for the business and to come away with the order.

So in the context of the success story in small commercial, this is really a terrific beginning.

It is only a beginning, and I continue to remain very optimistic about this.

But it's a very good start.

Now, let's turn our attention to the middle market because the reality is that we also reinvigorated our middle market business.

We got it very product focused.

We got very disciplined on renewal business.

We tossed out accounts that didn't meet our pricing and return thresholds.

And we reinvigorated the place dramatically.

To give you a sense of what that's meant for us, last year in the first six months we did $110 million of new business in our middle market segment.

This year we did $160 million of new business in that same segment, a 45% increase in new business in the marketplace.

Now, obviously some of that is rate driven.

But as you all know from your coverage of the industry, this is substantial amounts of volume, far more volume than it is rate.

So it is really unit growth.

It adds significantly, and again Marita and her entire team and the work they've done and our nine regional executives out in the field have done a tremendous job in implementing this and 18 months later we're off and running.

If you add those two up we're talking about a quarter of a billion dollars of new business in the first six months in our general commercial business.

I don't want to leave Mike and his folks out for the commendation also and that goes to Joe Estes doing the business of the Discover Re and all the folks in the specialty lines.

We did $428 million in new business in the first six months of the year, up from $360 million in new business last year, also a substantial increase.

Obviously, they are more rate driven than volume driven, but volume as well.

You take it any way you can get it in this business, and if you add all that up you're talking about nearly $700 million of new business in the first six months of this year, which I think is actually just phenomenal and speaks tremendously to the success of the strategy and what it means.

We've been asked lots of questions about our small commercial strategy or our middle market strategy.

We try and elevate the conversation.

We try and talked about a distribution strategy that we recognize that agents and brokers are our sales force, that they have customers, they have product needs, and that successful businesses identify the needs of their customers, and we receive the agency brokers exactly that way and do their damnedest to meet the breadth of their customers’ needs in an aggressive responsive way.

That's really our strategy.

It is not about the product, it's about the distributor and having the product there to meet their needs.

So we feel very good about this quarter.

We feel really good about what it bodes for the rest of this year, and we are – continue to execute.

We are out in the marketplace and doing our thing and doing it every day.

With that I'm going to turn it over to Tom to cover some of the other financial matters and then we'll answer any questions anybody has.

Okay.

Thank you Jay and good morning.

You just heard Jay talk about a lot of the premium trends coming out of the strategic initiatives.

Let's face it, premium is cash so it's a nice segue to move to cash flow and investment income.

For the quarter, the all end operating cash flow for the company is a positive $200 million.

Included within that is $280 million of negative cash flow associated with our runoff businesses.

That gives us $480 million of ongoing operating cash flow.

Obviously this is at a run rate of close to $2 billion on this ongoing cash flow.

This is a demonstration of price turning into cash as we roll these strategic initiatives out.

If you look at investment income it is down slightly this quarter, $274 million versus $281 million in the first quarter.

That's primarily and almost solely driven by the large Western MacArthur payment that we talked about made in the first quarter.

With that payment out of the way and the type of cash flow dynamics that I described, I expect that this will allow for the continued build of investment assets going forward and certainly stabilizing our quarterly investment income rate.

Moving to the capital gains line, you notice a $43 million after-tax capital gain for the quarter.

There is within there some small gains and losses on routine activity.

This is primarily driven by our venture capital investment manager's decision to liquidate about half of our holdings in Select Comfort via a public secondary offering.

St. Paul Venture Capital was a very early investor in Select Comfort, as a result we have a very low basis.

This offering resulted in a pretax capital gain to us of $68 million and therefore the after-tax net capital gain of $43 million that you're seeing in this quarter.

I'd like to move next to talk about the multi reinsurance programs.

First of all over the course of July and August, we're renewing our workers' compensation and casualty reinsurance treaties.

And generally, I expect that they're going to be renewed at very similar coverages to last year and prior years.

And frankly, at a very similar cost.

So I think the take-away is these renewals are not going to lead to any real change in the risk profile or cost profile of that business.

More importantly, during the second quarter, we did engage and enact new coverage on our commercial surety business.

We incepted two treaties providing over $500 million of coverage over this book of business over five years.

This includes coverage of up to $100 million dollars per principal on gas supply bonds and up to $150 million per principal on other bonds.

And the treaty does include the small number of counts that are already in bankruptcy at the time of the inception of the treaty but does provide a substantial amount of coverage over a potentially volatile line of business.

Now relating that to the surety charge that we took this quarter and preannounced on Friday, as a review you recall in April that we announced via an 8-K that we had received notice on claims from a bankrupt principal where we had bonds with penal sums totaling $120 million, and we started receiving claims at that point.

We reviewed our assessment of those claims and that total exposure under those bonds throughout the quarter, and booked the $86 million pretax charge that we discussed on Friday.

After tax, $50 million or 23 cents.

Now, this new reinsurance program does not cover companies that are already in bankruptcy but the small number of other principals that we cover that are in bankruptcy have nowhere near the size of penal limits that this that this loss that we took this quarter entails.

So it's the level of coverage that these two treaties provide over surety book is really very substantial.

Finally I'd like to move to our underwriting loss in our runoff segments.

The runoff businesses generated underwriting loss of $49 million in this quarter, of that amount, $49 million related to the current accident year.

This brings our year to date underwriting loss to about $100 million.

I estimate that this segment will generate about $25 to $30 million per quarter in underwriting loss for the rest of the year.

Thank you and back to Jay.

I think that's it.

We -- it's actually a fairly straightforward quarter.

So we'd just like to open it up to questions, and be as helpful as we can.

Very good, thank you.

The question and answer session will be conducted electronically today.

If you do have a question or comment for our presenters please signal by pressing the star or asterisk key followed by the digit 1 on your touch tone telephone.

If you are using a speaker phone today, we do ask that you make sure that your mute function is turned off to allow your signal to reach our equipment.

Once again please press star 1 if you have a question.

We’ll take our questions in the order that they are received and we’ll take as many questions as time permits.

