旅行家集團 (TRV) 2003 Q4 法說會逐字稿

This call is being recorded.

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

Good morning, everyone.

And thank you for joining us for the St. Paul Company fourth quarter 2003 conference call.

With me on the call is Jay Fishman, Chairman & CEO;

Tom Bradley, Executive Vice President & CFO;

Mike Miller, President of Speciality Commercial;

Marita Zuraitis, President of Commercial Lines;

Tim Yessman, Chairman of the Claim organization, as well as many other members of the Executive Management.

On the call we will address the fourth quarter and 2003 year-end results and other topics.

Copies of this statistical supplement, press release and other materials related to today's call are available on the investor page of our web site at www.stpaul.com.

Definitions and reconciliation between GAAP financial majors and nonGAAP are provided at the end of the presentation slides.

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

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

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

The St. Paul Company has no responsibility to update forward-looking comments.

The forward-looking statement may involve risks and uncertainties that may differ from our current expectations.

These factors are described under the forward looking statement disclosure in the Company's most recent form F-4 filed with the SEC and available through our web site.

Also, please note that we will be stopping our call at 10:00 a.m. eastern to allow investors to listen to the Travelers conference call.

We've geared our comments to allow ample time for Q&A.

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

Thanks, Laurie.

Good morning, everyone, from eastern Siberia.

It is 15 degrees below zero here with a expected high of minus 5.

We feel fortunate because our friends in international falls, it is 27 below with a wind chill factor of minus 45.

Those of you on the east coast, begin to worry, this is coming your way.

I want to thank you all for joining us.

I'm going to spend a few minutes talking about the high points of performance of both insurance as well as our investment business.

And then I'm going to turn it over to Tom to talk -- to provide some additional financial details and talk more specifically about health care.

We know you're all interested in that.

And then I'll briefly wrap up with comments on the pending merger with Travelers.

If you turn to slide five, you'll see we've summarized the operating earnings for the year and for the quarter.

We posted operating earnings of $620 million for the year.

And generated operating return on equity for the year of 11.6%.

Obviously in both cases after the impact of the $350 million health care reserve adjustment.

Strategically we've accomplished a tremendous amount over the past two years.

We have dramatically changed the profile and franchise of this company and created by investing in our ongoing businesses and receiving tremendous execution for all of the people in this organization.

A franchise that is growing considerably and profitably and generating substantial financial returns.

In fact if you turn to slide six, you can see that excluding the health care reserve increase, we hit an operating return on equity for the year of 15.6%.

If one were to exclude the health care charge in 2003, and indeed to exclude the [inaudible] settlement in '02 to provide for a better comparison; earnings were actually up 36% for the year.

That's a $3.53 a share against $2.59 a share last year.

Book value per share now at $26.93.

An 8% increase over the previous year.

We're hopeful the health care reserve increase and the other actions we've taken this quarter as well this year put the topic of reserve adequacy behind us and allow us to focus on the continued performance of our ongoing businesses and the opportunities created by the announced merger with the Travelers.

The business continues to perform well, continues to be a very strong contributor to earnings.

While we are disappointed a reserve charge is required, it doesn't dampen or enthusiasm or confidence in sustaining mid-teens and higher return on equity in 2004 at the St. Paul.

Turn to slide seven, you'll see Nuveen has just recorded its ninth consecutive year of net record income.

Assets under management continue to increase continuously over that period, and are now beginning to approach $100 billion of asset under management.

The company is exceptionally well positioned, has broaden out their product line substantially, now has a very diversified portfolio products, more than most people perceive and well positioned to continue it's trajectory of growth.

On another note, substantial due diligence in review of Nuveen's business and operation has taken place over the last several months, as it has in low asset management companies.

And we're pleased to be able to say that we're impressed with the level of integrity exhibited by the Nuveen folks in managing their business.

It is a conservative organization and one where integrity is a byline of the way they do business.

Turn to slide eight, we'll give you further insight into why we're so pleased with the performance of insurance businesses.

The specialty business generated $288 million in pretax underwriting profits and our commercial lines business generated $235 million.

Net written premium growth in the ongoing business has continued to grow and is now a 25% for the year, driven by continued price increases, stable retentions and new business flows.

The value of the speciality commercial franchise continues to show in the profitability of the segment, with 2003 rate increases averaging 20%.

For the year, growth was 23% in our specialty commercial business.

Overall, new business was a very strong $891 million.

