旅行家集團 (TRV) 2004 Q4 法說會逐字稿

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

We ask that you hold all questions until the completion of formal remarks, at which time we will give instruction for the question-and-answer session.

At this time, I would 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 fourth quarter and full-year 2004 earnings, as well as the results of our asbestos review.

We have a lot to cover this morning, so, we will try to go through all of the information in a time efficient manner and save ample time for questions and answers.

Hopefully, all of you have seen our financial release released yesterday evening and a copy of our webcast presentation, issued earlier this morning.

All of these materials can be found on our website at www.stpaultravelers.com under the Investor Section.

Today, with us we have: Jay Fishman, our Chief Executive Officer, Jay Benet, our Chief Financial Officer, Brian McClain, who, we announced this morning, will be heading up our Commercial Operations in addition to the Claim Operations, Mike Miller, head of Specialty, Joe Lacher who heads up our Personal Lines, and other members of senior management.

They will be referring to the webcast presentation as they go through their comments , and we will open it up for question and answer after the prepared remarks.

Before I turn it over to Jay Fishman, 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 asbestos 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 in our most recent 10-Q filed with the Securities and Exchange Commission.

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

Also , in our remarks, or responses to questions, we may mention St. Paul Travelers operating income which we use as a measure of profit, and other measures which may be non-GAAP financials measures.

Reconciliations are included in our earnings press releases, financial supplements, and other materials that are available in the investor section of our website, stpaultravelers.com.

With that, I'll turn it over to Jay Fishman.

Thank you, Maria.

Good morning everyone, and thanks for joining us this morning.

We made solid operational and financial progress in the fourth quarter, albeit with provisions for asbestos and environmental exposures totaling $673 million after tax suppressed our operating income for the period.

Not withstanding, we posted operating income of $307 million for the quarter.

The underlying profitability was therefore very strong before the impact of year-end study.

When we look at the full-year 2004 financial results, reported operating income of 983 million reflects absorption of the asbestos and environmental provisions, the second quarter reserve adjustments, and heavy hurricane catastrophe losses in the fall, nearly a billion dollars in earnings after tax, after giving effect to all of those items.

This morning, I would like to address two subjects.

The first is our improving operating platform, and the second is financial flexibility.

A number of important systems conversions have been completed, several are nearing completion, and many are well under way.

We have successfully converted our financial systems, consolidated our data centers, combined the investment systems, and consolidated the personnel and payroll systems.

As we approach the first anniversary of our closing, we will be nearing completion of systems consolidations in the middle markets, and national accounts Commercial units.

As we look to the future, we're very excited about the new product and related technology that our small Commercial unit will be rolling out next quarter.

We're making significant investments in Claim and in continuing to develop our segmentation skills in Personal lines, and this should continue to support top-line profitable growth.

All of this should make a meaningful difference in our competitive positioning.

We are also well along in the process of absorbing the impact of conforming the company's underwriting practices and policies, particularly so in the General Commercial area.

The underwriting orientation and appetite that this company has is now clear to the marketplace, and our agents remain supportive and enthusiastic.

We are ahead of schedule on the realization of our expense targets and believe that we are well on the way to meet the $450 million target that we established early on.

Jay Benet will address the timing of these savings a bit later.

Yesterday, we also announced our intentions to explore alternatives for divestiture of ownership of our investment stake in Nuveen Investments, and to combine our Fire and Marine, USF& G, Travelers, and certain other of our insurance companies into one pool.

Nuveen is now a relatively small part of the St. Paul Travelers organization, and this is an important step to build additional financial capacity and flexibility and it reflects our strategic decision to focus on the Property Casualty industry.

Nuveen is a premier asset management franchise.

Tim Schwertfeger and John Amboian-- have ably led,, with their management team, a terrific group of investment professionals the development of a unique franchise and highly consistent performer.

They've done a remarkable job in building a first-rate company.

Nuveen has had ten consecutive years of record earnings, and now has in excess of $115 billion of assets under management.

The company routinely posts return on equity approximating 30 percent.

Most of you know that nearly 20 percent of Nuveen trades publicly on the New York Stock Exchange under the symbol JNC.

It has a current market capitalization of about $3.5 billion.

The St. Paul company has brought its 79 percent ownership to -- of Nuveen to St. Paul Travelers with the bulk of the position currently held at the holding company level.

Our property casualty companies receive next to no capital credit for our ownership of Nuveen.

The proceeds from the -- of the divestiture would at closing be available to be downstreamed to our insurance companies, and would improve the insurance company's capital position substantially.

We would utilize the additional capital to support organic growth, fund future consolidation opportunities, and have greater flexibility in capital management.

We would also improve the tangible net worth of STA.

It is worth nothing noting that even in a taxable transaction, the company has a $2 billion net operating loss carry forward from the former St. Paul companies.

Lastly, we are working closely with the Nuveen team to minimize any disruption, and are focused on ensuring the continuation of their exciting prospects.

We have retained Merrill Lynch and Morgan Stanley to advise us on this review.

Moving on to Asbestos, Jay Benet will provide you with much greater detail, but our charge was driven largely by changes in defense costs, particularly so in what we label Home Office accounts.

The impact of this trend, when applied to future expectations of claim activity, requires an increase in the reserve balance to provide for these defense obligations.

There are fewer new mass claim filings, but individual claims from peripheral defendants seem to be on the rise.

We've done a good job managing the large case exposures, but as we have said in the past, it is very difficult to predict future claims trends in asbestos.

The provisions reflected a thorough analysis based on all the relevant factors of which we are aware of today.

I would now like to now just comment on the marketplace and short-term outlook for the company.

Into the first quarter, the marketplace remains quite competitive, sometimes far much too so on on individual transaction basis and particularly so in the commercial businesses.

We are a company that is committed to being competitive.

We are also a company that is committed to thoughtful underwriting inand pricing.

We will always strive to meet our customer's needs but it would be inappropriate of us to do so in an irresponsible way.

We will be a very competitive market, but I hope we are never known as a hot market.

Flexibility, consistence consistency and performance, are the key characteristics of our company, and we are very comfortable continuing to embrace that philosophy.

Turning to specific markets.

In Personal lines, rate will likely continue to exceed loss trends in Homeowners.

In Auto, loss trend end rate appear to be converging.

Frequency in Personal lines continues to be quite low, and on an all-end basis, we anticipate continuing widening margins in Personal lines in 2005.

The Commercial and Specialty businesses are more difficult calls because, as I have previously mentioned, the pricing environment is increasingly competitive.

We continue to experience low levels of claim frequency, and there does not appear to be any change on the horizon.

Severity, or basic claim inflation, continues at mid-single digits.

Given the rate environment in our Commercial business, it is possible that loss trend could exceed rate in 2005.

However, we feel very well positioned to expense savings and productivity improvements to continue to operate successfully in that more challenging marketplace.

We move into 2005 with real confidence recognizing, however, that the market place is changing, and it may have an impact on 2005 premiums and profitability.

We anticipate that on an overall basis, premiums will be generally flat with corresponding quarters of 2005 one to at least the first half of 2005.

By this we mean, we anticipate continued growth in Personal lines being offset by continued modest declines in Commercial lines.

All in, we anticipate that in 2005 that our return on equity will be in the 13 to 15 percent range, and we are more comfortable at the lower end of that range.

Our base measurement is average shareholders equity for 2005, excluding the impact of FAS 115.

Finally, we announced certain management changes this morning, naming Brian MacLean and Mike Miller as Chief Operating Officers of our company, as well as promoting Joe Lacher to the position of Executive Vice-President.

We also noted that Doug Elliot will be leaving the company this month to pursue other interests.

Doug has been with the company for 18 years, and he has been a friend and partner since I first came to the Travelers in 1992, and we wish Doug great success in whatever he decides to do next.

While we all will certainly miss him, we are accompanied by very deep strength.

And we are before I turn it over to Jay to continue, I just want to make one prepared comment with respect to the ongoing investigations, and this will be all that we really have to say with respect to these matters.

As we previously reported, St. Paul Travelers has received subpoenas from the office of the Attorney General of the state of New York, the Securities and Exchange Commission, and other government agencies in connection with ongoing investigations of the insurance industry.

The company is cooperating with each agency and responding to the requests for information it has received.

