旅行家集團 (TRV) 2005 Q1 法說會逐字稿

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

We ask that you hold all questions until the completion of formal remarks at which time you'll be given instructions 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 St. Paul Travelers and head of Investor Relations.

Ms. Olivo, you may begin.

Thank you.

Good morning everyone and welcome to our first-quarter 2005 earnings conference call in which we will review the results for the quarter for the Company.

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

We understand that both CNA and Mark MacLennan have conference calls at 10:00, in consideration of their allotted time we will promptly end the call at 10 AM.

Hopefully all of you have seen the press release, statistical supplement and webcast presentation released this morning.

We will be referring to the presentation during this webcast.

All of the materials released this morning can be found on our website at www.St.PaulTravelers.com.

Today with us we have Jay Fishman, our Chief Executive Officer, Jay Benet our Chief Financial Officer;

Brian MacLean, head of our commercial and specialty operations;

Joe Lacher, head of our personal lines operations and other members of management who are available to answer questions.

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

Our presentation today will include certain forward-looking information.

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

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

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

The forward-looking statements speak only as of today, and we do not undertake any obligation to provide updates on the information contained therein.

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

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

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

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

With that I will turn it over to Jay.

Thank you, Maria.

Good morning everyone and thank you for joining us this morning.

We are very pleased with our first-quarter operating results, and importantly we believe that the earnings force power of this organization is now becoming apparent.

By most measures in our industry this was a very strong quarter.

For the quarter we posted a strong operating return on equity of 16.7% and record operating income of $859 million.

Our combined ratio for the quarter was 90.5%, down 1.4 points from last year's first quarter.

I would note that this combined ratio performance was achieved prior to our realizing the significant portion of our projected merger related expense savings.

As we reported in our last call through December, we had realized $114 million of expense savings, up from an original estimate of 62 million.

Again as discussed in our last call by the end of 2005 we expect to achieve actual savings of $310 million and a run rate of $350 million.

All other things being the same, this $200 million additional expense savings once realized, should reduce our expense and combined ratios by approximately 1 point.

While we have more work to do on premiums, given the first-quarter gross premium comparisons, and we are going to speak today about gross premium comparisons and Jay Benet will give you some insight into that, our picture is improving nicely.

Retentions across all of our businesses were very strong, some at the highest levels they have been in over a year.

New business production levels gained momentum as we moved through the quarter.

For the quarter across our entire organization we did approximately $900 million in new business.

And as it relates to the future, just last week we announced a field initiative specifically designed to bring our franchise to a much more local level, and we are optimistic that this initiative will have a real impact on our top line.

Consequently, we believe that we have the tools in place to drive improved premium performance.

Our key message is that momentum is up.

We are being competitive in the new business market when appropriate, and we are comfortable staying on the sidelines when pricing competitiveness suggested is the right thing to do.

With respect to marketplace conditions, we remain encouraged.

Rate for business retained remains reasonable even though competition for business in the marketplace is considerable.

Loss trends remain benign and as a consequence it is still a good time to do business and we are pleased with our progress.

We had just completed the countrywide rollout of Master Pac and Pac Plus, a suite of new, small commercial products and the enhanced technology platform on which they run and will be delivered to our agents.

Over the last 60 days we have presented this product in 88 locations to over 9000 apkendees (ph) from over 3000 agencies.

These products which broadly expand the classes that can be written and quoted in real-time through our easy to use agency base technology interface are now available for June one effective date business.

This has been very well received by our distributors and we believe should make a meaningful difference in our select business by the end of this year.

In our personal lines segment growth and profitability continue to be very solid.

The impact of cat, our personal lines tiered auto product with sophisticated segmentation tools, is resulting in unit growth and strong retention.

Loss frequency and personal lines continues at quite low levels and as a result margins remained strong.

We announced in April that we successfully priced our transactions to monetize our equity holding in Nuveen Investments.

After-tax cash proceeds from this sale, roughly $2 billion when combined with first-quarter earnings, provides a significant boost to holding company liquidity, statutory capital levels and overall financial flexibility.

Before I get to the webcast presentation let me spend a few minutes covering recent events in our industry and the various regulatory investigations that are pending.

As we announced back in October 2004 outside counsel with the oversight of our Board of Directors, has been conducting an internal review of certain of our business practices.

This review initially focused on our relationship with brokers and was begun by us immediately following the announcement of litigation brought by the New York Attorney General's office against a major broker.

Subsequent to that we received a series of subpoenas and requests for information from a variety of regulators, including the New York Attorney General and the Securities and Exchange Commission in connection with industry wide investigations related to our relationships with brokers, as well as a variety of other business practices and issues.

Our internal review was expanded to comply and cooperate with these requests for information and to verify whether the Company's business practices in these areas have been appropriate.

The reviews have been extensive.

As of this date we have examined more than 15 million pages of e-mails, reviewed more than 10,000 underwriting files and interviewed approximately 200 current and former employees.

Our review with respect to business practices with brokers has been extensive, but we continue to receive even recently and respond to additional requests for information.

So far we have found only a few individual instances of conduct in each case involving nonmanagement employees that were inconsistent with our employee code of conduct, and we have taken appropriate disciplinary action and informed regulators of such.

However, given the ongoing nature of the governmental investigations, it would be premature for us to provide any conclusions, even preliminary ones, as to their ultimate outcome.