Or 18 percent of the year's net premium and retentions remain stable throughout the year.

Commercial lines posted double digit price growth.

And new business of $858 million or 35% of net written premium.

Overall, retentions have increased slightly.

Our strategy of enhancing our middle market presence and developing a strong commercial franchise is succeeding in the marketplace.

Commercial lines generated $235 million in pretax underwriting profits in '03.

Our middle market franchise where we put tremendous strategic focus and operational emphasis on the past two years to build up or commercial lines franchise and have it compete with the best of the industry, it has been a terrific success.

They have $541 million of new business for the year and small commercial $276 million of new business.

If you recall, when we really set the small commercial strategy out two years ago, we identified a goal of building a $1 billion small commercial business, as I would characterize as an intermediate strategic goal.

We finished the year at $741 million in net written premium, and we are well on our way of moving toward that goal.

In fact on a current run rate basis, we're actually quite close.

If you turn to slide nine, I'll give you insight into underwriting cash flow.

We've clearly turned the cash flow corner.

Two consecutive quarters of positive cash flow importantly.

Our ongoing business cash flow now exceeds the outflow related to our runoff businesses.

And we expect cash flow in 2004 to continue to grow and be positive.

It will be further enhanced by positive cash flows that will come to us from the corporate aggregate re-insurance treaties in place in 1999 and 2000.

During 2004 we expect to begin to receive payments on the losses during those years.

And in fact we expect to receive over $1 billion in cash over the next two years from those contracts.

Page 10 gives a little bit of insight into investment income.

Positive underwriting cash flows have driven invested assets up to $21.9 billion in costs.

At the beginning of the year, I indicated that I thought we would be able to hold invested assets flat over the year.

We grew slightly somewhat in excess of that estimate.

Growth in the asset base has resulted in sequential growth despite the continued decline in the embedded yield in the portfolio.

The fixed income portion of the portfolio remains very high quality with the average fixed income rating remaining at AA+ with a duration of 3.8 years.

In summary, our insurance businesses are growing profitably.

They are doing well, generating increasingly positive cash flows leading to investment income.

We feel very good about the future.

With that, I'm going to turn it over to Tom to go into additional financial detail of the businesses.

Thank you, Jay.

On slide 12, we have a little more detail in the commercial lines business.

I want to note that the commercial lines business reported a combined ratio of 83% for the quarter and 88.3 for the year.

The fourth quarter did include $34 million of positive development or 5.6 loss ratio points, primarily related to a release of reserves from the World Trade Center event.

The expense ratio of 30.9 is up slightly from the full year ratio of 29.4 mostly due to additional accruals for agent compensation incentives driven by the strong underlying profitability of this business.

On slide 13, you see speciality commercial reported combined ratio of 92.7 for the quarter and 93.3 for the year.

Expense ratio of 26.1 for the quarter and 28.3 for the year, continuing to reflect those expense management efforts.

The fourth quarter underwriting profits of speciality commercial of $81 million is net of 48 million of underwriting losses in the surety and construction business.

We continue to book the current business at a loss ratio above the historical averages, reflecting the continued weakness in the construction segment of the overall economy.

During the fourth quarter, speciality commercial is impacted by a net increase of prior reserves of $55 million.

Or 4.5 ratio points.

These movements both up and down among different businesses and lines for the result of our regular year-end reserve assessment are included in the losses here and are spread throughout the underlying business.

On slides 14 through 17, we've updated our health care metrics through year end.

Slide 14 is the continuance of our emergence of new claims throughout '03.

As you can see, adding on the details for the fourth quarters, that trend continues very favorably as we've seen during the first nine months claims continuing to emerge at a rate less than expected when we set up our metrics a year ago.

In fact the emergence during December was the lowest we saw of any individual month during the year.

On slide 15, update of the development on known cases, for the last several months of the year.

As you see for the fourth quarter, basically zero -- and going back to the July-August time frame, zero development on known open claims inventory as of the end of '02 for the past five or six months.

This is an important metric when we're at the end of the third quarter.

We had just started to see -- just started to see this metric come down to zero, and we're happy over that period, it has remained around the zero point through the end of the year.

On slide 16, actually showing kind of a long-term view of observed redundancy ratio trends going back to '99, the point being that the redundancy ratio concept is not new.

We've had it for some time at varying levels as we talked in the past during the '01 time frame particularly.

It had gone down to lower levels.

