旅行家集團 (TRV) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third-quarter earnings review for St. Paul Travelers.

We ask that you hold all questions until the completion of the formal remarks, at which time you'll 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.

Ms. Olivo, you may begin.

Thank you.

Good morning, everyone, and welcome to our discussion of our third-quarter, 2004 earnings.

Hopefully, all of you have seen our press release and financial supplement, which we released last night -- not too late this time -- and copy of our webcast presentation issued earlier this morning.

All of these materials can be found on our Web site at www.St.PaulTravelers.com under the Investor section.

Today with us we have Jay Fishman, our Chief Executive Officer, Jay Benet, our Chief Financial Officer, Doug Elliot, head of our general Commercial and Personal operations, and Mike Miller, head of our Specialty operations.

We also have other members of senior management that can be available to answer questions.

They will discuss the financial results of our business for the quarter and will be referring to the webcast presentation as they go through their comments.

We will take questions after the remarks.

Before I turn it over to Jay, who will start the discussion, I would like to mention the following -- our presentation today may include certain forward-looking information as defined in the Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical facts may be forward-looking statements.

Specifically, we may make forward-looking statements about the Company's results of operations, financial condition and liquidity, the sufficiency of the Company's (indiscernible) and other reserves, the post-merger integration and other topics.

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

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

These factors are described in our earnings press release and our most recent 10-Q filed with the Securities and Exchange Commission.

We do not undertake any obligation to update forward-looking statements.

Also -- (technical difficulty) -- to questions, we made mention St. Paul Travelers' operating income, which we use as a measure of profits and other measures which may be non-GAAP financial measures.

Reconciliations are included in our earnings press release and financial supplement and other materials that are available in the Investor section on our Web site, St.PaulTravelers.com.

Now, I'm going to turn it over to Jay Fishman.

Good morning, everyone.

Thanks for taking the time to join us this morning.

I'd like to spend a few minutes going over some of the highlights of the third quarter and the relevant performance during that quarter.

I'm going to take a couple of minutes to address the Attorney General review and investigation and give you an update as to where we stand on that, try and give you a sense of some of the dynamics that are impacting our business.

Then I'm going to ask Doug and Mike and other members of the senior management team to fill in and give you a robust understanding of what's going on within our business.

First, very strong underlying operating earnings for the quarter -- $774 million before the catastrophe losses of $402 million.

We are pleased with the emergence of the earnings strength and the robust earnings pattern that's developing here -- strong in commercial, strong in personal.

In fact, the earnings potential in this organization now is really beginning to emerge.

So, good postings up in that third quarter.

Particularly strong growth in both topline and was well as bottom line in our personal lines business -- net written growth of 16 percent -- I'm reading page 2 now off the webcast -- premium growth of 16 percent in our Personal lines business over the third quarter of '03, a 48 percent growth in operating income CATs over the third quarter of '03.

I think, importantly, the rate gains that we continue to experience and the loss trends that are being evidenced in Personal lines continue to support the conclusion of widening margins.

We continue to earn at rates that exceed underlying loss trend.

As it relates to trends and dynamics for the commercial lines businesses, both general as well as specialty, I will make a couple of observations.

First, we did observe, in the third quarter, continued weakening, particularly in the new business marketplace.

We made that observation in a webcast at the KPMG seminar on the 27th of September and indicated that we thought in fact the premium environment for the rest of this year was beginning to go through some changes.

What we saw -- and it has been interesting to note the commentary of other competitors over the last several days -- was a particular weakening for business that was in the new business flow.

That pricing for business that was in the market had become quite aggressive, and even if one is writing at a 90-combined, obviously a 10 point decrease in rate, all other things being the same, brings that combined up to 100, and 100 combined at today's interest rate levels really doesn't produce the kinds of returns that are appropriate for the risk that's being taken on.

So it's an interesting point in the marketplace, an interesting inflection point, and it's not to say that there aren't new business opportunities that are attractive -- there are and we see (indiscernible) and Doug and Mike will take you through it -- but there are new business opportunities that don't make sense.

Other people may in fact see them sensibly; we don't.

Both companies' heritage here are of disciplined underwriting, disciplined pricing approach in transitional markets.

I know that the actions that we are taking the sense and while I wish the market were different than it was, we can only operate in the market that's presented.

We don't think that there's anything unique in the marketplace conditions that present themselves to us than anyone else.

In fact, those of you who have any interest, I would direct you to the just recently announced consul of independent agents and brokers survey of marketplace conditions that came out earlier this week.

I think you'll see that confirms broadly that kinds of conclusions that we have been reaching about business that enters into the new business marketplace.

Having said that, there are a couple of other things that are worth noting in terms of revenue comparisons and what's happening at the top line.

I'm going to ask you to turn to page 6 of the web -- (technical difficulty) -- and I'm going to take you through a couple of adjustments.

Both companies in the third quarter of last year experienced some robust gains through renewal rights transactions, whether through Kemper, or Royal, or Atlantic Mutual.

I think one of the ways to look at those transactions is a one-time organic growth that doesn't have a new business flow behind it.

Last year's add becomes current-year renewal, and that's defined -- and we will take you through those statistics, but there really is no new business flow behind that because you are essentially buying existing blocks of business.

If you make the adjustment on page 6, the 12 percent decline that was showing in Commercial Core is actually down 7 percent, adjusting for (indiscernible) 12 percent decline is 7 percent decline.

On a total net written premium basis, if you adjust for the renewal right transactions and eliminate the impact of the second line, which is our run-off lines of business, it's actually down 1 overall, so the down 5 becomes down 1.

So one of the ways to think about our quarter comparison in terms of revenue gains is that it's a challenging quarter in a sense driven by the renewal rights transactions that were added last year.

Lastly, in the revenue environment, it has become clear to us that there is an impact on our new business flow that we are experiencing as a result of the merger.