We do note that we are fully cooperating with all regulators and we are hopeful that we will have more to say about this matter later in the year.

Our own internal review with respect to finite reinsurance, one of the subjects about which we received a number of subpoenas and requests for information, has been performed in two separate segments.

Finite reinsurance purchased and finite reinsurance.

Our internal review with respect to finite reinsurance purchased which we undertook in response for information has been completed and we have concluded that our accounting for these products is correct.

Very few of these policies remain operative at this time.

With respect to finite reinsurance products sold our work in this area is ongoing, but based on our findings to date, we are optimistic that no significant issues are likely to be identified.

Finally with respect to broker and agent compensation, the large brokers have announced changes in the way they wish to be compensated, indicating that they will no longer enter into contingent commission arrangements.

As it relates to independent agents who of course constitute the bulk of our producers, we continue to believe that profit sharing arrangements are a viable and appropriate form of compensation.

We continue to monitor the legislative and regulatory activity in this area where most of the proposals focus, wisely in our view on greater disclosure and transparency of the ultimate buyer.

As marketplace practices and legal standards continue to evolve, we will of course adapt our own policies and procedures to reflect those changes.

I'll remind you that in addition to our own review, which in many respects continues, the governmental investigations are also ongoing and the various regulatory authorities could well reach conclusions different from our own regarding any or all of these matters.

We do not intend or pretend to speak for any of the authorities nor do we prejudge the outcomes of their investigations.

We will continue to cooperate fully with the various parties involved with the aim of a satisfactory resolution of these inquiries.

In light of the ongoing nature of the regulatory inquiries and our wish not to prejudge the agency's eventual conclusions or findings, I believe I have said all that I should on these matters for now.

Therefore I hope you will understand that we will not be taking questions or commenting further on these particular issues.

Let me also provide you with our perspective on the currently proposed asbestos legislative reform.

The asbestos litigation reform issue has gained momentum in the Senate with the introduction by Senator Spector of his bipartisan trust fund proposal.

His bill calls for the creation of $140 billion asbestos victims trust to be funded through $46 billion of contributions from insurers and $90 billion of contributions from defendants with the residual coming from certain existing bankruptcy trusts.

We continue to believe that a fair and equitable trust fund with provisions agreed to by numerous insurers last year is a viable alternative to this tort system for resolving asbestos claims.

While we very much appreciate the efforts of Senator Spector and other members of the Senate, we do not believe that the bill as presently drafted meets the minimum thresholds of certainty and finality that are critical to a fair resolution of this crisis.

Nonetheless we are one of the insurance companies who will continue to engage with members of Congress to see changes in this bill in an effort to improve the proposal, and we are anxious to participate in the process.

With that now let me turn to the Webcast.

As I said before, it was a very strong quarter.

Turning to page 2, we posted operating return on equity of 16.7% and total operating income of $859 million.

We had very strong performance in all of our segments with combined ratios of 94.9, 95.6 and 78.7 in our commercial, specialty and personal businesses, respectively.

Our overall GAAP combined ratio at 90.5% was 1.4 points better than last year's first-quarter.

It is worth noting that these results include in our personal and specialty segments $58 million after-tax of catastrophes, including $38 million of further development related to third quarter 2004 storms, and in our personal lines segment $78 million after-tax of favorable prior year reserve development.

Our premium picture continues to improve excluding our one-off businesses, gross written premiums were down only 3% on a pro forma combined basis, and I would importantly observe that the first quarter of 2004 on a pro forma basis was a particularly strong premium quarter in part, we believe, because the companies were still competing against each other as separate companies in that quarter.

Retentions in all of our businesses were very strong and new business trends improved as the quarter went on.

There is a real sense of energy in our field organization and our success in the marketplace is building real confidence in the strength of our franchise.

We accomplished our goal relative to the sale of Nuveen, which brings in after-tax cash proceeds of approximately $2 billion, greatly improving our financial strength and capital position.

Turning to page 3 we can see that operating income has increased 40% from the prior year first quarter, which does not include the St. Paul results.

I would note that the 2004 first-quarter operating earnings per share included $83 million of investment income related to the public offering of an investment held by one of the Company's private equity partnerships, adding $0.18 to earnings per share in last year's first-quarter.

Exclusive of that gain operating earnings per share increased by 3.4%.

The average shares outstanding quarter-over-quarter reflect the additional shares issued in connection with the merger.

Page 4 of the webcast requires little explanation but does graphically demonstrate the dramatic change in profitability from the last several quarters.

With that I would now like to turn it over to Jay Benet who will take you through the financial performance of our organization during the first quarter, followed by Brian MacLean and Joe Lacher, who will then offer additional comments on our operating segments.

Page 5 shows gross written premiums by market for our three segments comparing first-quarter 2005 to first-quarter 2004 on a pro forma combined basis, including St. Paul for the first quarter of 2004.

Overall premium volume of 5.8 billion excluding the impact of the run off businesses in commercial other was down 3% consistent with our expectations and trends in recent quarters.

Core commercial of 2.5 billion while down 7% was slightly better than what we had expected for the quarter.

Specialty was down 2% due to planned reductions in our construction business and personal continued to grow.

Brian and Joe, the leaders of these businesses will provide more insight into their results, but before they do let me explain why I've been discussing gross rather than net written premiums.

If you turn to page 6 our casualty ceded reinsurance programs for the specialty businesses have been restructured, which has precluded meaningful comparisons of specialty ceded and net written premiums quarter-over-quarter.