The areas of the industry-wide investigation addressed to the company include it's relationship with brokers and agents, the company's involvement with nontraditional insurance products, and lawyer liability insurance.

The company is committed to honest and ethical business practices in compliance with the letter and spirit of of the law.

Accordingly, the company is reviewing it's own businesses in light of the ongoing industy-wide governmental investigations for compliance with company policy and applicable law.

With that, I would like to ask Jay to take you through a more detailed analysis of the financial performance and summary of the asbestos review.

Thanks Jay.

Before I begin, I'd like to remind everyone that as in prior quarters, St. Paul is excluded from all of our GAAP numbers for all of 2003, and for the first quarter of 2004.

Turning to page 3 of the webcast and the quarterly information, net written premiums were up 52 percent on an as-reported basis, but down 1 percent on a pro forma combined basis.

Brian, Mike, and Joe will discuss the reasons behind these results a bit later.

Operating income was 307 million in the fourth quarter, and we should note we were profitable despite the $1 billion A & E charge.

Operating income for the full year was almost 1 billion, 1.1 billion, including the first quarter for St. Paul, and again, we were profitable despite A& E, the third-quarter hurricane losses, and our second-quarter charges, all a reflection of the underlying earnings power of our company.

Average shares, we're calculating fully diluted EPS was 708.6 million in the quarter, and reflect as to year-to-date amounts which have been restated the newly-adopted accounting requirements relating to our contingently convertible debt.

Page 4 is the summary of prior year reserve development during the current quarter.

In Commercial, the major story is the $922 million asbestos reserve increase -- excuse me -- which I will discuss in detail in a few minutes.

Environmental increased by 84 million.

This increase was due to litigation costs increases and certain adjustments made to assume reinsurance exposures.

There was no prior year development in Specialty in the quarter, and in our Personal segment, we have a favorable development of 140 million, due to the continually favorable trends in claim frequency that we've been experiencing.

Page 5 displays the total full-year GAAP combined ratios as reported for each of our business segments, breaking out catastrophes, prior-year development, and certain other adjustments to arrive at an underlying current-accident year combined ratio pre CATS.

We use this view to provide insight into the profitability of our current business and we continue to see very favorable results in all of our segments, under 90 percent for both Commercial and Personal, and 90.1 percent overall.

We also find that these full-year combined ratios as we're showing on page 5, provide insight into run rates, given reestimations of the current year losses that have occurred throughout the year.

As page 6 shows, our expense savings related to the merger are actually emerging ahead of plan.

To date we've achieved over half of our planned census reductions in merger related areas, and while our overall census is down, we have added more than 500 people in non-merger related areas such as in our growing and highly profitable Personal lines business.

Actual expense savings were $114 million in 2004, well ahead of our initial estimate of 62 million, made at the time the merger was announced, and our revised estimate of 82 million made earlier in the year.

We now have one employee benefits platform, and have completed many major systems conversions.

We're confident in our ability to achieve our original $350 million annual savings run rate goal by December '05, and a revised run rate goal of 450 million by December '06.

The results of our actions are now expected to achieve actual savings in 2005 of 310 million as the graph on the right-hand -- right-hand side of the page indicates, and 400 million in actual savings in 2006.

Turning to asbestos.

We use the same techniques in our study this year that we have been employing for many years, that being a detailed in-depth policyholder by policyholder review of exposures leading to projected payout patterns that are based on the most current information available.

We do not and have not used a simplified survival ratio approach.

These techniques were applied to policyholders of both Legacy, Travelers, and St. Paul.

Results of the study led to the reserve increase of 922 million, bringing the total net reserve up to the 3.9 billion that you see here on the page.

On a gross basis, the reserve increase was slightly higher at 932 million, which is $10 million higher than the net, as most of the increase related to our mid-tier category of exposure, that being the Home Office Review category for which we do not have much reinsurance remaining, and to assume the reinsurance in international.

Page 8 provides highlights of the ever changing asbestos landscape in which there have actually been some favorable developments during the past two years.

On the plus side, there's been judicial pushback against the Plaintiff's bar in some areas,' along with legislation in previously difficult jurisdictions, like Mississippi and West Virginia.

However, venue shopping continues, and we have seen higher than expected litigation costs due to increased trial activity.

The truly impaired been getting to the courthouse more often, which we actually view as a good thing, and there has been an ever greater focus by plaintiffs attorneys on peripheral defendants from whom we have a duty to defend.

The graphs on page 9 show recent trends in loss costs excluding settlements and defense costs -- I'm sorry, excluding settlements as well as defense costs, and this information, as noted, relates only to Travelers and is shown for illustrative purposes.

But as you can see from the graphs, loss costs have actually moderated since 2002, which is in line with what we have expected.

Defense costs, however, for the reasons previously stated, have continued to increase and have become a major reason for the reserve increase in the Home Office Review category.

Turning to page 10, I'll talk briefly about an area that is not the major reason for the reverse increase, that being changes large nonproducts exposures.

We have settled several of these cases within the reserve estimates established two years ago, and we've had favorable rulings that have impacted AC&S and other large exposures.

Importantly there have also been no new large new products exposures that came to light.

Relating to the nonproducts exposures, page 11 rolls forward the unallocated IBNR for year-end 2002 to now.

Over all we have achieved one of our major objectives, that being reducing uncertainty by settling exposures.

We were able to move 623 million from unallocated IBNR to the structured settlement category during this period.

The largest of these movements is related to our unique ability to settle our direct actions which amounted to just over 500 million of this amount.

The 100 million reserve increase that you see at the bottom of the page is being made this quarter as part of the $922 million addition.

We've updated our inventory of smaller disputed items and have modestly adjusted estimated settlement costs.

This increase is not driven by a single large case, rather, it represents relatively small changes on a number of exposures.

As page 12 shows, 650 million, or more than two thirds of this 922 million reserve increase, relates to the Home Office Review accounts, where litigation trends and the targeting of peripheral defendants, as I discussed before, are the primary drivers.

The other major increase in the reserve relates to the assumed reinsurance in International category which increased by 147 million.

As was done in the past, we had a third party review of one of our international operations which led to a little less than half of this portion of the increase, and the rest of the increase relates to updates for assumed reinsurance.

Page 13 displays the composition of the asbestos reserves by category, along with a number of policyholders at 2004 pay data.

Items to note here: the total IBNR now stands at a little over $3.2 billion, or if you remove the structured settlement agreements, it is $2.3 billion.

This amount of IBNR, which includes the 555 million of unallocated IBNR that I discussed earlier represents almost 60 percent of the total reserve balance.

Total policyholders with asbestos exposures now stand at 1,950, with almost 70 percent in the least risky category, the field office review for which we estimate total exposure for each policy to be less than $100,000.

Page 14 shows our net reserve of 3.9 billion, which equates to 4.8 billion on a gross basis.

We've evaluated the collectability of the reinsurance, determining that the net recoverable of 843 million, which has already been reduced for known credit risks, as well as for an allowance for other potentially uncollectible amounts, is reasonable in amount.

Well, that concludes my remarks on the results of our asbestos study.

Turning to page 15 and premiums.

For the quarter, we wrote 5.154 billion of net written premium, which is down 1 percent on a combined pro forma basis from the prior year quarter.

Year-to-date, we wrote 20.7 billion, the same amount as in 2003.

For the quarter, Commercial core was down 9 percent, Specialty was up 3 percent, and Personal was up 13 percent.

Brian MacLean, Mike Miller, and Joe Lacher are here.

They are the leaders of our Commercial, Specialty, and Personal businesses, and they're now going to discuss their respective operations.

So let me first turn it over to Brian.

Thanks, Jay.

I'll take a few minutes to talk about Commercial lines.

I'll start with the core earnings perspective, which will lead to a discussion on the marketplace as we see it today.

Underlying earnings have remained solid both in the quarter and for the full year.

For the year, our accident year combined ratios including the third quarter hurricanes is at 93.9, and as Jay has showed earlier, 89.8 before the catastrophe losses.

Overall loss trends have been very modest, frequency trends remaining favorable, and loss severity fairly normal.

So, all of this, even given relatively small price increases, has produced very attractive product margins.

Going forward, although we are not expecting the price change will exceed loss trends in '05, expense savings and increased net investment income should help us succeed in a more challenging environment.

So, shifting to the production look.

