旅行家集團 (TRV) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Second Quarter Earnings Review for St. Paul Travelers.

We ask that you hold all questions until the completion of the formal presentation at which time you will be given instructions for the question-and-answer session.

At this time, I'd like to turn the call over to Ms. Maria Olivo, Executive Vice President of Investor Relations and Financial Planning and Analysis.

Ms. Olivo, you may begin.

Thank you.

Good morning everyone and welcome to our second quarter earnings conference call in which we will review the results of the quarter for The St. Paul Travelers.

This is the first quarter in which we reported as a combined company.

As disclosed in our press release and statistical supplement, all information for the first quarter 2004 and prior except for the pro forma combined net written premiums information is that of Travelers.

The information for the first quarter and prior for Travelers has been restated to conform to our new segmentation.

Our discussion will be followed by question-and-answer session.

This morning we released a presentation which we will be referring to during this webcast.

This presentation as well as the press release and statistical supplement for the quarter can be found on your website at www.stpaultravelers.com.

Today with us we have Bob Lipp, Chairman;

Jay Fishman, our Chief Executive Officer;

Jay Benet, our Chief Financial Officer;

Doug Elliot, Head of General Commercial & Personal Operations;

Mike Miller, Head of our Specialty Commercial Operations and other members of management that will be available to answer questions.

Before I turn it over to Jay, I would like to make the following statements.

Our presentation today will include certain forward-looking information.

The Company cautions investors that any forward-looking statements involve risks and uncertainties and are not guarantees of future performance.

Actual results may differ from our current expectations due to a variety of factors.

These factors are described in our earnings press release and in our filings made with the Securities and Exchange Commission.

Also, in our remarks or responses to questions, we may mention certain financial measures that we believe are useful to investors.

These may include operating income, operating return on equity, and underwriting gain or loss.

These are non-GAAP financial measures as defined by SEC rules.

Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings press releases, financial supplements, and other materials that are available in the investor section on our website stpaultravelers.com.

Now I’ll turn it over to Jay Fishman.

Thank you Maria.

Good morning everyone.

I’d like to take the first few minutes of this call and just take a step back a bit and remind everyone why we put these two companies together and why we believe that it is such a compelling opportunity.

And I would like to take you back to 1996.

Travelers from middle of 1995 in that year earned $383 million and it was 11% return on equity and it was actually a fairly successful franchise.

We have the opportunity to combine with the Aetna property-casualty business, which was a struggling franchise perhaps making a couple of $100 million, but questionable even there.

And it was very much a transforming transaction that created really a remarkable company over the following 8-9 years.

That $383 million in operating income grew last year to nearly $1.7 billion and it produced a return on equity of nearly 17%.

It changed both companies fundamentally and provided a platform for growth and a platform for performance that was extraordinary.

And many of you who are listening into this call this morning have often described that transaction as the only transaction, the only merger in the property and casualty space that actually produced real success.

What Bob and I saw and understood and still continue to see so clearly is the opportunity to do that again.

And the opportunity to put these two franchises together and do it in a way for the long-term success of the venture is critical to the way we think about it and critical to the way that we operate the business.

We started off in 1996 first with a company that had sound financial footing.

We undertook the operational efforts that we needed then, we trained people, we developed product, we enhanced our technology and our platform, we promoted, we advanced and we have built a franchise overtime again that was very successful.

And we feel in most respects that we are in an identical position today.

We have created a franchise with a very sound financial footing and we are now beginning to take the steps operationally that will produce a successful franchise overtime and ultimately we will realize the financial benefits, the operational benefits, the people benefits that makes so much sense to us as Bob and I sat and talked about this together.

And as we think about that, the opportunity here looks and feels an awful lot like it did in ’96.

There is a geographic opportunity, the overlaps of these businesses are such that to expand and broaden the franchise is very clear to us, there is a product opportunity, there is not a product in our space now that we don’t have real underwriting risk management and claim expertise.

The ability to deal in small and medium and large property and casualty, specialty and general, directors and officers, in technology and public sector, and select commercial -- these are all wonderful franchises with a great skill behind them, and, in fact, bringing that skill to the marketplace will enable our agents -- and this is where it matters -- it will enable our agents to do more business, better business, and more profitable business.

And that’s what we all do to make this franchise a success.

We have an opportunity to generate real efficiency from combining these operations.

The controllable expense base between them is substantial and there is an opportunity to reduce them and produce a much more efficient operation.

And lastly, but I would argue most importantly, is we have a tremendous people opportunity.

The organization that make -- created that success in 1996 was 20,000 strong and, in fact, we have the opportunity here now with 30,000 people to have the best organization in the business.

We have really first grade, wonderful leaders in every position that we've got.

These are matured, experienced business people who have seen good markets and bad markets, and they know how to operate in all of them.

And I know from having been in this business over my years that having those kinds of people, having the strength of that organization really provides for the success of the operation.

Our game plan is relatively straight forward, in a sense, we are doing the same things that we undertook in ’96.

We took the opportunity to review the success and the failures of that transaction to learn from what went well, to learn from what didn’t go so well, and make sure we wouldn’t make those same mistakes again.