Our gross written premium comparisons are unaffected by these changes in our ceded reinsurance programs and remain a valid indicator of changes in our business volumes.

As you may recall we began making these changes shortly after the merger and further changes were made in the second half of 2004.

By January 1 '05 the new programs were fully implemented and under the new programs, specialty ceded premiums are expected to increase in 2005 and expected losses retained by the Company are expected to decrease.

The 2005 reinsurance programs generally attach at lower loss levels and the Company retains larger shares above the attachment points.

Overall there will be little impact on quarterly profitability and given the changes, will continue to report both gross and net in future periods.

In addition, we made a modest adjustment to 2004 ceded written premiums in our specialty segment as well as an even smaller adjustment in our commercial segment both on an as reported and on a pro forma combined basis, to report at inception all ceded written premiums for reinsurance agreements that have minimum amounts that are required to be ceded.

Previously, ceded written premiums for certain of these agreements were reported over the life of the contract.

These changes only affect our statistical disclosure of net written premiums on a quarter-by-quarter basis.

They don't affect amounts over the life of the reinsurance contracts, and they have no effect on gross written premiums or GAAP or stat quarterly earned premiums, operating results or capital.

They were made to conform to statistical measurement of production net written premium across our businesses.

There were be no significant changes in companywide historical trends, but in the third quarter of '04, we did note that specialty net written premiums changed from a 7% reported decrease on a pro forma combined basis to an actual improvement of 4% and this was the largest change.

These adjustments did not change our characterizations of 2004 net written premiums in any significant way.

Turning to page 7, the margins we are achieving on our 5 plus billion dollar premium base do remain very strong overall and in each segment 94.94 for commercial, 95.6 for specialty, 78.7 for personal and 90.5 overall.

This was a very quiet quarter for prior year loss development in our casualty lines; prior year development was essentially zero in commercial and we experienced 3.5 points of prior year development specialty solely due to the increased costs associated with the third quarter 2004 hurricanes.

In our personal segment we continued to experience favorable prior year development with 8.2 points due to continued favorable frequency and severity trends in our personal auto and homeowners businesses, due in part to claim department initiatives that have reduced costs through more effective and timely claim handling procedures.

And this was offset slightly by 0.4 points related to the third quarter 2004 hurricanes.

Overall while current year weather costs were modest and added only 0.6 to the consolidated combined ratio, the consolidated combined ratio included 1.7 points related to current and prior year caps.

With that now let me turn it over to Brian.

Let me start with commercial lines and I will talk a little bit about profitability.

For the quarter profits were very solid at 433 million with an overall combined ratio of 94.9.

There were no major issues and losses in the quarter with frequency trends remaining favorable and severity slightly better than what we had expected.

So overall margins remained very attractive.

Going to page 8 on the production side overall is a very solid quarter.

Starting with commercial accounts retentions were up to 79%.

Part of the retention lift in the quarter is in the large property area where we have now worked through our underwriting actions on a catastrophe exposed St. Paul national property books that we talked about before.

This had accounted for roughly 2 points of drag on the overall retention in previous quarters.

Our core field book ran at an 81% retention, which is our best quarter since the merger.

Overall pricing continues to slide modestly and as you can see on the slide down 1 percentage point a quarter for the last four quarters.

We are optimistic that we are seeing the soft landing that everyone in the industry seems to be hoping for.

Selectively risks can be very competitive in the marketplace and property rates in particular are under the most pressure, but we don't see prices falling drastically in any one line of business.

New business dollars were up slightly from the previous quarter and measured as a percentage of what is available for renewal on what we usually call new to base.

New business went from 16% in Q4 to 18.5% in the current quarter.

The story is much more promising however, when we look at the individual months.

In both February and March new to base was over 22%.

In our core middle field book we are very focused on the new business marketplace, and although it remains very competitive, we believe there is still solid opportunities.

Two months certainly do not make a trend, but we feel very good about our progress in the quarter and the quality of what we are writing.

In select or the small commercial business the trends there are roughly similar; it was a great retention quarter at 82% and pricing, although down slightly from previous quarters, continues to be positive at 3% and right on what we have expected.

While new business is not where we want it to be, we've been very successful in the smaller end of this marketplace.

In the larger select account size we anticipate the flat form rollout that Jay just spoke about will have a real impact on our new flow beginning with the June effective.

So overall in select product margins are excellent, retention is at near record levels, pricing is still positive and loss trends are a little better than what we expected.

And assuming we get our expected lift in new business we will be in an even better position going forward.

In national accounts, which isn't displayed on this page, gross premiums were level with last quarter.

We continue to see growth in the 1 million to $5 million account size, which over the last five years has really driven the profitability for us in this market.

On the larger account size claims under administration and fee income are down from the first quarter of '04 due to the loss of some larger jumbo accounts.

We talked about this in the past and this segment of the market continues to be very competitive, and we won't chase these accounts if they are below our target returns.

So in total for commercial we feel a solid production quarter, retention is very strong, price change dropping but slightly, and the new business picture still not where we want it to be but improving.

Now turning to specialty segment, operating earnings here were very strong at 188 million even after 47 million in catastrophe charges.

Of those charges 13 million are in the current year and due primarily to the winds and flood claims in the UK in January; the remaining 34 million is development on the prior year third-quarter Florida hurricanes, primarily in our personal cat risk business.

