旅行家集團 (TRV) 2006 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 the 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 Mr. Michael Connelly, Vice President of Investor Relations.

Please, Mr. Connelly, proceed.

Thank you, good morning and welcome to the St. Paul Travelers' discussion of our first-quarter 2006 earnings.

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

All of these materials can be found at our website at www.stpaultravelers.com under the investors section.

Today with us we have Jay Fishman, Chairman and CEO;

Jay Benet, CFO;

Brian MacLean, Head of our Commercial and Specialty segment; 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.

Then we will open it up for questions after their prepared remarks.

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

Our presentation today includes 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, our earnings guidance and statements about our share repurchase plan are forward-looking, and we may make other forward-looking statements about the Company's results of operations, financial condition and liquidity, the sufficiency of Company's reserves, and other topics.

The Company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee 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 recent most recent 10-K filed with the Securities and Exchange Commission.

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

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

Reconciliations are included in our earnings press release, financial supplements, and other materials that are available on the investors section on our website, stpaultravelers.com.

With that, I am going to turn it over to Jay.

Thank you, Mike.

Good morning, everyone, and thank you for joining us today.

The first quarter's results represent a milestone for our Company, as we posted record quarterly operating income of $1.011 billion or $1.41 per diluted share; a consolidated combined ratio of 88.9%; and an operating return on equity of 18.1%.

This was driven by strong performance in all of our segments, no catastrophe losses for the quarter, and net favorable prior-year development in each of our segments amounting to $32 million after-tax in total.

Our bottom line also benefited from higher yields and growth in our investment portfolio, favorable non-catastrophe related weather, and a $49 million benefit from the resolution of various prior-year federal and state tax matters.

We are pleased that we have achieved a level financial strength and earnings capacity such that we can now begin to return excess capital to shareholders while still seeking growth opportunities.

As a result, today we are announcing that our Board has authorized a 13% increase in our quarterly dividend to $0.26 per share, and a $2 billion share repurchase program which represents approximately 7% of are outstanding shares based on yesterday's closing price.

We are targeting this program to take place beginning this month and completing it within approximately 24 months or early in 2008.

Based on the strong performance in the first quarter, we are raising our earnings guidance for the year; and we will speak more about that in a few minutes.

But first, I would like to spend just a moment speaking about our approach to running our business.

We are fully committed to the creation of shareholder value, growing book value per share, and achieving mid-teens return on equity over the long term.

We seek opportunities for profitable organic growth, and when those growth opportunities do not fully utilize the capital we are generating we will return excess capital to our shareholders by buying back shares and/or increasing our dividend.

We have a tremendous breadth of product; we're pleased with our geographic presence; and we are focused on and well-positioned to grow organically.

Our day-to-day focus is to generate growth by selling our broad array of products, as total account solutions for our distributors and insurers.

Contrary to recent market speculation, we do not need acquisitions to either grow or improve our franchise.

We're not currently active in this regard and have not been since the merger.

If an acquisition opportunity were to arise, we would only consider it if it would enhance shareholder value.

Turning to page 3 of the webcast, we have increased our guidance given our very strong first-quarter results and our view that our business fundamentals are stronger than we anticipated just three months ago.

Accordingly, we are increasing our annual guidance for 2006 by 100 basis points to an operating return on equity in the range of 14.5% to 15.5%, which translates into diluted earnings per share in the range of $4.70 to $5.00, an increase of approximately $0.30 from the previous guidance.

The lower end of the range allows for such variables as less favorable performance in the non fixed-income segment of our investment portfolio, and less favorable non-catastrophe related weather.

The upper end of the range assumes that these important variables remain at their favorable current levels.

This guidance also assumes for the remainder of the year our original annual catastrophe estimate of approximately $460 million pretax, or $300 million after-tax, and no additional prior-year reserve development, either positive or negative.

Our base measure for equity is expected average shareholders equity for 2006 excluding FAS 115.

Our base measure for diluted earnings per share is an average share count for the year of 723 million, which does not include the impact of any share repurchases.

For modeling purposes, we would suggest that you assume that one-third of the share repurchase program will be completed by the end of 2006.

Regarding regulatory matters affecting our industry, the investigations described in previous quarters 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 to these matters.

We have begun 2006 in a strong position, and all of our announcements today are a testament to that.