In the Commercial Accounts area, overall retention has dipped a bit in recent quarters, and as you can see, price change is now slightly negative, and new business is holding at just under 15 percent to base.

So let's look at some of the businesses within Commercial Accounts to break those trends apart.

First , the large property market set some of the most significant change as bulk pricing and changes in terms of conditions have deteriorated.

In addition to the marketplace, we have taken underwriting actions in certain catastrophe-exposed national property risks, to bring that book in line with Travelers' much larger national property business.

This has accounted for over two points of the drop in retention in each of the last three quarters in overall Commercial Accounts.

Although we don't see the marketplace improving, we're now essentially done with our integration, and that drag should mitigate going forward.

The other area that's been a drag in retention, is the generalist field book, and similar to national property, this is also an area where we've had to conform Legacy company underwriting emphasis.

And by generalists account, I mean the traditionally low severity, rather standard commercial risks, retail stores, service industries, office commercial buildings, et cetera.

In these areas, we compete with just about everybody in the marketplace, and therefore this is consistently the most price-competitive segment in Commercial Accounts.

So, we've been working through this most competitive segment of the market while at the same time blending our underwriting approaches, and needless to say, this has been a difficult segment.

We're focused on this segment, we're prepared to compete, and we believe we can do better, but in the end, it's going to depend on market conditions here.

In the rest of Commercial Accounts, where we have significant industry expertise in underwriting and product, we fared very well, and this is really made up of two pieces.

First, the rest of the field book, actually, the majority of the field book, which would include industry-specialized groups with proprietary products and rates, and these would be classes like heavy manufacturing.

The second piece would be our other first-party businesses, boiler and machinery, Agra business, inland Marine, and in all of these segments, we believe we've got a distinct, both underwriting and product, advantage.

In these segments throughout the year we've seen growth and feel really good that that growth will continue into next year in this marketplace.

In the Select or Small Commercial business, the story is more positive.

Going into '04, our number one priority was to retain our quality accounts in this segment.

Retentions have been solid throughout the year, and in the fourth quarter, were up a bit to very strong levels.

Pricing is still positive, up 4 percent, but new business levels remain below our expectations.

We really believe this is due to both marketplace and integration issues.

In the market, the competitive dynamics in the upper end of this segment are very difficult, and we believe new business pricing here is very soft.

Actually, very similar (inaudible) Commercial Accounts generalists field book dynamics.

From an internal integration perspective, we knew going in that this would be our most challenging area.

It's the segment with heavy policy transaction volumes and much tighter regulatory environment, and the overall Small Commercial market is dependent on product filings, technology platform, in both our underwriter and agent work flow.

So, accordingly, we spent a lot of time in '04 selecting the platform and planning for the 2005 implementation of what we need to do with Select, and all of this was in the teeth of a softening market.

The good part of this story is that we've made tremendous progress in this area, and have just begun the external launch of our new products and technology.

Over the next three months, we will have about 90-plus agent rollout meetings to introduce in significant detail select product enhancements, broader customer breadth, and improved technology platform, which will enhance our underwriter service to our agents.

All of these actions will be fully-implemented policies with June effective dates.

With all of that, right now, we really feel great about our position in the small commercial market.

We expect retentions to continue to run at very strong levels, and the enhancements I just spoke of should lead to an improving new business line in the second half of the year.

Before we go to Specialty, I just want to make a few comments on National Accounts.

I know it's not on the page.

This is a big franchise for us, and it continues to be very successful.

It's the driver of the 20-plus increase in fee income that we've got running through the P&L, and the margins here remain very solid, and we continue to experience significant growth in the 1 million to $5 million account size.

Claims under administration, as you can see in the supplement have dropped some in the last two quarters, due to the loss of some very large, what what we would call jumbo, accounts.

This segment of the marketplace, right now, we believe is very competitive and a lot of accounts out there are priced below our return targets.

So accordingly, the loss of these accounts have a significant impact on claims under administration, but very little impact on fee income or profit.

So that's the Commercial story.

Now, I would like to turn it over to Mike, who will talk about the Specialty markets

Thanks, Brian.

Turning to page 17, I would like to provide insight into the Specialty results for the fourth quarter and full-year 2004, and our positioning for 2005.

Our operating earnings for the fourth quarter were a solid $140 million.

This includes $25 million of after-tax from the reestimation on the the third-quarter hurricanes.

For the full year, excluding the hurricanes and our repositioning that we talked about in Construction and Surety, our combined ratio was performing in the low 90s, indicating a strong underlying book of business.

Net written premiums grew 3 percent for the quarter.

Domestic operations grew 4 percent, and excluding construction which declined roughly 10 percent, we were up in excess of 9 percent.

While this does include $42 million of former Gulf business, we still had a very good growth absent this in most of our businesses.

International declined 4 percent primarily due to our exit from our Personal Lines syndicate.

On a pro forma year-to-date basis, Specialty premiums declined 3 percent driven by the actions mentioned in bond, construction, and Lloyd's.

Retentions for the quarter was consistent with previous quarters, and improved in International.

As we have discussed in the past, renewal retention is a key focus for our underwriting operations.

Renewal business is historically more profitable, due to increased knowledge about the account, relations with the agents, and credible performance history.

In addition, 2004 marks our third consecutive year where earned price exceeded loss trend projections, making retained business more profitable, which drives more emphasis by our underwriters.

Domestic renewal price change for the fourth quarter improved to 9 percent and was 5 percent for the full year.

The downward pressure on price increases moderated during the quarter, and some sectors such as Construction experienced some growth in payrolls and work loads.

New business for the quarter was in line with previous quarters, and in a very acceptable level for all of 2004.

Due to the competitive market condition, new business levels are down from 2003, even after excluding the impact of renewal rates transactions.

We remain active the new business marketplace, and believe profitable opportunities still exist.

As we enter 2005, pricing on some of the more competitive lines appears to have stabilized in the fourth quarter.

Additionally, as many of you know, D&O and professional liability reinsurance placements for the January 1 renewal dates indicated a limited reinsurance appetite for these lines and increasing costs for those placements that were completed.

We are hopeful this will lead to a more responsible market as respects limit offer, terms and conditions, and pricing.

We have substantially worked through the repositioning of our Construction and Surety businesses.

The remaining specialty businesses begin with strong underlying profitability, and are well positioned to compete in our segments in 2005.

And now I would like to turn it to Joe.

Thanks, Mike.

I'll just spend a minute talking about Personal lines and I'll reference page 18 and some of the other material you got in our press release and statistical supplement.

It was clearly a strong quarter, with another strong quarter growth in Personal lines, with earnings of $378 million and combined ratio of 69.7 percent, we were very pleased with the results.

Those are clearly buoyed by $91 million of prior year, and $78 million of current year improvement in loss ratios, but even as you adjust for those, the combined ratio for the segment was an 87.3 percent, so a very strong quarter.

Probably the best place to look to think about run rate for a -- full year -- full year '04, with a $939 million earnings number, and $246 million of prior -year impact.

I think when you adjust through all of those items that's a 90 percent combined ratio for -- for the full year.

And again, the 90 percent includes the impact of all of the hurricanes that ran through -- through the country over the year, so given that, we feel very pleased with those financial and earnings results.

On top of that, we've had some very strong growth and continue to report that growth.

From an Auto perspective our net-written premiums are up 9 percent,, and policies in force are up 9 percent.

We continue to see renewal price changes in mid-single digits.

As Jay mentioned earlier, we are seeing that marketplace become significantly more competitive.

RPC and loss trends are converging, and we do expect to see growth slowing in the Auto segment as competitors in the marketplace moves more aggressively.

From a Property perspective, we continue to see that part of the personal lines of business perform very well.

Net written premiums are up over 20 percent.

Policies in force are up 15 percent and RPCs, renewal price changes continue to run in the high single digits.

We do expect pricing to continue to be at least a little bit in excess of loss trend and to drive modestly improving margins for the overall business.

The competition in the property segment has been less significant than we've seen in the auto segment and we hope that will continue for time to drive the strong growth that we've had there.

Perhaps the most excited we are about anything is the improvements in execution that we've got in the underlying in business from the significant investments that we've described over past quarters.

We're pleased with our progress, with our advances in pricing segmentation.