And from an operational perspective we really do feel terrific about where we are.

The field activities are just going exceptionally well.

The agent response has been terrific as validated, in fact, by I’m sure someone on this call doing an independent survey of our agents, and asking them how it's going.

Our goal has been to make this seamless.

We understand that if we create heartburn for any of our agents or brokers that in fact we won't succeed.

So it has been about retention and it has been about consistency and it has been about behaving in a way that gives them the confidence that notwithstanding that we are a big market player at this point, that we are the market that they want to do businesses with, and that's a key element of where we are going.

Our product offering has been secured, it's been established in the organization, we have done a tremendous amount of training in the first quarter, we had agent appointments to make, we had individual employee training, underwriter expertise to be developed.

No one in this organization was a renaissance underwriter, no one bought the strength of all of these products to [bear] and if we were going to capitalize on the marketing opportunity we had to get that training done behind us.

So, we are well along the way to doing that.

We are optimistic that the savings that can ultimately produce here will exceed our expectations, we are in the early stages of working through that and it is a long process.

Bob and I both learned in our previous experience that you'll achieve efficiency over years, if not in months, it's in years and we are committed to that because we understand that being a low-cost producer in our business is important because it allows you to be more competitive with the revenue line.

Saving money in terms of expenses is critically important and it becomes a fundamental element of success when you can translate it into selling product at a lower cost -- just as the folks at Wal-Mart what it means to be a low cost producer and what that can do for you revenue line.

It's not only about expense savings; it's for what it does for you at the revenue line.

Our systems conversions are underway and they are going quite well.

Again, from an operational perspective, I am not sure that we could be in much of a better place four months after the closing of this transaction.

Having said that, we do focus on the near-term as well.

We do have near-term objectives and initially having this be seamless from the agents perspective was critical.

We’ve seen other transactions fail and they failed because they created problems for agents and brokers.

So, first and foremost again was retention, consistency of underwriting and bringing that strength to the field and we’ve been terrifically successful in that regard and the numbers tell the story.

And as we think about our competitive advantages and I sit with my [lisping] down and while I didn’t intend to do this, I ended up with four Ps -- people, product, platform and profitability.

We had to get the right people into the right jobs and get them focused on the marketplace.

We got to get to the breadth of the product into the hands of those people and being able to deliver it to the agents doorstep.

We have significant systems conversions to do; our billing has to be seamless.

Our premium collections have to be seamless.

Our agents records and controllable income statements have to be seamless.

And we’re well on our way to success.

And lastly, it's profitability, which is beginning to focus on the revenue opportunities that exist here and on realizing the expense efficiencies.

And that’s what we do everyday when we get up, some thing that -- whatever we are doing that day is going to fit into one of those four P categories or at the moment it's probably worth doing.

And again while this quarter certainly had its interesting dynamics, inside the Company we feel terrific about the operating performance that we've been able to achieve and we know we are off to a great start.

And Bob is here with me.

Bob, I don’t know if you -- you’ve been around the country to the extent, do you want to make some observations too?

Right, Jay.

Just I've had sort of the luxury and it's been fun to travel around over the last several weeks talking to a lot of our people in the field and especially account executives and underwriters and those sort of people that are in the field offices doing various things with agents and their policyholders.

And really second, I have sort of categorized it in three different areas, but the first is that we do have a great franchise, it's been clear certainly from the date and the past that both the St. Paul and the Travelers had an excellent relationships with their independent agents around the country and that is, of course, with the coming together of these two companies and this is very much felt by the field people that this great franchise has a great name and of course the immediate issue in terms of bringing two companies together was to not to disturb the relationship that we had.

In other words, to really keep one plus one equaling two; and in fact I think that’s been very well achieved.

The ability to not disrupt long-term relationships that existed between independent agents in both of the companies was really our first startup business and that’s very much been handled.

So, no news in that area is good news.

The second thing is that and Jay briefly mentioned, is the ability to present basically in the future a much larger product line to these agents that we have these great relationships and franchise with is really starting to get people excited.

And it's early days, but really the -- and actually the organization of regional executives, we have 14 of them across the country and their primary job along with their other activities is to really present our broader -- much broader product line to the individual agents in a user-friendly way.

That’s been accepted with great enthusiasm.

It really has been honed in the traditional legacy St. Paul operation that is now really accepted as the way to do business as far as agents across the combined organization.

And that’s clearly -- I don’t think there is any question about that -- this really presents opportunities to sell additional products to existing agents and has great potential in the future.

As being accepted now as my god, this is the only way to do it.

We have got lots of early stories about successes, but there is no question that from the traditional St. Paul product base, for the first time they have great opportunities as far as our claims and workers' comp emphasis, and our claims operations, as far as personal lines that existed in the legacy travelers area is now available for those account officers.

And on the Traveler side, for the first time, as Jay has indicated, we have real international capabilities to go with our national account and our excellent position there to present to those policyholders.

And also the -- lots of things coming up now as far as the use of the specialty operations at St. Paul to make further penetration into the agency that then was certainly possible in the past.

And that I think is going to add, I’m very enthusiastic about that, that’s going to add some real growth to our top line in the future.