We remain focused providing solid returns, growing our business organically, executing on the inherent strengths of our franchise, and working hard to produce strong results.

With that, let me turn it over to Jay.

Page 4 of the webcast summarizes our first-quarter 2006 financial performance.

Let me start by saying that this was in fact a strong quarter.

As Jay mentioned, operating income increased by 18% to just over $1 billion, while operating price per share increased 15% to $1.41, each reflecting a consolidated GAAP combined ratio of 88.9% and strong net investment income, both of which I will be discussing further.

With regard to net earned premiums, which were just under $5 billion, the 2.5% decline in the quarter was mostly in the commercial segment, reflecting a significant reduction in run-off operations, where business is intentionally being nonrenewed, and a reduction in ongoing operations due to lower premium volume written in 2005 versus 2004.

In addition, earned premiums declined in the Specialty segment due to the sale of the Company's Personal Catastrophe Risk business in the fourth quarter of 2005, and the first-quarter 2005 sale of certain credit-related personal lines classes previously written through the Company's Lloyd's operations.

These declines in Commercial and Specialty net earned premiums were partially offset by growth in the personal segment that resulted from an increase in new business volume, strong business retention rates, and renewal price increases.

I would also like to point out that our average diluted share count of 721 million was up 1.7% over last year due to the issuance of shares in connection with long-term employee compensation plans.

Page 5 contains a pie chart showing the contribution that each of our business segments made to first-quarter operating income.

Commercial at 52%;

Specialty 25%; and Personal 23%.

We are quite pleased with these splits, which demonstrate not only the diversity of our earnings base but the power of our franchise as well.

Our full array of property casualty products, our balance between shorter-tail property and longer-tail liability lines, and our top position with independent agents all have enabled us to achieve this record level of operating income by being a market leader throughout the country.

As the data on page 5 indicates, first-quarter consolidated operating income, as well as our GAAP combined ratio, benefited from there being no cats in the quarter, as well as $32 million of after-tax favorable prior-year reserve development.

This was our sixth consecutive quarter of favorable reserve development ex-A&E.

It should also be noted that this quarter's operating income included a nonrecurring benefit of $49 million after-tax due to the favorable resolution of certain prior-year federal and state tax matters.

Other observations worth mentioning are that investment income was quite strong, and claims were lower due to the fairly mild winter weather we experienced.

Finally, loss estimates related to last year's hurricanes remain unchanged.

Margins remained very healthy in all of our business segments.

Our combined ratio was 88.9%, a 1.6 point improvement from last year.

Our loss and loss adjustment expense ratio, which improved by 2.4 points, benefited from high retention of our profitable in-force business, along with better-than-expected frequency of non-cat related losses and better-than-expected loss severity, both consistent with recent trends.

Partially offsetting this improvement in our loss ratio was a 0.8 point increase in our expense ratio due to a reduced National Accounts fee income offset in the expense ratio calculation.

Having said that, G&A expenses actually declined by 2% when compared to last year's first quarter.

With that, what I would like to do now is turn things over to Brian.

Thanks, Jay.

Both the Commercial and Specialty businesses had very strong first-quarter performance, so I am going take a few minutes and go through the drivers behind the numbers, and then go through the current trends.

Commercial and Specialty businesses had operating income of $535 million and $257 million, respectively, for the quarter, both up substantially from a year ago.

Underwriting margins continued to be at very attractive levels.

Combined ratios were 89.7 in the Commercial segment and 90.7 in Specialty.

In addition, retentions continue at very strong levels; and renewal pricings in all the domestic operations are slightly positive.

It was also a fairly benign weather quarter, and net investment income was higher due to both strong cash flows and higher investment yields.

Focusing specifically on the Commercial segment on page 6, the improvement in the combined ratio was driven by lower weather losses and a continuation of the relatively stable loss trends we saw in the second half of 2005.

Claim frequency continues to be modest, and severities are well within normal levels.

G&A expenses have come down, but there is a slight increase in the expense ratio as a result of lower earned premium, primarily due to the Commercial Other business that was in runoff throughout 2005.

In addition, fee income which is credited against the expense in this calculation, was also down.

Turning to the top line, excluding our runoff businesses, Commercial core net written premium is down 3%.

As you can see that is driven by our National Accounts business.

The reduction in National Accounts is primarily attributable to the three factors which we have outlined on page 7.