We anticipate further rollouts of different pricing programs over the course of '05, and we're very pleased with our investments and our claim process development which is showing promising results, and, again, we anticipate further rollouts of these programs throughout the country through the course of '05.

Back to you, Jay.

Thanks, Joe.

Turning to page 19 and the balance sheet, average invested assets continue to march up ward, drawn by 1.7 billion in the current quarter to 63.2 billion, a 5.2 billion increase since the merger was completed on April 1.

The major driver of this increase was the very favorable cash provided by Operations, which totaled almost 4.5 billion during the past 9 months.

NII, shown on page 20, has increased during the last three quarters, and most notably in the fourth quarter due to steady performance in our Fixed Income portfolio and in the fourth quarter, increased returns in our Alternative Investment portfolios.

Private equity performance was very strong the quarter, and gains were realized in connection with transactions that took place within our Real Estate Partnership portfolio.

Our overall after- tax yield also increased to 3.6 percent, as seen the quarter.

On page 21, we present a break down of NIIfor Legacy Travelers and Legacy St. Paul.

This information is pretty much self-explanatory, and we provide it here just for the analyst community.

And finally on page 22, we show that the company remains well capitalized, ending the year with over $20 billion in common equity, debt-to-capital ratio of under 25 percent at book value per share of $1.35 -- I'm sorry -- 31.35, a little typo on my notes there.

With that, let me turn it back to Jay.

Just one or two more comments about Nuveen to help with some of the analysis that you all I'm sure you are going to want to do.

This clearly is a strategic decision for us.

It's simply a small part of our business.

It's a terrifically-performing operation, and there are other owners who can better help Nuveen achieve it's longer objectives than us.

It does obviously significantly increase our flexibility and improve the capital position.

I'm not going read through the rest of the slide on 23, but 24 is actually a substantive page.

This is the Nuveen balance sheet on a full push down basis, and a couple of important points to make here.

The first is that our investment in Nuveen was mark to market as of the closing date of April 1st.

So the book basis that you see here of 2.019 billion reflects that mark to market, and includes a push down of all of the goodwill that was related to that mark to market transaction, and obviously any other goodwill that existed prior to that.

So we've got a $2 billion book basis in Nuveen.

I'll make just one or two other observations.

The tax basis in Nuveen is quite low.

St. Paul made it's original investment in Nuveen in 1974, and as a consequence, again, the tax basis and the asset, and as a result, the tax expense, the tax expense to be recorded on the books, and the transaction will be reflective of that low tax basis.

However, to the extent that it's a taxable transaction, St. Paul also brings with it a $2 billion net operating loss carry-forward, so the cash proceeds of that transaction will be significantly sheltered by that NOL carry forward. aNd I think we that information you all have the ability to do whatever analysis on the Nuveen transaction you would like to undertake.

And with that we are open for questions and prepared to be responsive to anything you would like to know.

Operator, are you with us?

Yes. [operator instructions] Our first question comes from the line of Ron Frank from Smith Barney.

Please go ahead.

Good morning.

I want to try and get through a few things if I can.

First of all, Jay, the 13 to 15 percent ROE target ex-FAS is that on a beginning or average equity?

Average equity of '05, Ron.

Okay.

Also, with respect to the pool integration, I was wondering if Jay could quickly take us through what the specific advantages of that are expected to be, and you know, how quickly that could be accomplished, and, finally, I know it may be a little bit of a sensitive subject, but I was wondering if you were able to tell us whether the terms of Doug Elliott's severance includes some form of nonsolicit clause?

[voices speaking at once] The pools represent a simplification of the internal capital structure.

You know, we, today, write business in two separate pools, the pools -- I'm sorry, two major separate pools.

The pools are individually rated by the rating agencies.

It brings up questions of, you know, what businesses are you going to write in each one of the pools in the future?

How is each one of the pools going to be capitalized?

And it's just a very much simpler structure if you have one pool that represents, you know, all of the business that you're writing, or the lion's share of the business you're writing, and you can just manage capital that much easier, and you're an easier company to understand.

The timing of it is, you know, fairly straightforward.

We've done this in the past (inaudible) had an opportunity to combine pools.

We did it with the Aetna transaction in the 90s.

We also pooled some other things, so our experience is it takes somewhere between four and six months.

We would expect to have this completed sometime the third quarter, and it just requires some regulatory approval to get that done.

Ron, just to clarify, it would be a follow on to a divestment of the Nuveen investment.

Okay.

Maybe that answers my next question, which is which way you would expect the ratings on the combined pool to go.

I would refer to you to the rating agency announcements themselves, and -- and -- and we have got nothing to comment on in that regard.

Okay and -- okay then on -- and then on the other question?

On Doug Elliot's departure, there -- there is an agreement that we have executed with Doug.

It does provide substantial protections to the company in all of the appropriate ways.

Okay.

And, finally, I know you've addressed the issue of the growth outlook for the Auto business in '05.

I was wondering if I could specifically drill down with Joe, the premium -- The policies in force on a consecutive-quarter basis for Auto basically went close flatline in fourth quarter.

Shall we expect -- if you just connect the dots from the last few periods, that would indicate contraction for next year.

Is that a fair assumption?

I think, Ron, that we're expecting the growth rate to slow.

I'm not sure yet whether it will slow to the point where it contracts some.

We watch this, and it moves on a state-by-state basis, and it's a function of the relative competitiveness of the marketplace.

And we're sitting here at the end of January, there's a lot of runway left in the year that we're going to continue to aggressively compete in the marketplace, and we'll see how that turns out.

I think if you riffle through, and I'm sure you do listen to all of the other commentary from the other carriers, and we hear it on the street, Auto is becoming a more competitive marketplace.

Okay.

Thanks very much.

Okay.

Our next question comes from the line of Alain Karaoglan from Deutsche Bank.

Good morning.

A couple of questions.

The first one relates to -- we haven't heard anything on Medical Malpractice, Reinsurance, Worker's Comp, and Surety.

I assume you have reviewed those and you are comfortable with where you stand today?

We review all reserves every single quarter, and there is nothing to report in any of those segments.

And that's great news, and I hope that continues to be that way.

The second question is on the margins.

Jay, you went quickly in terms of each of the segment, Commercial, Specialty, and Personal lines.

Did I hear correctly that basically the expectation is that margins in Commercial lines will be under pressure, and that Personal lines will be expanding, or did I misunderstand that?

And what's the Catastrophe load in each of the segments that we should assume?

First just to respond to the margins, we do anticipate widening margins in Personal lines.

We characterize it as modest, but in all, rate exceeding trend on a simplified basis, in the Specialty lines of business, it's a very close call.

Rate actually came up a little bit in the fourth quarter, low frequency, you know, severity running at normal trends.

It's a -- it's a -- it's a pick 'em kind of a situation, Alain.

It's difficult to tell.

In the Commercial businesses, is, I think it tilts a little more to margins narrowing.

In that -- that case, again, we see -- we see very comfortable frequency, basically across all of the frequency--oriented lines, and that's been very encouraging.

Severity continued to be what I would characterize as normal, but, you know, it is sort of a middle single-digit number when you look at Severity, and it really comes down to an estimation of what happens to rate.

And right now, given rate essentially being flat in the Commercial lines, you would probably characterize it as narrowing margins, but if it's close enough that it could change.

So that would be -- be the spectrum that I would respond there.

In terms of your comment about -- about weather, and I'm going to try to answer this as specifically as we're capable of doing, we actually provide for weather, noncatastrophe weather, we provide that in our loss pick, and we do so on a regular monthly basis.

Catastrophes, of course, when not allowed to accrue for, you recognize it in accounting when it occurs.

However, we do provide a budget for that, as we figure out our budget.

And when you add the noncatastrophe weather, plus the budget that we're providing for catastrophes, you get approximately 2.5 percent of total premium across the organization.

And what I would share with you that approximately $150 million of that is in the catastrophe component that we would not accrue, but we would recognize as it occurs.

Okay.

That's helpful.

The last question is on the capital position.

You mentioned that one of the reasons Nuveen is strategic and enhances your flexibility from a capital position.

If we look at your premium to surplus ratio, it's at 1.4 times, your reserve to surplus ratio 2.7 times, it seems that you already have a lot of flexibility.

So I'm not sure -- and especially if we take into account the fact that premiums will be flat, your return on statutory surplus in '05 will be around 20 percent, so you will be generating significant additional capital.

