旅行家集團 (TRV) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the fourth-quarter and full-year 2005 earnings review for St. Paul Travelers.

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

At this time I'd like to turn the call over to Mr. Michael Connelly, Vice President of Investor Relations.

Mr. Connelly, you may begin.

Thank you, good morning.

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

All of these materials can be found on our website at www.st.paultravelers.com under the investor section.

Today with us we have Jay Fishman, CEO;

Jay Benet, CFO;

Brian MacLean, Head of our Commercial and Specialty businesses; and Joe Lacher, Head of our Personal Business.

They will discuss the financial results of our business and the current market environment.

They will refer to the webcast presentation as they go through their comments and then we will open it up for questions.

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

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 fact may be forward-looking statements.

Specifically we may make forward-looking statements about the Company's results of operation, financial condition and liquidity, the sufficiency of the Company's reserves 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 to measure profit and other measures which may be non-GAAP financial measures.

Reconciliations are included in our earnings press release and financial supplements and other materials and are made available in the investor section of our website, st.paultravelers.com.

With that, I'm going to turn it over to Jay.

Thank you, Mike.

Good morning everyone and thank you for joining us today.

Let me begin by saying that 2005 was a year in which we produced strong profitability notwithstanding record hurricanes.

We posted full-year operating income in excess of $2 billion including after-tax charges of 1.5 billion for catastrophes and 566 million for A&E as well as an after-tax benefit of $350 million for other net favorable prior year reserve development.

Our operating return on equity for the full year was 9.6% or 17.2% adjusting for the above items and the combined ratio was 101.3 or 89.0 also adjusting for these items.

Our topline performance improved as the year progressed and that continued into the fourth quarter.

For the quarter we reported $151 million of operating income or $0.22 per basic and diluted share.

Excluding catastrophe losses, prior year development and the fourth quarter impact of current year loss ratio reestimation, operating income was $913 million; operating return on equity was 16.5%; and our combined ratio was 89.5.

We experienced strong underlying earnings in all of our segments driven by continued benign loss trends obviously other than the hurricanes and solid net investment income.

We also note that this was the fifth consecutive quarter in which we had overall net favorable prior year reserve development excluding A&E.

Gross and net written premiums excluding the impact of our runoff lines were up 1 and 3% respectively over last year's quarter.

Commercial core net written premiums were up 4%; specialty was down 2%; and personal was up 8%.

Underlying these results we continued to experience historically high retention rates, generally stable renewal price changes and new business premiums that are mostly ahead of last year's fourth quarter.

And as we look through the details of our premiums this quarter we are pleased with the underlying dynamics.

We're sure that many of you are interested in our view of what's happening in the marketplace.

Generally we are observing increasing prices and tightening terms and conditions in catastrophe exposed areas particularly so in property lines.

In some cases the changes are substantial but they are necessary given our expectations of potentially changing weather patterns.

In non-catastrophe exposed areas, the market seems to have achieved stability.

We are focused on our catastrophe exposures and will continue to adjust our risk in reward equations accordingly.

The actions we have taken and will continue to take include changes in gross exposure, pricing, terms and conditions, insured values and deductibles as we seek appropriate returns in this environment of potentially increased frequency and severity of weather.

As it relates to our balance sheet, we lowered our debt to total capital ratio to 21%, our tangible GAAP equity increased by 12% and our statutory surplus increased by 19%.

Our net worth now exceeds $22 billion.

Our capital position is very strong and we have demonstrated our ability to generate substantial capital internally.

We want to make certain that our capital position reflects how we evaluate our current catastrophe exposures and we want to remain well-positioned for market growth opportunities that emerge.

We continue to evaluate all of these factors and hope to engage in more dynamic capital management as we move further into 2006.

With regard to broader industry issues, I'm sure that many of you are aware of a proposal suggesting the need for a state and federal structure to provide a backstop for severe natural catastrophe costs.

We struggle with this proposal because we believe our industry has the ability to manage the risk posed by these events.

The long-term solution requires free market rates for insurance and as a consequence, we support less rather than more federal involvement in this arena.

In contrast we applaud the renewal of [TRIA] for two more years but look forward to working with our industry and government in finding a permanent solution which we believe should be a more narrow federal role limited to the assumption of international and domestic nuclear, biological, chemical and radiological terrorism events subject to an industry retention.

Other than this category of truly uninsurable risks, we believe the industry has the resources, creativity and ability to respond to the challenges related to the threat of terrorism.

Finally while we continue to believe the industry has the ability to manage most risks, we are actively involved in the discussions surrounding asbestos reform and we continue to seek a permanent solution providing fair compensation to victims and certainty to defendant in insurance companies.

The judicial environment in which we work today is not getting the job done.

Consequently we support the concept of a trust fund similar to SA-52 that Senate Majority Leader Frist plans to bring to the Senate floor.

However, this proposed legislation requires substantial modifications to be fair and equitable to all involved.

To that end, we are one of the companies that continue to be actively involved to shape SA-52 for the better.

In that regard Jay Benet will be covering the results of our own asbestos review.

Regarding regulatory matters affecting our industry, the investigations described last quarter remain ongoing as are the Company's efforts to cooperate with the regulators.

Therefore we have nothing new to report and this will be all that we have to say with respect you these matters.

Finally, I'd like to take a moment and comment on our outlook.

The combination of modestly rising interest rates, continued benign loss trends and the momentum in premiums I've spoken about bodes well for longer-term profitability.

Our guidance for 2006 is that we expect to have an operating return on equity in the range of 13.5 to 14.5% for the full year assuming normal non-catastrophe weather and catastrophes of approximately $460 million pretax or $300 million after-tax or roughly 2.2 points on the consolidated combined ratio.

It is worth noting that the 2006 catastrophe estimate compares to approximately 200 million pretax and 130 million after-tax that was included in our 2005 budget, an increase of approximately 130%.

We have not assumed any prior period development, arranged substantial change in our capital management and our base measure for equity is expected average shareholders equity for 2006 excluding FAS 115.

We have begun 2006 in a position of strength.

Our capital position is very healthy and we are excited about the upcoming year.

2005 was also a year of real progress in the evolution of our organization.

In less than two years our Company has very much come together with its own identity and with a real sense of employee engagement.