The majority of the National Accounts business is loss responsive.

That means the premium and fees charged to our customers are based on actual loss experience.

When loss trends are favorable, as they are in today's market, we charge less and sometimes even return premiums.

Because the customer is taking the majority of the risk for loss volatility, there is very little impact to our bottom line from these premium fluctuations.

Secondly, National Accounts is also where we record our participation in various residual market pools.

Again, as loss trends moderate, the voluntary market becomes more competitive and the pools begin to shrink.

Since these involuntary pools are typically unprofitable, the premium decline is not a bad thing.

We are, however, a service provider for these pools; so as the pools depopulate, our fee income is reduced.

Lastly, there is also a decrease in new business, primarily in the portion of our business where we provide claim service on a fee basis to companies that choose to self-insure.

This business has become increasingly competitive, especially for the largest accounts where profit margins are traditionally the lowest.

We have seen a reduction in fee income from this segment of the market.

So in summary, we have a very strong National Accounts franchise.

The reductions in revenue resulting from reduced loss cost have minimal negative impact on the bottom line.

We are more concerned with the reduction in the new business, and are looking carefully at our return thresholds to make sure we are not missing profitable opportunities here.

Turning to our guaranteed cost businesses, net written premium in Commercial Accounts and Select Accounts was essentially flat with last year.

Reviewing the specific production statistics on page 8, Commercial Accounts retention is at 83%, continuing at an historical high level.

Pricing in this business turned slightly positive after several quarters of modest declines, driven primarily by improved pricing for cat-prone property exposures, which I will discuss in more detail in a moment.

New business is down as it is still a very competitive new business market.

In Select, customer retentions were again terrific at 86%, while pricing has remained very constant.

New business is up 13% over last year as we're seeing the impact of the platform changes we rolled out during 2005.

Therefore, given our solid profit margin and current market conditions, where retentions are high and the quality of new business opportunities at reasonable prices is limited, we are very pleased with these results.

Turning to the coastal property market, we're seeing substantial increases in pricing for Atlantic wind-exposed property in the South.

Just as importantly, however, we have been able to manage our exposure with significant changes in limits, deductibles, and terms.

Overall, this has resulted in reduced coastal wind exposure in the South; but we will continue to write business there where the pricing and terms make sense.

Moving to the Specialty segment on page 9, operating income is up 49% over last year.

The non-catastrophe current year combined ratio at 91.3% is consistent with the year ago and continues to provide great underwriting margins.

As we previously announced, we completed the sale of our cat risk business in November of last year.

Excluding the impact of cat risk, net written premium in specialty is essentially flat with the year ago.

The decline in Financial and Professional Services is entirely attributable to a change in the timing and the structure of our reinsurance contracts.

Construction premium was consistent with last year; while bonds growth was driven by strong retention, and new business volumes in executive liability, and good flow of construction surety business.

In our Other Domestic Specialty businesses, growth in our onshore oil and gas risk have offset lower volume in Specialty Umbrella.

Within International Specialty the decline was primarily due to the true-ups on prior-year programs and changes in the timing of reinsurance contracts at Lloyd's, and lower premiums in the UK and Ireland where both competitive markets and unfavorable exchange rate movements have impacted our results.

Looking at the production stats on page 10, just like the rest of the Commercial businesses, retentions were strong and significantly higher than last year.

Pricing is particularly difficult in the international business, where competition has been strong in the UK and Ireland.

In summary, we feel great with the performance of our book across the Commercial and Specialty businesses.

Retentions are terrific.

The property market within the Southeast coast is responding to the results of the last two years' storm seasons.

Away from the coast, pricing has stabilized.

So a good start to the year, and now I will turn it over to Joe Lacher for the PL results.

Thanks, Brian.

As with our other businesses, the Personal segment delivered strong earnings this quarter, with operating income of $249 and a combined ratio of 86.4%.

As you look at page 11 you'll see that operating income was down 16% versus the prior year.

This $45 million variance was driven by $55 million less favorable prior-year development.

The combined ratio did benefit from 1.9 points of favorable prior-year development and no impact from catastrophes.

Again, most of the change in combined ratio year-over-year was driven by smaller impacts from these two items.

Overall, net written premiums for the quarter grew 10% over prior year, with growth coming in all lines.

We're pleased with the strength of our agency plant.