We've done a substantial amount of analysis behind this to try and understand what's happening, and we do believe that we understand it clearly.

First, there is no systemic re-underwriting of our business going on; we're not creating circumstances for agents that cause them difficulty with their accounts.

No amount of anecdotal evidence about accounts that are coastal-exposed or accounts in any class of business mean anything.

Both companies here have been disciplined underwriters over along period of time.

The tools and the attributes that are available here to analyze profitability are used aggressively.

The fact is that an 80 percent retention rate are numbers that have been historically very attractive and as Doug and Mike will take you through it, we continue to experience retentions at or equal to historical levels and at rates that remain favorable.

While I think competitors would like to think that our book is under competitive attack in some way, the numbers certainly do not support that in any substantive way and we feel good about the nature of the relationships with our agents and their brokers and the business that we're holding onto and the price that it's being held onto at.

We will demonstrate that to you as we (indiscernible).

What has happened is that there has been something of a diminution of the flow of new business that is coming to us, as our agents continue to understand our underwriting profile or new business appetite.

There have been some changes; they are necessitated by policy.

It is impossible, as an underwriting company, to have two separate underwriting policies with respect to terms and conditions on a given risk.

We can only make one kind of soap and ultimately we can't sell one version in one channel and another version in another.

It basically has to be the same or we will always be adversely selected against.

We've been communicating with the agents as aggressively as we can.

We have been explaining to them what our profile is and why certain decisions have been made.

The communications have been made openly.

The fact is that gross conforming of terms and conditions are meeting with an aggressive new business-pricing environment and as a consequence, the simple flow of what we perceive to be attractive new business opportunities to us is less than it was from the two companies combined last year.

We believe that condition to be temporary; we are focused on working hard.

The answer to it is in spending more time with the agents and more time with our customers and more time with our intermediaries, causing them to have confidence in our underwriting philosophy, to understand why we've taken the actions that we've taken and to build back confidence that they can rely on us as a consistent marketplace over a long period of time.

But notwithstanding all of the anecdotal and reviews and kind of stories that we hear ourselves, we do believe we can demonstrate that we're not systemically re-underwriting our book of business, that in fact our new business numbers are what's weaker than what we would like them to be, and we are focused and urgent on making it better.

Having said that, we are an underwriting-disciplined company and we're not going to chase new business opportunities at rates that (indiscernible) not provide appropriate profitability.

That's not appropriate use of shareholders' capital.

We commit the capital to risks where the returns are appropriate and you seek aggressive growth when you can.

When you can't and the market doesn't allow, you run your business with a very bottom-line focus and you stay with that mindset and know we're doing the right things.

That is how we're going to continue to run our business.

So that is, I think, largely the story and again Mike and Doug will take you through more of that as we go through our individual businesses.

I want to make -- (technical difficulty) -- just in terms of sort of the workload that goes on here.

First, I just want to thank and congratulate everyone who has been working so hard down in Florida, getting all of these various hurricanes dealt with.

We're dealing with 40,000 claims.

We've got 240 of our own adjusters and 320 independent folks down there working 24/7 and getting claims settled in a very difficult environment.

So far, we've got 61 percent of the claims have actually been settled.

We've made a contribution of $50,000 to the Red Cross for relief efforts down there.

We feel badly for what's happened to folks and we're trying our best to be responsive and to deal with the issue as humanely as we possibly can.

Secondly, I want to thank all of the people in the technology group.

Just this past weekend, we completed the lift-and-load operation from our datacenter and consolidated out of two into one.

It went flawlessly, and again, putting two companies like this together has a fair amount of workload with it.

The people go ahead and they do their business.

Bill Bloom and Dave Findley and everyone else, congratulations on a job fabulously well done.

Thank you.

Let me take just a couple of minutes now on the widely-reported investigation of the insurance industry by the Attorney General.

As we reported in a press release, we have received subpoenas from the New York Attorney General's office and yesterday, we received a subpoena from the Connecticut Attorney General's office.

The subpoenas that we have received are broad, but they generally seek information relating to the inappropriate practices involving insurance brokers that we've all been reading about.

Given our size and position in the industry, we don't think it's surprising that we've been included among the companies asked to provide information.

We take the matter seriously and are cooperating to the fullest extent possible.

As any responsible company would under these circumstances, we're looking closely at our own practices.

We're working with outside counsel and they are reporting to our Board.

We are committed to honest and fair dealing in our conduct of business and if we find instances where our people are not applying that standard with the appropriate rigor, we will deal with it swiftly.

Some of our distribution is through brokers, and as do virtually all underwriters in our business, we have contingent compensation arrangements.

It's not our intention this morning to detail these arrangements in any substantive way but the announcements by the large brokers that they are ending certain compensation arrangements, a significant distribution channel is likely changing in a significant way and we are prepared to change with it.

We do understand that whatever the environments presented to us, that underwriting companies will thrive and we pride ourselves on our underwriting skill.

We're paying close attention to this.

It's unfolding in real-time for everybody, and I can't predict and won't predict what will happen next.

So with that, I'm going to turn it over to Jay Benet and we can begin to dive into the quarter.

If we can turn to Page 3 of the webcast, the there's a summary of the financial performance for the quarter.

The primary change from the third quarter '03 to the third quarter '04, as you recall, is the inclusion of St. Paul in the current quarter and the exclusion of St. Paul in the prior-year quarter due to purchase accounting, so some of the normal comparisons that I would go through, I will not go through, since they don't have that much meaning.

The primary factor in the quarter, for the operating results, are strong underwriting earnings that Jay was talking about before, coupled with the 402 million after-tax of CAT losses, so overall, what we accomplished in the quarter was operating carpeting income of 372, or 774 exp the CATs.

When you look at this on an ROE basis, on an operating ROE basis, while we report 7.5 percent that has been reduced by 8 points due to the CATs, so in general, we're dealing with a mid-teens ex-CATs kind of ROE for the quarter.