Beginning in '02, we see a nice trend moving forward.

As you recall, at the end of the third quarter, we had indicated that at the required redundancy ratio of 45%, we remain comfortable, but we're not willing to let the required ratio move above that level.

As we move through slide 17, showing the '03 year in some more detail, the blue line showing the monthly observations of redundancy ratio and the red showing the cumulative, you'll see that the observed redundancy ratio in November and December fall into the mid to low 30 range.

Where we were at the end of the third quarter, we had been seeing frankly a steady trend up going back to March in the cumulative ratio.

And a number of reported instances at the 45 area and even above as what was leading us to conclude that the 45 ratio was still attainable.

The incidents occurring in November and December led us to frankly go back to the books and spend a tremendous amount of time reviewing our assumptions, our management models, our claim models and the actuary model with reserves.

Ultimately we determined that a substantially lower perspective redundancy ratio was appropriate.

Using this new required redundancy ratio assumption, the management model, claim model and the actuary models using the paid data are beginning to emerge.

After the fourth quarter reserve increase that we've announced, the new required redundancy ratio going forward has dropped to the low 30s, all else being equal.

This will allow for deterioration from the current observed ratio of 40% for whatever variety of reasons.

On slide 18, we've given some additional detail on the runoff losses during the quarter.

In addition to the previously announced health care reserve charge of 350 million, the current period underwriting loss for the runoff business of $26 million within our guidance we provided for the third and fourth quarter.

The other segment was impacted by several other specific items.

We increased our allowance for uncollectible reinsurance by $37 million.

Predominantly driven by the downgrade of a single reinsurer but basically using our consistent methodology, providing an allowance for reinsurers based on credit rating and financial condition.

We updated our ground up claim accurarial asbestos review.

And as a result added 45 million to asbestos reserve for pure incurred but not reported claims in this segment.

Also driven by this study, in our ongoing statement, we have specifically allocated $40 million of GLIVR to in that ongoing segment.

The remaining reserve increases are predominantly Lloyds and Union America.

Focused on the U.S. casualty business where we've taken a less optimistic view of the future loss trends.

We've made an effort to address one up reserve levels as we move into 2004 and expect current year losses in the other segment to run about $10 million per quarter in 2004.

On slide 19 a summary of our capital position as of the end of the year.

During '03 we've accomplished significant improvements in our underlying operations, leading to an increased equity base of 6.2 billion from 5.7 at the end of the year.

And total capital base of 10 billion from 9.3 in the prior year.

At the same time we've lowered our financial leverage with total debt to capital dropping 37.6 to 38.5 and conventional debt to capital dropping from 23.9 to 34.3.

Jay?

Tom, thanks.

Let me just spend a moment or two talking about the situation of the planned merger with the Travelers.

You know we are in registration.

And as a consequence it is going to be difficult to respond to specific inquiries on the merger, having said that, general observations first.

We couldn't be more enthusiastic, not only Bob and me, but the people working on this and the energy put on it.

We couldn't be more enthusiastic about the strategic and economic rational of putting these two companies together.

As we're developing our plan to be implemented, we're finding very clear reinforcement of the basic assumptions that have brought us together.

First, we will have a unique breadth and depth of Commercial Lines products and services.

There is no one else in the industry that will be able to offer the breadth to the distributor and the breadth of product that the combined company will be able to.

It is quite remarkable.

And it will also have a meaning from our perspective personal lines presence that is just extremely well done and very well run by Joe and his whole team.

And we end up with just a leading insurance franchise.

Secondly, I think perhaps most importantly, we end up with an exceptional talent base, the best in the business.

You've seen the announcements we've been making over the last two months.

Just in the last few days, we're reached a new level of announcements.

Just yesterday evening, we announced the Regional Vice President positions of our small commercial business and our middle market business.

We've announced the leadership of some of the smaller businesses within Commercial Lines.

Sometime today the entire finance organization will be announced.

And this has really be accomplished smoothly and with relatively little conflict.

We will also have the entire administrative services announcement out today.

It just has gone very well.

When you look at the lineup, an extraordinarily talented organization with years and years and years of underwriting skill and expertise and product breadth and experience and gives you great confidence in the ability to execute on this.

Our distributors, brokers and agents have responded positively to the proposed combination.

We've been keeping them informed and involved to the decisions that we've made.

Essentially our philosophy has been to the extent they view this transaction as invisible, we've been a success.