Excluding the weather events our combined ratio was 90.8.

Much of the improvement over previous quarters in the combined is coming in the bond area.

Last year we discussed the repositioning of that book and we've now completed that cycle.

What now remains is a very strong core book, and that is contributing to our combined ratio improvement.

In general loss trends are stable and profit margins remain very solid.

Shifting to the production story on page 9 and the domestic specialty statistics, overall retentions continue around 75, but this includes a 5 point retention drag from the construction book.

We are still working through bringing the two companies construction books together, but are nearing the end of that progress and we expect retentions to improve on a go forward basis.

Other than construction most of the businesses were running at 80 plus percent retention levels and we certainly feel good about this.

Price change was down from last quarter but underlying rate change was flat and still positive.

As we mentioned in last call Q4 price change was driven by an increased exposure trend primarily due to payroll and work loads in the construction segments.

New business for the quarter was in line with previous quarters, and given the market conditions continues to run at a very acceptable level.

Just like in commercial lines, the new business market is very competitive, but we remain active in the market and believe profitable opportunities still exist.

So overall in domestic business, total gross written down slightly due to the dynamics I mentioned in construction but otherwise we're encouraged by the trends.

In international we see similar trends to what we see domestically.

Retentions remaining very strong; prices are holding at the low single digits excluding the Ireland market where regulatory reforms have created the expectation of meaningfully improved loss trends, thus driving prices down to double-digit negatives the last couple quarters.

So again ex Ireland fairly similar to what we are seeing domestically.

Similar to the domestic business new business flow in the marketplace is down as companies seek to retain their profitable books, and we are going to continue to look for opportunities that meet our return hurdles.

And remember that the international book here is only about 20% the size of the overall domestic book.

So in aggregate in specialty a great earnings quarter and ex construction a solid production story, and again we believe the construction numbers will improve going forward.

Now I'll turn it over to Joe for the personal lines story.

I'm going to follow our pattern this morning of taking a look at profitability first and then moving on to our production story.

Earnings for the quarter were very strong at $285 million, an overall combined ratio of 78.7%.

These earnings included after-tax charges, current year catastrophes of $7 million and $4 million prior year reserve development on the third quarters '04 storms.

They also benefited from $78 million of additional after-tax prior year reserve development.

Cash (indiscernible) and prior year reserve development were largely consistent with the year ago quarter and consequently the underlying combined ratio has improved 4.9 points.

Profitability improvements driven by several key items.

First, claim frequency and severity continue to decline across our major lines and remain at largely very positive levels.

This is consistent with prior quarters and industry trends.

Second, the results of our claim re-engineering initiatives are beginning to emerge.

They are showing improved speed in claim resolution and mitigation of ultimate claim severity.

We continue to further refine and roll out these initiatives across the entire country.

Third, our product sophistication, our (technical difficulty) selection and pricing capability continue to allow us to attract and retain consistently profitable business.

Moving on to page 10 and looking at our production story, this was an overall solid quarter.

Policies in force were up from prior year quarter by 5% and auto at 12% and homeowners and other.

Retention levels are strong and stable.

Growth is slow from prior quarters as a result of slowed new business levels largely driven by two main items.

First, the impact of the Royal & Sun renewal rights transaction increased new business levels and growth throughout all of 2004.

As expected and previously noted this was a onetime, one-year boost in new business.

Second throughout late 2004 and into 2005 organic new business has declined due to increased competition in the marketplace.

This is focused in the auto market and it spans the majority of geographies.

Most major competitors in the auto market are achieving target returns and are pushing for growth.

Competition in the homeowner's lines is less intense, and as players appear less consistently satisfied with their returns or less satisfied with their underwriting mix.

Our continued strength in homeowners is allowing us to maintain our growth in this area.

Looking at renewal price changes, in homeowners and others they remain strong.

Given underlying loss trends, we believe that is pricing will allow for continued margin expansion in the homeowners and other line.

Our renewal pricings in auto declined to 3% and are under some additional pressure, given the competition in the marketplace.

Nonetheless, we believe that current auto pricing levels and loss trends will allow us to maintain profit margins assuming these business dynamics generally remain consistent.

Now let me turn it back to Jay.

Page 11 shows the steady increases we've been achieving in averaged invested assets primarily due to strong cash flows from operations, which amounted to almost 1.1 billion in the current quarter and over 5.3 billion since the April 1, 2004 completion of the merger.

Average invested assets now stand at over 64 billion.

NII of 583 million after-tax which is shown on page 12 is also continued to increase due to steady growth in fixed incomes, net investment income and performance in our non fixed income portfolio that was comparable to the fourth quarter of 2004.

Within other investments private equity returns were the largest contributor to the favorable quarter.

Overall the portfolios after-tax yields held steady at 3.6%.

Page 13 shows our capitalization at the end of the first quarter.

Debt to capital now stands at 23.5% a full point below the December 31, 2004 level, common equity exceeds 20 billion, book value per share is $30.51 and tangible book value per share is up to 23.82.

In the process of combining our main insurance poles and hope to complete this process in the third quarter as we previously talked about, and we remain well capitalized, have substantial holding company liquidity and have increased our financial strength and flexibility even more with the recent Nuveen transaction.

We've included a schedule on page 14 showing the expected estimated quarterly impact of the Nuveen transaction for the remainder of the year.