We will pause for just one moment to assemble a roster.

And our first question today will come from Mr. Michael Lewis representing UBS.

Good morning Jay.

Good morning Michael.

I have a few questions.

Number one, it seems you had a reserve release in your catastrophe covers or something like that, and that had to have an impact on your results.

Is that true?

Can you give me some explanation there?

I think it was about 1.3 points.

And the other question, I'm not really very clear in this, on the runoff business you originally said that you have between $100 million and $125 million towards the upper end of the range.

You had $60 million in the first quarter after tax, you had a $49 million pretax year, $40 million accident year, I guess $9 million from prior year development or something.

And you can run $25-30 million pretax a quarter.

Can you kind of translate that out to me on what's the new run rate for the runoff losses?

And how that has changed from what you said a quarter ago and how it works out going further.

Thank you.

I'll take the second one and then Tom will answer the first.

You've got actually most of the facts exactly right.

There was $60 million of current year in the first quarter.

There is $40 million of current year in the second.

So we're at $100 million and our estimate now is it will be between $150 million and $160 million for the full year, so another $25-30 million up per quarter.

What we are going to be -- what we actually have begun now is an analysis of the expense structure of these runoff businesses.

They obviously, at this point, are considerably smaller than they were a year ago.

We've not really addressed the expense structure along the way.

We wanted to make sure that the basic processes and the exits were handled properly, that they were done right.

And that's been successful.

So in the context of thinking about '04, it's simply too early for us to really comment or observe on what that number is going to be.

We're going to do a study.

We're going to do an analysis.

And as we get closer to the end of the year we'll give you an update what those losses for ‘04 look like.

But you've got the numbers right on that front.

Mike, on your question on the catastrophe loss you're obviously referring to the $20.2 million in the analyst supplement.

In our reinsurance runoff operation in the U.K., we did take down $20 million worth of prior year reserves related to our catastrophe losses.

They have been reallocated to other -- other reserves within that book of business.

So there's actually no net bottom line impact to that.

As you've heard me mention, there was actually a $9 million slight positive prior-year effect in the runoff book.

So for that line, specific line on the report, there is a negative 20, but net bottom line it actually had no impact.

Okay.

Just lastly, can you just tell me what's the difference between the $40 million accident year and the $49 million that you reported, just so I understand that.

The current accident year loss related to the 49.

In other words, related to premiums that are still being earned this year, and the associated expenses, is the $40 million.

The $9 million is net adjustments to all the prior-year reserves and all those runoff businesses.

Okay.

Then factoring that all in, Jay, you're still talking about a 15% ROE this year, is that still in the ballpark?

Yes.

Can you define what your goal is now versus what it was a little earlier in the year.

We'd said early on, in fact, it was the time we did the equity offering, that the equity offering wouldn't prohibit us from earning a 15% return on operating earnings for calendar year '03.

And yes, we still feel very much that that is our profitability objective.

Thank you very much.

Next question today is from Tom Chulnoky representing Goldman Sachs.

Good morning.

Can you kind of break out the impact of the Kemper acquisition in some of your numbers?

Specifically it looks like your commercial lines segment grew a lot year over year relative to what it did in the first quarter and just what the impact was?

It did grow a lot.

Very little of it had to do with Kemper.

That is all organic growth?

There is a modest amount of Kemper business that came from the transaction, but in the context of the quarter of a billion dollars, it was a modest number.

And the reason is that we only had one month's worth really by the time the transaction got done and we were out in the marketplace.

So yes, the growth that you're looking at is overwhelmingly organic growth.

And could you give us a little bit more insight as to what's going on with pricing trends that you're seeing in various lines of business?

If you could just kind of give us a view of the market.

I'll ask Mike and/or Marita to comment.

I guess my own observation would be that we don't see any particular meaningful difference between the second quarter and the first quarter, that Mike's businesses, the specialty businesses, continue to generate significant rate increases and the general commercial business continues to generate less significant, although still well in excess, well in excess of loss trend.

We see I think the same trends that other folks do, which is that casualty lines continue to be fairly robust, property lines less so.

I think one of the interesting things, Tom, about pricing that really hasn't yet gotten a lot of attention, I'm sure you're aware about the TRIA act, absent an extension by the Secretary of the Treasury will actually expire January 1, 2005.

And as a consequence, as we get closer to the end of this year and we start looking at one-one renewals in property, obviously the further out from 1-1 you go, the likelihood that the property business you're going to be committing to in the early part of '04 is going to be expiring at a time without the benefit of that TRIA act coverage.

I can't imagine that the Secretary of the Treasury will act before the end of this year.

And so as a consequence, underwriters are going to be confronted with that underwriting decision in early in the first quarter of '04.

I'm speculating now, but my speculation will be that that will put added pressure on reinsurance capacity in the property arena and that that will help, I don't want to say jump start, but it wouldn't surprise me to see a push in property rates that were tied to underwriters' thinking about terrorism exposure without the benefit of that TRIA act coverage.

It is hard to imagine it is back on the agenda so quickly but indeed it will soon be.

I don’t know, Mike or Marita do you have anything to add to that at all?

I would just echo everything that Jay said on the casualty lines.

I think the strength and the buoyancy remains in the market and given some of the things that have happened with other carriers, we feel very well positioned as far as our opportunities to continue to advance that through the rest of this year and into '04.

Can I just get one clarification on the commercial lines growth though?

When you look at that, can you break down the contribution of price versus exposure?

Because that's a lot of growth.

It's a lot of new business.

Retentions were generally speaking about the same as they were.

In the context of Commercial, I'll do a quick off the top of my head kind of number.

I would tell you that more than half is unit growth, and less than half is rate.

I've got -- maybe I want to think about that some more, Tom, and get back to you.

But I would say that's probably about right.

Again, I think this speaks to the strategy.

This isn't -- this isn't really about individual product or individual pushing.

I have spent a tremendous amount of time in the last six months with agents, a tremendous amount of time with them.

And this is a well thought out, and out in the field, well-executed strategy that's beginning to bear fruit.