Why are you looking for so much capital flexibility?

Well, first, I would just make an observation that we have stated for as long as I remember that we would prefer to be operating at -- at higher ratings levels than we do today, and as a consequence, I really explained all along that, notwithstanding the kind of conventional ways of looking at capital, that we were there in a capital building mode until such time as we got to the ratings levels that we thought were appropriate.

So step number 1 is to -- is from a capital standpoint just to get the ratings back to the levels that we think are appropriate for a company of this size and earnings capacity.

This has the ability to add substantial amounts of capital, and when you add in the organic cash creation, the organic capital creation that we would anticipate in 2005, you obviously get to a whole different -- a whole different analysis of capital and capital adequacy.

It's truly in that regard, potentially a transforming event.

Capital to support organic growth, we would use it to support acquisition opportunities in the Property and Casualty business to the extent they became available, and, lastly, it would enable us to look for aggressively at capital utilization vis-a-vis our shareholders, and look at that in the broader sense.

So I think is as crisp of of an answer as I'll capable of providing.

Thank you very much.

Thank you.

Our next question comes from the line of Michael Lewis from UBS.

Please go ahead.

Good morning good morning, Jay.

Good morning, Michael.

An interesting question.

It seems you're guiding down the earnings estimate, and I look at my numbers EX all of the noise, you seem to are have exceeded expectations in the fourth quarter, plus you caught -- what I'm using is an average book value ex-FAS 115 of about 32.

You said go to the lower-end of your range, that's somewhere in the 415 area, even at 14 percent, it's under 450, so a little commentary there.

And the secondary question is, could you give us an update on where you stand on the consolidation regarding platforms and systems?

I know you went over this put it went by me a little fast.

I really would like to know what you've accomplished, what remains to be accomplished, and how you feel you're doing as far as -- you know, targeted expectations?

Thank you.

First, with respect to your first question, we really have resisted providing estimates before, so I'm not changing or re-estimating anything.

What I am attempting to do is to provide you with some insight into the way that we look at the returns of the business that we're in here.

And obviously we're still in the insurance business, it always has all of the variables that insurance businesses have.

First, there's the variable of rate, and it would be probably inappropriate of us to -- to sit here and look forward into '05 and assume that rate would necessarily be flat.

So we've taken, I think, a somewhat conservative view of rate development.

Two, the expensed savings that we are talking about and are being generated are actually, and I take this as a big positive, are actually fueling all of the development work that's going on in Personal lines, as Joe pursues an increased implementation strategy, and the people that he's hiring to support that.

It also supports the development work that's going in claim.

We're continuing to become, in effect, increasingly focused in claim on a Personal book, which is high frequency, very low severity, and a commercial book, which can run from low frequency, low severity all the way to the upper end of that -- of that spectrum.

And so the number of people that we've actually added in claim and in Personal lines, and in the areas that we've been growing inn the last nine months is actually substantial.

So I would actually characterize that the expense savings are being reinvested into our business, in growth opportunities, more than they are into a bottom line.

And I think, again, our focus is to continue to provide the basis for future profitable growth.

Lastly I would just make an observationthat not withstanding the push in interest rates, at the short end of the curve, in fact, at the longer end of the curve, which is where we invest, they're actually flat to down.

That back in December 31 last year, the ten year was actually trading at 4 and a quarter.

We finish this month at 413, which actually is really quite remarkable when you think of what has happened over the past 12 months.

There was a tiny spike around the middle of the year, bringing it up to about 4.5 percent.

And as we all know in our -- in our business, and again just responding to sort of how we think about return on equity, there's a tendency to assume that everything will go well, and nothing will go wrong, and whether that means that, weather events turn out to be more significant than we've had the past -- i mean it would be inappropriate to annualize the fourth quarter -- utilizing a catastrophe load at that level, and figure that that's sort of a normal thing.

So, I think that we've set an appropriate threshold, and it gives us the room to continue to invest in our business and build for the future, and we feel good about that

Great.

Could you go into the second question, please?

What was it?

Oh, the platforms.

My answer got so long, I forgot your question.

I almost forgot it myself, Jay.

Yeah. [laughter] I'll do my best, but please recognize we're actually talking about literally in this place hundreds of systems.

So when we talk about -- for example, we've converted our financial systems.

Those are just a few key words, but there are dozens of systems underneath that that support all the way up to the general ledger that are now fully converted and on a single platform.

We've consolidated the data centers into the travelers data centers, and that was done successfully over the New Year's weekend, and it went -- it went virtually flawlessly.

The investment systems which were split before, Travelers was run on a Citigroup platform.

St. Paul was run on its own.

Those have now been combined entirely on to the St. Paul system.

The personnel and payroll systems were all combined on to the St. Paul system.

That had been outsourced to Citigroup, as well.

The actual conversions in Middle Markets and National Accounts are well along.

In fact, it's possible that the National Accounts are actually completed at this point, and actually Ellen Rizzo, the CFO of Commercial is nodding yes, so the National Accounts conversion on to the Travelers platform is finished.

The middle market, I think by June, as accounts renew, will all be renewed all on to the Traveler system within the Middle Market.

And I think that that's -- that those are the sort of big production systems.

On the management side, the management information systems have now been fully consolidated.

We actually have a consolidated controllable income statement for this entire operation.

So we're not looking at two separate pieces of paper anymore with different definitions and controllables.

And that whole system, which runs all the way down to expenses and production and volumes and agent profitability, and early warning systems for claims both with respect to frequency and severity.

Those have all been consolidated and are now being produced on a single basis.

So we're getting a whole lot closer to -- to being, in fact, at the production level, one company.

Thank you very much.

Pleasure.

Our next question comes from the line of Brian Meredith from Banc of America.

Please go ahead.

Yeah, good morning.

A couple of quick questions.

The first one, back in the Commercial lines business, and I like the -- thanks for providing some of the stuff with respect to what's going on with retention, but is it possible to break down a little bit more as far as what you feel the drop in the retention ratio is related to merger issues versus pricing issues?

You want to do just on the national property?

I think that's the easiest one to start with, right?

Yeah, I without say first of all in any precise way, no.

We struggle all the time with trying to figure out what's driving our numbers, and how much of it is market, and how much of it might be merger.

You know, I think there are two places that I talked about where we think that these things have come together.

Probably the most discrete is the national property area, where we took Legacy St. Paul is probably more catastrophe exposed than the new company's appetite is.

And we worked on that book, and that's probably a pretty distinct, a couple of points a quarter.

A lot of that, I would say, is our appetite.

At the same time that marketplace has also been moving.

It’s A lot harder in the generalist Commercial book, so with any degree of precision, no.

I would chalk it up to being more market than merger, but we're sorting through it.

Brian, I would add when you look broadly across these businesses, there are many that had no integration issues whatsoever.

I mean, most of Mike's businesses when you look at other than Construction and Surety had no integration issues at all because Travelers was not actually in those particular lines.

Brian's comment about the field book of middle market is relevant, I think, because it was in effect a doubling of -- no matter which way you look, both sides brought about the same size field market book.

It was about -- I was going to say a billion three each to a billion six, but I think the field book was about a billion three from each company, and as a consequence -- two from each company?

Just the field? [inaudible] I thought it was a billion three.

But in any event, my point is that there was a clean doubling of the size of that field book, and to the extent that there were underwriting differences and points of view, that's where the rub was the greatest.

And I've used examples like this before, where, for example, the extent of limits that would be provided in a particular real estate industry exposure, or terms and conditions supporting some of the nonprofit or social service businesses.

The company simply had different underwriting policies, and ultimately had to pick one.

So that process, I think in the middle market was the area where the decisions related to conforming those issues were probably the -- the most numerous.

Okay.

And then -- and I assume that that whole issue is probably behind us by now?

Real close.

Okay.

We're approaching the first full year, and I would -- I don't know that we began the integration of that thing immediately on April 1, but certainly by June it will be behind us, yes.

And could we see the same type of issues as you put the small Commercial lines together?

Far fewer.

It's--

Small Commercial issues are more operational in nature, as we talked about.

We all know that there's lots of little policies flowing through technology.

You know, we had there a Travelers about a $2 billion book and St. Paul about a $700 million book.

We had to bring those together.