And finally, it goes without saying, you know, I had a, sort of, good fortune last week of being at Chicago for a couple of days with all of our regional executives and their key people.

It's just great to see the quality of people that we have calling on agents and running our organization.

They come together very well, it's not we, they, or anything else, it's the enthusiasm for the relationships, the franchise, the product depth, and the opportunities to -- for increased penetration in these individual agencies.

When we analyze it, the penetration is actually not that large and we have got great opportunities for future growth there.

So, I want [to] second basically what Jay said, so this is coming together, I would say, better than my recollection of ’96.

And I think the opportunities are exceptional and it's a transformational coming together as far as this new company for both prior companies.

Great.

Bob.

Thanks.

And Jay is going to do some of the summary financials, we are going to have Mike and Dough go through their respective operations and then we will be available to answer questions.

Starting on Page 3 on the webcast, focusing on the financial performance for the quarter and the year-to-date.

Starting with the top line net written premiums, they were up 61% up to 5.261 from 3.269 in the prior quarter, but I want to remind you all that's because of the merger.

As Maria had indicated earlier, St. Paul estimation is not in last year's numbers because of purchase accounting.

If you look at it on a pro forma basis, it's up 4% and we will talk about that a little bit more later.

The quarter's operating income is actually a loss of 310, that's based on the guidance that we received and discussions we had with the SEC.

We had talked earlier about $1.6 billion pre-tax or $1.05 billion after-tax of reserve adjustments and another $26 million after-tax of restructure charges, it was determined that the appropriate accounting for the quarter would be to run those through the P&L.

So the 310 was driven by that as the dialog box in the top right of the page indicates.

When you look at the first six months of the year and of course the first six months of the year has also been impacted by those reserve adjustments.

We are profitable with operating income of $304 million.

And then looking at the bottom of the page, the operating ROE, we recorded a 6.3% negative ROE for the quarter and the impact on the ROE of the reserve adjustment and the restructuring cost was 21.3 points for the first -- for the second quarter.

If you look it on a six months basis, the ROE was in positive territory 3.9 and, of course, that was reduced also by that same series of charges and impact to that was 13.6 points .

Page 4 is just a quick reminder of the accounting that we follow under purchase accounting.

I went through this in the first quarter, I am not going to spend a good deal of time in this period doing it, but we are applying purchase accounting.

It is the Travelers results for all periods because adding St. Paul only for the second quarter of ‘04 and subsequent and when it comes to the business segments, we have redefined the segments to be four in total -- Commercial, Specialty, Personal, and Asset Management and the supplement has been adjusted for that change.

Page 5 shows the impact of purchase accounting on several of the items, first the balance sheet and then the income statement impact of that.

We previously provided some information to you what these likely adjustments would be as well as the magnitude and, in fact, they are coming out very close to what those estimates were.

As it relates to why this is here, this is not something that you see in the financial statement.

But somebody who are looking at historical St. Paul and adding that to historical Travelers, you will have to reduce or adjust the historical St. Paul numbers for things of this magnitude.

Page 6 gets in to an analysis of the operating income.

It shows a very simple picture here.

The underwriting gain or loss followed by net investment income, asset management, which is really the result of Nuveen as they relate to us; and then other, including interest expense and minority interest.

The underwriting gain of course has been impacted by the reserve adjustments and the restructuring costs, the magnitudes are laid out here.

Net investment income from period to period went from 345 up to 490 and primarily the difference there is the inclusion of about a $136 million after PGAAP of the St. Paul net investment income.

When we look at the other including interest expense and minority interest, the major driver there is the inclusion of interest expense on St. Paul debt which comes into the income statement in the second quarter this year, it wasn’t there in this view of last year because it was only Travelers last year and then there were some merger related costs as well that we are driving that.

And you can see the cats in the quarter at the very bottom, a lot lighter this quarter than they were a year ago.

Page 7 is a pictorial representation of what the combined ratios look like.

The Travelers reported a combined ratio of 94.8% last year and then comparing that to the 122.7, we thought it was important to spike out the impact on the combined ratio of the reserve adjustments and the restructuring charges and that impact was about 31.5.

So you can see that 91.2 would be what the combined ratio would have looked like absent those charges.

We do the same thing on page 8, by segment and we have to get a little creative here because of the positive impact on personal lines as to how to show the bar graphs, but essentially the same story.

When you back out, take a look at the combined ratio ex the reserve adjustments and the restructuring charges, you are running in 88.5 in Commercial, 94.3 in Specialty and about 92.8 in Personal.

Net investment income on page 9 shows the 490 that I referenced before and again that includes the $136 million for St. Paul after PGAAP reduction of about $57 million.

Absent PGAAP, St. Paul’s number would have been $57 million higher than the 136.

And we show the components of NII as we have done before.

The fixed income portfolio has a major change in it's run rate, 432 for the quarter, you can see it was in the low 3s in prior years when St. Paul wasn’t in the portfolio.

And the alternatives produced about $58 million on an after tax basis in this quarter.

You can see it's down from the first quarter, but the first quarter, as the slide indicates, had a very large one-time gain from an IPO related to a private equity partnership that we have.