It shouldn't surprise you that we're doing much more business.

We have a much more competitive product.

And I'm not talking about price.

I'm talking about people and service and technology and responsiveness and class of business and underwriting breadth and reach and just general interest in the business.

It's -- this is you know, you work at something and hopefully you actually do get results.

I will say on the rate profile that across the book, it's just under 20% growth in price, that's across the entire book.

And it's interesting.

One of the areas where pricing continues to be a very vibrant is in Joe Estes’ Discover business, the alternatives transfer business where as a result of the competitive dynamics in that marketplace pricing has just been remarkable.

It's also been the case in Lloyd's where I think we're up 40% in price?

We're over that last year and we'll be around 25% this year.

For the full year, you think?

For the full year.

For the full year.

And the international business again is around numbers 20, let’s say?

Or more.

Okay.

So, I think it's really been very much sort of business as usual.

This is Marita.

I completely agree with everything that you're saying.

There really was no significant change in price.

Retention was up slightly in the commercial lines business but most of the growth is due to some very good new business opportunities that we took advantage of.

Okay.

Thank you.

Pleasure.

Representing Smith Barney, our next question comes from Ron Frank.

Good morning Jay.

Good morning Ron.

Couple of things.

First of all on the runoff, could you characterize for us why the accident year loss is now going to run, I guess it's fair to say significantly above what you'd originally estimated, not tragically so, but it’s a significant difference, and within that, I note that the health care loss was about the same as in first quarter.

That was expected, you know, at some point during the year, I forget exactly when it, to break significantly and wind down as the tail coverages, the sale of tail coverages sort of fades away.

Could you give us some color on that specifically within the overall explanation, and then I have a follow-up.

Sure.

I'll ask Mike in a moment to comment on the health care number.

One of the important reasons why it's run a little bit hotter than we had that originally anticipated was that the way the reinsurance business is written, is that you actually don't know.

You write a treaty, typically in losses attaching treaty, you get reports down the road of the amount of business that you ended up subscribing to.

Given the timing of the reinsurance runoff, there is reinsurance transaction and its related sale is still experiencing some losses attaching that relate back to this runoff book.

That I hope we'll have a better insight to this I think over the next three months, I hope that will begin to turn down now fairly dramatically given the timing of the transaction.

But we've got some work to do.

The second, as I mentioned before, is that the expense load of that business really needs, the runoff businesses generally, I use the phrase singularly, but needs a real hard, another look.

Both in terms of the staff that's there, the systems support, the claim organization, the rent, the infrastructure, all of it.

When we put the businesses into runoff initially, we did obviously all the headcount reductions, that was something that we did.

But now it's time to take a real hard look how we're running those businesses now for the longer term runoff implications.

So we're optimistic that we can produce a different kind of expense profile a little that will also help mitigate those losses.

Mike, I hope you know about the medmal.

What I would say [inaudible] to health care is, relative to your question on the tails, what we had talked about is actually through the middle part of the year that on the large hospital business there would still be options available to customers on tail reporting provisions.

And we are now through the segment of the book and all tails have been passed the point of being offered and/or accepted.

And from here forward, we now would expect given the fact that the periods are known, if you will, and actually a significant number of the large hospitals from our perspective didn't buy the tail from us, and therefore, the period now for which they would have to report new claims on those hospitals is now expired.

So we would expect to see, from a new reporting standpoint, that number begin to drop, and drop significantly as time goes forward.

But that book took us up until almost June to sort of get to that point.

So we've been in the phase where in fact we anticipated new claims and new reportings until all those policies under reporting options have expired and now that will begin to trend downward.

On that subject, Mike, there were, I think, three items that you watched that you name in the 10-Q for indications of how your reserves are, in what good shape they are in in the medmal.

One was the redundancy ratio and to this day I can never name the three from memory.

If you could update us on where those stand.

And also after that for Tom.

Tom, if the payout from Western MacArthur was mid-January, why does that explain, as per the press release, most of the consecutive quarter decline in net investment income?

If it went out the door in mid-January, I would have thought it would have pretty well hit the first quarter number.

I'll take the medmal issue.

There are three factors.

One is the actual observed redundancy ratio, which continued very much in that sort of upper 30%, low 40% range during the second quarter.

The second is the amount of new claims coming in, and the first quarter, we were actually substantially below expectations.

In the second quarter, we were 5% above expectations.

On a year to date basis its nets out to 12% below our expectation for new claims.

So that's a good sign.

That's a bullish sign.

The third element is the development, the case development on old cases.

And there, while the direction was good, it was not as good as we had hoped.

So when you put that whole mix together, basically, the benefit, the observed benefit from the lower new claims, offset the observed bearish sign if you will from the case development.

And the redundancy ratio continued right in line.

So sort of in a nutshell, no real change from the first quarter.

We continued to watch the trends carefully, we take as -- I would say we take as optimistic the claim development numbers.

Those -- this is I'm talking now about the new claims.

That looks good.

And it has looked good, you know, again we were I think 5% over expectations in the second quarter.

But that was really largely one month, as opposed to an observed trend.

I would say the observed trend in new claims continues to look pretty good, and we are, for a whole variety of reasons, I mean, we live this every week, we do a little update.

But we have, you know, reasons to hope that the development will begin to evidence itself in more substantive ways, that the direction which has been good needs to be more good, if you will.

So that's sort of in a nutshell where we are on medmal reserve development.

Ron, on the investment income, you're right, the Western MacArthur payment was in January.

But it was the significant driver of the total negative cash flow for the quarter.

It was over $800 million total negative cash flow for the quarter and honestly that was the big driver.

You could argue that it was early in the quarter and was baked in.

We also had a small decrease in the overall yield quarter to quarter of a .1%.

A $7 million decrease sequentially isn't hugely significant, but it was the general negative cash flow position from the first quarter that was -- that was the driver.

And Ron, what we did and have continued and will continue to do here is, we've shortened up the duration of our portfolio considerably to I think where, Bill, is it 3.3 now?

End of the year it's 3.4, it’s probably about 3.4.