It is the people who touch them every day, the under writers who the call on them and the claim people who work with them don't change.

If the procedures and processes don't change and they come to understand that this is an opportunity for them and not a threat, really all of those concerns go away.

At least so far, the responsiveness has been terrific.

And Bob and I have learned significantly from the experience that we had together in 1996 that these early days and how we deal with agency brokers is really the most critical decision we make.

Chuck Clark said something so simple and elegant.

Step one is to make sure two plus two equals four.

We want to make sure 2 plus 2 doesn't equal three.

And somewhere down the road we'll figure out how to make it five, and I do think that's the right way to go about this.

We want to make sure the agents perceive this as good as what they had before and we build from that case.

We remain comfortable with all the financial objectives that we've laid out.

All the work we've done so far has caused us to have a higher degree of confidence about it and we feel terrific about it.

Lastly, in summary, things are going very well in the process, in the transition process.

There have been remarkably few disagreements to people working on this.

Everyone has a real spirit of cooperation and a real commitment to creating a company that will distinguish itself in the property casualty industry.

So our enthusiasm runs high, so does the workload.

But that's what we do.

And we're anxious to get to the closing to begin to build the company we know we're capable of doing.

So with that we turn it over to questions.

And we'll be happy to answer anything we can be helpful about.

Thank you.

The question-and-answer session will be conducted electronically.

If you would like to ask a question, signal by pressing the star key followed by the digit one on the touchdown telephone.

Once again if you have a question, we ask that you press star one now.

We will pause for just a moment and we'll take our first question from Tom Cholnoky with Goldman Sachs.

Good morning.

I have one question with a follow-up.

As you look at the speciality business and the commercial lines business, what do you see right now as the spread between rate increases and lost cost trends today and where do you see that spread by year-end 2004?

The rate indications, Tom, are discussed at least what we've seen this year.

And obviously they were more heavily weighted to the front end of the year than the back end.

Obviously the lost trend is somewhat more speculative.

We're not talking about the current loss trend but we're talking about the projected loss trend that will match up against the cash flows related to these policies.

Speciality businesses by a reasonable amount.

In the commercial lines business by somewhat less.

Now, what is interesting is that, again, you will tend to project into the future a continuation of the severity friends that we've seen over the last several years.

The act is, what we're really seeing is some of the more current data, is a moderation of severity, a moderation of inflationary trends that really are consistent with what you see in the overall economy.

Now, if that does continue to bear out, the spread will begin to widen once again.

So it really is a question of whether one takes a longer term view or a shorter term view.

Inflationary impacts in the economy are all-time lows.

No one is banking on that, creating lost ratios dependant on that.

We tend to use our 7 to 9% loss trend, because that's what the long term trends have been.

And obviously we continue to have rate trends that exceed that in both lines of business.

If I can follow up, if I assume basically we don't see real significant change in loss trends -- I can't speak for everybody on the call.

But why shouldn't I be modeling loss or combined ratios for you in the ongoing operation in the mid-80s than where you are today.

I believe the '04 margins would be better than they were in '03.

I believe rate gains in '04 at least as we book them, we make a lost pick.

We incorporate that into our lost rate assumption.

Our assumption in looking at the '04 model is that rate will exceed lost trend.

So all other things being equal, the combined ratio will go down.

Does that put you in less competitive -- will that ultimately serve to reduce your ability to raise rates?

Rate occurs at the point of sale trade by trade, transaction by transaction.

And it depends upon the risk and it depends upon the situation on the account and everything else.

So it is a hard thing to generalize.

Obviously, rate increases have moderated.

But we don't see -- there isn't anything in the data that we see.

Not one thing that causes us to conclude that rate increases won't continue.

They may continue at a decreasing rate.

In some of our lines of business based upon whether it is events in the financial services industry or events in the D and O arena, rate gains in certain classes of business are continuing to accelerate.

So there is a blending of things going on here.

I'm not a dooms day person in this regard.

I continue to see a more rational marketplace, a more stable rate environment and people making better economic decisions.

I talked about this before.

I think it is driven by Sarbanes-Oxley.

I think it is driven by more demanding accounting standards.

Changes in the reinsurance community.

I think all of those things contribute to a more stable environment and I believe we're going to continue to experience that.

Great.

Thank you.

We'll go next to Michael Lewis of UBS.

I have a few quick questions.

Is it something in the air or is it just the way things work out because of the merger.