Looking at the yields in the first quarter, the reported yield was 4.9 on an after tax basis, adjusting for that gain that I just mentioned in the first quarter, it would be about 4.0 without that gain.

And looking at the second quarter, the after tax yield of the portfolio is 3.3 and that 3.3 has been impacted by the mark-to-market of the St. Paul portfolio on April 1; ex that market would have been 3.7.

With that what I would like to do is turn it back to Jay to discuss net written premium.

Yeah.

I will do the next couple of pages quickly.

Obviously, and as reported, net written premiums up 61%, driven entirely by the inclusion of St. Paul over the current quarter in this year, and obviously excluding from last.

Page 11 restates that on a pro forma basis as if were combined in the preceding year quarter was well, an increase of 4%, 19% growth in Specialty, 3% growth in Core Commercial, and Mike’s business shows a 1% decline, there are stories behind each of these that each of Doug and Mike will get into.

But we are pleased with what’s happening in our revenue profile.

What’s happening is what we would like to have happened and we feel good about where we are.

So, with that, Doug, I think, you are [inaudible]

Thanks Jay.

Obviously, in the quarter there was a lot happening from an operational standpoint.

And much of the early days of the quarter I would remind you all that in many respects we are competing against each other because much of the April business is quoted on in March, and in fact, prior to April 1, we were really two different companies.

So, with all that as a setup, our focus was on retaining our best business, top people, and I think, we have accomplished that during the quarter.

Retentions were very strong across all three core segments.

In the national account arena, consistently we have run high 80s, low 90s and we were exactly there in the quarter.

And across both middle market and in the select small commercial world, we were around 80 and I think those are very strong numbers, both given our historical performance and also given dynamics in marketplace.

Rates remain positive, but are clearly moderating from prior periods.

Property is on of the lines that’s leading that moderation curve.

And as we have talked and you have seen with some of our numbers in the press release, terrific rate adequacy, our combined ratios are in excellent shape, and I think we will be in very responsive on a line by line geographic basis in terms of need and loss trend and making sure we are balancing that on an account by account basis.

In the quarter, we wrote nearly a $0.5 billion new business in the sector in spite of all that was going on.

I think that’s a terrific story.

Across all these segments, in light of training, licensing, meeting with agents, being out in front of the producer profile, I think we accomplished a lot and all of these sectors really had a very strong start to what I think will be a terrific franchise opportunity.

So, when I set back from the page, I think we are very satisfied with the results, we look forward to the operational momentum.

I really do feel like our people are getting their feet beneath them and that momentum to me continues to build and I hope this is just the beginning of the story.

Mike let me shift it over to you.

Thank you, Doug.

On page 13, we have a pro forma view of the net written premiums for Specialty on the top the box, obviously, a quarter-by-quarter view over the last six quarters.

You will note on our window indicated on the second quarter, a $75 million impact reduction in the premium due to the reinsurance reinstatement that we talked about previously.

Overall what I would say is you go down to our segments of Domestic Specialty and International Specialty, as Doug was indicating in his segment, I would tell you that overall as a backdrop I am extremely pleased with the operations.

As indicated on the Domestic Specialty, if you were to take the Domestic Specialty, excluding the Surety and Construction operations where we have talked before and are still underway in our repositioning of those businesses, the premium change for the second quarter over the second quarter '03 was a very solid 6%.

And, in fact, in our core operations where we have had a little impact in strategic shifts from the merger, those operations that formally were Specialty operations that we have talked about such as technology public sector, financial and professional services, were at a very strong 14% growth, where we have had consistent strategy and profitability over the last number of years, indicating a very strong support and acceptance in the marketplace.

On an overall basis, our renewal retention levels across Specialty are very much in line with recent historical levels, in the mid 70s.

Our renewal price increases on a year-to-date basis still are in the double digits, which is very solid and in the second quarter the moderation had those numbers in the high single digits and still very acceptable.

The combination of these companies has created new relationship opportunities for cross-selling the Specialty products that we are extremely excited about and just now in the early stages of beginning to see both the potential and the opportunities and the excitement as our businesses work together with the agents to work on opportunities that I think are going to be exciting as we go forward in the remainder of ’04 and ’05.

On the International Specialty segment, the adjustment excluding the foreign exchange and a renewal date change in property that was in ’03 has a run rate in international at 11%.

Our international operations are both profitable and performing at a very solid growth rate in the double-digit level and our expectations for positive trends continuing there as we look forward in to the remainder of ’04.

So in aggregate I would say that the businesses in the Specialty operations are extremely well positioned.

As Doug had mentioned, we like the activities that are going on with our key agents and internally on a leverage and opportunity basis with all the different product offering that we have across the company and we feel very good about the positioning, Doug.

On 14, we are trying to [back the] first lines and here really the numbers do speak for themselves and they are terrific.

This is obviously one of the sectors inside the Company that was not affected by the St. Paul combination.

An outstanding quarter with premium growth of $247 million, the Royal renewal rights acquisition continues to proceed well.

Conversion rate over the Travelers paper is in fact higher than our original expectations.

Retentions remains strong across both lines Auto and Home and renewal pricing continue in the mid to high single digits.