I'm not sure we shortened it.

No, no, I’m sorry.

No, I didn't mean from here, I mean we've taken the action to shorten the portfolio in recognition of 50 year lows of interest rates.

There was a small give-up associated with that and obviously part of the $10 million comes from that.

We felt pretty stupid about it for six weeks in May and June, we feel much better about it now.

Good one.

I was just going to ask you about duration.

Thanks.

And we'll take our next question today from Chris Winans with Lehman Brothers.

Thank you.

Couple of questions.

First of all, in terms of the progress you've made with your independent agents, which competitors, just in terms of regionals versus nationals, where do you feel like you're making progress in -- just in those two categories?

Yes, Chris.

Truthfully, I feel like we're making progress with the agents with whom we're doing business and really don't view it in the context of competitive dynamics.

So I'm not really in a position to answer the question.

Okay.

And how about on commissions, are you doing anything different on commissions for your agents?

Mike or Marita, have we done anything?

Well, actually, we’ve done -- I'm not aware of anything we did this year, right?

Have you done anything this year, Marita?

Can you hear me Jay?

Yes, I can.

Read me your answer.

No, no difference at all.

Yeah, the one thing that we did change, last year for this year, which was interesting, or was last year was our first year of doing it?

We changed the profit sharing formula that we had with agents and we changed it materially.

We actually introduced a profit requirement.

It hadn't been there before.

That the payment, the payments related to, you know, what are sometimes called bonus payments or profit sharing payments, we just for forgot to have an element, I'm being facetious here, you can't see me, but we didn’t have a profit element in it, and we did introduce that, and that is amazing how that can also change agent behavior.

You know, they tend to view us, in a sense, as customers and they give us what we ask for.

So if there was no profit element in the structure, guess what tends to happen?

So we've changed that and I think that that's also truthfully been part of the change in behavior at the agent level.

So when you talk about significant new business opportunities in commercial, where's it coming from if not from Kemper?

Is there other you know, where are these opportunities coming from?

Yeah, I don't have any comment on the companies who used to carry the business that we're now writing.

We actually, in many cases, don't even necessarily know.

We're dealing with an agent, the agent picks up a new account and it comes to us as an opportunity.

It's not that the agent has moved it.

I think that there's this sort of stubborn view out there that agents move business from one carrier to another willy-nilly.

They actually don't.

They think about their customers first and foremost and they understand that if the relationship between the insured and customer isn't broken they don't have to fix anything.

So they're not inclined to move a book of business from one carrier to another.

But what you try and do is position yourself as they grow, as they gain new business opportunities, as they pick up new accounts that you're in a position to gather your share.

And that's how we think about it.

Okay.

So when you're looking at these new accounts, you also I assume are looking at the previous experience on these accounts from whoever you're getting it from, right?

Sure.

Okay.

A minor detail question.

Is your definition of a catastrophe the standard PCS identified catastrophe?

No, no, it's not.

We identify a catastrophe for when it's a catastrophe for us, and it's -- the details of which are we don't make big public.

You don't, okay.

No.

And if I could just trouble you on one more thing.

Could you give me just a since sense of where the changes are coming in your reinsurance recoverable on your balance sheet?

In other words, are you specifically are you seeing any longer duration of time, the turn around time for when you bill your reinsurers to when they're paying?

We actually, and I think we provide an analysis of this, I'm not sure Laura, if we don't we probably should.

Actually, a very small percentage of our reinsurance recoverable is actually billed and due.

Most of it is set up on an incurred basis and then obviously as the loss gets paid it converts into an incurred recoverable into a bill and due recoverable.

Do you know what the percentage of the balance is?

I don't.

Okay so you can't tell me what percentage of this is for paid losses?

I -- Laura's looking.

She seems to think she has it and I know we do have it.

I do have it.

Okay.

Just under a billion for paid loss.

11% of the total is billed and due.

Okay.

And I don't -- do we -- we have very little, I mean, that's technically overdue.

Right?

I get a report every month, with -- and it's a small report.

It's stuff you stay on and you know, sometimes there's coverage disputes and things like that.

But it -- you know, most of it's kind of routine goings back and forth.

I think it's fair to say given all the attention that largely speaking, we do not have a problem with respect to collection of reinsurance recoverables.

There are a couple of isolated carriers.

We are fortunate enough not to have substantial balances with them, who even with us are slower.

Now, no one has turned around and set, "we're not paying."

We've got as I say one or two relatively small balances that have been slower and we watch them.

And we watch them carefully.

And by the way we won't do business with them again.

Right.

It's real simple.

So if you look back over time, the percentage of what is billed and due is -- and the percentage of your reinsurance bet, of the total, have those changes any way over the total, over the past two years, those ratios?

I don't think it's meaningful.

I don't know the answer to the question.

I don't know if I would know offhand what looked two years ago compared to now.

We certainly could look at it.

Our write off history is very stable and very low.

I don't know if we've had a year in the last five that we even had $5 million worth of recoverable written off.

And maybe, Chris a little more directly to your question, looking at the balance sheet in the analyst supplement you do see an increase in the pay loss recoverable and you see a corresponding decrease in the unpaid loss recoverable.

That really is a shift of the Western MacArthur recoverable since we paid it in the first quarter, it obviously moved from unpaid to paid.

So dollar-wise that's the biggest mover there.

Okay.

Last question, the hit ratio on your new business, I'll call it your new business entry system, do you have a sense of -- you were kind of coming around to it, in terms of the number of quotes per month, the amount of new business.

It's -- the amount of that, I guess what I want to find out is, what is the conversion rate on the quotes?

Yes, that's a fair question.

Marita do you have any insight to that?

I don't.

Jay, on the hit ratio on the small commercial system it's going to differ significantly by who's using the system, and what type of hit ratio that you're talking about.

I don't have the statistics right in front of me right now.

But the quote to written versus the quote to submitted versus a CSR versus an agent, it's going to differ significantly.

We certainly can get that information depending on what specifically you're asking.

Okay.