Both companies had platforms with strengths and weaknesses.

Given that, it made sense to move to the Travelers platform, converting the 700 million in St. Paul causes some operational disruption, and probably -- the other thing it does is it causes, you know, internal distraction in that we have to have a whole bunch of people who would have been building and enhancing our technology working on the conversion.

So it just needs a lot of work inside the place to do it.

That's an area, though, when we come out of the process, the breadth of the classes, the nature of the business being written in vet, the kinds of risks, will clearly be much broader than either company was on its own.

That's an area, though, when we come out of the process, the breadth of the classes, the nature of the business being written in Select, the kinds of risks, will clearly be much broader than either company was on its own.

That's a process where we come to the marketplace once it's finished

And, again, I don't wanna -- I don't wanna apologize for where we are today with Select.

I mean, we feel fantastic about running over 80 percent retentions.

And pricing is going to be pricing.

We're driving that, and still running something positives.

We would like to be doing more in new business.

Our new business is not insignificant, and as Jay just said, I think by the second quarter, we're going to feel tremendous about where we are in that marketplace.

Right.

Last question.

How much of the Personal line new volume is coming from St. Paul, old St. Paul agents do you think?

All St. Paul agents that were already Travelers agents are continuing with the same process that they were before and are doing super.

New agents, that are new to the Personal lines, it's relatively modest volumes at the point.

We've gone through a fair amount of discussions, but each one of those becomes an individual discussion with an individual agency, adding a new carrier into their marketplaces, and and then banging it out one policy at a time.

So we're thrilled with those relationships, and thrilled to be able to expand the depth of them, but it will take us, you know, more than a few quarters to get to a number that you're going to view as significant.

Great.

Thank you.

Our next question comes from the line of Larry Green from Langen McAlleney.

Please go ahead.

Thank you.

I actually have a few questions on the asbestos review.

First, was there an outside actuarial review done at the same time?

And if so, where did your number fall within that range?

Two years ago, when we did the groundbreaking asbestos study, where we significantly increased reserves, came up with enhanced disclosures, and really set a new mark, I think, for the industry, that we wanted to make sure that we were not leaving any stone unturned.

And at that point, we had hired an outside firm to come in to look over our shoulder and evaluate the methodologies that we were employing to make sure we weren't missing anything.

The result of that review is such that we recognize; that we had the internal capabilities that had been built up over many years, and our -- you know -- having to deal with asbestos at the Travelers since the mid-90s-- the mid-80s, and, you know, having done that at that point in time, we didn't feel it necessary to have -- you know -- that same level or same kind of review done in the current year or in the prior year.

So there is no outside actuarial review, and there is no comparison to be made.

Okay.

Thanks.

I know it's hard to compare numbers with the prior review because of the addition of St. Paul, but the -- I mean, the home office number of policyholders, obviously went up very significantly, and in -- in the prior review, you had said, I think, that, you know, you only had four policyholders or so that moved into that -- four policyholders with -- with first notice moved into that category over the prior three years, something like that.

Yep.

Is it fair to say that, you know, most of the increase was due to the St. Paul book, or has something changed in that trend?

And I noticed on the AM Best review that more than half of the A& E increase was due to the St. Paul book, and can you talk about that?

And, you know, was there just less rigor that had gone into that reserving process prior to -- to this?

In terms of the numbers of policyholders, we set a very, very low threshold for a policyholder to be considered part of the home office review.

For a policyholder to stay in field office, as you recall from my comments, the estimate that we make of ultimate exposure has to be less than $100,000.

That's not millions, that's $100,000.

The purpose of that is to get as many policyholders that have, you know, any kind of meaningful asbestos exposure into the hands of the experts.

Tom Joyce runs our Special Liability group, and -- you know -- his team both in the home office and field office are second to none in being able to manage these exposures.

So what we do -- what we do is go behind the numbers, and ask ourselves, well, of the policyholders that were added to the home office account, do any of them represent significant exposure?

And the answer to that has been no.

We transferred a relatively small amount of these -- of reserves associated with them, and the amount of paids associated with the transfers from the field office to the home office were, you know, also very small magnitude.

We also have, as you duly noted, the addition of the St. Paul book that is going to be changing the name -- changing the total numbers of the policyholders in each category, so, you know, that's also working its way through the numbers.

But when you step back, when you step back from it, there's nothing about the size of each one of the policyholder groups that translates into a change in exposure.

Relative to the other question, you know, Tom and his team that do the ground up study as I mentioned, did it for you know -- both companies, and actually we consider it to be one company.

That was done blindIt wasn't done in a way that said, all right, these are Travelers policy holders, these are St. Paul policyholders;

It was just these are the policy holders, vis a vis analyses of exposure.

You add up the numbers, and they come out to be what they are.

And finally, just this on the structured settlement, can you give us an idea of the paid loss trend for those looking (inaudible) few years?

Again, I think in the prior review, you had said that those would be -- the pays would be completed in 2007.

Has that changed?

And what's the status of the PPG payment?

In terms of the payment patterns, you know, one of the nice things about taking something out of the uncertainty category and putting out into the certainty category is you know what your exposure is, it's capped, and you're going to be paying it out.

You know, we expect to pay that out relatively quickly.

The lion's share of the monies associated with the structured settlement categories do relate to both PPG and the direct actions, and, you know, they could be paid out as soon as some time this year, frankly.

Far as the the status is concerned, why don't I turn it over to Tom, and he can -- he can -- provide, you know, some summary deal -- details on that.

With respect to PPG, the bankruptcy court judge in that case has asked for additional briefing in light of the CE decision to see what effects that decision may have on the settlement.

You know, clearly, PCC believes that the plan is fine the way it is, and there will be a hearing scheduled at some point the future to see exactly what happens with the modifications to the plan, if any are required.

And we have our settlement, and we're hopeful our settlement will be approved as part of the agreement, and we'll pay the money in short order.

Thank you.

Our next question comes from the line of Charles Gates from CSFB.

Please go ahead.

Hi.

Good morning.

My first question, when would you foresee another review of asbestos reserves similar to this one?

Charlie, we do an annual ground up study.

We've done that for every year since the mid-80s, and by definition, they'll be -- we end this one, and we essentially start the next one immediately.

It's always something we look at.

I thought that basically the last similar ground up study was the one completed in January of -- of -- of 2003?

No, we did one then, then of course we had the Travelers, the large reserve addition at that time.

We did another one in '03 that was completed in the fourth quarter of '03, or January '04, whatever the actual timing was, and at that time, you know, based on the environment, based on the information we had, we determined there was no need to change the reserves at that time.

So the next one is January of '06?

We complete them, you know, in the fourth quarter, and, you know, when we define fourth quarter, it includes January of the following year, yes.

I believe the census of the two companies at year end '03, was 31,750 What was the number as of year end '04?

You know, Charlie, what I don't want to do, and I've said this before, is really get. into, you know, recognizing sort of the human side of putting two companies together.

I really don't want to go into counts an a monthly basis, but what I can say is that we had established a target -- an estimation of reducing headcount by about 3,000 people through the integration of the two companies, and we're about halfway through that.

Now, as I said before, we've added people in Personal lines, we've added people in Claim, but in terms of the targeted areas that -- that we identified, we're about halfway through.

So -- so -- so basically you'll give us the census, I guess, on March 15th on the 3k?

That's correct.

Ok.

I guess the only other question would be, expense savings had been invested in growth.

I believe that was your comment, Jay.

That's right.

Could you elaborate on that, sir?

Sure.

If you look into two very specific areas and to a lesser extent I would say a third.

First, what Joe Lacher and his folks have done in Personal lines over the last three years and in building a segmented product that really tracks performance, price rate loss trend on an individual state basis, on an individual product within that state, has really been the foundation of the success that we've had, and I and I really -- I would ask Joe to talk about the number of for example of product managers that you had then, the number you have now, and just strategically where you are heading.

A lot of what it takes to make the process work, is we had eight or nine product managers three years ago, and are close to 30 now.

We -- we had a research and development group that had a couple of people in it and we've got north of a dozen now.

And we -- we have -- it's a whole infrastructure of management information, computer systems to call out the information and define it, purchasing and external data, burning those together with a strong set of statistical analyses.