Based upon our analysis we expect to record a second-quarter gain of approximately 145 million related to the April 2005 secondary offering and the Nuveen repurchase.

Assuming approvals are received as expected from Nuveen fund shareholders in the third quarter, we expect to record another gain of approximately 73 million at that time.

The transaction will generate $2 plus billion in after-tax cash proceeds after fully utilizing the 1.6 million St. Paul NOL that remained at the end of the first quarter, the NOL being reduced in the first quarter by 400 million due to the first quarter profitability of the Company.

We have already received 1.8 billion of cash with another 400 million expected in the third quarter after fund shareholder approval.

With that I would like now to turn things back to Jay for some final comments.

Just two topics to cover quickly before we turn to your questions; first on page 15 turning to our organization, since we last spoke John Albano has been promoted to manage all of our commercial businesses.

John is a very seasoned and experienced underwriter and manager; most recently has led our national accounts division.

John has been with us for over 30 years and brings broad experience in small, midsize and large commercial accounts.

Greg Dizozi (ph) and Michael Klein have been given the responsibility for managing most of our specialty businesses.

Greg has recently been overseeing public sector, global technology, excess and surplus lines and our specialty umbrella business.

While Greg has been with us for just two years, he brings a long tenured experience with both Royal and Sun Alliance and Chubb.

Michael Klein has been overseeing our financial and professional services business.

Following in his roles overseeing public sector and technology Michael has been with the company for 15 years and brings a broad range of actuarial and underwriting management experience.

John, Michael and Greg all now report to Brian, and if you know Brian and you know the experience and talent he brings.

He is a 17-year veteran of the organization, having capably overseen the small commercial business, the overall claims operation and he has served in a range of senior financial management roles.

I am excited to work with all of these folks to further develop our franchise.

I think it speaks well to the depth of our talent in this organization.

Those of you coming to our upcoming invester day presentation in New York on May 24th or will have an opportunity to hear from these folks personally.

Finally as to our overall corporate financial expectations, last quarter we told you that we were comfortable in our ability to deliver 13 to 15% operating return on equity in 2005, and we expressed more comfort at the low end of that range.

Given the strong start to the year reflected in this quarter, and importantly the general insurance market conditions we continue to experience, we are comfortable moving higher in that 13 to 15% range for 2005.

Recognize this is said in concert with our intention to maintain meaningful investment in our businesses to ensure profitable growth.

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

Also I would note that this assumes no significant prior-year reserve development either positive or negative, and it also assumes a "normal" year of weather and catastrophe losses.

With that let's open it up to questions.

(OPERATOR INSTRUCTIONS) Jay Cohen with Merrill Lynch.

Just one question and maybe a couple questions.

The first is with the proceeds from Nuveen, obviously you set aside some rating agency concerns, a lot of it is in the insurance company, but at what point do you think you will be in a position to manage your capital assuming the growth doesn't takeoff which it doesn't look like it's going to?

I would make a couple of observations.

First our earnings in 2004, even though they were a billion dollars after-tax were less than we had anticipated and less than we had expected.

And while we are off to a really good start here in the first quarter of '05, I think we've got a few more quarters of improved performance to deliver and demonstrate before we can anticipate meaningful changes in our capital management strategy.

Having said that I would expect us to be able to do that as we turn into 2006.

Nice to have that flexibility anyway at some point.

And then just a small issue really is the share count just kind of every quarter creeps up a bit, and maybe it's just the option programs but should we expect that kind of share count creep to continue assuming no capital management here in the near-term?

I think in terms of what you're seeing on a quarterly basis the underlying dynamics of what is causing it to move the way it has ought to continue.

It shouldn't change by very much.

We wouldn't expect, but there is always things coming in and out of it, and with stock prices change that also impacts the fully diluted.

I think that is the point; it really isn't option exercise, as you look at the price of the stock and generally what's happened over the past 18 months.

So that is not a meaningful contributor to the change but we can take a look either further, Jay and get back to you.

And one last quick one, it seems that from a production standpoint is it fair to say by the second half of the year just given the merger that the comparisons should get somewhat easier and from a new business standpoint the comparisons should be more positive?

First I noted this in my formal comments, and would observe this again.

If you take a look at the first quarter, first and second quarters of 2004, they were very much high watermarks.

They were the result of renewal rights transactions.

They were the result of the Companies competing in the marketplace as two separate companies.

Even as I explained before even the results of the second quarter were largely booked and actions taken from times preceding the merger.

So the first and second quarters truly are high watermarks.

So obviously I think the comparisons will get quite easier as we move into later in the year.

But I think more importantly we are more optimistic about our actual results and how they will appear in comparison to the prior year quarters.

Again, we do look at gross written premiums and excluding the runoff businesses, which is an important adjustment to make -- these are businesses where we are actively seeking to reduce the premiums as dramatically, as quickly as we can.

Gross written premiums were down only 3% from a fairly strong first quarter of '04.

So I do think that we've got two things going on that the comparisons will get easier but I also think that the performance will improve.

Great.

Thanks for the answers.

Ron Frank with Salomon Smith Barney.

Two things if I could.

One, allowing and understanding your comments about the bump from the renewal rights transactions and so on early last year, the consecutive quarter policy in force growth is looking now pretty flat in personal lives.

So my question is barring a significant change in the competitive environment are we headed basically as the comparisons lap in the next few quarters just for flattish year-over-year comparisons?

Is that a reasonable expectation?