But is the amount of at year end both ongoing and runoff businesses greater than it would normally be?

Is this more an industry pattern?

Or is this because we're basically positioning yourself for a merger?

In the ongoing business, you have a negative cat number.

I'm just trying to figure out, is there anything unusual in this year.

Or is it more merger related?

The answer is no to both of those questions.

First of all, there is none of our accounting decisions, none of our reserve decisions in any way by the merger.

They stand on their own.

They stand the examination of our internal folks.

They make certifications all the way up the line.

Come up to Tom and me before he and I certified.

It is merger blind.

The answer to that is no.

As it relates to the number of adjustments -- I'll make a couple of observations.

Obviously at the end of the third quarter, we already were very clear in that if we didn't see an improvement there would be a need to take a healthcare reserve charge.

So while we're disappointed that it happened in the fourth quarter, it is not a great shock to us.

It was borderline by the end of the third quarter.

The asbestos items are really driven by an update of the year-end ground up reserve review.

You just don't do that each and ever quarter.

The amount of work engaged in that is substantial.

You make various estimates during the year.

At the end of the year you do the analysis and it grind up.

Lastly -- and I tried to describe this with limited success.

The level of scrutiny that gets applied both internally and secondarily by the internal -- by the external certified accountants is of a different nature than it was before.

There were times where 20 or 30 million reserve development dollars is a given quarter were given spread sheet and carried over to the next quarter.

Maybe the development was offset, maybe there was another change, but that's just not the case anymore.

Its just not the case.

If there is development that occurs, we all ask ourselves the question, is there some reason that it shouldn't be taken right now.

And so, as I've said before, I think that the new standards - I hate to say that, but the new standards of governance inevitably will introduce some additional volatility in the results of the insurance company.

We're not crystal ball people, we're actual business people trying our best to see what the future trends are going to be.

Some of your businesses are easier than others.

You're making long tail projections of estimates.

If there's one thing you know, it is not going to be right.

You know the actual experience is going to be different.

It will sometimes it will be a little higher.

Sometimes it will be lower.

You hope those swings aren't substantial.

But that's what we've got to go through every quarter.

And the reinsurance recoverable wasn't driven by us.

It was driven by a ratings downgrade by reinsurers.

We have no choice but to react to it.

But each of the things are done for specific reasons and substantially documented and evidenced.

And you close the books and try to do it on a books ready basis.

It sort of is what it is.

Thanks very much.

One quick follow-up.

On the international Lloyds business.

I know I had to put a lot of numbers together.

Maybe I actually missed something.

Did you actually grow 95% premiums year over year in the fourth quarter and 64% over the year.

If that is right, what is going on in that business?

Is there a reemphasis on that.

Clarify that a little.

Mike, remember in the first quarter, we took away the quarter lag in Lloyds reporting.

If you go back to the first and second quarter notes, you probably see that.

We also had a change in the accounting for a commission and premium structure which grossed up premiums significantly.

So we can get you the apples and apples, but it is not that leveled growth.

The growth to the extent there is growth is driven largely by rate, as opposed to volume.

The rate gains.

And Lloyd in particular have been just really quite strong.

But, no, there is no particular added emphasis.

We remain in the same four lines of business that we've been in.

We are in the Marine business.

We are in the property business.

We are in the aviation insurance business.

And we have a small personal line indicate of A and H products.

And that's it.

Those are the lines we're in.

We do no casualty business.

No long tail casualty business.

Thanks very much.

And I'll go next to Ron Frank, Smith Barney.

Good morning.

Two questions.

One you haven't addressed specifically -- although you've gone into detail about the health care runoff loss.

The fact you lost nearly 200 million in the other runoff category. 185 to be exact.

And my question is, was that mainly prior to period development.

And if so, was it a surprise relative to the prerelease of the medium mall numbers, since there was no mention of it.

Ron, I went to a couple of the numbers that impacted the other runoff including 26 in current year. 45 in the asbestos adjustment. 37 in the uncollectible reinsurance.

All of the current period underwriting loss was in the other category.

Yes.

Of that 26 that I broke out on that slide.

Frankly I didn't view it as a prerelease item.

Because it was more or less absorbed in the operating results of the rest of the business.

Well, could we talk about what still seems to be if I take those numbers out about $100 million round numbers of adverse development in the other segment.

As I mentioned, primarily, Lloyd and Union America.