We are one organization and our management team is working well.

We're focused on the marketplace and the agent reaction to the work we've been doing since April of '04 is just terrific.

We can feel the momentum in our organization and we're excited about what 2006 holds.

With that, let me turn it over to Jay Benet.

Thanks, Jay.

Page three of the webcast provides financial highlights for the quarter and for the year most of which Jay has already covered or are self-explanatory.

I do want to point out that the 694 million share count used this quarter in our fully diluted EPS calculation is lower than the full year 2005 diluted share count due to the antidilutive effects of convertible securities.

This occurred as a result of the reduced level of income reported this quarter due to the catastrophes and the A&E charge.

And as you will recall, a similar reduction in the fully diluted share count occurred in the third quarter.

Page four shows our fourth-quarter in full-year consolidated operating income and GAAP combined ratios including four significant items included within our results.

Cat losses, A&E charges, net prior year development ex A&E which was favorable for the current year and for the fourth quarter, the impact of reestimations of first- through third-quarter current loss year loss ratios due to new information and insights.

We have provided this data to you as we did last quarter to aid in your understanding of the current and the prior year results.

We continue to see very healthy underlying margins in all of our business segments, our current quarter and full-year 2005 combined ratios excluding the four items I just mentioned, were 89.5% and 89% respectively, both improving by 2.1 points from the prior year periods.

As Brian and Joe will discuss further, we're experiencing very strong retention of our highly profitable in force space while frequency of non-cat related losses and loss severity continue to be better than we had expected.

Page five shows the after-tax cost of Hurricanes Katrina, Rita and Wilma by segment and including reinstatement premiums and state assessments.

As Jay said, this has been a record year for cat losses.

Our gross loss estimate for Katrina and Rita has increased by 16% from amounts reported in the third quarter.

While our third-quarter estimates of projected losses for Katrina and Rita were based upon many factors and assumptions that have emerged as expected, certain of these factors and assumptions have not, in particular the number and severity of large claims in our commercial business and damage estimates for offshore energy facilities.

On the other hand, projected losses related to Wilma for which we disclosed earlier in the fourth quarter an estimate of 220 million after-tax and net of reinsurance have emerged more favorably than expected.

Here again large claim activity was the driver, this time being less than what was originally projected resulting in a $33 million reduction to the estimated cost of Wilma or the 187 million you see on this page.

It should be noted that these loss estimates, like all loss estimates, are subject to uncertainty particularly given the recent timing and scope of these storms and we will continue to closely monitor them going forward.

Turning to asbestos on page six, we used the same techniques in our study this year that we have employed in the past, a detailed, in-depth policyholder-by-policyholder review of exposures leading to projected payout patterns that are based upon the most current information available.

The study resulted in a net reserve increase of 830 million bringing the total net reserves to 4.4 billion up from 3.7 billion at the beginning of the quarter and 3.9 billion at the beginning of the year.

The increase was concentrated in three areas, midtier exposures or what we previously referred to as home office accounts, assumed reinsurance and international and IBNR.

The midtier exposures while loss costs have declined by almost 50% from 2002, is measured by the Legacy Travelers policyholder base.

Defense costs have remained high leading to an upward revision in our projection of these costs.

Assumed reinsurance and international reserves are based in large part upon an independent consultant study for one of the reinsurance pools which was updated this year and the increase in IBNR resulted mostly from the voiding on procedural grounds of the favorable ACandS arbitration ruling.

Despite the reserve increase, relative to two or three years ago, there has been significant improvement in the asbestos environment and in our exposure base.

This can be seen on page seven, judicial and legislative push back against the plaintiffs bar has become meaningful; the number and size of bankruptcy filings has decreased; and there were no new major bankruptcies in 2005.

As a result, we've experienced a significant reduction in new claim activity in 2005 and have not been confronted by any new major cases in recent years.

These are the factors that led to the reduction in loss costs that I previously mentioned.

However, litigation costs have risen significantly from two to three years ago due to the increased trial activity.

The truly impaired rather than the unimpaired are getting to the courthouse more often which we continue to view positively.

Plaintiff's attorneys are focusing on peripheral defendants who have significant defenses and for whom we have a duty to defend.

Cost shifting is taking place due to the exhaustion of coverage or insolvency of other carriers and venue shopping by plaintiff's attorneys continues.

Page eight summarizes several different aspects of our asbestos reserve position.

I would first like to note that this information is being presented in a different format than in prior years.

We've combined all settlement categories into one line and we've also combined three other categories, home office review, field office review and unallocated IBNR, into one other category entitled other policyholders.

This was done so as not to spell out amounts that relate to matters that are in litigation.

The number of policyholders for which we are settling asbestos related claims now stands at 1776 down from 1950 a year ago.

And we estimate that for 65% of these policyholders, our total exposure to each of them is less than $100,000.

The gross reserve increased to over 5.1 billion while the percentage of reinsurance recoverables decreased to 14% of the gross reserve down from 18% at the beginning of the year.

Gross paids were consistent year-over-year and IBNR comprised 2.7 billion or 62% of year-end reserve.

There is one final point I'd like to make.

The recent Hartford opinion related to [Lester MacArthur] was based on different treaties and a different method of session and we do not believe that it should in any way adversely affect our reinsurance claim related to Lester MacArthur.

That concludes my remarks on the results of the asbestos study.

I will now briefly discuss environmental related claims for which we increased reserves by 30 million in the quarter bringing the total net reserve to 425 million at the end of 2005.

As page nine indicates, we continue to see reductions in policyholders submitting environmental claims for the first time, the severity of new claims has gone down and the exposure base has been greatly reduced from what it once was.

Today's claim activity principally relates to small- to mid-sized businesses such as dry cleaners and gas stations, not chemical manufacturers and petrochemical companies as once was the case.

Nonetheless, costs have risen for many of the same reasons as for asbestos related claims causing the minor increase in the reserve this quarter.

Page 10 includes two graphs, the first showing the number of policyholders by year of first claim notice and the second gross paid losses by year with large single settlements split out each for the period 1998 through 2005.

I believe these graphs tell the story of a greatly reduced exposure base.

Each is clearly trending down during this period of time.

Page 11 displays for 2005 prior year reserve development ex A&E by quarter for each of our business segments.