Organic growth aside from Royal continues to be strong and on the quarter at 19% actually very similar to the first quarter, I think we are off to an excellent first half of the year, very solid numbers.

If you peel that back a little bit on page 15 and we’ve shared these organic and line trends before; obviously, on the left side of the page with Automobile, if you think about where those combined had been in the last couple of years in the improvement that we show you here, our growth rates obviously reflect our increased appetite as those combined ratios get better.

And we had a terrific quarter, the 13th consecutive quarter of PIF growth on the Auto side, the 8th consecutive growth quarter on Homeowners. 11% PIF growth in the quarter for Auto and our year-to-date combined continues to get better.

On the Home, 12% in the quarter;

I just think an outstanding both organic and overall growth quarter for personal [inaudible] continued to hit on all [sides] and we are very proud of what they are continuing to achieve.

On page 16th you have a profile of the investment portfolio.

We have not made any major changes in the portfolio and other than moving to take advantage of more tax exempts, we don’t expect to see the portfolio change from the profile that you see here.

It's roughly 91% fixed comprising fixed maturities of 83, short-terms of 7 and mortgage loans of 1, and the rest -- the alternative investments you can see include the private equities or funds etc.

The duration is a, you know, the remaining in the low 4s, at 4.2, it’s a very high quality portfolio at AA and the below investment grade percentage remains quite favorable at 4%.

Turning to the debt and capital on page 17, we ended the quarter where we expected to be.

We didn’t have any financing activities in the quarter.

We had a total debt to capital ratio of 24.2%.

And looking at book value for common share, we always do this with and without FAS 115 impact.

On an ex FAS 115 basis, we stood at 29.3.

We do have an impact on book value relating to goodwill and intangibles, so when you look at it on a tangible book value basis, we recorded a tangible book value ex FAS 115 of 19.66.

One of the thing that’s very important to note in analyzing that is that, you know, you really have to factor in the market cap of -- the market value of Nuveen, because a good deal of the goodwill and the intangibles relate to Nuveen, and of course, Nuveen is publicly traded and has a valuation established in the marketplace.

So making that adjustment, the "tangible book value" is really about 22.84.

With that what I would like to do is turn it back to Jay.

Thanks Jay.

Just three quick comments before we turn to questions.

First, if you are sort of adding in the background, but you should be hearing this, this is a company that even in the early quarter, actually did $1 billion of new business in this quarter.

That’s what we are talking about; we are talking about new business even at current rates running at $4 billion a year, which I just think is quite remarkable.

Two, I want to take the opportunity to thank 30,000 employees who have been working so hard and so diligently on this.

These are challenging times, the work is hard, the work is late, people are killing themselves to make this a success.

And I just want to let all of them know, many of whom who listen because most of them are shareholders that we understand, we know, we appreciate everything you are doing and thank you.

And lastly, if anyone is interested, and I'll let Bob speaks for himself, but if in fact we knew a year ago what we know now, would we still put these two companies together, the answer is absolutely, and we would do so in fact with more enthusiasm perhaps than we felt then.

This is a terrific opportunity, we feel wonderful about it, and we know that we are going to be able to build a real success.

Bob, I don’t if you share that.

I would definitely, Jay.

I mean, it's just no question, I think it's we are front of the normal power curve on this, and I think market position and strength and reputation and franchise is going to serve our shareholders extremely well in the future.

Happy to turn it over to questions.

I want to correct one that was asked to me at the last session.

Someone asked the question in all of these reserve charges were there any run-off losses that were in those numbers and I answered no and I was incorrect in that answer, there is $30 million of miscellaneous international run-off losses that are included in the other category for St. Paul.

That's the only question that was asked that our answer was incorrect on, but that's all there is in that number.

The other question that was asked that we promised to get back on was what was the duration of the cash that came back to us from the commutation of the reinsurance agreement and the answer to that is that it has a duration of approximately 3 years, but it does actually have a fairly long tail on it, but that's -- those are the two answers that we promised that we would get back.

So with that, operator, happy to open it up to questions and take what everybody would like to ask.

Thank you.

We will now begin the question-and-answer session.

If you have a question, you will need to push "*" "1" on your touch-tone phone.

You will hear an announced you have been placed in queue.

If your question has been answered and you wish to be removed from the queue, pleas press the "#" sign.

Your questions will be queued in the order that they are received.

If you are using a speakerphone, please pick up the handset before pressing the numbers.

Once again, if there are any questions please press "*" "1" on your touchtone phone.

Our first question comes from Bijan Moazami from FBR.

Please go ahead.

Good morning everyone.

I was wondering if there was any change in your commission structures.

This is Doug and the answer is no.

We are still providing product under both platforms and the commission structures that were in place prior to 3/31 are still in place and will remain so for the rest of 2004.

Are you paying any special bonuses to your agents?

We had a top side bonus to our profit sharing plan based on certain measures that need to be hit, but if indeed those measures are hit, we have a top side kicker.

Our next question comes from Ron Frank from Smith Barney.

Please go ahead.

Good morning.

Doug, I was wondering if we could drill down on the growth in the core commercial small and middle market.