And also since it continues to be a subject of interest I was wondering if somebody could give us an updated "Big Dig" comment.

Let's see just to make sure that we get all three comments because I would like Joe to just comment on the personal lines activity and I would make an observation -- and this is to some extent instinct, Ron.

I believe that with the advent, with the introduction of the select product with the renewed energy out in the field I remain optimistic and hopeful that the second quarter results will actually show improvement, and I just believe they will.

Obviously we will see what happens.

As it relates to the big dig, the situation there remains unchanged.

The reserve position remains by all indications just fine, and we feel good about the reserve set up for the Central Artery/Tunnel Project.

Joe, do you have anything specific on the personal lines trends?

Relative to the personal lines trends, Ron, I think you're seeing particularly in the auto market, what we're seeing broadly across competitors and the marketplace.

Growth is slowing for us and most players as that becomes more fierce.

I think as you compare year-over-year we're going to see at least a quarter or two where it slows more consistently with what we see now; some of the underlying trends when you look state by state, where we are seeing more fierce competition say for example in New Jersey.

Our responses to those environments are going to take us a quarter or two more to move them into the marketplace.

So you will see that have an impact later in the year.

I am sorry, I did not quite understand that last comment, it will take you a year or two to move what into the market?

A quarter or two, as an example something like in response to the New Jersey marketplace.

You mean to just sort of reconfigure on price and design or what have you?

(multiple speakers) figure the product set and reconfigure their platforms to deal with a much more broadly competitive marketplace from a regulatory standpoint.

Okay.

Thanks very much.

And Ron, before we leave the topic just one other observation.

There isn't -- notwithstanding all of the press coverage -- there isn't anything that has occurred related to the central artery project that is problematic from our perspective or was not envisioned by the reserves when they were originally established.

So my comments that reserves remain fine is said in the context of all of the publicity that the project has received and in the issues up there.

So we actually feel very good about it.

that is what I was after;

I wanted to know how it is developing relative to your expectations.

Yes, just fine.

Thanks a lot.

Alain Karaoglan from Deutsche Bank.

Good morning.

A couple of questions.

Jay, your comment about the expense ratio of expecting it to be a point better, was that overall or just for the commercial lines?

No, that was overall.

What I did was simple arithmetic.

I said that we expect that by the end of this year, we will have accomplished $200 million in additional expense savings, approximately $20 billion in premiums across the whole places of point.

So it's a point across the whole operation.

Okay, which takes me to the first on the lines expense ratio which around 26% is higher than the peer companies.

Do you expect to focus on that and to get it -- to lower the expense ratio there?

I realize that the synergies on St. Paul are on the commercial lines, but is that something of concern to you?

I think one of the things you can look at, and I would ask you to just aggregate it a little bit between auto and homeowners, we have a more homeowners rich book than most of our competitors and peer companies, and commissions tend to be higher in that homeowners book.

So there is a chunk of the difference that is related to that basic commission level.

We've also seen a clip-up in the last couple of quarters as profit-sharing payments, contingent commissions, have risen a little bit, and that is largely driven by the improvements in the loss ratios.

So it is correlated to that loss ratio performance, and we've had such strong earnings and such strong results that there is a little bit of an offset in that expense ratio line.

So we feel pretty good about it, given this underlying cause.

But are you working to decrease it?

Well, we are not working to decrease profit-sharing because that would decrease the profit.

No, the expense ratio.

We're trying to manage the underlying G&A expenses, and there's some additional investment we put in there in the last couple of quarters, but it is really comparing '05 to '04; it is roughly half a point that is driving on that investment.

The real drivers, again comparing this year over last year, is coming from commissions and mix of business.

Okay.

Last question on loss cost trends, what are you seeing in commercial lines?

You did mention that frequency and severity was improving.

Could you talk about it?

Maybe -- I don't know, averages don't (indiscernible) themselves, but maybe even workers' comp.

I made the comment, Alain, that loss trends remain relatively benign, meaning that there isn't much of a change going on from the recent patterns that we've experienced, and those patterns -- and I'm speaking broadly across the business -- remain relatively low levels of frequency and a severity which really reflects the basic inflation that is embedded in the business.

But I would say from a historical perspective that is relatively attractive, and at this moment there really is nothing changing in those loss trends.

Thank you very much.

I want to make one other observation because I think it is important.

We are a company that is committed to making the investments that are necessary to build profitable growth in the business.

And I would use as examples what Joe has done over the last several years in investing in the segmentation product, the multi-tiered segmentation product, has been a tremendous return on investment project and has positioned the personal lines business in very different ways.

And the investment that went into building these new Master Pac and Pac Plus products was real investment to be made, and again will speak, I think, well as to the future growth potential that we have.

So while we are always looking at the expense ratio, I would like to make a point that we're not driven to drive that expense ratio to the lowest number possible.

We are a company that constantly evaluates investment opportunities and return on that investment, then we are committed to making the investments that will provide for future profitable growth.

One can burn the furniture for heat if you get carried away in these businesses, and I just want to make a point we are committed to the future, and that is going to mean continued investment.

Thank you.

Brian Meredith with Banc of America Securities.

A couple quick questions.

First, Jay, could you comment a little bit about what the culture and kind of morale of the organization is right now?

You have had a number of senior management departures, and even some in the middle ranks have heard about in the marketplace.

Should we expect some of this to come to a conclusion?

Obviously, there's some merger and integration issues that continue to go on here.