Turn to page 4.

We do our typical analysis of operating income.

You know, (indiscernible) we break it down into four components -- the underwriting gain, what we did on an after-tax basis for net investment income, the operating results of Nuveen, which is the Asset Management section, and Other, which is primarily interest expense and some other expenses.

First, turning to the underwriting, on a pre-CAT basis, the underwriting gain for 2004's third quarter was 247 million versus 188 last year, and that's up 31 percent from the prior-year quarter.

We are earning in the favorable margins that we've been writing business at; that's a primary driver of that.

We're also starting to see the expense savings associated with the merger driving that number.

We did have some prior-year developments that impacted the current-year quarter; that was about 51 million after-tax versus a favorable 9 the prior year, which of course was Travelers only.

But overall, when you look at the reserve development, it was pretty much neutral in the quarter due to what's taken place in the current year, particularly in PL, where we had some changes in the loss picks for the year relative to favorable frequency on homeowners.

PL continued to develop favorably; we had 25 million of favorable after-tax reserve development, just focusing on the prior year.

In CL and specialty, we did have some minor increases and given the size of the reserves in these businesses, we consider them to be very minor.

In CL, there were really no significant items; it was a small grouping of items in various businesses and it was spread between Travelers and St. Paul; it wasn't concentrated in either or both legacy companies.

Overall, that was about 34 million after-tax.

In the Specialty line, here was a combination of things as well.

You know, the actual reserve increase that we had is about 23 million.

There was a slight strengthening of 12 million after-tax for uncollectible reinsurance.

Then we had a reinsurance transaction that gets accounted for in the prior-year development; that was worth about $7 million, so nothing much happening there.

Turning to NII, as part of this analysis, it increased to 514 compared to last year's 347.

I think the best way to look at this is how did we do in the second quarter of this year when we were a combined company?

In the second quarter, we did achieve 490 of after-tax net investment income, so we were up from that.

I will show you more detail on that later.

Nuveen continued to perform well.

We earned 37 after-tax for the quarter, up from 34 in the second quarter of this year.

Our share of that, which doesn't appear on page 4 because of the minority interest, which is included in the other category, our share of that was about 29 in the quarter.

Finally, Other improved, mostly because of the purchase accounting adjustment associated with interest expense.

That was worth about 12 million of that.

Then we also had various expense reductions and we did reallocate some of what would otherwise would have been corporate expenses up to business lines, and that's reflected up in the underwriting (inaudible).

Turning to page 5, obviously the combined ratios were impacted by CATs in the quarter.

Focusing first on PL, even with 9.9 percent of CATs, the Personal lines' combined ratio was 94 percent; that's due to the continued favorable non-CAT property frequency I mentioned before.

Overall, the combined ratios remain favorable for each of our businesses, and you can see the data on that page.

Page 6 is the topline story.

Jay took you through -- I'm not going to take you through any more of the details since he has already discussed it, so what I'd like to do here is turn it over to both Doug and Mike to talk about the details of the businesses.

Good morning, everybody.

Focus on page 7, inside the Commercial segments, and we will start with a comment about the top line.

Obviously, overall top line at 12 percent, as Jay noted a few moments ago, if you adjust for the renewal rate component last year, primarily Kemper, that number is 7.

Before I move to the middle market, which we call commercial and small commercial and select, just a couple of comments about national accounts.

We had a solid quarter.

Obviously, the statistics don't line up the same way, which is why we don't spell them out here, but I would describe the competition a little bit more aggressive on the top end of national.

We've talked to you in the past that clearly our core focus product niche is the 1 to 15 segment.

We continue to see very positive organic growth in that segment and we're pleased with the quarter, so I would describe it as a solid 90-day period.

Moving to the middle, and actually, I will do some of this combined because some of the same themes run through.

Our retention statistics for both of these businesses, middle and small, were very strong in this quarter.

We give you a few one-time adjustments in commercial accounts because I think they are important to get a sense of the consistency across these quarters -- a 79 run-rate basically in the third quarter in the middle and 79 also in select, so very pleased with those numbers.

We continue to see slight moderation on the pricing curve and Jay also has chatted about that, basically flat in the middle and from 7 to 5 on the small commercial side.

I would say in line with what's happening in the marketplace and again (inaudible) select out in front of what we see, relative to trend, and slightly behind that on the loss side relative to commercial accounts.

Clearly, much of our discussion has focused around new business, as an awful lot of attention driven at some of these numbers (sic).

Before I take you through a few of the pieces, let me just ask you to reflect on a few parts of the page.

If you look at the middle market new and work your way across the page in the quarters, starting with the second quarter of '03, you do see the bump-up relative to the renewal rates, the acquisition of Kemper in the middle; 302, 342 are clearly outside of prior run-rate quarters.

As you work your way forward, I think you have to keep that in mind.

Obviously, if you did the pure math in the third quarter of '04 and compare 187 to 342, you get a 45 percent shift.

Clearly, 12 points of that is coming from the Kemper so I think of it much more in terms of 33 percent.

There are a number of factors driving and it's impossible for us to spell out the individual components but clearly, competition is much more aggressive.

We are working through our own underwriting consistency matters.

We are conforming and trying to bring one product to the marketplace.

I would suggest to you that the agents want to hear less about it and want to see us compete and deliver on that.

We are working hard to make that happen.

As an example, last week, we had our leaders in the middle market from across the country in Florida for four days.

We sat down and we ripped apart the month of September; we looked at everything we knew about October; we focused on what we were going to get done and will get done in the last two months of this year and clearly set out a path that we were hoping to execute on for the next 90 days and we will be back in that same room in the month of January focused on the first quarter.

So, I feel very good about what these folks are doing.

I think that we're keeping our discipline and again, we're building this franchise for the long-term for the next two quarters.

On the small commercial side, much the same story but different factors.