Let me start by saying that we are extremely pleased with the results of our reserve evaluations this quarter as we have been for each of the quarters during the year.

On a consolidated basis and excluding A&E, each quarter experienced favorable reserve development and in the third and fourth quarters, each segment also experienced favorable development.

What I'd like to do now is turn things over to Brian and later to Joe, who are going to provide further insight into our business operations.

Thanks, Jay.

I'm going to take the next few minutes to discuss the trends in the commercial and specialty businesses.

So let me start with core profits and the key drivers behind the numbers.

As you can see on pages 12 and 15, the commercial and specialty businesses earned $756 million and $679 million respectively for the full year.

So even after an unprecedented catastrophe year, and the A&E reserve actions that Jay just reviewed with you, our commercial and specialty businesses combined for over $1.4 billion in profits.

Driving this '05 performance is an ex catastrophe accident year combined ratio of 90.6 in the commercial segment and 90.4 in specialty.

Non-catastrophe claim frequency has been very modest and severities are well within normal levels.

Therefore, although renewal pricing has been essentially flat to slightly negative in 2005, margins in these businesses continue to be very good.

Focusing on just the commercial segment, expenses are basically flat as merger savings are being offset by investments in production focused initiatives.

When you look at the expense ratios in the supplement, you'll see a 2% increase to 30%.

The increase is due to the runoff segment which has very little earned premium but obviously an ongoing expense base.

So excluding this impact, the expense ratio is 27% essentially flat with last year.

Turning to the top line, gross written premium in the commercial core was down 3% while net written was up 4%.

Both of these variances were impacted by our national accounts Discover Re business.

The gross written change was due to reduced writings in certain lines within Discover Re but on a net basis this was more than offset as we reduced our utilization of reinsurance and retained more of the business we wrote.

Absent these impacts from Discover, both gross and net written premium for the remaining core commercial businesses was basically flat with the fourth quarter of 2004.

Reviewing the specific production statistics shown on page 14, commercial accounts retention at 82% is at an historical high.

Pricing in this business has improved slightly turning positive after several quarters of modest declines.

The improvement is primarily due to higher pricing for cat exposed property risks.

In other lines and in non-cat exposed property, we've seen slight improvement in price in this quarter.

New business increased 5% over last year but if we adjust fourth quarter of 2004 for the renewal rights businesses in that quarter, the increase is 16%.

In select or the small commercial business, customer retentions were again terrific at 86%.

Here we have also seen some improvement in pricing from cat prone property but to a lesser extent than in the larger accounts.

This market generally reacts slower to pricing actions than the larger commercial businesses.

New businesses is up 9% over last year.

And as you may recall earlier in the year we discussed the rollout of our new select platform and these new business trends are a result of that rollout.

We expect the new business trends in this market will begin to accelerate albeit gradually, as we move into 2006.

So in both businesses, a great result on the renewal book from both the profit margin and a retention perspective and we're seeing some growth in new business.

Moving to the specialty segment on page 15, the financial result is encouraging.

Operating income for the quarter was up 17% despite the hurricane losses.

In addition to Wilma in the quarter we increased our estimate for third-quarter storms due primarily to the losses on offshore energy businesses.

As we previously announced, we completed the sale of our cat risk business on November first, 2005, which has reduced our cat property exposures in the specialty segment.

Excluding the impact of cat losses and prior year reserve development, the combined ratio for both the fourth quarter and the full year were approximately 90%.

This is about 8 points lower than the comparable combined ratio in 2004.

Investment income was also significantly better on strong business cash flows.

So on page 16, gross premiums were flat across the specialty businesses as growth in financial and professional services offset lower volumes in construction.

Within international we had growth in global accounts, Ireland and Canadian business which was offset by a reduction in our business in the UK and at Lloyds.

Net premiums were down 2% but this was due to changes in our reinsurance program.

Looking at the production statistics for specialty on 17, the story is very consistent with last quarter.

Already strong retention continued to improved slightly to 81%, significantly higher than where they were last year.

Construction retentions have improved dramatically throughout the year reflecting the successful integration of our two books of business.

Pricing at plus 3% in the quarter was similar to what we've seen all year and new business was flat with the fourth quarter of 2004.

In international it's a similar story although pricing is slightly negative in these markets.

Retentions are very strong in the mid-80s and new business is stable with the fourth quarter of last year.

At Lloyds, which is not included in these statistics, we've seen strong price increases in the energy and property businesses which were obviously significantly impacted by last year's Atlanta hurricane season.

So let me give you a quick summary of our mood across all of our commercial specialty businesses.

First, we feel great about the renewal book.

Secondly, we're reexamining our catastrophe exposure in the light of a changing climate and lastly, we're focused on adding quality new business opportunities.

So what are we doing about this mood?

Well obviously retaining the renewal book is a high priority and has been an equally huge success.

Record retention levels on very stable business with very little price deterioration is a great place to start.

On the natural cat issue, we're working it on two fronts.

First, we're reexamining the tools we use in catastrophe management.

We've dedicated significant resources to our full-time cat management organization.

We're working closely with the modeling companies to scrutinize model data and assumptions and we're making more intensive use of other outside experts.

All of this is geared towards a better understanding and improvement of the risk reward equation for coastal wind exposed property in the more dynamic weather environment.

But secondly, we're not waiting for perfect truths from the modeling process.

In the meantime we're taking actions in the marketplace relative to risk selection, pricing, terms and conditions, values, verification and rate filings.

All of which are improving our position dramatically in the market right away.

And lastly on new business, with most market participants continuing to experience strong retention the flow of attractive new business in the market is somewhat limited and we will continue to exercise thoughtful underwriting judgment.

But we are now in a position to leverage the proven strength we have in product, in distribution, in customers to create more opportunities.

By better cross marketing, gradually expanding our product offerings to existing customers and broadening our industry appetite with existing agents, we believe we should be able to do just fine in a tough new business marketplace.

(technical difficulty) the commercial specialty story.

Let me turn it over to Joe for personal lines.

Thanks a lot, Brian.

Turning to page 18, the personal segment delivered strong earnings this quarter with operating income of $249 million and a combined ratio of 84.5%.

You can see that the earnings excluding displayed items were $237 million for the fourth quarter, up $26 million from the prior year quarter.