And the CSR is a nonagent like --

CSR is customer service rep.

It would be -- it's actually again, you know a bit tongue in cheek, the person that obviously runs the offices for the agents when they're out doing whatever they do, right?

Okay.

Thanks very much.

Pleasure.

Next question comes from Jeff Allen with Silver Crest Asset Management.

Good morning.

This breakout between operating and runoff is very helpful.

The Western MacArthur payment was that in ongoing or in runoff?

That's in -- well, it was in the first quarter.

It was in the runoff business.

Okay.

Thank you.

And representing SF Investments, Steve Shapiro.

Good morning.

Getting back on the focus on the agency plant, can you discuss more specifically what kinds of products you're now offering that are so appealing that you hadn't offered before?

Sure.

And Mike or Marita should absolutely chime in.

The St. Paul two years ago was a company whose principal focus at the agency level was specialty products.

I'd like to call them industry-specific because they would be such things as oil and gas, public sector, financial and professional services, D&O, professional liability, architects and engineers--a whole host of specific products that take real skill, real talent in underwriting.

And the typical distinction of a specialty product is one where underwriting claim and risk management are fully integrated, you are essentially not dealing with generalists, people who handle A&E claims do only those, they have expertise in it, and ones who do the underwriting only handle architects and engineers accounts.

So, real industry specific and very highly focused.

A substantial majority of the premium that peace through the hands of agents in the United States is nonindustry specific, general commercial products.

So you start off with the typical middle market businesses, the great sort of unwashed middle market, retail, wholesaling, light manufacturing, even heavy manufacturing.

And then you take that down right down to the small commercial arena that would include such things as small retail shops, individual construction, artisans, plumbers, electricians, small service, small offices, the -- the small commercial arena was -- is a particularly specific one, because the technology and the form and the delivery system is what makes the product successful.

It's not the product itself, it's the ability to do it quickly, and efficiently, and with no touch.

It is all done through the technology box.

If the risk that's being underwritten meets the criteria that's been delegated to that agent, it can actually be rated, quoted and bound, without an underwriter at the St. Paul actually ever looking at it.

It can actually be done completely electronically.

So it is very efficient, and the system does the issuance directly through it.

It's all about speed and efficiency.

You also have to have the ability to take on the service obligations from the agent for it to be a success.

And the service obligations include such things as account renewal, declaration pages, certifications for contractors.

If you have them do work, they deliver an insurance certificate.

And you're either in the business or you're not.

There's nothing in between.

Because if you don't have that full panoply of service and technology, you're much too expensive for an agent to do his small commercial business with than someone who does.

And you're dealing with very small premium accounts, maybe $5,000 per account, something like that.

So the agent has a grand total of $750 before profit sharing on commission to get that thing booked on an annual basis.

Two missed phone calls, a bad transaction, and an hour with an underwriter and you've spent $750.

So it's all about speed and efficiency.

We simply had none of it.

We had no infrastructure whatsoever who of two years ago to deliver that product.

So whatever we did in that arena was sort of last pickings.

We were adversely selected against.

We viewed it as an accommodation to the agent rather than a business that had returns and profitability on its own.

And we understood in the world of consolidating agents, that if we didn't fill that need, somebody else was.

That was the important thing, if we didn't fill that need of being responsive and agile and capable, in middle market and small commercial, somebody else would.

And given the fact that we had a substantial presence with those agents and our industry-focused business, all we had to do-- two years later and a lot of blood, sweat and tears was to put all this to work.

And we knew we could be in the flow of the business to come at us.

So, we opened up our first service center in Atlanta about 14, 16 months ago at this point.

We are in the process of opening up our second one in Colorado Springs as we speak, so we got the time differences covered.

We know what it takes to succeed in this business and the flow is coming at us.

It is no great surprise, it is good news but no great surprise.

Would I add when Jay is talking about the overall agency, when we talk about having the breadth of offerings to them, there are very few agents that actually -- there are a limited number that focus on a singular segment to Jay's point.

They really deal with business in their territory why they live.

And what makes us unique versus a lot of our competitors and why the combination of the small and the middle market and then all the specialties we have is not because we just go find specialty agents, it's because at that agency they know that when they have those five or ten accounts that are in these varying segments we want them to think of us.

So we really leverage everything we can bring to them relative to capability.

And so when they think of the importance of the breadth of things they do in their office, they think of the St. Paul, because we have more of those offerings than most of our competitors in the business.

And that's when we say leverage the breadth.

That's what we really talk about.

And if there is a real advantage here it is in that breadth.

There are certainly lots of companies who do terrific small commercial work and there's lots of companies that do terrific middle market work.

And there are some companies that have a decent array of specialty industry-specific products.

And there are precious few that really have the breadth.

And our vision was, to provide that breadth and be in a primary position to meet the agent's needs.

And it's not unique in the sense of one and only, true one and only.

But our position is pretty unusual.

It is that.

Let me -- I really appreciate the comprehensiveness of the answer.

Let me just ask one quick follow-up.

Can you quantify in any way what you think you need to spend on technology annually, and what the trend in that number is going to be going forward?

Well, that's a good question.

I -- what we do, and I need to think about that before I just give an answer.

I will tell you that we have, I don't know, somewhere around 1300 or 1400 technology people inside the St. Paul Companies.

I think that's our full count.

There's about a thousand here, I think there's about 300 or so in Baltimore, something like that.

So everything that we've done so far has been done internally.

We've developed it ourselves, we've done the work ourselves.

And again, it's not terribly difficult to understand what the competitive dynamic is.

You can go into an agent's office and say show me X company's system, show me why company's system, and you know what, they do.

They're more than happy to share with you what is the state of the art, and you can see the screen flow, you can understand how it works, and can you get your own people very much focused on it.

So I'd like to think about that question before I answer it quickly.

There isn't anything that we're doing in technology that I see particularly necessary to ramp up staffing levels, to get there.

What we are going to have to do is put field people in place.

With this kind of business flow, with this kind of business flow and if it's real and if it sticks, we don't -- we don't have enough in the field organization to respond to this kind of flow of business.