Clearly, we are off and again here, 28 percent if you adjust for the Kemper bump-up in the second quarter or third quarter of last year.

There are a number of factors happening.

Clearly much more of a platform issue here as opposed to just products and underwriting.

We are merging systems and programs.

We will go through a conversion and start that in the early part of '05, but we're pleased about what's happening and I think we've got to earn our way back with these agents and share with them an expanded breadth of appetite and product.

We intend to do that over the coming quarters.

So I would describe a very solid commercial third quarter.

Mike?

Thank you, Doug.

The domestic and international specialty operations is laid out on page 8.

It concluded what I consider a very solid third quarter.

As Doug mentioned, as you look at some of the different components of this inside of the domestic specialty segment, as you look in the topline on the new business premium side in the third quarter of '03 as well as the second quarter of '03 and the fourth quarter, we had a significant impact relative to the Royal renewal rights deals in FPS and the Kemper renewal rights deals in both FPS and umbrella.

As you move into the first quarter, second quarter of '04 as well as third quarter, you see a more normalized new business level.

In the third quarter as well, excluding the impact of the continued work we're doing in construction, our new business writings we think are right on line with consistent levels that we've performed at for a number of years.

The renewal retentions, as you can see, tracking across the page for almost a couple of years are very consistent and actually, the number in the third quarter of 76 percent mask -- given some of the re-underwriting that we have going on and the repositioning of some of the construction and surety businesses -- masks what are very high levels of renewal retention in a lot of our core operations that have been consistent for some time, such as technology, public sector, ocean marine and FPS, where those retention levels are running in the mid to high 80s -- very strong performance.

On renewal price change, you can see that, since the fourth quarter of last year, we are on a fairly constant what I would call moderating level of price change.

The 6 percent in the third quarter is consistent with what we've seen over the last number of quarters, and we think a very solid rate adequacy level as the businesses are positioned for the coming market period.

Inside of our international specialty segments, you see very consistent performance on the renewal retention and again in the third quarter, as mentioned previously, that number of 75, when you exclude the nonrenewal of the Personal lines creditor facility, again would be in the low 80s, a very acceptable, strong performance.

We continue to see, in the international segment, a moderating of the price -- renewal price-change levels down to slightly positive at this point and new business premium levels very consistent with where we have performed.

In aggregate, I would say that the specialty operations are very well-positioned to succeed in the current market conditions as we look forward and we are excited about that.

Doug?

On page 9, we lay out the Personal Lines production story, and I would just characterize the overall performance as excellent in the quarter, both top line and bottom line, particularly in light of the events in Florida. 16 percent topline performance on an organic basis that equates to 10.

The Royal impact is roughly 6 points, so I would describe both sides of the top line, both organic and other, as very strong.

PIP -- and you see continued consistency across both lines -- up 11 percent in auto and 14 in home.

The retentions are rock-steady; they really do continue to line up in very steady fashion.

Again, we're pleased with the rate change gain in both these lines.

So we're pleased overall about Personal Lines.

As look the loss ratio Jay shared with you that we have adjusted some of the current-year picks, feel good about what's happening and this continues to be a very vibrant part of our operation.

Turning to page 10 and average invested assets, we can see continued growth in average invested assets.

We actually grew by 2 billion in the current quarter to 61.5 billion, and the major driver of that was 1.9 billion of cash from operations.

On page 11, we show the net investment income growth as well.

I mentioned earlier, in the second quarter -- the first quarter -- we were combined as a merged company.

We had reported 490 million after-tax in NII.

That's grown to 514 million, a 24 million increase, or 5 percent sequentially.

That's really being driven by the higher level of invested assets.

Yield remained at 3.3 percent after-tax.

There were no major changes in the portfolio, although we do continue to move more towards tax-exempt, taking advantage of the combined tax position of the Company and the duration remained at 4.2 with asset quality at AA.

Page 12 shows a further breakdown of net investment income, including the combined prior-year quarter, combined of St. Paul and Travelers, and the current quarter prior to the PGAAP (ph) adjustments, which, as you can see on the page, are substantial -- 48 million in the current quarter.

On a pre PGAAP (ph) basis, the combined portfolio yielded 3.7 percent, which compares to 3.9 percent in the prior-year quarter, reflecting the lower interest-rate environment that faces all companies.

On page 13, we depict the debt and capital structure of the Company.

Frankly, there have been no significant changes in it in this quarter.

The capital ratios remain pretty much where they were in the second quarter with debt-to-total capital at 24.3, which is a favorable level.

Book value per share increased from $29.52 in the second quarter to $30.91 in the third quarter -- 29.50 during the second, 30.91 in the third.

It was driven by the earnings of the quarter less the dividend.

We did have unrealized investment gains that also drove that.

If you back out the unrealized investment gains and look at the adjusted book value per common share, that also increased; that went from 29.30 in the second quarter to 29.63.

Lastly on this page, we also show a tangible book value of both unadjusted and adjusted for the market value of Nuveen, which brings it up to 23.21.

That also increased from 22.84 in the second quarter to 23.21 in this quarter.

With that, I will turn it back to Jay.

Thank you, Jay.

Just one or two comments before we take questions.

I think that we're doing a lot of things very well and the place is pulling together quite nicely and beginning to establish some identity and its own view.

In that regard, it's good.

We're not perfect;

I think we underestimated, I think I underestimated in particular the agent reaction to the accumulation of the transactions that were presented here.

It wasn't just St. Paul and Travelers, but it was Kemper and it was Royal and it was Atlantic Mutual.

In fact, in the several months preceding the transaction, the amount of market change that agents had to deal with was probably more dramatic than I anticipated that it would be.

Frankly, the confidence that all of us as a senior management team have had in being successful and pulling these things off so seamlessly before probably overcame our actual ability to execute it as seamlessly as we would've liked.