This underlying earnings improvement was primarily driven by increased business volumes and continued profit margin expansion.

We achieved this while continuing to invest in our product's sophistication, infrastructure and claim initiatives.

Our full-year numbers show a very similar story with GAAP combined ratios of 89%.

Adjusting for the items described on page 18, the combined ratio improved by 1.5 points to 85%.

You can see on page 19, net written premiums were up 5% for the year and 8% for the quarter reflecting increasing momentum.

Overall we're very pleased with the segment's profitability.

I'll turn to individual lines to discuss production and to provide some greater color commentary on earnings.

In homeowners, our GAAP combined ratio including catastrophe was 79.5% for the fourth quarter and only 93% for the full year.

Focusing on production, on page 20, our retention remains strong and stable.

While renewal price change is down slightly from the prior year quarter to 6%, pricing still remains ahead of our observed loss trends.

Our policies in force grew at 5%.

Excluding the impact of the Royal & SunAlliance renewal rights deal, new business was up about 24% versus the prior year quarter being generated across diverse geographies.

We're feeling good about the fact that these results have been favorably impacted by the rollout of our Quantum Auto product that I'll discuss more in a minute.

I'd like to spend a moment talking about how we're responding to the potential higher frequency and severity of weather events.

We are coordinating our efforts with those commercial property measures that Brian just described.

We're working with modeling companies to validate model inputs and assumptions and to more effectively and appropriately utilize their outputs.

We're taking action where we deem it necessary to manage the risk reward equation.

This includes pricing, deductibles, underwriting, insured value verification, and in some cases rationing or leveraging our available property capacity.

Obviously pricing and changes in terms and conditions require regulatory approval and will take longer to move into the marketplace.

We're confident that we start with a solid foundation and we'll utilize enhanced capabilities to strengthen that position as appropriate.

Despite a very challenging year with catastrophes, our consistent and discipline and strength in this line continue to evidence themselves in our results.

Turning to auto, profitability remains strong with the GAAP combined ratio in the quarter of 88.5% and for the full year of 86%.

Retentions remain strong and stable at 85%.

Renewal price change was flat reflecting the increase in market competitiveness that's been broadly seen and discussed in the industry.

This quarter we saw a significant increase in policies in force and in new business reflecting the impact of our Quantum Auto product rollout.

In the fourth quarter, policies in force growth versus the part year quarter was up 4%.

That compares to an increase of 2% in the third quarter.

New business volumes in the fourth quarter were up 47% excluding the impact of RSA.

In order to more fully describe the impact of this product rollout, I'd like to point you to page 21.

First Quantum is a highly sophisticated [multi-varied] based product.

It was designed to more finely segment and accurately price risks and to simultaneously reach a broader range of risk in the standard and preferred market.

It is successfully doing just that.

Our increase in new business has been most significantly driven by higher quote activity since the conception of Quantum.

In impacted states when we look at each week's production data, the number of agents quoting with us is up over 40%; the number of quotes per agent each week is up over 25%.

Success through increased quote activity is very powerful.

If you assume the constant close rate, a 75% increase in quote activity would translate into a 75% increase in new business.

We believe this increased quote activity is being driven by a number of factors.

Quantum successfully reaches broadly across the standard and preferred marketplace and is competitive.

Our significant investments in business and operational capabilities have made us one of the easiest companies for an agent to do business with.

Our strength in the homeowners line facilitates account sales; our consistency of appetite and execution appeals to agents who want and need to work with stable carriers.

Our infrastructure investments are bearing fruit in two very significant ways.

First is the rapid rollout of the product.

In just over half a year we are active in 19 states which represent approximately 46% of our in force written premium.

Second, we are able to more intensely monitor results than ever before.

We're reviewing geographic and mixed profiles for both actual written policies as well as quoted policies relative to our expectations.

We analyze closed rates and win rates at cellular levels looking for anomalies.

Too high a close rate or a win rate can be as troubling as too low.

We're tracking loss frequency at detailed geographic and risk profile levels, predominantly at this point on shorter tailed physical damage lines looking for differences from our expectations and from our in force book of business.

We monitor all of these early validations of profitability to ensure that results meet our expectations and our return hurdles.

The expansion of our product management organization, our research and development teams and our management information infrastructure enables us to track, analyze and act upon these items on daily, weekly and monthly basis.

We have made and continue to make significant investments in our claim effectiveness.

These are simultaneously having the benefits of increasing customer and agent satisfaction and improving our ability to manage severity.

The sophistication of our product, the granularity and intensity of our monitoring efforts, the agility with which we can respond to changes, the strength of our underlying profitability and the improving effectiveness of our claim department all give us confidence in the likely positive impact of these initiatives.

We're very pleased with our auto results and we're looking forward to 2006.

With that, I will pass it back to Jay.

Thanks, Joe.

Page 22 once again demonstrates the steady growth that we've been experiencing in average invested assets.

Growth in the quarter was fueled by approximately 400 million of positive cash flow from operations down from previous quarters due to the high levels of claim payments resulting from the recent storms.

Average invested assets now stand at 69.1 billion up over 6 billion since the fourth quarter of last year and almost 10 billion since the second quarter of 2004 which was the first quarter of the combined companies.

After-tax NII of 632 million shown on page 23 continued its upward trends fueled by steady growth in our fixed income results which benefited from the growth in net assets that I just discussed as well as increased short-term interest rates.

While the non-fixed income portion of the portfolio also performed well during the quarter, it was not at the same level as it had been in recent quarters but overall, the after-tax yield remained at 3.7% for the quarter.

Lastly, as page 24 indicates, we ended 2005 with just under 22 billion of common equities, 8% more than a year ago; a very healthy debt to total capital ratio of 21%; book value per share of $31.47 excluding FAS 115, a 5% increase from a year ago; and stat surplus of over $18 billion, 19% increase over the year.

We've also increased holding company liquidity from 223 million at the beginning of the year to almost 1.6 billion at the end of the year.

We've done much this year to solidify our capital base and liquidity position despite record cat losses and feel very good about having achieved our objectives.

With that, we'd be happy to take any questions that you may have.

(OPERATOR INSTRUCTIONS) Tom Cholnoky with Goldman Sachs.