Primarily North American casualty business, we have taken a less optimistic view of future lost trends as we closed out both of those businesses for the end of the year.

You've got to take another look at it at year end and book your number.

And if that was the case for the fourth quarter here.

What is important, Ron, obviously over the year we've had a couple of times.

That's not the first time it happened.

As we dug in and looked into it, we are trying to understand all of the dynamics in their entirety, no lack of effort being put on this and trying to put up what needs to be put up to be done with the issue.

And a question on ongoing operations, you mentioned the up-and-down reserve adjustments and speciality and general commercial.

And it seemed like they roughly offset.

There -- as I understand it, there was no meaningful net loss, net strengthening or release in the ongoing ops.

That's being the case, the paid to incurred ratio went up to about 100% in the quarter.

Although it was 81 for the year -- I recognize that's a comfortable number.

Does that signal a more favorable view taken of the current accident year as of year end as opposed to what you viewed it.

We did not adjust the current accident year.

Then how should I interpret the fact that you made substantial additions for the first nine month and virtually none in the quarter.

I'll have to look into the paid.

The adjustments were prior year type adjustments.

The world trade was some.

And there were some net increases in speciality.

And I mentioned the construction.

Maybe we can circle back on it.

It just seemed unusual since the two seemed to cancel out on the overall operations.

The only favorable development that occurred in the numbers was the World Trade Center event release.

It was still a net prior year charge.

Relatively small.

But it was still a net charge.

We'll move next to Jay Cohen of Merrill Lynch.

A couple of questions as well.

First, a surety and construction business for the full year still above 110.

You've obviously put a lot of work into that.

It would seem that historically that business, that combined business should be below 100.

When do you think you can get to at least 100 in that business?

We were hopeful we would have done so this year, Jay.

And it should certainly be at this level next year.

One of the things that drove it this year was the particular surety loss that occurred in the second quarter.

Had been written for a company that went into bankruptcy.

As you remember adversely impacted the results.

Because it was a significant event.

I feel good about a couple of things.

First as it relates to the company going forward, Bill Cunningham is going to be running our construction business.

Bill has been running Travelers construction business for quite some time and has really I think -- Bill turned that business around and did so very, very successfully.

And I'm pleased that Bill is going to be taking over leadership of the whole business segment.

I think that's terrific.

He's going to report to Mike Miller.

It will continue to run in the specialty segment.

We feel good about that.

Secondly in the surety business, you know we had made very substantial management changes this year.

Very substantial ones.

And in fact we're looking for new leadership.

Greg from our shop had been kind enough to go down there and take an an interim role.

Doreen is going to be taking over the entire bond and surety business.

Doreen is a real pro.

Her experience will service us very, very well.

She's a disciplined underwriter.

While she is like four foot nothing -- sorry Doreen -- she's tough as nails.

She's is not someone you want to sit across the table and negotiate.

I think we're going to turn the corner on the surety business.

It feels better there.

I think that the leadership change was appropriate and necessary and timely.

And I think we're on our way back actually.

Right.

And I'm not sure if you can answer this, kind of related to the merger, but if you announce the merger, you talked about the accounting adjustments and noted how they were sensitive to changes in interest rates.

Look like given where current rates are.

We actually have -- yesterday's spike was interesting.

If you remember, I think we said if interest rates went up 100 basis points, most of the mark-to-market went away.

And yesterday's spike was interesting.

Obviously I haven't done the work yet to reflect that in.

But the rates will be what they will be on a daily close.

And that's the day we mark to market.

But the quality of the work we did back then and the information we provided still stands.

Okay.

That's fair.

Thanks, Jay.

We'll take our next question from [inaudible] of A.G. Edwards.

Good morning.

I want two very quick questions.

I was hoping actually to focus on one of the lines that did spectacularly well, especially the commercial line, particularly with 78 combined ratio.

A couple of comments on why that was as good as it was.

And if that kind of level is sustainable in that business?

We're just trying to catch up to you.

It is the subsegment within specialty commercial.

There was an increase in specialty.

And it involving with a lot of ups and downs.

There were reserve takedowns in several of the businesses in that other specialty as we call it segment so I think it is a little fairer to look at the whole specialty segment.

To think about where the run rate is.

Fair enough.

And then just to follow one comment to Tom's question about pricing, yesterday, Gallagher was talking about a difference between kind of what companies are shooting for and what, perhaps, companies will actually get when they get to the street that maybe the insurance companies -- trying for price increases they couldn't quite accept.