Our sophisticated product offering and our operational excellence are combining to deliver strong performance.

Turning to the homeowners’ line, where our GAAP combined ratio was 78.1% for the quarter.

To continue on page 12, homeowners' production continued its consistent performance.

Our retention remained strong and favorable at 87%.

While renewal price change is down from the prior-year quarter to 5%, it is in line with observed loss trends.

Our policies in-force grew at 6%.

New business was up about 34% versus the prior-year quarter and is being generated across diverse geographies.

Our disciplined approach to homeowners remains an advantage.

As we have discussed before, we continue to reflect the increased risk associated with Atlantic wind into our risk-reward equations.

Our growth is driven from areas outside of the wind-exposed South.

We're pleased with this diversification and with the continued strength of our performance.

Turning to auto, profitability was solid, with a GAAP combined ratio in the quarter of 93%.

This was up from the year-ago quarter principally due to a reduction in the amount of favorable prior-year reserve development.

Retentions remain strong and stable.

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

Both new business and policies in-force saw significant increases in the quarter, reflecting the impact of our Quantum Auto product rollout.

PIF growth versus the prior-year quarter was up 7%.

We have heard that a lot of competitors have been talking about us lately; actually we appreciate the attention and have been watching it very carefully from all of its sources.

We're pleased to be getting it.

If we were not, that would mean that we weren't being successful.

We have a terrific distribution system with very strong agency relationships.

We deliver our products and services with outstanding ease-of-use and operational excellence.

When matched with a sophisticated product this generates attention-getting results.

As we have spoken about it before, Quantum is a multivariate tiered pricing program.

That’s in 23 states through the end of March and in 28 states as of today.

The program is designed to more finely segment and accurately price risk, while simultaneously reaching a broader range of customers in standard and preferred markets.

It is successfully doing just that.

All products of this kind require ongoing monitoring and continuous tuning of prices.

We are intensely monitoring the program and its performance and making regular adjustments.

We review broad ranges of information.

We examine the profile and mix of business across policy and driver level attributes.

We have analyzed and continue to analyze the programs positioning and yield relative to the marketplace and competition, looking at charts, premiums, quotes, sales, and close rate information.

We integrate these reviews with anticipated profitability data.

Obviously, the loss data from this program is limited and immature at this point.

However, we're closely examining leading indicators like physical damage frequency, BI claimant to claim ratios, and a number of others to assess the program's profitability.

CHECK

We drill into all of these slices of the program, analyze them relative to our in-force book of business, demographic and marketplace norms, and our expectations for the program.

These reviews have varying levels of [field-on] CHECK capability where we slice information very granularly.

These analyses are been tracked and assessed on a daily, weekly, and monthly basis.

The timeliness and level of granularity and information is allowing us to evaluate and tune prices appropriately, providing a high degree of confidence in the program's long-term success.

We have invigorated our distribution system.

We communicated our change in product breadth.

We have changed agent and producer habits, encouraging them to quote us more regularly.

These are key goals during the first phase of our Quantum rollout, and they have been successfully achieved.

Overall results are generally in line with our expectations.

We look forward to further rollout of the product and the rollout of our Quantum Home product later this year.

With that, I will pass it back to Jay.

Thanks, Joe.

As you can see on page 14 of the webcast, average invested assets grew by $600 million during the quarter.

Operating cash flow was a positive $562 million higher than the fourth quarter of 2005, but impacted by last year's storms.

Average invested assets now stand at $69.7 billion, up $5.5 billion from a year ago.

The quality of our investment portfolio remains very high and duration relatively unchanged at 4.0.

After tax NII, as shown on page 15, continued to grow, amounting to $670 million in the quarter, up 15%.

Fixed income results also grew by 15% due to the increased invested asset based and higher interest rates, while the performance of the non-fixed income portion of the portfolio was one of the best since the merger.

Several components of the non-fixed income portion of the portfolio -- private equities, hedge funds, and real estate investments -- all contributed to this strong showing.

The after-tax yield on the total portfolio was 3.8%, which was 20 basis points higher than a year ago.

Lastly, as page 16 indicates, we ended the quarter with almost $23 billion of common equity, up 4% since year end.

A debt to total capital ratio of 20.3% down 70 basis points since year end; and book value per share excluding FAS 115 of $32.68, up 4% since year end.