And I mean, Mark Schmidtline started with zero people a year ago, I think he's got a grand total of 100 people now.

With this kind of flow he's going to have to bulk up his operation.

He won't be able to respond to it.

There is, you talk about where the rubber hits the road, it is at the point of sale.

So if there is an expense to be -- to be laid out here to support this kind of growth it's much more in the field infrastructure I believe than in the technology arena.

Thanks very much.

Pleasure.

And Jay Cohen with Merrill Lynch will have our next question.

You have a couple of unrelated questions.

The first is, are you seeing any trends either favorable or adverse, in claims inflation, claims frequency and severity, certainly in the commercial business.

Tim is here and I'll ask him to comment.

I --

In the context of frequency, new reported claims across the whole place are down 16% through June.

And the context of our pending inventory, our pending inventory is down 10% over the same period of time last year.

And we're very pleased with our severity trends in terms of average paid claim.

And a lot of the core lines we're doing very well in terms of average paid claims being at or a little bit below last year.

For instance, in auto and VI and workers' compensation.

Although our pick, I'm looking at Tim, I'm completely in concert with him on the inventory which I know the number is, I'm completely in sync with the frequency, that's exactly right.

The plan this year envisioned an increase in severity of somewhere between 7% and 9% depending on the individual line.

And I think across the entire book -- we should check this because this is too much from recollection.

But I believe across the whole book, we are a little bit better than that.

But we are seeing an increase in inflation--average severity, up at around that level.

I mean, we're not seeing it higher than that.

We're certainly not seeing severity trends exceeding it.

Is that right, Tom?

Looking at the data, current accident year is right at about, that sort of 7% to 9% range in terms of severity.

So I would say nothing --

For the liability lines.

Right.

And much less for the property.

So no, I don't see anything in the claim data now that is problematic.

The frequency data actually sounds pretty good.

Yeah, I think that that's true.

And we'll see.

It's -- we'll see.

That's all.

Okay.

Second question, given the kind of added information and the time that's passed on the medmal book, can you -- are you -- will be you changing your guidance on what the worst case scenario was?

You through out a number, I think it was $250 million, is there any reason to change that outlook?

I -- no, in a nutshell, there's no reason to change that outlook.

That outlook was really -- the fullness of it was that we said that everything we see at the moment points us to an indication that the reserve position is adequate and it will work out okay.

But we also recognize that with a book this large that small changes in the variables that we spoke about earlier could produce an adverse outcome, and we felt it appropriate to say that if things did go bad, if those trends did develop poorly, that a reasonable worst case would be, an additional $250 million pretax.

I think emotionally we feel a little better than we did six months ago, because I think frankly that we just didn't know.

That's why we put the number out.

And six months later the general trends continued to support the conclusion.

So we feel better.

I hope, and it's nothing more than hopeful, that's all it is, that by the end of the year that we'll have a more specific view.

That would be my hope.

And we'll see.

Okay.

And then just last quick question.

Regarding your efforts to look at the expenses in the runoff business, could such an effort result in a near-term charge related to any restructuring there?

Tom just kind of whispered at me, doubtful.

I think if we ended up with--I'd have to look at it.

The only thing I'm thinking about as I'm sitting here is obviously any severance that would be involved.

Having said that, with this kind of growth activity that we're seeing in our main business, it would not be difficult for us to redeploy folks that would come out of our runoff businesses and put them to work in our ongoing businesses.

So my hope would be that we could do this at a modest cost, if any.

So that's sort of what the thinking is.

Great, thanks Jay.

Bill Wilt with Morgan Stanley will take the next question.

Hi, good morning.

One detailed question, one broader.

Detailed, just back to the runoff briefly.

Is it fair to say that in 2004, maybe but for reinsurance premium true-ups, there shouldn't be any more earned premium?

Or will earned premium still be going through?

Yeah, I mean, they'll be some earned premium.

It is going to be pretty modest.

Reinsurance is the wild card as this stuff gets reported.

But even at that, you know, anything that gets reported would be automatically written and earned kind of at the same time, as a late adjustment.

So I'm going to imagine that it's going to be pretty modest in '04.

Thanks.

The broader one turning to the specialty which hasn't been talked about quite as much today, thought it would be useful if you could perhaps pick out the business segments within that that has you most excited and the best growth opportunities?

And add a little bit of color.

Then, looking the other direction, and at perhaps the business segments that are underperforming and is going to require work over the -- in the near term.

I'll do the tougher one, I'll talk about the underperforming.

I just make two observations.

We continue to view -- we continue to view the surety environment as being difficult.

There's nothing particularly on the horizon that leads us to believe, at least over the remainder of this year, that it's going to get any better than it is right now.

We are planning for it.

We're providing for it.

And working hard on the surety business.

And we think our profile in the context of the difficult economic environment-- everybody, I was listening on the radio this morning and folks talking about recovery.

You're hard pressed to see it in the construction arena.

It's -- maybe it will come.

Maybe it's a lagging indicator.

But it's difficult to see that.

So we continue to watch the surety business carefully.

And I would also observe that we have, this goes back to 2000, long before I got here, that there has been a dramatic push to reducing the exposures there.

Exiting large accounts where possible, entering into co--surety arrangements where they've made sense, bringing the book more properly in line with the available reinsurance that's now in place.

And I think the quality of the work that Fred Gurba and his forecast doing right now is just terrific.

It's never any fun working through a difficult business.

And, Fred I know, if you're listening, you're not having any fun but you're doing great work.

Please keep it up.

The other business that we're just watching carefully is the specialty excess umbrella unit, and not because our results are difficult, not because results are in any way bad.

But if there's going to be a change in pricing, this is where you got to be very nimble and you got to know when to back off a little bit.

And -- because this is the line that the folks at AIG put up whatever it was, 1.5 billion of additional reserves for.

No matter how good an underwriter you might be, you've got to watch the pricing trends and know when the market's telling you something and not in the vernacular fight the tape.

And I think Chris Longo and his group are doing a terrific job of doing that under Mike's leadership.