But when you actually talk to them, they recognized that it's gotten a little more competitive on the street.

Do you have any thoughts -- do you see it that way at all?

Somewhat more competitive on the street today than a year ago.

Competitive is a funny word.

It was competitive three years ago at the rate increases we were getting.

And it is competitive now.

You're seeing companies beginning to post returns on equity.

You've got others coming in at 15, 16, 17.

We're beginning to get to some level argueably of rate adequacy.

Of course it becomes difficult to continue to pass on rate increases as you at least of the magnitude what you hope emerges is a business where there is an ability to pass on loss trend, plus a margin going forward.

And that's what -- everybody loves to run a business where the dynamics are more normal.

It doesn't have the same cyclicality as this business has had historically.

I also recognize that agents particularly or brokers have a particular vested interest in taking a public position that says it is much more competitive.

They represent their clients.

And they do a good job of it.

And they would love all of the companies to feel and believe the world is more competitive.

I take those statements with a little bit of a grain of salt and look at the actual numbers we generate.

I think ultimately we have the best view of rate, because we see it each and every single month.

We don't really speculate on it.

We really know what the numbers are.

That's great.

One last question if I could.

If we did an analysis similar to the one that you provided with the health care segment, would we see similar patterns of the various trends that you illustrated within your expectations?

Well, the reinsurance book gets attention just like every other line that we do.

And that book of business continues to look fine.

There isn't anything there that causes us any heartburn at the moment.

And obviously we watch it very, very carefully, given some of the competitors and what has happened there.

We did provide a slide a number of quarters ago to you that compared the actual book loss ratio at St. Paul compared to industry averages.

And it was interesting.

I would direct you to that one, because you can actually see what the business was booking in the years that were identified as the softest elements -- softest years in the cycle.

We don't -- reinsurance is a different kind of animal than the health care business and doesn't really lend itself to the type of emergence redundancy development kind of analysis.

It simply doesn't -- it simply doesn't work that way.

Because the claims are -- there's much less frequency and much more severity.

So you look at it claim by claim as you go through that process.

So it doesn't hold together that way.

I just wanted to make an observation for a moment on the health care.

I think if you look at the trending line in the slide that Tom provided, that runs from March until October, it was steadily increasing during that period of time.

And in fact six months during this year, we actually had achieved redundancy rates at or above 45%.

So that was the basis of our conclusion at the end of the third quarter although we recognize and said very publicly we were running out of room.

That, in fact, if development didn't stay negative, or in fact if reserve redundancy didn't stay at those kind of levels, we were going to have to take action, and that is indeed what happened here in the fourth quarter.

Just one other comment to add, the full year total is a positive $3 million.

It basically broke even.

Including the expenses of running the place and running off those reserves and that's on top of a $22 million loss for all of '02, which were the two years in runoff.

Kind of two years we accepted reserves -- or kept reserves during the transaction of '01 and prior.

And two years out, they basically developed flat over that period.

So it is a different type of book of business.

It is well managed in runoff.

And performing fine.

Naturally we're all focused on it because what is happening with competitors.

Thank you very much, guys.

And I'll go next to Bob Langen with Langen McAlenney.

Good morning.

Looking at the St. Paul and Travelers quarters that came out this morning -- or last night.

What is clear is the ongoing operations are doing better than you and I think the street thought they were doing.

And the runoff losses were a drain which you attribute to not year-end but just the way things flow.

As we look to '04, and maybe we talk about the industry or your company or the merger, should we be focusing more on how good the current operations are running and doing our models?

Or should we be mindful of the pit falls of runoff and looking forward.

We have tried our best, and I'm acutely aware of the number of quarters that we've sat at this table and talked about prior period reserve numbers, sometime small and sometimes large numbers.

And as a consequence, where it has become somewhat hollow.

But we have tried our absolute best to get the right numbers down.

It doesn't serve anybody, any constituency to delay postpone or put off.

We've been open and straightforward.

We try to provide enough information to share in the understanding of the analysis.

We don't do it in a back room in a closed box and put forth a number.

We were hopeful -- I've learned in this business never to say never.

We're hopeful we put the reserve development behind us.

We're working hard at it.

It's in our interest to do that because we spend all of our time working on where we're going instead of where we've been.

And I do recognize it has been a frustration for investors and a frustration for us as well.

You close the books and get a call from the folks in London.