Stat surplus of $18.5 billion was up 20% over a year ago, and Holding Company liquid assets now stand at over $1.8 billion.

While some additional work needs to be completed, we have already completed a great deal of work necessary for updating our catastrophe models, reevaluating exposure levels, and resizing rating agency capital requirements under new and evolving rules.

As Jay said in his opening remarks, we expect to be generating more than enough capital to support our business growth and are pleased to be returning excess capital to our shareholders.

With that, we would be happy to take your questions.

(OPERATOR INSTRUCTIONS) Jay Gelb with Lehman Brothers.

I want to touch base with you all on the guidance.

If St. Paul Travelers put up an 18% return on equity in the first quarter, it just seems that this 14.5% to 15.5% ROE guidance for the full year seems conservative.

Also, I was hoping you could comment on that as well as your outlook for premium growth and investment income growth, so we can triangulate on how we should feel about the guidance.

I will take the first portion of that, Jay.

I think one of the things you can do is actually take the first quarter's earnings, take out the prior-period development; take out the tax benefits; annualize it; subtract out -- I'm sorry, add back the tax benefits for the first quarter; add back the prior-year development; subtract the cat number that we have given you.

And I think you will get to an indication of why the number at the moment makes sense.

It is possible that conditions could be better in the investment income area.

It is possible that they could not be as robust, and that is really what the range reflects.

But I think the arithmetic behind getting to what our indicated range is -- and again you've got to take into account the $460 million pretax of cats that is in our guidance -- it is really straightforward to do.

In terms of investment income, or premium direction?

In terms of investment income, we have the fixed income portfolio, which comprises about 93%, 94% of the entire portfolio.

So I think there you can just model off of the results that you have been seeing based on estimated cash flows associated with the business results that we have been putting up.

As it relates to the other part of the portfolio, the non-fixed income component, as you can see from the history, that has varied based upon equity returns and based upon transactions happening or not happening in various parts of the portfolio, like the real estate component of the portfolio.

So what I tend to do is really just look at the trend and work off of an average of some sort.

As far as premiums go, I think premiums are one where I think you have to look at the market and make your own determination.

It is not an area where we have previously given out any particular guidance.

Jay, I would make one further observation, which is that Jay Benet indicated that we have now had -- I think, what? -- six consecutive quarters of favorable development ex A&E.

Obviously, we do our reserve analysis each and every quarter, and we make whatever adjustments it is appropriate to make at that time.

So our guidance doesn't envision any further development; and that may or may not happen.

Obviously we will know when we finish the reserve reviews at the end of each quarter.

So I think those are the things you take into account when you figure out the numbers.

That is a good point, thanks.

Separately on the catastrophe management, could you give us a sense after all of the improvements you have made to catastrophe management since last year -- increased reinsurance, pulling back from exposures -- what do you think your losses would be in '06 if the same type of events were to happen from the '05 storms?

Just to give us a magnitude of direction there.

Let me see if I can be helpful.

First, as you know, or at least we have told you before, our catastrophe treaty comes up July 1.

As a consequence, we have not finalized our plans for the amount of reinsurance that we will be buying.

I would say that given the pricing that exists in the marketplace today, that it is unlikely that we would actually buy more than we have in previous years, although we are looking at some different forms and different structures other than pure national cat cover and evaluating those.

So it is still in the formation stage.

Just to answer your question specifically, if the same storms happen this year, our losses would be the same.

I don't think that there would be -- and I'm speaking now to the gross losses, that before any reinsurances -- and I think that the terms and conditions -- I'm sorry.

Let me -- I am answering your question actually in a sense differently than you are asking.

Why don't one of you take a shot at it?

You know what I'm --.

This is Brian.

I don't have a specific calculation for you.

We have clearly gone through in some of our businesses, and changes in terms and conditions, increases in deductibles, changes in business interruption coverage would definitely have some substantial impact.

It would not be something of a magnitude of 40% or 50% reductions in the loss dollars.

So there would be something there that would be fairly significant.

I think we were more answering it along the lines of -- for the purposes of our own planning, and as we have updated our models, we have not really assumed in our own planning a substantial decrease in our gross exposures from last year's levels, based upon the actions we have taken.

We are sure there are some individual exposures, terms, and conditions.

But for the purposes of our own earnings planning and our capital planning, our presumption is at the moment that our gross exposures are very similar to what they were last year, and in fact, we will have no more insurance.