And those are the two that are on my watch list.

I don't know Mike anything else on the negative side of the equation?

No, I don't -- I think that's exactly right, Jay.

I think inside of the specialty segments, we're very -- we're very excited about a number of them.

Actually, we've got significant momentum in market presence in them, and we see significant expansion opportunities.

I'd include in those the financial and professional areas, and one of the exciting additions that came out of the Kemper transaction is we picked up an architects and engineers business that we'd been looking at for a couple of years.

So that's an exciting new segment of ours.

We'll continue to take advantage within our strategy we've had in place of the professional liability market opportunities and the selected D&O opportunities.

The technology business continues to perform extremely well for us, and we would anticipate as we move into '04 that there would be a continuing slow recovery there in that segment.

And we'll do well there.

And in each of the public sector and oil and gas segments, we're having terrific years.

So I think -- we have a number of these segments that we think we're extremely well positioned in and have worked on for a number of years that we're excited about '03 and '04 and I think well positioned.

Thanks.

A quick follow-up on surety.

I'd happily listen to the cost of the reinsurance program that you described at the outset if you want to share that.

But if not, would be curious to know just if you could talk about how that's paid, was it paid cots of the reinsurance paid this quarter, does it drag out over time, is it a function of claims if there are any?

It's generally quarterly payments.

And you know it's over a five-year period.

You know, sometimes there are premium adjustments based on reinstatements and additional premiums and things like that.

But it's -- you know it's not a lumpy all paid at once type of premium.

One of the interesting things about the program, and obviously we entered into it to mitigate exposures.

As the insurance arena changed and the coverage that was available to us changed we had to respond with it.

Importantly, we identified in our Qs previously one particularly large exposure in the energy trading sector, a gas supply bond which I think we identified $190 million principal sum there.

Obviously, we now have $100 million per year of available reinsurance in the event of a gas supply loss, right?

It's 100 million per principal

$150 million in the aggregate per year?

Maximum per year.

Maximum per year.

Obviously we have mitigated the impact of that loss dramatically, more than 50%.

And it's -- the potential loss, that account by the way continues to perform, it is not -- it is not in default.

It continues to live up to its obligations and, in fact, it's successfully refinanced its bank situation and recently accomplished certain asset sales in amounts greater than originally had been anticipated.

So we feel better about that account than we did some time ago and particularly so on a net basis.

So it's a well structured well thought out program designed, again, to continue to promote earnings consistency

Thanks very much.

Pleasure.

Ira Zuckerman with Nutmeg Securities has the next question.

Most of them have been answered.

One question, one comment.

I would appreciate and I assume everybody else would do, if you could get this stuff to us the evening before, rather than getting it to us with very little time to look at the numbers.

And the more general question I've got, given the fact that the company's now much stronger financial basis, has the board, or the management, given any thought to the dividend poll can policy, given the change in the tax laws?

We give it a lot of thought.

First in the context of our own yield, we're actually I think now at like a 3.3 or 3.4 yield.

Our earnings payout in the context of analyst estimates have us at about a third for this year.

And I think that's twice the S&P 500 and 1.6 times the S&P Financial Index.

So we feel pretty good about the sufficiency of the existing dividend.

Obviously the board has two more meetings left this year and meets in August, and meets again in December.

And it will be the subject of discussion and we'll see.

Okay, thanks.

And our next question today comes from Mr. Charles Gates representing Credit Suisse First Boston.

Hi, this has been a tremendous call.

Hey, I only have -- I have two questions that I'll lob.

Question No. 1 is the fact that I believe in the last five years, St. Paul or bought two foreign surety companies, one was the largest one down in Mexico and then this Canadian company.

Is the surety business of a similar personality there than it is here?

Oh, well, largely no.

There are a couple of key differences, in Mexico, first, the reinsurance program is a losses attaching program, as opposed to a losses occurring during.

And what exacerbated the issue in the surety business was, when several large reinsurers decided to withdraw from the market in significant ways.

And left the entire industry in some state of turmoil.

And so our coverage down there is losses attaching.

So we're in pretty good shape.

Secondly, the nature of the business is a much smaller business.

It's just much more focused, and it's not really engaged in -- not in any meaningful way -- in the large commercial risks that we -- It really stuck to its knitting in terms of contract surety, largely, I think that's true, right?

It's odds and ends you'll find outside of it but generally it stuck to its knitting.

Correct.

What we now call St. Paul Guaranty, which was London Guaranty, is in the process of narrowing its focus to make it more consistent with the surety profile.

They had been engaged in a number of nonrelated businesses, including obviously being the largest surety company in Canada, we've decided to make a change away from those nonrelated businesses and to again stick to our knitting.

So that's the story of there.

My second question, sir.

I believe on the Cincinnati financial conference call yesterday, they characterized your commercial lines business focused on small accounts today is akin to some extent to the business owner's policy that the St. Paul Company sold years ago.

Would you compare and contrast that and in answering the question could you elaborate on the competitive environment in the very small commercial lines risk market?

Yeah, the small commercial market, the product is in fact to referred to sometimes a Bop or a Bip, a business insurance policy.

Think of it as a form, much as you would a combined homeowners and liability policy that you would have at your home.

It covers property and it covers liability.

The sort of very basic stuff.

I'm not aware of a sail that the St. Paul did in selling its small commercial.

No, you had that business and you closed it down.

Yeah, I -- I'll let someone else who was here at that point comment.

When I got here that business we were not in it.

The competitive environment, it's an interesting marketplace.

Over the course of the soft cycle, it was much less resist tent to price deterioration.

It was much less competitive.

The small commercial owner doesn't have a dedicated risk manager, isn't out there beating up on the insurance companies day in and day out to save 30 bucks on their insurance premium.

They're happy to get the premium, they demand a high level of service and responsiveness, and they've generally been fairly insensitive to reasonable price increases over time.

It wasn't exempt from the soft market, but it was a very different dynamic than the middle market.

It also has had, as a consequence, less price vibrancy on the upside.