We've recognized it as an issue; it's getting our full and complete attentions; we are working with all of our agents and our customers to try and cause them to understand the consistent underwriting company that we can be and that we can be relied on.

Nonetheless, I don't expect conditions to change through the fourth quarter;

I don't anticipate anything as being particularly dramatic in the fourth-quarter results differently than what we're seeing now.

It's possible we could shrink again.

The environment, as I say, looking into 2005, given everything that's confronting us, is simply too unpredictable to really look out and see, with any definitiveness, any particular changes.

So I think we know what we have to do.

We have our agenda clearly identified.

We are certainly up to the task but I also want to observe that there's a lot of good things that are going on here as well and we are very much off and running.

So with that, we are open for questions.

Thank you. (OPERATOR INSTRUCTIONS).

Ron Frank with Smith Barney.

I've got a couple of things.

First of all, I just want to make sure I understand this issue of the impact of the Kemper renewal rights transactions on comparisons.

You said and Doug said that growth would've been about 7 percent, or rather contraction 7 percent, not 12, had it not been for the bump-up from Kemper.

Is that assuming none of the business renewed?

Because otherwise it would stay in the premium base, wouldn't it?

It assumes that there's no business flow behind it.

In other words, it treats it -- and actually it's the right question -- it does show up as a renewal but if you think about how we measure business flow, new business flow, as a percentage of expiring premium, the fact is that those renewal rights transactions in a subsequent year will show up as renewal but will not show up as underlying new business flow.

So the idea of being -- you didn't have another Kemper-like deal, another new business bump-up?

Correct.

Okay.

If I heard correctly, Select pricing was down -- the small-business commercial was down 5 to 7 percent.

If so, my question to Doug is, assuming we continue on this path, Doug, should we assume that, at least as far select goes, it will be less a matter of the merger-related issues as just the reduced risk appetite in the face of the pricing?

Let me recap the numbers and make sure we have them right.

On page 7, we said that pricing had moved from 7 to 5.

That's still a plus 5.

Okay, thanks.

Okay, and it reflects (indiscernible) the marketplace.

That helps.

Sorry, thank you.

Tom Cholnoky of Goldman Sachs.

Yes, two questions and I know it's kind of a difficult question related to new business in the middle markets -- but as you look at the agents I guess that you say you are not getting the new business activity fro or as much as you thought you would, is there any distinction between those agents that have both St. Paul and Travelers represented in their offices, versus those that had just one or the other?

So in other words, are agents concerned about the concentration that the new company has?

Before Doug answers -- because he has got the facts -- and I want to make -- because I do think it's important for us to try and categorize what we believe to be the impacts here.

First and foremost is the impact of the competitive new business marketplace.

What I mean by that is I think that the issue of our own flow is being significantly exacerbated by the fact that there are companies that are willing to write these levels of new business at prices that we have not.

So, we are clearly, at the moment, not identified what I would characterize as a hot market -- check with anybody; no one would accuse us of that -- but I would put first and foremost the marketplace conditions specifically and then more generally the reaction of the agents to that marketplace condition.

It's certainly more the former than the latter, but your question is a good one and we do have an insight to it.

Tom, what I would say is that, in the middle, the overlap of agents is much more a consistent pattern.

In other words, there were not a lot of either St. Paul-only or Travelers only middle-market produces on either one of the prior books, so that issue is really not at play as much in the middle.

I say that because, in Select, it is something that we are working our way through.

Clearly, there are different patterns inside the St. Paul-only and the Travelers-only, prior Select producers, and we're seeing a little bit more of what I would say reduced flow from the dual agents in the small commercial sector, and we're working our way through that.

Okay.

Then, given your losses in the hurricane, I guess two sub questions -- one is were you, A, surprised at the amount of the loss?

Secondly what does this imply about your view of reinsurance of whether you were properly reinsured, had enough protection there and what you may do in the future in Florida?

No, I think that we -- actually, it's an interesting question.

We had our Board meeting yesterday and actually spent a substantial amount of the Risk Committee meeting taking our Board through the results of the individual storms and the relative modeling and what the impact was.

This came out I think very much as we would have anticipated, and we still have a threshold of a pricing objective in Florida that produces a level of profitability that's really quite sound.

Our own property catastrophe kicks in at $760 million of exposure.

We obviously didn't even get close to that on any of these storms.

I think that's, again, one of the strengths of the Company, the financial capacity to take on appropriate priced risk and not have to lay that off to reinsurers because of inadequate capital.

No, I think what happened in the last month confirms that we're in the right place and we feel very good about it.

So you're not going to revisit your CAT programs then?

No.

Your next question comes from David Sushi (ph) of JP Morgan.

A couple of quick questions -- on the expense saves or cost initiatives with the integration and the merger, can you give us an update in terms of your targets and what the impact is on the quarter?

That's my first question.

No change from the last time we did the update.

Our original estimate over the entire horizon period -- and that was through the end of '06 -- was 350 million.

We've subsequently increased that to 450 million.

We are right on track and Jay is actually looking for a slide to answer the specific question of what we did in the quarter.

Yes, in terms of the realized after-tax savings year-to-date, we've measured those at about $40 million, which is ahead of what our trajectory in accordance with the plan was.

We thought we would be roughly at about 30 at this point in time.

So we are looking at the drivers of that.

We feel comfortable that we are meeting or exceeding the objectives we set out to do.

The more significant numbers will emerge next year as we complete the systems integration and begin to shut down duplicative and redundant systems.

Okay.

You highlighted in the past here with -- you are undergoing the asbestos review.

Where are we in that process?

When are we going to see some of your conclusions surrounding the analysis?

Provide us an update on that piece.

We had indicated that the asbestos reserve study, which is done annually, would be completed in the fourth quarter, and we're still on track to do that.

It's premature to talk about anything from the study at this point in time but we will expect it completed on time.