So our net exposure will be about the same as it was last year, although obviously, with the updating of the models, it is more than we thought it was a year ago at this time.

So that's I think the best way that we can answer your question on our cat exposure at the moment.

Great, thanks for the answers.

I will get back in the queue.

Ron Frank with Citigroup.

A few things if I could.

One, a question for Joe Lacher.

Joe, could you talk to us a little bit about the remaining schedule for the rollout of Quantum Auto and also homeowners?

In particular for the Quantum Auto, any large states that you're going to be rolling out into over the near term?

What I have in mind there is when we should think about this lift from the introduction of Quantum in terms of business growth sort of hitting an anniversary date and settling down.

Okay.

Well, we are in 28 states now.

There's a number of states where the program can't be introduced or won't be introduced;

Massachusetts, California, those kind of environments where it doesn't fit with the regulatory environment in what is allowed to be used in those states.

We will probably -- and have delayed New York for a little while and will continue to do so, as we factor in some particular peculiarities relative to that state, and specific model adjustments we need to make for that.

Beyond that, there is another half a dozen or so that will go out this quarter that should get us to the peak impact of the program.

Beyond that, there should not be any big changes that come after that.

So really this quarter should see the body of that impact.

Homeowners will start rolling out late in the year.

We don't anticipate it having as significant an impact on growth as we did from an auto perspective.

It is going to be a much more sophisticated pricing program, but it will have a different complexity around it as we implement homeowners, and anticipate that moving a little bit slower.

Okay, just following up on that, if we were to characterize the growth you're seeing on account of Quantum, is it mainly a function of so to speak showing up really in segments that you just were not present in previously?

Or is it a matter of being more competitive in areas where you already had a significant presence?

It's a couple of things going together.

You have hit on the big ones.

First, the product has a significantly greater breadth.

We were very concentrated; our sweet spot was very concentrated in the most highly preferred risk before, and we have broadened that sweet spot.

That does not -- I repeat, not -- move us into nonstandard auto risk.

But it moves us more broadly into the standard and preferred marketplace.

It makes us more competitive on a broad range of risks, where we were intentionally not necessarily playing before.

That is one of the things we think has given us a great lift in the program.

I think we shared some data with your last quarter that looked at the increase in the number of our agents that were quoting us, and the increase in the quotes per agent.

That was a big signal to us that agents were finding us more broadly usable as they looked across their range of products.

Then we were getting a big lift from that breadth, so we see that as a big advantage of the product.

In addition to that, there are some spots where we are little bit more competitive.

We have had very strong combined ratios and have made significant investments inside of our claim organization to keep loss cost trends in check.

Some of that is invested in the pricing.

Okay, thanks.

Just two detail questions if I may.

One is for Jay Benet.

Jay, was that tax benefit spread between the PC segment and the Other line?

Because it looks like there was sort of a little bit of a distortion in both.

Most of the tax benefit was concentrated in the corporate area, in the interest and other piece of the business.

The rest of it was spread in the other segments, so it wasn't much in any of the segments themselves.

Okay.

Finally, Jay Fishman, you said you were not assuming any big change in your gross exposures in the guidance.

Are you assuming a significant increase in deductible?

Because based on what we're seeing so far on the buy and sell side of the transaction, it looks like a significant increase in your deductible would be almost inevitable.

I'm sorry, your retention rather.

Retentions on our own reinsurance program?

Yes.

I will take that.

Let me go back for a moment, because actually the questions about cat exposure are complex and not always easily answered in sort of single sentences.

As Brian mentioned, we have been getting significant improvement in coastal exposed rate.

Obviously, on its own that doesn't change gross losses or net losses.

You recognize that as written and then subsequently earn premium as it is earned.

So the risk-reward balance here is in some measure rate driven, in some measure exposure driven.

Brian is absolutely right, we have made significant changes in terms and conditions and exposures and the rest.

But again for the purposes of our own planning, and given the fact that the models are not yet updated to where any one of us in the industry would like them to be, we really haven't assumed a significant decrease in our exposures from those changes in terms and conditions.

I'm sure there will be one if in fact there are similar storms.

But again for purposes of planning we're not making that assumption.

Our assumption with respect to reinsurance that is available to us at the moment is that, again, it is unlikely that it would be more than what we had last year.