Good morning.

I just wanted to touch on the personal auto for a second if I could?

And I don't mean to be trying to cause trouble here.

But Safeco came out and talked about a major company that was kind of being very disruptive in the marketplace.

We went out and talked to a number of insurance agents and everyone of them pointed to St. Paul Travelers as being disruptive with a new product.

And then we've also heard that you folks may have underpriced the product a bit and are now looking to reprice it.

So I'm just wondering whether perhaps in coming out of the box with the Quantum Auto, whether you made it not have made some errors here?

And I'm a little surprised that people would say that you are being as aggressive as you are in the marketplace.

Well, let me address that in a couple of different ways.

First, we're not viewing ourselves in any way being disruptive in the process.

We're starting with a book of business that is achieving an 86% combined ratio and as having significant ability to manage and improve Severities.

So we start from a position of strength.

I read the same comments, obviously you may have heard the call that Safeco had made.

They suggested that there was a competitor who was priced 30% below loss cost, had 80% closed rates and had an unsophisticated product.

I can tell you that our product is highly sophisticated and is as sophisticated as really any of the top tier competitors out there.

We aren't achieving close rates anywhere near 80% and we're achieving results that are in line with our target profit expectations and in line with our expectations overall.

I'm not sure who they were talking about but either they've got a bad set of underlying analysis or they were talking about somebody else.

We feel terrific about our position with this product and our ability to monitor it and manage it and to maneuver in the marketplace appropriately.

Okay.

And sorry, one quick follow-up if I can.

Can you just kind of maybe quantify for us your loss cost trends flow from a frequency and a severity standpoint?

Our loss trends are generally in line with what we're seeing from an industry perspective from a frequency standpoint.

And a little bit better than what we're seeing in the industry overall from a severity perspective.

Okay, great, thank you.

I would characterize that, Tom, this is Jay Fishman.

I would just characterize that in the context of a looking at the business over the long term is that we are at I would call it substantially historically low loss trend levels in personal auto.

Right, so you've seen no variations recently at all?

No meaningful changes at all.

Okay.

Great, thank you.

Jay Gelb with Lehman Brothers.

Thanks and good morning.

Jay, I was hoping to touch base on the guidance.

This 13.5 to 14.5% ROE, that assumes no favorable development and I think you mentioned early in the call that's been happening five quarters in a row.

If you backed out all the one timers I believe you said ROE was 17% in 2005.

When I put all that together with higher growth potential, it just seems kind of conservative.

And no buybacks as well.

First I would observe that the assumption for catastrophes isn't playing a meaningful dynamic in your analysis.

The 17% that you quoted was before any catastrophes in the period.

And obviously for the full year as we disclosed, we're assuming $460 million of pre-tax catastrophes, 300 million after on 22 odd billion dollars of net worth.

That is obviously what -- 150 basis points or so impact on the return on equity right there.

We obviously have some investment programs continuing to support what Joe has been doing in personal lines, making meaningful technological steps.

I talked about this earlier and I don't want to get bogged down here.

But investing in the basic technological platform that runs our business so there is some investment spending.

And candidly it's awfully difficult sitting here today to predict what's going to happen to the rate environment.

We do see significant changes occurring in coastal but I don't know yet about what happens in the world of reinsurance.

So I think that is an appropriate way for us to look into 2006 and provide guidance to you in that regard.

Do you see this as a baseline with potential room for upside if all the things you are talking about currently come to pass, improved rates, the buybacks, maybe some more favorable development on the core reserves?

We always hope to do better.

We always hope to do better.

And everyone in the organization is focused on achieving the maximum results possible consistent with investing in the franchise for the longer term.

I think this is a fair characterization of our guidance and that is why we have offered it that way.

Great.

And then separately on capital management you talked about possibly getting more involved there.

The premium for surplus remains low, debt to capital right about where you want it to be.

You've been through the storms and the asbestos charge and still put up decent returns on equity.

How much flexibility do you think that gives you on capital management in 2006?

I think that we have to just finish the catastrophe analysis that we're going through and we also want to hear what observations the rating agencies have about catastrophe exposure generally and capital required to support catastrophe.

I think those are the two kind of principal hurdles that remain ahead of us before adopting a more aggressive approach.

I observe that even if the $2 billion of actual earnings this year at a 1.5 to 1 premium to surplus that kind of number would support $3 billion in premium growth and obviously we're not anticipating growing our premiums by $3 billion.

From a pure internal capital generation perspective we are generating more than enough to fuel our own operations.

And I'm hopeful as these issues become clearer or resolved further on this year that we will be able to become more aggressive.

Great, thanks for the answers.

Jay Cohen with Merrill Lynch.

Thank you.

I guess a couple of questions.

First is, some of these are kind of quick.

New business, in most lines went down in the fourth quarter versus the third quarter.

I'm assuming there is some seasonality there?

Yes.

Secondly, what kind of share count should we be expecting in 2006 assuming no --?

Can I go back to that for a moment?

It was a quick yes, but obviously January 1 is our biggest single period of renewal, and July 1 would be the second.

So that is what drives the seasonality.

That is good.

Share count in '06 has been creeping up.

Assuming no share repurchase when we look at fully diluted shares, what kind of share count should we be expecting?

Jay, this is Jay Benet.

I think if you go back to page 3 of the webcast, we showed you the average diluted shares outstanding for the full year, and that would be -- which was 713.

That would be the base upon which you look at the next year.

And I think there is some growth in that with the employee option type plans; not much, but it should grow slightly from that.

Okay.

Year ending, fully diluted shares were more like, what, 715 by year-end?

Yes, but you asked for the calculation.

So you're still going to do it off of an average.

So I think you could just look at the patterns as they develop.

Keep in mind that you shouldn't be looking at either the third quarter by itself or the fourth quarter by itself because of the antidilutive effects that we talked about.

Full year would be the more appropriate starting point, if you will.

Next question.

I guess I was a little surprised you took a charge for ACandS, given that it seemed that the ruling that came down was somewhat of a technicality and didn't necessarily indicate you would be liable for that case.

What was the thinking behind putting up a reserve for ACandS, and can you share what the amount was?

The last question is the easier one to ask -- to answer.

We're not going to share a specific amount.

Transparency is nice, but we can't be that transparent.