We just came across an issue, problem or development.

You sent someone over.

You work hard to try to understand it.

That's all management can do, react to the facts and circumstances and deal with it the best they can.

I feel very good about our business.

I think the way people have responded here and the franchise that's been built.

It has been terrific.

I get anxious when I saw this, because in a certain sense, no one should interpret that I in any way suggest that one can or should ignore prior period development.

It is real.

It is money.

It is share holders money.

So it counts.

But if you take a look at the earnings or the return on equity this year, ex. the prior period reserve development, you'll get a number of it actually exceeds a billion in earnings.

And a return on equity well into the high teens.

Your point is well taken.

We feel terrific about what we've built.

In fact time will tell.

To all investors, if you plan on listening to the Travelers conference call, please have your assistants dial in now.

If I could follow up -- am I still on?

Yes, you are.

Just looking at my '04 model -- perhaps it is irrelevant, because we'll never see St. Paul as a stand alone company if the deal does get consummated.

I was using a 90 combined ratio.

More than the $40 million you're suggesting.

And I was getting a 470 of earnings power.

The street said under 450.

There has been skepticism about where the ongoing is going to be.

Put another way, would you be really disappointed to see '04 burdened by substantial runoff losses?

Would I be disappointed, you bet.

Absolutely.

Do I think there is some skepticism?

Yes.

Some of it is well deserved and well earned.

I'm just being candid.

We've had more than our share of problems.

But I think, you know, models are models.

And they tend to point in a certain direction.

And I think, again, Bob and I put forth a model as part of the offering that showed proforma earnings in excess of $3 billion.

And that's the kind of earnings power that exists in the combined entity.

That does reflect a billion from our organization.

And reflects $2 billion from the Travelers.

So your point is right on.

Thank you.

Good luck.

[Alaine] from Deutsche Banc.

Good morning.

Just a couple of questions.

One clarification.

On the corporate expenses, they seemed to have picked up from $64 million in the 3rd quarter to 77 million.

Is there anything we behind that or could you tell us why it went up.

The other question relates to -- Jay, now you've had the opportunity to talk to Travelers and look at their book of business.

When you compare both books of business, are there any lines of business or segments where either organization may have taken a different point of view on that business.

And either in the appetite to write it and how they reserve for it the lost cause trends or on reserves in general.

That's a very good question.

I'll take that and let Tom answer the one on the expenses.

The St. Paul speciality businesses are in some cases businesses that are either new to the Travelers or in some cases businesses that they really had not embraced.

So, for example, our technology business we do $450, $500 million a premium.

Travelers does 45.

Our financial and professional services business had largely been done in both insurance at Travelers .

Our casuality appetite is somewhat broader and more robust than the Travelers is.

And I think that in that record, there is a learning experience that will go on.

The fact that Mike is going to continue to lead that segment and the underwriting profiles are sound and continue to stand the test of time I feel good about.

When you look at the lines where we overlap, and you talk to field people, you can't tell where you're talking to a Travelers field person or a St. Paul field person.

These are companies focused on field underrating, analyzing risk.

Because of the controllable systems, the incentive systems that exist at both companies and are so similar, there is not a volume for volume sake. profitability which converts back to an underwriting focus.

I don't believe from an underwriting culture standpoint there will be anything here that will be a struggle to get over.

We do have a little work to do on the casualty side of the business to begin to take that -- just to make sure the skill and expertise doesn't become one -- I talked earlier, we've got to make sure 2 plus 2 is 4.

We've got to work on that.

Everybody has got the right frame of mind.

And there is a tremendous amount of open mindedness.

So no, I think this -- I actually think that is going to be an easy one.

From a merger transition strand point and integration perspective, there isn't anything that has occurred here that causes me to lose sleep at night.

From that perspective, it is going exceptionally well.

This is Tom.

On the first part of your question on the corporate expense, it is actually an interesting item.

It is really not affecting the net.

Much our capital we use to support businesses some of it is done via loans from the holding company.

In fact we forgave some interest on a lot of those loans, up to close to $10 million for the quarter.

So while it shows up as an expense in the parent segment, it would be an offsetting credit in that business segment.

So it really is a onetime unusual item not affecting the net -- the apparent expense level to the first three quarters is more indicative of the holding costs.

How much was that?

It was just under $10 million.

Thank you very much.

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I just want to remind you I'm going to be in my office. 651-310-7696.

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