And then having an underlying set of rate quote and issue systems that can take what ultimately is a wildly complicated pricing process, and dumb it down to the point where it can be executed in a couple minutes on a transaction level through an agent's office through whatever kind of medium somebody wants to purchase insurance from us.

So we've made very significant investment in the people, in the technology, in the management information, in those research and development areas and in all the areas to help our field force execute that process where needed to do business.

We've added -- we've added in Claim, and Brian is going to continue to manage Claim, just thirty seconds on what's going on there?

Yeah I mean, on the other thing -- and Joe and I have been really working hand-in-hand, and more importantly, our organizations have been working hand-in-hand to drive this strategy, and another big part of it is the execution on the Claim level.

And as Jay was saying, we've -- you know -- we've added significant numbers of folks across the country that have much more of a hands-on, front-line approach to the Personal lines, again that high frequency, relatively low severity business.

That's a big part of our strategy, having built that.

We've also continued Charlie, as I may have said before -- we've got a dedicated group of folks in the Small Commercial area, and, frankly, from experience, that's a group that we're going to keep on and continue to develop and continue to move our Small Commercial systems forward.

It's -- it's -- it's --There's a tendency to think that you've reached a state-of-the-art, and so you move those folks to a different area of technology and lo and be hold a couple of years later you find yourselves not really state-of-the-art anymore and competitively behind the 8 ball.

That's now a real commitment on my part.

I think that this company could use additional investment in technology to bring it up to a level where it will be world class in all of the technologies that it brings to the agents and to the customers, and so we're going to do that.

Now, having said that all of that, I don't want to mislead you, we are not investing all of the expense saving into -- that's a lot of money we are generating in expense savings and we certainly are not investing all of that savings into growth opportunities.

It's just absorbing enough of it, and so when you add on things like normal wage increases to the people that we have, and staying with us, that it's difficult to see an absolute dollar amount of savings, but they clearly are being generated, and they clearly are being, in part, reinvested in our business.

One more question.

I think some acquisitions in this industry historically were early recognized that they wouldn't work.

One was American Safeco.

I think a second was St. Paul USF&G.

Do you have any questions concerning St. Paul for malpractice?

I don't have any.

None whatsoever.

No, but do you disagree with my premise?

I -- I -- First, I -- I -- I think both the things you mentioned before are complicated.

The answers are somewhat complex.

The notion that USF& G and St. Paul didn't work, I would argue that -- that -- I don't know what the price was, but I would argue that that transaction brought a generalist book to the St. Paul that put it in a different competitive position, and if you roll forward the St. Paul into the world of medical malpractice that ultimately emerged, without the USF & G transaction, I don't know if the company would have made it.

I honestly don't know.

So I have trouble looking back and simply opining that something worked or didn't work.

I'll tell you that I think what Mike McGavick has done at Safeco is terrific, and I think he's made a great success of the organization, so I don't quickly come to those conclusions.

Thank you.

Our next question comes from the line of Dave Sheusi from J.P. Morgan.

Please go ahead.

Hey, good morning, everyone.

Just a couple of quick follow-ups here.

First on some of the management changes.

I just wanted to get some additional color in terms of what's fueling that?

Is there anything surrounding the New York AG investigation, or is it merely operational changes or personal reasons on that piece of it?

And then just as a second -- second part, is there any -- any color you can provide regarding some of the financial targets that, you know, either internally or the ROE targets that you have, and what that means in terms of, you know, the new management team in place, and the incentive compensation for 2005?

First, I would tell you that it had absolutely nothing to do with any of the investigations at all.

Absolutely nothing.

And that's -- and that's -- I should be clear on that point.

Secondly, people have different personals aspirations, and they seek different things to do, and in this case, Doug, the departure was mutual.

The departure was amicable, and we wish him well in whatever he does.

I think what's most important is that you understand a couple of things.

First, this is not a one-man band.

This is a 30,000 person organization with a remarkably deep bench, and the people who touch agents and brokers, they're out there today understanding what we're doing.

So, that one.

Two, Brian is a 20-year veteran of the Travelers.

He has run Select.

He has run Claim.

I would tell you that he has done both of those things with phenomenal success.

He has the broad support of the people around him and in this organization, and I know he'll be very successful in his new role.

Mike has done a terrific job in building a Specialty business, and seeking opportunities, but you should not in any way perceive that this indicates a change in strategy.

It does not.

There is no change in strategy.

There is no change in under writing.

There is no change in conservatism or aggressiveness.This is business as usual, and I can't overemphasize that possibly enough.

There is no change in the compensation systems.

There is no change in how we're going to evaluate performance.

This is very much business as usual.

And can you talk a little bit about that evaluation process?

I mean, I guess in terms of accountability and how do we get comfortable that, you know, the balance sheet is trued up, and the targets are in place to kind of run forward here?

We measure performance at an individual office level, all the way down to that level.

The controllable income statements that were generated for each office, and they're subsequently rolled up for each region, and for each zone, and so one can measure performance anywhere, anyhow that you like, and it's all computerized.

And even I'm capable of sitting down at a machine and pulling off whatever slice of the performance spectrum that I would like to see, and and see how it does.

What we actually do is we include development, we include -- I think at last look of three years adverse development rolled back into the controllable income statement, so that certainly someone or an individual can reach for greatness in the short term, and although I would -- I'll come back to controls in a moment, but ultimately sort of the individual has to eat their own -- their own cooking, and I think that's part of it.

It's important to understand that the collaborative underwriting process that was a -- I would characterize it as a hallmark of the Travelers underwriting organization is being broadly embraced by this company.

And I liken it to in a financial institution in a bank having a credit committee that designates authority out into the field, and when an individual transaction either by its size or by it's terms or by it's industry exceed that individual's authority, it ends up going in front of what amounts to the -- it's called the CURE process here, collaborative underwriting review, but you can really liken it to a credit committee.

And it's reviewed by a number of people who do not have P&L responsibility, who are separated from any financial interest in that transaction.

And I think that when you really talk about underwriting discipline, when you talk about consistency, and you talk about long-term performance, that that collaborative underwriting process is an absolute foundation of the success of this organization.

We were on our way in the earliest of days to building it at the St. Paul.

We have the opportunity to leverage quickly, to leverage quickly into it here, so I that I think is the ultimate check and control about making sure that underwriting is executed in the field in a proper way.

Thank you, Jay.

Our next question comes from the line of Paul Newsome from A.G. Edwards.

Please go ahead.

Thank you.

And good morning.

Just a couple of quick questions.

One I was wondering if we could get a little update on what's going on with the Big Dig exposure?

And then second, I'm reading the AM Best review, and I'm getting a little confused over some comments they're making about dividend payments up from the Travelers pool to the holding company, and presumably back to the St. Paul company, and there seemed to be a suggestion that those -- that there's not enough dividend capacity from the Travelers pool into the St. Paul pool, and that's the concern, unless you sell Nuveen.

Do I have that right, or am I just confused?

I was assuming just kind of merge the whole pool, and it would one big chunk of capital?

Well, first with respect to the Big Dig, Doreen Spadorcia who runs our Surety business is here, and I've asked her to take just two minutes and do an update on our exposure to the the Big Dig.

Good morning.

Thank you, Jay I guess what I would tell you is we set out as an immediate priority to resolve the exposures that the contractor had that we had bonded.

And we are well on course to getting those things where we think they should be.

We've had a number of questions come up about whether the leaks in the tunnel have changed our view of any of that, and I guess what I would like to leave you with is notwithstanding the media's recent attention on that issue, that is not a new issue.

When we did our comprehensive review for the second quarter, we were aware that the issue of leaks had been around for at least several years, and we feel that where we are on that is contemplated the exposures, given the leaks.

So we're on course to meeting our obligations comfortably with where we're situated.

Paul, regarding your question on the rating agency, let me first start by saying that each of the rating agencies draw their own conclusions based upon their experience with us and other companies.

So I think, you know, in comments specifically on AM Best, the best I could do is just have you, you know, closely read what they say, and, you know, try to understand that.

I think, you know, when you look at the whole question of how the company is run with the two pools, by definition, this gets back to the simplicity that I was talking before, you know, if you have favorable things happening in one pool, and they're accumulating capital and some things that are causing capital not to accumulate, you're always going to be moving capital around.

And it really comes back down to what the total capacity of the company, and what are the views for the capital utilization going forward.