As it relates to the overall study, we indicated before that there were several components, not just the ACandS decision.

But we factor in everything that happens in the marketplace to arrive at what the reserve increase should be.

In looking at the position that we had been in for ACandS, that has varied over time.

We went from having the same defenses before the arbitration decisions that we have today.

We had very favorable arbitration decisions.

There is a procedural technicality that we're dealing with, so we just try to factor all those things into what we think is proper reserves for that, as well as the overall asbestos reserve.

I guess it just seems the increase was somewhat surprising, given that you talked about these rate trends.

You just did this full-blown study a year ago, and the trends seem if anything to get better during the year.

Defense costs were up, but that can't be a big shock either.

It just seemed like it was a much bigger charge than I would have expected, given the backdrop that you presented.

I think on the defense cost side, one of the things that we do is we evaluate trends.

And by that, what I mean is we have a population of policyholders that we're looking at.

We evaluate over time what we think the costs are going to be to either defend those policyholders or to defend particular claimants, whatever.

But sometimes you could have relatively small changes in trends that have multiplier effect, given the number of years that we're dealing with and projecting out.

I wouldn't look at -- again, we're not giving the components of the increase, so it's hard to really get into it.

But the nature of it is that it was impacted by all those three things I mentioned.

Okay, thanks.

Larry Greenberg with Langen McAlenney.

Thank you.

Jay, I was just wondering on the asbestos side if you can give us a little bit of a picture going forward on what we might expect from loss -- paid loss trends?

They don't seem to have really changed materially over the last couple of years.

I think when you did your '03 study, you had suggested that settlement paid losses were pretty much going to be done by 2007, if my memory serves me.

Can you just give us some idea what we should be looking for there?

One of the things I'd point out is that as a company, we have always tried to move things from an unsettled to a settled category.

So what we provided back in '02, it would have been a snapshot of what the settlements looked like at that particular point in time.

And over time, we have added to the settlement category and, therefore, added to the number of paids, the amount of paids in the settlement category.

As it relates to the overall amount of the paids, I did point out that looking at '05 versus '04, the amounts were similar.

So we didn't see an acceleration in the amount of the paids, but a good chunk of that remains part of the settlement categories.

What about going forward, any color on that?

I think going forward, certainly whatever we have in the settlement category is what we expect to pay.

Some of that we would hope to pay sooner rather than later.

We had announced in the previous years the settlements for the direct actions and the settlement of PPG.

Both of those are still pending final approval.

But with the approval of those hopefully we'll get at some point in time that we'd expect to see a fair amount of the settlement category be paid relatively shortly.

But we can't judge the timing of that ruling.

As it relates to the rest of the portfolio I'd say there's more of a flow that goes on to the payment patterns that we've been seeing and will be replicated going forward.

Okay.

Can you just bring us up-to-date on these status of Discover Re and how active that is these days?

This is Brian.

Discover is clearly still active.

What we have gone through in the last year is to really integrate Discover and its product offerings with our core quart national accounts and product offerings.

They really play in different places of the market and have different strengths, Discover more at the higher end unbundled side of the marketplace.

And so the pieces of Discover that we've moved away from were the ones that clearly overlapped with our existing national accounts franchise.

But it is clearly an ongoing part of our operation.

Thank you.

Brian Meredith with Banc of America.

Good morning.

A couple of quick questions.

First, did Discover Re things that happened in the commercial line segment expect a combined ratio at all and if not was there anything else unusual in the commercial line segment this quarter in the combined ratio?

It appeared that there was a spike up here in the underlying combined ratios there?

Sequentially.

I'll admit I'm struggling a little bit with the question.

First of all, Discover didn't create any significant anomaly in the combined.

When I say underlying, if you stripped out the catastrophe losses and the reserve actions, I think you saw sequentially a couple hundred basis point deterioration in the combined ratio.

I mentioned in my comments the expense ratio which is up a couple of points due to the impact of the runoff segment.

In other words no earned premiums but -- or virtually no earned premium and a kind of a fixed cost expense flow that is flowing through there which is almost 3 points in the overall.

So that's clearly a piece of the driver in the combined.

That would be the other blip that is flowing through there.

Okay.

And then Jay, just quickly back on your the guidance here in the ROE forecast.

Just let me come back to that.

Let me come back to Brian's comment just for a second so you really understand that.

As the runoff business runs off, premiums obviously begin to approach zero.

But the overhead expense base of running those operations continues to be reflected as an expense.

And so the impact obviously is the expenses are from a combined ratio perspective absorbed in the early days by the premiums but as they run to zero, it just obviously it impacts the combined ratio adversely.

Got you.

And then with respect to be ROE guidance, Jay, if I take a look at what the current environment is right now for personal lines and commercial lines, underwriting margins are pretty attractive.

In fact, I think some would argue we're probably near peak with underwriting margins.

Would you say that a 13.5% to 14.5% ROE is the peak return on equity given the current kind of capital requirements the business with increased catastrophe losses and other things going on?

That is a great question and we've talked about that amongst ourselves a great deal.

I think we're in an unusual period of time here because we've made an assumption that weather is going to be worse and worse by a fair amount.

And the real question is how quickly can terms and conditions and deductibles and in short values and rates catch up.

We operate in a regulatory environment in many of our businesses so in some businesses we can affect those changes pretty quickly.

But in many of our businesses we're unable to do that and it takes time.

It can take a year, it can take two years.

My view is and this is not guidance and I want to be explicit about that, that I would hope that the rate -- and it is a hope -- I hope that the rate environment and the terms and conditions are such that we can essentially get back to the long-term financial goal of midteens ROEs.

I think those are the kinds of levels where the risk and reward equation begins to make some sense.

And I think we're in a little bit of an awkward spot at the moment in that we've made an assumption that weather is going to be considerably worse and yet we have not had the opportunity to go to them.

And by the way the reinsurance cost will be worse and the rest trade.

And I think it is just going to take some time for the revenue line to catch up.

I feel like this is an almost weigh station point that we're in between an environment that we all thought we were in a couple of years ago and potentially a new one that we're entering into now.

I'm certainly no less optimistic than I was.

I just think it's going to take a little bit of time to get there.

Thanks, Jay.

Paul Newsome with AG Edwards.