If you could just comment, that would be great.

Yes, I would start by telling you -- and I'm looking around the room to see if anybody here would disagree, because everyone will have their own perspective -- but I actually think morale in the place is quite high.

I think we've been successful in the marketplace.

I do believe that in the context of the merger that we are turning or have turned the corner, and I think that many of the issues that a transaction of this size inevitably precipitate are now behind us.

We have, I believe, a management team in place that is deep and experienced and committed to the success of the organization.

And people leave for various reasons.

They leave for personal reasons.

They leave for who knows why.

And I think we've done a wonderful job of identifying our business leaders, and I think the organization has rallied around it.

Doreen Spadorcia's claim group has been flying around relentlessly to every claim office that we've got, it is just being hailed honestly as a leader in the claim department, and I think all of these things help.

I think when you get the right people in the right positions that a nearly 30,000 organization can understand and embrace, and it makes sense to them and morale goes up.

It doesn't hurt, by the way, to post a quarter as we've had in this quarter.

Everybody likes to work for a successful organization and this quarter speaks to success, so people feel buoyant and uplifted and I think the analogy in sports, I think we're going to take the success and build more successes on it.

But I think that the morale in the place is actually quite strong.

Great.

Thanks.

Larry Greenberg with Langen McAlenney.

Specialty lines, when you ex out the 2004 cat impact it looked like the combined ratio, the underlying combined ratio came down pretty nicely as to the low 90s, and your comments about being through some of the bond issues.

Should we expect that to kind of maintain a more profitable margin level?

I don't know that any of us have enough of a crystal ball to know what's going to happen to rate in the loss trend, and those are variables that we don't control.

But I think when you look at these numbers and the results for the quarter there really two items that one would say one should look at in terms of the sustainability.

Obviously there was personal lines favorable development of $78 million on an after-tax basis, and I would probably characterize it as unusual catastrophes in the first quarter probably certainly related to compared to the competition.

In our case to have had further development on the third quarter of '04 storms.

But I don't see anything in these numbers that is not a core business, that is not organic to what we do.

And I think trend and price volume spoke well about looking for the soft landing.

Loss trends remain fairly benign.

I don't know what's going to happen to weather but no, I think that what you are seeing now is the underlying profitability, genuine profitability of these businesses emerging.

Great, thanks, and can you just briefly give us a little bit more color on the new select product, Master Pac I think you called it?

Is this an area of the market that you haven't been in, or something you've been working on and just are introducing some new products there?

I think it is a couple of pieces, and obviously what we now have in our smaller commercial is the combination of a very large Traveler's franchise and a fairly significant St. Paul franchise.

Speaking from the Traveler's perspective I think we were very focused on the small end of that marketplace where we've been pretty successful.

But when you look at and I'll use account size, but it is not the perfect way to describe it, the accounts of between 10,000 and $50,000 premium is a place where from a Traveler's perspective we had clearly gotten behind the curve.

I think St. Paul was in a different place there.

We've gone through a fairly dramatic expansion of our class appetite.

We've changed the coverage components for our product, which in more additions than subtractions but really getting a product that fits better with what that customer needs.

And we've really improved the technology platform that the agents can use to issue it.

So I think it is a fairly robust change, and I think a significant opportunity for us in the marketplace.

Characterize it, too, the context of the competitive environment.

A number of our -- and this was to some extent a necessity of our merger it was necessary to pick one system.

We did obviously opt for the Traveler system in the early days.

Brian mentioned I think that did put us in a bit of a competitive disadvantage in the larger end of select, just as a couple of competitors were introducing their own product that better dealt with that higher end of the small commercial business.

And so out in the marketplace we were dealing with a somewhat less competitive product while other folks were introducing more competitive products.

And this I believe leapfrogs us and puts us at or better than any other broadbased class expansion product in the marketplace.

Time will tell and we will see that what the numbers are but we are certainly back in the competitive arena now.

But what is the target premium for this product?

What is the (indiscernible) account size?

I am sorry, Brian just had to step away for a moment, talking about the approximate account size, of course we are really not --.

I think to use premium as a surrogate, which isn't a great one, it is 25, 10,000 to $50,000 account size is what we would typically call it.

But in this case we are looking more at what are the exposure dynamics of the account and looking at how robust a business.

But that is a rough measure of what we're looking at.

And that was a step that was very consciously taken to respond to the way agents think about the business.

It was not -- it wasn't an -- it was an internally developed product but it wasn't developed to meet our needs.

It was really developed to meet the agents' needs and the way they assess and evaluate that marketplace.

So I think we've got something here.

Okay.

Thank you.

Michael Dion with Sandler O'Neill.

Good morning, two questions.

First off, it looked like the expense ratio in the commercial lines segment was up over the prior year quarter.

I was just wondering what was driving that?

And then secondly, just with respect to some of the senior management changes in the organization now, the combined entity is thirteen months old, if we were to look down several layers from the slide 15 in the presentation, how would that turnover look relative to where we were thirteen months ago?

I will take the second part first as Jay scrambles to get back to the data and to your first question.

In looking at the list and it is really largely the same group of people -- Doreen Spadorcia was running the bond business.

We've promoted Doreen, it was not a departure, it was driven by the fact that Brian was promoted and Tom Kunkel (ph) stepped in to ably begin to run that business but that was not driven by a departure.