You said there were modest price increases which means absent those there was basically no underlying growth in the business.

Your comments on various things, you know, considering product and licensing, getting out in the field, we were competing with each other early on etc. seem to imply -- it seems to add up to that we should assume there was some merger disruption at work in the early days and that absent pricing this should be some kind of low water market.

Is that a fair interpretation or it's not that you have filmed in?

Ron, let me make one or two comments and I will have Doug answer because there are some interesting anomalies in the way that we do business. 40-50% of the business that's reflected in the current quarter as written is actually underwritten and quoted in the first quarter.

We work ahead in our business.

You are not doing business on a current basis, but you are dealing with business that's renewing 30, 60, and 90 days ahead and when we analyzed it, between 40 and 50% of the book was actually done before the companies were merged.

So, in fact, we were competing against one another.

We actually were taking business from one another that on a consolidated basis, obviously, turns out to be not growth.

So there are some interesting anomalies in the way the operations come together that’s having an impact here.

But I’ll let Doug talk about more of the specifics.

On the mechanics, the numbers that you described, I don’t think are out of line at all.

I think that you have it fairly accurate.

You add up the new business pieces together with the pretensions and you get, you know, essentially on organic flat, up a little bit quarter adjusted with pricing, obviously.

I'd remind you that in light of all that we were working our way through and people in April didn’t understand both product lines, we had lots of things going on, I still think that was a solid quarter, but mechanically I can't argue with the numbers you have put together.

But I would take exception to the word "disruption" because I actually don’t perceive that there was any disruption.

What we did were the things that had to be done to make the franchise a success.

We had to get people trained, we had to get agents appointed, this was very much part of the strategic and operating plan to have the transaction be seamless.

So, I wouldn’t characterize it as disruption at all, it is exactly going - it’s going exactly according to plan.

Jay, sorry for that being the wrong word.

I was just trying to get at the -- what I think is the right impression from what you are saying that the various merger processes, the lags involved in renewals etc. sort of depressed the organic growth to some degree, whatever that is, and it sounds like that’s what you are saying?

Let me say it my way.

May be I should ask it another way.

Is flat what we should look at going forward or else being equal?

I think that the answer to that, Ron, is going to be dependant in some large measure about what happens to marketplace environment generally.

We feel very good about our ability to harvest substantial amounts of new business and if in fact the rate environment maintains some vitality to it, the answer to your question is no.

I wouldn’t expect it to be flat.

If in fact rate ends up giving way, we will have a different kind of answer to that question.

But I would not anticipate as you say all other things being the same that you would look at the core commercial lines' premium volume and anticipate flat for the remainder of this year.

No.

That would be an incorrect assumption.

And just hitting this one last way, if I may, the 80% retention ratio that you mentioned on small and mid commercial, is there anyway that even approximately you can give me a pro forma number for what that might have been 6 or 12 months ago, for the combined company?

Well, we can give you the actual numbers for the individual companies.

I don’t know -- I've got -- average handy to do that.

That’s the reason I’m using ranges, Ron, is that as we conform some of the accounting pieces that we have talked to you about, we are also conforming some of the practice beneath some of these businesses relative to how we compute pricing and retention etc., which is why I can't use first quarter out of the gate exact science here.

Alright.

But essentially they are not far from where they would have been a year ago on the retention side.

Okay.

Thanks a lot.

Our next question comes from Brian Meridith from Banc of America Securities.

Please go ahead.

Yeah.

Two quick questions.

The first one, could you give me specifically what was the impact of the Royal premium on the quarter in the commercial and personal, if that's possible?

I can give you -- I can give you the premium change impact, what our -- I don’t have it on a premium basis.

In the first quarter, I think, I shared with you roughly the impact from Royal.

And I think I have said 8 points of the 19 roughly was coming from Royal.

I will go back and double, but that that percentage continues to be about the same.

So, on a premium basis, I think the Travelers core organic is still slightly double digit with the differential being the Royal piece.

That was core, slightly doubled.

Okay, great.

The next question, Jay, can you talk a little bit about what's going on as far as retention of people right now at St. Paul Travelers, you know, have there been any issues either in the organization as far as trying to retain people given this merger process?

No, there hasn't been any issue there at all.

I was asked on the last call about any senior management changes, Tim Yessman who co-Headed Claims decided that he wanted to become more involved in philanthropic activities and he has left the company and Brian MacLean who had co-Chaired Claim with him has taken over the position.

At the -- certainly at the senior level, that's the only position I can think of.

Even at the regional executive level, one left, but the 13 who were appointed into that position are all with us and engaged and fully committed.

All of the business unit Heads are still very much part of the place now, I think it's actually gone very, very well.

Okay and last question is with respect to the system conversion, you said it was going quite well in your press release, are you still slated for 1-1 conversion?

That's a big question because there is, you know, 15 conversions underneath that, but as it relates to, for example, the investment systems conversion, yes, January 1 is our date.

As it relates to select and middle market, I'll look to Doug.

Yeah, middle market is still on target for 1-1.

In fact there will be a few states we would allow towards the end of the fourth quarter of '04 and then selects will follow shortly probably about the end of the first quarter of '05.