Good morning.

I was hoping you could maybe step back and talk about sort of the big pieces that are adding consistently volatility to the earnings, asbestos, the runoff and whether or not --?

The runoff has had no impact on volatility in our business whatsoever so let me stop your point right there.

Certainly not and this quarter but --.

Not in this year.

And not in this year.

And I would like you to talk -- and I'm really thinking beyond next year in truly long-term sense.

Is the nature of St. Paul going to -- a very long tailed liabilities and in the size and history such that we should just think about having your asbestos charge or something along those lines every year in our earnings investments?

I'm not really sure how to answer that question because underneath it is a premise that really is kind of faulty about our Company, almost from the get go.

We have a wide mix of businesses.

We have short tail.

We have long tail.

We have property.

We had auto.

We have homeowners.

We have workers comp.

We have general liability.

In fact on a premium basis our business is more short tail than it is long tail as we're sitting here today.

I think one, your premise isn't quite accurate.

Two, this is now five consecutive quarters that we've had only favorable reserve development other than asbestos and environmental and we've pointed that out.

So I think the Company has reached a stage where it is demonstrating clearly a different level of reserve adequacy than perhaps some people think.

You'll determine how much time it will take before you endorse that as well.

In terms of the catastrophes, we're not God.

And we insure weather and storms will happen and the wind will blow and that's what we do for a living.

And I think the fact that we posted up $2 billion in earnings in a year of record-breaking hurricane activity is actually pretty good testimony to the Company's risk management, reinsurance profile and disciplined underwriting.

And in terms of asbestos, I feel unfortunate that ACandS happened as we were in this first month.

I obviously wish it hadn't.

But we're in no worse position than we were in before the arbitration.

That's all that happened was that the arbitration proceeding from a technical standpoint was pushed to the side.

So we are where we are.

I don't know how to answer about the future.

We are a Company that is always going to do the right thing in terms of books and records.

We're going to take into account everything that occurs, all factors and circumstances and record what we have to.

We feel very good about our balance sheet strength.

We feel good about our reserve position and that is where we are.

I'm endorsing.

I've got a buy on the stock.

Another question, could maybe check on a different topic, can you talk a little bit about thoughts on the potential for increased reinsurance cost on your own business over the course of the year.

It looks like property rates are up sort of 30% across the board.

We have planned for an increase in reinsurance rates, but let me try and characterize it for you.

And I made these comments at a seminar that I spoke at a couple of months ago.

We are not in the big scheme of things a big utilizer of reinsurance.

We are not a big company that writes enormous grows and buys tremendous amount of reinsurance to net down.

Our property catastrophe treaty renews July 1.

I don't know what will happen.

But a 50% increase in rates would only cause the combined ratio to change by .2 percentage points.

So we're not talking here about a cost that even if it goes up at a 50% level has a dramatic impact on our business.

And that obviously doesn't take into account any offsets from changing rates, terms, prices and conditions in our primary business.

And obviously if it were to double it would be .4 points.

I've also disclosed that if the price were to be up 50% and we were to buy 50% more, both, that in fact the after-tax cost -- I'm sorry the pretax cost -- the pretext cost would be less than $100 million difference.

So it is just not a dramatic driver in our business.

Most of our other treaties are January 1 renewals and I can make the observation that most of them renewed what I'll characterize as at or around expiring premium.

And I'm looking at Brian just to make sure that that's a generally correct statement.

The only one that is still is an important treaty coming up is our property treaty July 1, property cat treaty.

Great, sounds like something we don't have to worry about too much.

Thank you very much.

Charlie Gates with Credit Suisse.

Hi.

Good morning.

I actually have two questions.

My first question given for lack of better expression, continuing sore that is asbestos and Jay Benet's brief reference I believe to cost shifting.

How are the fortunes of St. Paul Travelers influenced by the planned transfer of the asbestos liability from Ace to this UK company?

I actually, I'm looking at [Tom Joyce] who runs our special liability group who is here with us.

I, Charlie, am just knowledgeable enough about that plan to be able to comment on it as it relates to u.

I don't know if Tom is?

I'm not aware of what impact it might have presuming that Ace is still in the game and still participating in the cost sharing environment that we have in asbestos and still paying its share of the losses, the impact would be nonexistent.

No, but if you transfer -- well for you guys raising reserves by $800 million during the period seemingly if the liability is transferred to this company that for all you know has one million dollars worth -- who's going to pay on that side do you think?

Again, I don't know specifically about the Ace transaction and I'm not responding -- my response is not with specificity to that situation.

As a company, we don't support a concept of a well capitalized company conveying its liabilities to a less well capitalized company that doesn't have the same level of security.

Because when and if a company fails it obviously impacts all of us.

Just conceptually we thought and have for a long time believed that some of the transactions that were being discussed sometime ago and again, this is not in reference to the Ace transaction, let me make it clear.

It's just not something that -- the notion of good bank, bad bank conceptually is not one that we embrace.

We think it's not good public policy.

My follow-up question, with reference to your comments about possible pricing improvements in the small commercial lines with segment of your business, how does that square with say your regional competitors that from their standpoint seemingly don't know how to spell the word hurricane?

I think it's a variety of things.

Pricing improvement in small commercial and I guess you we referring to what we were saying about what happened in the fourth quarter -- I mean clearly along the coast everybody knows how to spell hurricane.

I mean companies say in Ohio, Illinois, Indiana, outside the Gulf Coast region.

That was the question.

Clearly a different environment, a different marketplace.

Our observation would be that what we saw in the fourth quarter was a relatively modest but some stabilization of a pricing trend and that is that going into that small commercial pricing had been declining again at a relatively benign rate or modest rate.

But prices had been dropping and in the fourth quarter we saw even away from the coastal areas some stabilizing of that.

Not a dramatic improvement but a stabilization.

There is no question that when you get away from the coast, the dynamics are much different and we're going to continue to operate in that marketplace and see where it goes in 2006.

We don't see significant price improvements going on in small commercial away from coastal cat exposed areas.

The only follow-up question, what did you mean the dynamics are much different when you operate away from the coast?

That is my last question.

It is just exactly the fact that as you said, the people in Ohio aren't worried about the hurricanes.