Just my last question, and I will (inaudible) open it up here -- just on your formal commentary, you indicated that your loss takes on the personal lines side continue to evolve.

Can you just put some backbone behind that those comments and just give some highlights on some of the loss cost parings (ph) you're seeing on your portfolio?

Frequency is better; it continues to improve.

We didn't anticipate that it would continue to improve at that level at the beginning of the year but if you look at the cumulative nine month run-rate of earnings within personal lines, that really right now is sort of where we are sustainable.

In other words, I wouldn't conclude that there is an aberrational increase in the quarter that causes the nine-month number to be an inappropriate run-rate.

We are now where we should be for the year.

Is there any geography in the U.S. that's (indiscernible) any concern or are we seeing any signals that you are seeing a reversal of that trend?

Not relative to the claim trend.

It's balanced across the country.

There clearly are pockets of competitive behavior, state-by-state, that we are on top of, aware of and working our way through.

If you would just take a step back not just in personal lines -- and this is a more broad comment because I do think toning these things is important -- the general view of loss trend here at the end of the third quarter is better than it was at the end of the first and better than it was at the end of the second virtually, I would say, across the board.

Now, that doesn't mean that we've made any changes in our actuarial loss picks or in fact have baked any of that into our underlying profitability, but I think, just as a mood piece, we feel better about what we're seeing in real loss trend data than what we thought we would be seeing by now.

We've probably started the year somewhat more pessimistic than we feel about things now.

Jay, just one final question here, just if you can just wrap our arms around some of this turmoil and just highlight, you know, your top three priorities over, you know, the next three months or so as you kind of boil it down.

Because there's obviously a lot of moving parts with the agency side, the cost saves, the integration of technology, the topline growth story, capital initiatives.

What's your focus?

There's only so much time in the day.

In fact, David, to your point, it's certainly not turmoil here.

This is the best and strongest management team in the business.

As a group, the level of strength and ability to deal with problems here is infinite.

It really is quite remarkable.

I don't worry at all about technology;

Bill Bloom is the best I've ever worked with and I have a tremendous amount of confidence in his ability to execute and Jay Benet is the best CFO I've ever been around, so I don't have to worry about hanging onto that.

I try and spend as much time as I can with Doug and with Mike and with our agents and with our employees and with our customers because that's where it matters right now.

I think we've got so many things going well in the some areas that it gives me the luxury of time to go spend it on where it's not going so well.

It's not going as well as I would like it to go with the way the agents are dealing with us in a new business flow.

I'm sure, if pricing were up 10 percent instead of down 10 percent, we would be having a very different discussion here.

It's just an interesting moment in time when our change is meeting up with an unusually soft spot in the new business marketplace.

If I were one of our competitors, I would be trying hard, as a competitive strategy, to take aim against us.

One of my concerns early on was that happening to us?

Were we going to see a meaningful deterioration in our retentions?

Were we going to see business moving away from us?

We're very pleased that that's not happening.

I think that speaks to the strength of our people in the field, their ability to work with their customers and their agents to deliver good-quality service, to be viewed as a value-added company.

What we need to do is to cause the agents to understand -- and these are really such fine points.

You know, we talk about integrating underwriting.

We can't exclude a condition in one policy and include it in another sold through two channels, so it's my responsibility to make the sensible choice, decide which one from an underwriting policy is the right one, and make it stick.

That obviously has an impact on somebody; the world, you know, is not perfect, causing them to understand why we make those changes and working through problems.

Pete Higgins has been tremendously creative at working through some of the inconsistencies and solving the agents' problems while still maintaining underwriting discipline.

So, that's where we're trying to spend it.

We've also spent a lot of time with the regional executives.

We want to make sure that their role and their view of the world and their participation in this company is accepted, viewed as important, viewed as substantive because frankly, if we are going to be successful in really broadening out the franchise and moving to higher levels of cross-selling over time, it's really going to be because of their efforts and their results.

So, what I've been trying to do is to point out I'm trying to spend as much time out in the field as I possibly can being visible, understanding the issues and trying to resolve them.

Great, thank you.

Charles Gates of Credit Suisse First Boston.

Good morning.

My first question -- could you share with us the census or the number of employees when the two companies got married, and the approximate senses at 9/30?

I'm happy to share with you what the census was when I came when we came together.

I've been resistant to providing employee counts quarter-by-quarter and month-to-month because I just don't think it's respectful of the people and where we are going.

We did say that we were going to ultimately, over time, reduced headcount by about 3,000 people.

When we put the two companies together, we were at 31,750 at the end of 2003 -- was our headcount.

Again, I expect us to, over the horizon period, to be able to reduce that by about 3,000.

My second question -- actually I have three.

My second question -- those savings numbers that you shared with us, the 350 (ph) which is now $400 million.

450.

Excuse me, 450, those are pre-tax numbers?

That's correct.

My final question -- as I recall, 1996-1997, many companies, because of the recognition of a reduced rate of inflation than they had foreseen, elected to drawdown reserves for (indiscernible) losses, did less reserving than would otherwise be the case and therefore reported higher levels of earnings.

In your comments, I believe you indicated, that as this has year continued, you've seen a lower rate of inflation I believe in claims settlement costs than you had foreseen.

Given, for example, you have $53 oil, do you think that there is any possibility that history is going to repeat itself?

Well, that's a complicated question.

I think, first of all, you make adjustments in short tail lines sooner than you make adjustments in long tail lines, so as we see changes in property and as we see changes in weather, they are more deliverable, they are more real, and so you react to them more quickly.

I think that long-term changes in terms of workers' compensation, in terms of medical cost inflation, in terms of tort reform and tort costs, are just so highly unpredictable that to rely on short-term trends to point you in different levels of profitability is gambling, frankly, and I really do characterize it that way.

I think you either win or lose.

I think you have to have a long-term mindset to what the underlying inflation is and most importantly, price to it.