And you should understand that doesn’t mean completed, that actually means begun in large scale and it will take 12 months because you do it on as renewed basis, it will take a full 12 months to finish the conversion and then ultimately shut those systems down.

Got you, terrific, thank you.

Our next question comes from Alain Karaoglan from Deutsche Bank.

Please go ahead.

Good morning.

I have a few questions, could you give us a little bit more details on the rate level that you are seeing for the major segments and what are the loss cost trends for some of the segments?

Yeah, that’s actually a good question.

I would like not to speak about the specifics of our rate environment because as I have come to understand that you’re really talking about our competitive profile and that’s simply not something that it makes sense for us to broadcast competitors who would listen in.

But we are talking about sort of single digits in the core commercial business and high-single digits, low double-digits in the specialty businesses somewhat generally.

I would make an observation and I have listened to several other analyst calls as well.

When you say loss trend, understand that what really we are doing is making a projection of what the associated losses to these premiums will be in years out.

And so these are very sophisticated and educated, but they are nonetheless estimates of what will happen in the future.

Our own assumption is one of a fairly -- it’s a fairly -- I can't say whether it's conservative or aggressive, but our presumption is that loss trend will in fact accelerate against these premiums and as a consequence at these kind of rate levels, we find it hard to understand how people can say, of course [they are booked], that their rate gains exceed loss trend.

We no longer see that, we actually in the context of the rate gains that are being delivered today as well as the assumption of lost trend that we are applying against it, we are in a position we think of squeezed margins.

Now people can obviously become exceptionally aggressive in terms of making those estimates of loss trend.

Ultimately the losses are what they are and you pay now or you pay later, but you pay.

And so we have taken I think a fairly appropriate view given some of the dynamics that we actually see.

Now, having said, that if in fact we are heading into a market with compressed -- with compressing margins, there is no better position I would want to be in the [norm than I would here].

Again, this reminds me a lot of ’96, we were entering into what turned out be an exceptionally soft marketplace and the ability to generate the efficiencies from the combination of the business and the ability to harvest the revenue gains that presented to itself gave what was then the Travelers tremendous firepower to offset what was an unprecedented declined soft market in the late '90s.

And so in terms of dealing with that margin compression, I couldn’t feel much better positioned than I would here.

Jay, at the time of the merger and the proxy, both managements were giving their indication of what they saw the growth in earnings would be over the next couple of years and St. Paul’s estimate was around 12% for its earnings and [tap] around 10%.

Does this rate environment change that for you; does the profitability outlook change from what it was when the proxy was put together?

Alain, my recollection of the proxy was that those estimates were based on First Call, not estimates based on what the Company had said.

So, we do not project out and provide guidance in the future as to what the earnings would be.

But I think you have to look at the underlying dynamics of the business that we have been talking about, you know, looking at the trends and investment income, looking at what Jay and Doug and Mike have been talking about with regard to the underwriting profile as it relate to underwriting gains, and then, you know, factor in the ability of the Company to actually integrate and reap the savings that we have talked about on the expense lines.

Actually, the Jay, the original -- the base estimate was based on analysts, but the growth rate was according to the proxy given by the Company, but could you speak to maybe the investment income portion that seems to be lower from the pressure on the yields this quarter.

If I -- it's running at a little bit less than the run rate than you had by $20 million or so, even if I were to take away the PGAAP adjustments?

I think what you are seeing there is what has been going on in the portfolio for, you know, quite a while.

First of all, the cash flows that are adding to the portfolio, you know, from an operating standpoint remains strong.

And, you know, the drivers are the higher average invested assets.

On the other hand, you know, what you have in the portfolio at least on the Travelers side and I will say why -- I'll be clear on this in a minute as to why I’m just talking on Travelers.

You have investments that continue to roll off the portfolios that were put on at higher rates.

Even though rates are up now from where they were, they are lower than what the investments were, that are at that are rolling off on the Traveler side.

We don’t have that on the St. Paul side of the investment portfolio because the entire portfolio is mark-to-market on April 1, as if the entire portfolio is purchased on that date.

So, going forward, whatever your outlook would be as it relates to the interest rate environment, you know, you will have the different dynamics of what I just mentioned impacting NII going forward.

All that said, you know, we think from a net investment income standpoint, increases in interest rates are good for the portfolio's net investment income.

I think the other piece that you are seeing is in the alternatives.

When you add the two companies together and look at the run rate of what's been thrown off on the alternative, yeah, this was a reasonable quarter for alternative investment, net investment income.

I wouldn’t say it was a terribly strong quarter, but as you know -- I mean, that's going to be transactional.

So that will develop its own run rate over time.

Thank you.

Our next question comes from Jay Cohen from Merrill Lynch.

Please go ahead.

Couple of things, first, I guess a request, when announcing after the close -- for me at least [inaudible]close to 4 o' clock in the afternoon rather than 4 o' clock in the morning, makes it more difficult for us.

Actually makes it more difficult for us too.

Fair enough.

Second, the real question, first, it looks like you put in place an aggregate stop-loss cover for the 2000 accident year for the St. Paul business.

One, is that correct and then secondly, why and how much is that costing you?