Along the East Coast there is a huge variable at play that all of us are trying to figure out which is what is a predicted -- or what is a reasonable expectation for frequency and severity of wind losses in 2006 and beyond?

In much of the much rest of the country, they are not worried about that issue.

So it is simply that fact that huge variable is not part of the equation in Ohio or Illinois or wherever else.

Thank you.

Just a follow-up to the question that was asked before about the loss ratio quarter-to-quarter, third quarter to fourth quarter in commercial, if you adjust for the impact of the cats and the prior year reserve development, in the third quarter we also had a reestimation of the current year loss ratio in the commercial segment.

That along with the same factor in the fourth quarter is adding the distortion that you see.

If you really want to get a feel for what the underlying loss ratio is for commercial ex these things, you probably should look at the full year loss ratio.

Matthew Heimermann with JPMorgan.

Good morning.

I just wanted to come back to personal auto for a second and just ask maybe where you think the gains and tests and top line are coming for in that channel?

Is it changed from -- share gains from other channels?

Is it potentially the fact that old St. Paul agents now have an auto product again after not having it for five years?

Just give a little bit of color on that?

It's coming from a variety of different places, most significantly the volume is coming for the independent agency channel and I think there are always some carrier or some customers who are switching distribution channel and will get a mix into that as they move into an independent agency environment.

Within that it varies by geography.

We have made some significant efforts to increase our penetration inside of existing agencies and some significant efforts to add more agencies to increase our flow of quote activity.

So it is a combination of existing agents, old St. Paul agents and new agents that are responding to value proposition.

And then just in terms of loss cost expectations, can you give us a sense of what you're building into pricing in terms of severity?

Going back to the comments I made a couple of minutes ago we continue to see very favorable frequency, absolute frequency levels in the personal lines auto environment and have seen consistent with what the industry is seeing, some modest decline on that.

And from a severity perspective, again, very consistent benign trends with what the majority of the rest of the industry is seeing.

Is that -- I guess is that what you're building into pricing now?

Yes.

And then just I guess one question on the favorable development.

Can you just give us a sense especially in the commercial and specialty segments, what accident years that is coming from and what lines of business?

It's pretty well spread out.

I mean it's not a particular line of business and it's not a particular accident year.

It is looking at very favorable frequency and severity.

It's across some property businesses and it's across casualty businesses.

When you say spread out over a couple of years is that the last three years?

I mean how far back are we going here?

It's a complicated question because once you have favorable development from several years ago, it kind of rolls through your estimates when you start thinking about your starting point on any given year.

It is a combination of things that over the last five or six years are just manifesting themselves in a very favorable way.

Okay.

And just in terms of property coming from property and casualty, is it relatively balanced or more one or the other?

Your question is a good one.

It depends on the period of time that you're looking at.

A lot of our favorable development particularly if you look at it from the full year standpoint was property related where things whether its fire or weather-related events just didn't happen.

Thank you very much.

[Phil Wilt] with Morgan Stanley.

Good morning, thanks.

Just two quick ones.

I know time is running tight.

Plans for the holding company assets I think you said it was $1.6 billion?

Is that the rating agencies banking on that staying there?

Is that ready to pay claims or are they earmarked for any uses you can tell us about?

There is no earmarked usage for it.

We like to do and I can't speak for the rating agencies but I'm sure they like it as well is to have financial flexibility at the holding company.

The holding company relies on a flow of dividends from its operating companies, to fund it and the holding company has obligations like interest and dividends.

Having cash at the holding company just provides for a very healthy financial picture.

Sure.

And is 1.6 billion it seems like is that a high watermark or is that kind of a run rate level to keep up there?

I think when you look at our interest and dividends for a year date they round out to about $1 billion.

At 1.6, I think we feel like we're in very good position.

Sure.

And the question second question on the environmental survival ratio for all its flaws I guess I'm surprised to see that dip as low as two or may be even a bit below I guess notwithstanding your remarks about the nature of the exposure based shrinking.

It looks like the Company has paid in excess of 200 million in environmental claims from what I can see every year for the last 13 or so years.

It would seem that with the survival ratio of two you're anticipating a pretty dramatic fall off that presumably should start to manifest almost immediately.

When you go back far enough in time you are going back to a time where the book was very different, where you had large settlements of larger exposures.

And what we've tried to communicate is that there has been a real shift in the exposure base in recent years.

And then looking at individual years we spiked out in the chart we showed you and the webcast some single large settlements and those have skewed the payment pattern.

But what we do is we don't look backwards, we look forward and look at the exposure base as we see it today.

We estimate what kinds of liabilities we might have and what those payment patterns might be and we come up with our best estimate of what the reserve level should be based on those patterns.

Were the payments in I guess would be calendar year '04 and '05 largely in line with expectations coming out of the larger year-end 2002 study?

Yes, they were.

There weren't any large surprises there.

Again, much of it was payments on settlements.

That is a very important fact here that most of the payments that are going out are not what I'll characterize as newly settled large cases but in fact they are settlement payments from older cases.

That's helpful.

I'll sink one other last one in if I may?

It seemed in the commercial line segment there was the growth in workers comp and CMP, 12% and 16% respectively in written premiums.

Hopefully I picked up the right apples-to-apples page out of the supplement.

Are those numbers I guess. do they seem right, first?

And maybe you could talk about sources of growth commercial line segment, workers comp and CMP?

Well the CMP is obviously coming out of primarily the small commercial world.

And really all of the stuff we've talked about in small commercial on new platform and new product has been driven at CMP exposures.

So that would be driving the main part of the increase there.

The comp number can bounce around somewhat because of our national accounts book which has a heavy loss sensitive dynamic.

So sometimes we have customers who are just changing their program structure and moving from a premium bearing product to a non-premium bearing product.

And really essentially from a profit driving dynamic not changing the perspective.

So that's a piece of it.

So in short, no basic or fundamental change on a direction or underwriting appetite for workers comp.

Some little things going on but not that dramatic.

Thanks very much.

Ladies and gentlemen, that is all the time we have for Q&A.

I will now hand the presentation back to management for closing remarks.

Thank you operator.

No closing remarks to be made.

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

Thanks.

Ladies and gentlemen, we thank you for your participation in today's conference.

This concludes your presentation and you may now disconnect.

Have a great day.