You know, reserving -- all of us, us too, we all tend to focus on the reserving side of things and Lord knows it's important, because when you screw it up, it's a big deal.

But the fact is, if you're making a bad assumption about what your actual cost of goods sold are, how do you price your product?!

How do you ever produce an acceptable return?

So I think, given what's happened in our industry, which is a constant expansion of the contract, a constant broadening of interpretation of loss and loss exposure -- and if you don't include in one's pricing mindset the notion that you are going to be paying for things that you don't currently anticipate, you'll underprice and under-return habitually.

Now, the flip side of that is that that puts you to -- sometimes, that puts you out of the competitive marketplace, because companies don't universally sign up to that philosophy.

I think you've got to run the business for the long-term.

If you try and run it for this quarter and next quarter, you can find yourself in just a terrible pattern. $53 oil in the long run cannot mean lower loss trend, and I know that.

I know it can't! (LAUGHTER).

So, I am mindful of your comment, and we watch all of these things.

Thank you.

Bill Wilt of Morgan Stanley.

I am wondering if you had recent discussions with the rating agencies, and I'm thinking after the hurricane losses.

I am guessing organic capital generation in the second half of the year may not be what you had otherwise anticipated.

Does that change the dynamics for year-end discussions with them?

In terms of the rating agencies, I think you've hopefully seen the announcement that our First Floridian subsidiary was reaffirmed by AM Best in the quarter.

They recognized the strong capital position of First Floridian and of course they were one of the companies that took large losses associated with the four cats in the quarter.

No, I think, in terms of the rating agencies, we of course are in constant dialogue with them when an event happens and you know we've talked to them about what the total loss was relating to the catastrophes.

They understand what our earnings pattern is; they understand that, despite the fact that we incurred $402 million of after-tax costs, we made quite a lot of money in the quarter.

So, we just keep them up-to-date.

That's helpful, thanks.

A follow-up, if I could?

Sticking with personal lines, the rate increases in both auto and homeowners looked to be greater than what most competitors are getting.

I'm wondering, in that environment, your PIF growth has been strong.

So I am wondering what you attribute the strong PIF growth to and whether you think the level of rate increases is sustainable in the competitive backdrop.

This is Doug.

Let me try to take each of the questions on its own.

We have worked hard over the last several years to build this segmentation pricing approach, state-by-state, sale-by-sale, if you will.

I think that much of the result of that work is now starting to benefit through the top line of these businesses.

So thus, the work of actuarial and product management and having more product managers dedicated across smaller geographies to be more laser-focused in each of our core markets is paying results.

I think that will continue and we hope that will be really our framework as we go forward over the next three years.

It's hard to comment on the competition.

Clearly, as the Personal Line dynamics have improved from a profitability perspective over last year, our pricing has come down a little bit.

You can see our trends over the eight quarters, really seven quarters on page nine.

It's hard to know where that's going to go but if we look at filings on behalf of many of our competitors, we do see some downward pressure on the pricing cycle.

That's helpful.

Thank you.

Chris Winans of Lehman Brothers.

Two questions -- first is what's the status of your discussions with your agencies on contract agreements?

In other words, you had two companies; you have to merge them.

Any major changes there that the agents are seeing and how you are dealing with the response to that?

I'm going to put that into the category of my earlier comments with respect to the investigation and just defer any further comment on our compensation or arrangements with any of our distributors.

Okay.

My second question is can you just update us on the status of the large contract or surety exposure?

You know, has that company's management been taken over by another or somebody else handling the finishing of the work that they are involved with?

At what point do you expect to know the answer to the co-surety piece of the exposure?

First, the company that we were involved with has been sold to another contractor, so the work has been taken over by another organization.

The work is ongoing and going well, under control by any measure that I am aware of.

We are in negotiations with our co-surety.

Any idea how long the negotiation process would take to get to a conclusion?

I don't but I would speculate shorter rather than longer.

That doesn't mean weeks or days, but it's active.

Because of their own financial situation, it is, by definition, active.

A follow-up question from Ron Frank with Smith Barney.

Two, if I may?

One, you are putting obviously some clamps on the construction operation.

I was wondering if, just broadly speaking, there is still any strategic redirection to be done there, any wholesale exits of lines or what have you, including construction.

Second, I want to make sure I understand what your view is of this issue of being targeted by competitors.

It strikes me that it might be pretty natural that the merger -- by way of the merger -- you could have become an unwitting accomplice in this competition, just by view of the very merger encouraging competitors to come at you more aggressively in the new business market.

Is it your view that part of this competitive pressure on the new business market indeed is because you are being gone after, if you will, or does this look to you and smell to you just more like the natural course of events?

I will answer and then I'm going to ask Mike to talk about construction and surety and Doug on the underwriting piece.

First, we really do make a distinction when we think about the world between the business that we have, current accounts, and the business that's in the market available for everyone.

They are quite different, because accounts move for reasons.

They don't move just to move; they move because there's a problem; they move because the account is distressed; they move because the account owner is seeking a lower rate.

So whatever is in the marketplace really has to be viewed with a certain degree of skepticism about its ultimate profitability, given that it is in the market.

Sort of by definition, accounts that are happy and content and everybody feels good about, they just tend to sit.

So the first concerns that we had were was there going to be a competitive reaction, either by paying -- and I'm making this up, you know -- either by paying excess commissions or by attempting to twist agents or by attempting to convince agents that they had too much of their business with us.

That would have been a serious problem if in fact other companies had pursued that strategy successfully.

I don't know whether they pursued it, but it hasn't been pursued successfully because if you look at the retention of our business and the rates at which it is being retained at, we have a high degree of confidence that the way that we do business and the way that we react with our agents and our customers is sound and is lasting the test of any appropriate competitive reaction.

So that was sort of the first hurdle, and that's a very good outcome.

That's a good place to be.