I am not connecting with your comment at all.

What we did was in settling with --

I am sorry, go ahead.

Setting with the major re-insurer, you know, the commutation that we did, this was a very complicated negotiation that, you know, led to all of the cash coming in that we had indicated at the booking of the charge in the quarter, but as part of that both parties thought it beneficial to put in a stop-loss relating to -- a small stop-loss actually relative to, you know, what was in place relating to the 2000 accident year and that’s what Jay was referring to earlier; that's the duration of the cash associated with that as about 3 years.

It’s a fixed finite agreement and in fact that’s what generates the deferred gain that I mentioned in the previous call.

I mentioned that there was a deferred gain of some 60 somewhat million dollars that will be realized over time.

And because it’s a finite retrocessional agreement, the accounting falls in to that bucket.

But it is fixed and finite.

And getting to your first questions or comment, Jay, our style was not to put the press release and the supplement at 4 o’clock in the morning and we had every intention of doing that at a normal time when the market close.

If we created any difficulties for people, we apologize; we just wanted to make sure we got it right.

This is the first quarter of having all the financial systems trying to be integrated in a way that creates a supplement and the [ticking and tying] efforts and the systems efforts are just all the more difficult than we they’d be.

So again it's something that stylistically is what we’ll doing in the future.

Not a problem at all.

Thanks for the answer.

And our next question comes from Paul Newsome from AG Edwards.

Please go ahead.

Good morning.

Quickly, first, I want to -- I was interested in your comments at the beginning about the ways you shift between this merger and the one -- and Travelers.

And I was wondering if my recollection is correct and [if it has] ramifications on today, which was -- If I recall the Aetna Travelers merger -- the issues there those companies were more about the investments and about the expense structure which was way out of [whack].

My sense is that here the problems are not the investments and the expense structure, but really the underwriting -- historical underwriting and the reserves and is that correct recollection and does it make it easier or harder to rewind and to make this merger turn out like the last one?

If it’s a reserve issue, my sense is that a lot harder fix than an expense issue.

Well, first your recollection of 96 is partially flaw.

There was no issue with respect to investments at either Travelers Property Casualty or Aetna in 96.

There had been some issues with respect to Travelers Life back in the early '90s, but that was very much a different entity.

Both companies I think present -- both situations present the same type of expense opportunity at least initially and I mean, frankly to be achieving a 10% expense reduction here at least in these early days is not inconsistent with the thresholds and targets that we established back in '96.

What really created the '96 success because it was not all about expense as quite contrary, what Aetna brought a small commercial platform that was added incredibly neatly to Travelers' middle market and national accounts expertise.

Travelers had been a absolute world-class middle market national accounts business, Aetna had invested substantially into the small commercial business and the hand and glove fit of those two franchise proved its value overtime and that’s what really made that a success.

And what I see here is the opportunity to take the specialty and casualty orientation at the St. Paul and merge that with the basic commercial stream, national property business is small mid-market commercial and expand that market franchise significantly.

Back in '96 we became a much more important player to the agents that we had been before and we earned the business.

We did it because our execution was superior and we made it more easier and more profitable for them to do business.

That, Paul, is exactly the same game plan here.

Long term, this is about harvesting the revenue opportunities between these two organizations.

Of course, there will be expense opportunities and that will allow us to price the product more tightly than anybody else, but the success of this is ultimately proven to be proven by its revenue orientation.

Great.

Then an unrelated question, back to the commutation of the reinsurance contract, it sounds like that was a commutation of the 2000 aggregate -- corporate aggregate stop-loss transaction, and if that was -- if this is the case, would you consider commuting some of the other aggregate stop-loss transaction that happened before the 2000?

Well, first, I’m really -- I’m not going to comment about which specific contracts or treaties that we commuted, we have confidentiality agreements with our re-insurers and that is what it is.

I think that a careful [reign of our yellow blank], can give our readers some insight into perhaps what we did and I will leave that to your good analytical work, which I know you are capable of doing.

And then lastly, could you give us a little update what’s going on with Gulf and what strategically you are thinking about doing with that company?

Those discussions have been made.

Mike, do you want to take that one on please.

Sure.

On Golf, there were a core number of businesses inside the Gulf franchise that were well positioned in the market with excellent people and reputations that are being -- have become part of the specialty insurance.

Those include the financial institutions practice, and in fact, [George McCarty] who was heading that at Gulf, is now heading that in the new combined company, doing a terrific job.

The D&O business, we have merged that, and are in the process of trying to work through and retain customers and relationships and we are also working through a number of the different program opportunities.

So overall, we are pleased with the transition in the Gulf business that we really thought was core to their operation and where the earnings were from inside of it, outside of the other issues that they faced and we think that that will be a positive contributor going forward.

Mike, thanks.

What we are going to do is [inaudible] is another company that has its call starting at 10.

So we are going to conclude our call now, and if anyone has any questions that they didn’t get answer, they didn’t have an opportunity to raise, please call Maria and we will do that best we can to answer your questions.

Thanks for you attention this morning and we will see you all soon.

Thank you ladies and gentlemen.

This does conclude today's teleconference.

Thank you for participating, you may now disconnect.