And I again, I would just urge you to go back to the words that AM Best chose to write.

Having said that, let me make just one observation on the pool issue here.

There is no issue with respect to adequate capital or earnings coming up from the insurance operating companies, to take care of debt service and dividends and whatever other holding company needs there are.

There is absolutely no issue with that with respect to whatsoever.

Right.

We balance the needs of the operating companies with the needs of the holding company, and from a liquidity standpoint, we're in fine shape.

Their comment is actually specifically directed to individual pools which just is a question of moving capital around to the right -- to the right place, which is why merging the pools together again makes more sense.

Great, thank you.

Have a great morning.

Ladies and gentlemen, as a reminder, to register for a question, please press 1-4.

And our next question is a follow-up question from the line of Ron Frank from Smith Barney.

Please go ahead.

Jay, I want to try understand the issue of loss trend a little bit more.

I guess, put very simply, I'm trying to understand whether the concern over loss trend and price converging in Commercial and in Personal is a function of where you see losses now, or where you expect or fear they will go in '05?

You know, we all know that loss frequency and trends are very favorable now.

Everyone is observing a similar phenomenon, and I guess there's a gut feeling with a lot of of us that at some point that may, or even perhaps ought to get a little worse, but I'm trying to figure out as you set your ROE objectives in '05 in the context of these comments about converging of lines.

Again, whether this is based on the projection of where these losses will go, or what you currently see in terms of where they're headed.

I understand the question, and with all of the folks sitting around me, if I say something wrong, please correct me.

In Personal lines, we have generally assumed that frequency for 2005 will be at or just slightly above the levels that we experienced in 2004.

So we're not -- we are not projecting an improvement in frequency, but we are also not projecting a meaningful deterioration.

There is what I would characterize as an assumption of a modest uptick in frequency, '04 to '05.

In terms of severity, it's sort of the same basic news that it has been for quite some time.

Severity is running at a level-- we don't expect either an increase or a decrease in severity of any particular consequence.

It will be driven largely by inflation to the extent that inflation remains benign, I would expect the severity trend -- meaning its not zero, but it would not get worse, it would not get better but we are and rate in personal lines continues to exceed what we would project in '05, based upon those frequency levels and those severity levels.

In -- in the Commercial book, again, the same set of general trends.

Very, low levels of frequency.

Severity being supported by basic inflation, and I would characterize our estimates for '05 as being, again, a modest uptick in frequency.

We are not assuming that it continues to improve, but we're also not assuming that it deteriorates dramatically from here.

I think one of the reasons why our company, as well as others have, experienced favorable developments over the last four few years is that you keep looking at these frequency trends, and you keep wondering if they can continue.

And so there is a natural conservative bias to say let's project something more conservative, and the development has come because the frequency simply has not turned.

It actually continues to improve.

Was that true as of fourth quarter, Jay, in specific -- Was commercial frequency still in decline?

This is Brian.

I would say that the view is directionally the same Personal and Commercial, but not exactly, and two distinctions.

One is that Commercial lines frequencies have been positive, but not positive as in good.

Not nearly as good as the Personal lines frequency has been.

So same directional trend, but not for the same magnitude.

And probably in the Commercial side, kind of a flattening out -- I don't know so much the fourth quarter, but the second half of the year on the Property side.

So overall, we would clearly look at frequency in Commercial, and we feel very good about it.

The trend is mitigated maybe a little bit, particularly the Property line.

Okay.

And Mike's book and I'll let him speak -- but I would characterize Mike's book of business as being more Casualty oriented, and as a consequence, it's really a severity-oriented book rather than a frequency-oriented book, and in Mike's business, severity is somewhat less predictable.

You get swings in D & O financial institution claims, things of that nature, but based upon everything that we see at the moment, we would say the rate in Specialty has actually been encouraging in the last particularly two months, I would say, and I'm not talking January, I'm talk November and December.

And at those kind of rate levels be it would -- assuming that there's no dramatic change in severity, you would actually see modestly expanding margins.

You know, one broad -- if we're talking about margins on the Commercial side, I believe on the Specialty side, too, our view of where margins are going to go is the rate -- the pricing dynamic is the bigger variable here than the loss dynamic.

We don't see anything unusual on the Commercial side in either loss frequency or loss severity--

And that's really sort of the kind of nut of this, which is the loss trends, thinking about our business overall, they are actually very good.

They're very good in Personal.

They're very good in Commercial, and they're very good in Specialty, and the question really is -- the unpredictable is what happens to rate.

Jay, if I could follow up with one from Mike.

Yep.

Mike, you seemed pretty -- I don't want to say optimistic, but certainly sanguine, if you will, on the market outlook for the Specialty lines.

You know, comments of stabilization in some markets, improvement in others you mentioned the reinsurance market in D & O as a catalyst and we have heard that elsewhere.

Are there any other things you can point to in specific that may account for the Specialty lines perhaps, being a more stable or favorable overall market environment and outlook than some other areas of Travelers -- of St. Paul Travelers business?

Well, the interesting piece, think, as you listen to what Brian was saying, too, I think in the Specialty-focused areas inside of Commercial. you see it better than generalist results.

And I think part of it is, really, Ron, the focus and the specialization and the knowledge of the marketplace, as well as the relationship and respect you've built up over time with the agents and in many cases the customers.

And then secondarily, I do think given the severity nature of the business, there is -- and that's why I mentioned the reinsurance specifically.

There's a real sorting out, driven by both the financial capacity to deal with the Severity that we've been talking about, and the reinsurers' tightening of who they'll support based on the expertise that's there.

And actually we see those as positive things, and we feel very good about how we're positioned in that changing dynamic to compete.

Do you want to just mention the tready placement?

I did.

I mentioned that previously, and Ron that's what you were referencing, correct?

Yes.

Without naming names, can you give us an observation as to whether in the past three to six months you've seen certain markets in noticeable (inaudible)

Well, yeah, I -- I would prefer not to give names, you're right, and I would just say that clearly what you see in our pricing indication indicates, you know, over all, and again, it's a broad statement across a number of businesses, that already people that either because of their own internal view of what they've done and/or some pressure from other partners that support them in reinsurance, maybe are less aggressive.

Okay.

Thanks for allowing me the extra time.

A pleasure.

We've let this run just because we had so much to cover this morning.

We can take one more question, and then we're going to call it a morning.

Our next question comes from the line of Ira Malis with Legg Mason.

Please go ahead.

Hey Jay.

A quick question on capital allocation, a bit.

If your comments that you're using perhaps the proceeds from Nuveen and perhaps the capital accumulated over the the next year to support higher ratings, I'm sure there's been some inherent analysis that higher ratings are necessary to produce higher amounts of business, or more profitability in certain lines.

I'm wondering if you could just walk through and tell us, or tell me, where are the lack of another notch higher ratings hurting your ability to write business now, and perhaps how much incremental business could we see as a result of a higher rating?

I would actually disagree with the premise, which is that our --my -- my focus on the ratings, even at this level, is -- is not about whether we have the ability to write business, or we have the ratings necessary to write.

We do.

And -- and there isn't really any line of business at the moment in any consequential way that's impacted by our rating opinions.

My observation is only based upon the competitive environment, and to some extent, employee reaction.

I think -- I think that a company of this size and this profitability should have ratings that are consistent with it, and when they're not, it just presents some -- some -- some discord, if you will, even amongst us.

We -- and we understand, at least I believe I'm saying this correctly, that the issue for us as it relates to those higher ratings is less an issue of capital, and more an issue of earnings estate.

Can -- can this company actually produce the level of earnings that keep trying to show, but, evidently have been -- have been impacted by things and event?

And we understand that clearly, and I think that what we've tried to do is to deal with everything that we can as aggressively as we possibly can, because we understand that the only way for people to believe that the earnings stream is here is to actually deliver it.

There's nothing we can say about it.

So, the ratings are more a reflection of how we think about ourselves than in any way markets that open up for business that we can't otherwise write, so that's really my best answer there.

Okay.

Thank you.

A pleasure.

Well, I'd like to thank you all very much for being with us.

I know this was a long session.

We appreciate all of your attention, and we will speak with you all soon.

Thank you.

Ladies and gentlemen that does conclude the conference call for today.

We thank you for your participation, and ask that you please disconnect your lines.