So if anybody's trying, if they're trying to take advantage of what they perceive to be a competitive momentary weakness, it is not in the numbers and it's not succeeding.

Where we do believe things are happening is that, when an account ends up in the marketplace -- and if I were a competitor, I would probably be doing a similar kind of thing -- is to try and demonstrate to the agents that have that account in the flow that they are still in business; that they're not going to sit on the sidelines and let our company control, in effect.

So I think what's happened is that companies that traditionally would not have been as aggressive a new pricing market have become so (sic).

We track every sizable account between who we took it from and who we lose it to, and so as we look at our own database, it very quickly pops up who is being active from a pricing standpoint.

It's easily identifiable.

You can put three or four companies on that list; it varies a little bit by market -- but there are three or four companies in every market that have chosen to be, for whatever reason, exceptionally price-aggressive for accounts that are in the marketplace.

It's easy I think to kid yourself and say I am writing at a 90, so I will cut 10 points or I will cut 15 points and it will still be okay.

The problem is, it's not okay and we don't believe it's okay.

So we look at the accounts the same way everyone else does.

We analyze their profitability, we look at their lost trend, and we ultimately try and make a thoughtful pricing decision.

For the moment, the combination of that competitive appetite for new business, combined with a willingness to cut price to get it, just doesn't hit our sweet spot.

And so I think, in fact, what happens is is that agents know that's not a marketplace that we are going to play aggressively in, so we probably don't even see the flow at that point.

The agents know who the hot markets are and they know where to drive that business and we're just not going to be the first call at the moment that's being made.

That's just not the reputation the Company has.

I think it to incumbent upon us as a management team to test our own strategy all the time, to ask ourselves the question, are we being too conservative?

Are we being to aggressive?

Are we loosing an opportunity or do we believe that our pricing strategy is sound and solid?

Part of the process that I was asked before about what I'm doing is testing that thinking all the time.

It's not like you look up on the New York Stock Exchange and there's a bid (indiscernible).

You wrestle with value every day on every account.

So I think that's what's happening.

I think, if the marketplace were firmer, it would be less dramatic an impact.

The fact that there are companies willing to write at these kinds of levels and write aggressively -- and you all can figure it out, just look at the numbers, just as the questions and look at the numbers; you'll see who they are and you'll understand where that flow is going.

Then you make a decision.

We believe it's by choice.

We don't think this is happening -- that portion of it is happening to us.

We believe it's happening by choice and we are doing it with intention and thought.

So that's probably the best that way I can answer it.

It is a new business flow issue.

I hope it's temporary.

I think we can overcome it.

I am pleased that our existing book of business remains robust and remains tested in competition and does just fine, and that's where we are working on.

This is Mike.

On the construction question, we have absolutely no wholesale exit plans.

Actually, we've done a significant amount of work and I would say made a significant amount of progress taking what were two very different platforms and re-underwriting that had already begun, as we had talked to you about before in the last quarter or last year in the same call book.

We've really created a new underwriting profile direction of the organization that encompasses both segments of the marketplace, the different companies we're doing.

But in all of that, we've created a new underwriting products (sic); you've got training going on, new underwriting tools and direction.

Just in the last couple of months, we have begun to see that take traction.

What's important is that we are able to go out and clearly articulate and then execute what the agents really want to see on that strategy and start to have success.

The real focus there, quite honestly, is to return the book to profitability.

I believe we are on track to do that, and I think, in '05, we will see dividends from that.

We focused, Ron, on a couple of these things, just the bubbles -- I'm looking at page 7 for a moment.

The one program -- the one property program non-renewed, let me be clear -- that was a St. Paul program that I had struggled with from being there in early days and had wrestled with it and wrestled with it, and it just never passed the test of producing the kinds of profitability that made sense.

So, it's not as though the merger precipitated that program; that's the kind of work that we do here all the time.

The analytics that are available to us to understand account profitability is an asset, but it's only an asset if you actually put it to work.

So these are really things that are merger-driven; these are things that you do in the ordinary course of trying to move your book to higher levels of profitability.

Let me just add one piece over the top.

From a middle-market and larger account perspective, it clearly is a one-by-one review.

I would include construction in that discussion.

There's a bit more of class and actuarial mindset in the small commercial sector.

So as we think about select, I would describe the competition as a bit more regionally focused, regional players as opposed to the nationals we're seeing in the middle and upper end.

I would just ask you to factor that in your thought process.

I'm not quite sure that all the metrics that we use, have at our disposal, have built over time to look at classes, to drive our behavior, to think about how we do business in different parts of the country and where we price are available or being focused on on a regional-carrier basis.

That clearly is a competitor-by-competitor look.

So, it sounds like basically, overall on the new business front, there's a genuine a reduction in risk appetite with the pricing but also a need to -- I don't know how to describe it -- sort of clarify your message and get a little mindshare back with the agents.

Is that fair?

I think the latter, not the former.

Meaning, you know, we talk about this all the time;.

There isn't a class of business that St. Paul wrote that Travelers won't write.

There isn't a class of business that Travelers wrote that St. Paul wouldn't write.

There is some what I would characterize as sort of subtle terms and conditions that have to be conformed.

There's an integration of platforms at the small commercial level that has clearly caused some of our producers to struggle a little bit, but I think your former point is right, which is a clear identification of the kind of underwriting company that we are, a clear understanding of what we do and what we don't do, our orientation towards pricing aggressiveness, essentially establishing with the agents what is the St. Paul Travelers' underwriting view of the world and allowing them to trust in it enough that they don't have to worry about putting business with us.

So that's a real narrow focus.

Okay, thanks a lot.

(OPERATOR INSTRUCTIONS).

There are no further questions at this time.

Well, folks, thank you very much for your listening and your attention this morning.

We appreciate it and we look forward to speaking with you all again at the end of the fourth quarter.

Thank you.

Thank you for participating in today's conference.

You may now disconnect.