I mean, it's a business that sort of looks and acts like a more normal business.

It's been less cyclical on the upside and down side and on a consequence it's easier to manage and easier to price your product.

It is, as I said before Charlie, about the form, about a competitive price, not the most competitive price.

It's not necessary to be the cheapest.

It is absolutely not necessary to be the cheapest, to be successful in that marketplace.

You have to offer the full array of variables that make the product a success at the agent level.

You got to start with that.

If it's not successful at the agent level it doesn't matter how good it is for the customer, it doesn't work.

It doesn't work.

The agent has a very limited number of dollars to work with in getting business done and placed.

And this was interesting, a number of years ago I was actually with one of the larger regional South east agent sits.

And in a comment, they actually shared with me -- now, this is going back to the mid '90s -- that they were anticipating get out of the small business in its entirety because they couldn't afford it.

Now, this was before the advent of high speed Internet lines.

Most insurance companies were connected to agents by individual dump terminals at the agent's desk, and they went over a dedicated communications network to quote and rate the business.

And it was very expensive.

And no companies offer a service center to lay off the service obligations and the agents were turning away from it.

And it struck us all at that point was in that was a terrific opportunity.

We developed the service center and then the important break through in this whole thing was a user friendly high speed Internet which all of our platforms are on.

You don't need any special technology, you don't need any special computer equipment.

If you can get on the Internet you got a high speed link you can do business.

And that really made all the difference.

Thank you.

Pleasure.

And from Stadia Capital our next question comes from Ken Zuckerberg.

Good morning everyone.

I wanted to trace Ron Frank's statement on investor income.

Tom was there any impact of pay back on prior year finite contracts that came into play this quarter on the NII result?

None whatsoever.

I guess for modeling purposes, how should we anticipate and/or factor that in in the future?

Is it something that it's possible to gaining today, or is it, you know, many years out?

And then finally, is there any sort of strange changes with respect to interest rate drops or equity market moves that factors into the sort of the sensitivity of the finite program?

Let me get Bill to answer the second part of that.

Well, I think the -- I think it's a statistical matter that the fine night group was a nonissue for NII.

In putting that aside in terms of -- in terms of influence of changing rates and equity markets on NII, obviously given -- and you can do the arithmetic yourself, given the duration of the portfolio, only a fraction of it turns over in any one year.

So the effect of rate changes on NII are really muted, and at no point does NII change proportionally to a three years change in rate.

That said this backup in rates has been statistically significant.

As I looked at the securities we purchased over the last two weeks or so, the yields we're booking are appreciably better than what we thought we would be booking three or four months ago.

Bill, I fear I wasn't clear.

Let me just clarify.

Because I'm-d

You may not because I didn't totally understand the question.

I'm thinking about a quarter or two ago, Met Life, with respect to their finite contract, had an adjustment that was linked to equity market changes which was somewhat unique to that contract, but not all that unique to finite reinsurance.

Let me address the finite issue, Ken.

That's all I'm talking.

I'm not talking recurring.

Because essentially Tom what I want to try to think about is, X, the Western MacArthur what's occurring cash flow in terms of the buildup of the core investment portfolio and then -- thanks and then make any adjustments for things that have to come back into the equation from the old you know 2000 accident year or stop losses.

Stop loss programs on a finite basis for '99 and 2000, recall that those were funds paid contracts so all of the outflows associated with those contracts occurred during those years.

Obviously at some point we booked recoverables and we expect to get those funds back.

But as they come back on a paid as paid basis once the stop loss ratios within the treaty is reached.

So it will not be lumpy.

They will come back in you know every fairly long period of time as the associated reserves run out.

It's not going to be this year when we start to see payments.

And I can't predict when we'll start to see it.

But when we do it will be a gradual you know return of those funds from the reinsurer over a fairly long period of time.

And Ken to your first question, I don't think there is anything in this quarter's cash flow dynamics that one would view as unusual or different.

Okay.

So there -- there wasn't any --

The numbers that Tom mentioned, I can't think of anything in there that's --

There is nothing lumpy.

The core stuff --

What we did in cash flow this quarter is our business.

Great, so Jay as we're really you know taking a pen to the model and really thinking about where we go from here, the duration is 3.2, I guess is what Bill said right?

No, it was about 3.4.

And frankly I would envision it --

I started this year by saying that if I were sort of modeling out that I wouldn't anticipate any meaningful change in investment assets over the course of the year.

Okay.

I'd said that before and I think that's where we're going to end up, that the positive cash flows that are coming from the business are going to fund the unusually large ones that we Western MacArthur specific that we knew we had to make.

Jay a simple follow-on from that, does it appear in your mind that in terms of large one-time excessive outflows of claims, Western MacArthur was really the big one for 2003?

Boy, I hope so.

I'm not certain, I'm certainly not aware of anything else that's even in that zip code.

Yeah, I hope so.

Great, thanks.

One correction, going to take one more question.

But Ken had actually checked Ken on the rate gains at Lloyd's and he's got the actual data.

By syndicate here.

Last year open the property syndicate just to give you some flavor we had 45.

On the marine syndicate we had 80 and on the aviation was about 200.

That's percent.

That's percent.

Those are percentages.

This year I'd said earlier about mid 20s and the more likely outcome is going to be about mid teens.

And all of those businesses are producing profitable results.

One more question and then we'll call it a morning.

Very good final question from Ron Bobman with Capital Returns.

I had a question in the surety area.

Can you specify the number of principals that have been excluded from the renew reinsurance program and what the aggregate exposure related to those principals is?

It's a small handful of accounts, and the principal exposure of even the largest is nowhere near what we had on the event that we took this quarter.

That's really as much information as we'd care to make public.

Okay, thanks a lot.

Pleasure.

Folks thank you all.

We appreciate as always your time and attention and your constant query of us.

We thank you and we'll talk to you next quarter.

Thanks.

And this does conclude today's St. Paul Company quarterly conference call.

We thank you for your participation.

I hope everyone has a wonderful afternoon.

You are now welcome to disconnect your line.