On the commercial side John Albano had been running national accounts with Brian taking on this (inaudible) role we felt that a level of management support underneath him was appropriate so John is now going to see all of the commercial lines businesses.

And national business is being run by someone who was here thirteen months ago, the select business is the very same person who was here.

The middle market now that Pete Higgins is retiring is actually going to be run by someone who was in our national accounts business thirteen months ago.

So there really has not been underneath the kind of more public names that have left any meaningful individual churn or departure.

It is all very much the same folks, and I think we got the right leaders running the right businesses.

As far as the commercial lines, combined ratio and in particular looking at the expense ratio, there have been fundamental changes at the company and with the merger.

If we look back to the first quarter of last year it was lower than what the first quarter of this year is.

The first quarter of last year was just Traveler's only, so we had the impact of bringing the companies together.

The runoff businesses do impact that as well as some of the mix issues that we have.

And we are still again at the early -- I would say early stages where we are 114 through towards a 350 million target by the end of this year.

So there are still some real consolidation savings to be harnessed here, and given the fact that select was consolidated, the middle market was consolidated and the field office was consolidated, I would -- the field offices were -- I would anticipate that a fair amount of those additional expense savings will evidence themselves in our commercial business.

Okay.

Fair enough.

Thank you.

Michael Lewis with UBS Securities.

Good morning, Jay.

A few questions.

Jay, it seems your tone regarding market conditions have changed dramatically from the third quarter of 2003.

Maybe you can explain some of the reasons why you seem to be so much more I would say positive regarding prospects.

Also my second question goes to Brian at the AIFA Conference he made some comments that at least from his sector he was willing to take more price risk.

Are you doing it, Brian, and in what lines?

And lastly, can you explain the 10% increase in renewal pricing and homeowners in the 12% pith growth, with the kind of margins you are generating with or without catch, normal catch that seems to be pretty big increase.

And where you are doing your writings and how you're getting such good pith growth and rate increases?

I would say on the first one that that was was probably more in your ears than it was sort of coming from our view of the world; although it is obviously easier to be optimistic having posted the quarter that we just posted than to be quite as bullish or when we were dealing with the asbestos and environmental charges in the fourth quarter or with the cat storms in the third quarter.

No.

I've always been a believer and have articulated it on each of the last calls that the earnings horsepower of this organization was substantial and would ultimately emerge.

And I was confident of that.

And I think all you are hearing now is the meeting of that delivery to my own expectations.

I know what we have here internally and I know what we are comfortable and capable of doing.

And I feel great about our ability to be competitive and to compete and to win, ultimately to win.

And it is important; its just easier to say that having posted the quarter behind us that we have.

In terms of marketplace conditions, we did say in the fourth quarter that loss trend remained pretty benign, and that is where we are now.

We did say that the declines in the marketplace that were occurring, the reductions and increases then if you like were occurring, in fact more slowly than we thought they might, we just didn't know what the future would hold, and three months later we are hopeful, fingers crossed, that this notion of a soft landing is really in our future.

So no, I think that the opportunities are substantial.

The margins, the new business marketplace and I said this before and a lot of people do get it confused, when an account finds itself in the marketplace from time to time the competition for that account gets dramatic and the pricing gets out of sync.

And that is still the case and we will be aggressive where we should be and will sit on the sidelines where we should.

I don't think that much has changed;

I thin the results of the Company just enable us to articulate it better.

The one thing I would say massaging that a little Jay cause you said third quarter, I would say from inside the business and again, the next six months could change all of the whole industry's view of this.

But I think from a pricing perspective we feel that it is coming down softer than we feared it might six months ago, and that is probably a change.

The other thing specifically where we are willing to take some price risk is primarily in that core commercial account's field book of business.

And as I talked about -- and I don't want to blow February and March out of proportion -- but our new business psyched up a decent amount there and again I am talking about going from 16% new to base, up to 22%.

So we are not going crazy by any stretch.

But that is the area where we are really trying to look at a core field middle market business.

And the last one on homeowners.

From a homeowners perspective we continue to have very strong financial performance from a homeowner's perspective, and it is largely because we are good at it.

We are very disciplined underwriters, disciplined pricers and sophisticated in that process and very careful about the coverages we offer and where we offer them.

Our earnings reflect that, and our growth really is a broad-based growth, is across most geographies.

That doesn't mean we're growing everywhere.

There's certain catastrophe prone areas where we restrict that growth; we are very careful about it which has led to some of the underlying profitability.

But really if you look across our top 30 states, I think all but three of them are growing, and one of those were intentionally mitigating growth.

So it is a strength of the place and it is a strength of the organization, and we are going to continue to use that strength in the marketplace.

I shouldn't be surprised by a 10% renewal price increase with those kind of margins you're generating?

I think there are different geographies where we are working different items, and we are managing -- part of it is automatic increases in limits, and inflation guard (ph) that moves through different pricing components and part of it is responding where we think we have catastrophe-related issues or pricing issues that are at a pattern and part of it is because the marketplace continues to be a restricted marketplace.

And this is something that we can do and manage in that marketplace.

Thank you very much.

We promised that we would be respectful of the time, and it is 10:00 Eastern.

So we are going to sign off.

We thank you all for your time and attention and obviously Maria Olivo is available to take calls that you may have.

Thank you for being with us this morning.

Ladies and gentlemen, thank you for joining today's conference.

This concludes today's presentation.

You may now disconnect.

Good day.