Last year we had a retention of $750 million in our catastrophe cover.

The first 750 was ours, and then the next billion and a quarter we were about two-thirds placed in the marketplace on that.

I suspect our retentions will go up some.

I don't know that it will make sense, given quoting, to buy again at the $750 million level.

But it won't be dramatically more.

It could be $1 billion, in that range.

But that is sort of a bid and the ask at the moment, in that 750 to $1 billion range of retention.

And then it's a question of how much we buy above that retention level.

Okay, that's real helpful.

Thanks.

Matt Heimermann with JPMorgan.

Two questions.

The first question was on Quantum.

You made the comment that results were generally in line with your expectations.

I wonder if you could give us an example of where things went better, or maybe you were surprised and needed to make an adjustment on the fly in that product.

Then secondly, on the share repurchase, could you just give us a sense of kind of the after thought process that went into coming up with the $2 billion number?

Just to help us put that in perspective versus capital and some of the changes in the catastrophe exposure, etc.

It's Joe Lacher.

I will start with the Quantum question first.

Again, we have seen the program has such a level of complexity to it that there are in individual local markets lots of opportunities to do things a little bit different.

As we have rolled out individual states and looked at the territories underneath it, we found some territories or local markets inside of the state to be a little bit more competitive than we expected, in some cases a little bit less.

So we will go in and tune territory relativity.

We have watched tier factors.

In different states, we have tuned those, in some cases a little more aggressive, in some cases a little less aggressive, to watch the elasticity of how they behaved in the marketplace.

As we work those through, we bring them back in line to what our norm would affect.

We use those tests to determine what will get us the appropriate profile and mix program.

Across the 23 states that have been active through the end of the first quarter, I think we have had or will have inside of the next 90 days between 15 and 20 changes that have run through those.

So we expect it to be a fairly regular and frequent event.

If you watch competitors who have similar sophisticated programs, they wind up making tuning items on a regular event.

That is what the product manager is designed to do, is look at those individual local markets and see where the right opportunities are.

Just a quick follow-up.

Can you give us a sense of what growth was in the non Quantum states versus the Quantum states?

Give me a second to dig it out; and we will let Jay answer your other question.

Relative to the capital planning, the planning starts with a premise of being a AA company with the major rating agencies, and A+ or better with A.M. Best.

With that, we go through a lot of capital models, some directed towards the individual models that the agencies have.

So we have certain targets, certain standards that we want to achieve.

We also look at debt-to-capital ratios as part of that, as well as Holding Company liquidity, which is a measure of financial flexibility for the rating agencies and for ourselves.

Financial flexibility in terms of dividend and interest requirements primarily.

What we also do is -- what we also did as part of this process, given that things are in a state of flux, we anticipated what the changes would be in the rating agency models for the new cat modeling that is taking place, along with the changes in the requirements that the rating agencies are putting on us and putting on the industry as a whole.

So with all of that, we looked at the capital that the Company would be generating; the growth that the Company would be in our estimation achieving; and the capital needed to support that growth.

Then looking beyond that, saying that if we had excess capital, which we do, based on the modeling, that we would return that excess capital to the shareholders.

So is the time frame under which you are looking for this analysis basically 12 months?

No.

What we shared with you in my comments were that we are targeting the program to be completed over 24 months; that we are actually starting it this month, obviously, May; that brings us to early 2008.

But I would make the observation that the $2 billion program that we have announced is a starting point.

It is where we are beginning the process of returning capital.

To the extent that we generate more than that in terms of excess capital, we will obviously use it up faster and go back and seek a reauthorization.

If in fact, growth opportunities emerge or unexpected events occur and we have to adjust it, we will.

So it is a targeted concept, but not specific; and obviously we will adjust it up or down as circumstances warrant.

Okay, and then the growth question?

Yes, from a Quantum perspective, and the reason I was fussing with it for a second is we have got a number of relatively small states for us that are seeing big growth percentages.

Then we have got some of our bigger states where the Quantum impact becomes smaller.

So it can get a little garbled depending on which month or which quarter you look at.

I think overall, we have seen positive growth in our non-Quantum states, but in the very low single digit range; and probably a 10 to 15 point spread in aggregate in growth in the Quantum states.

Okay, thanks much.

Paul Newsome with A.G. Edwards.

Congratulations on the quarter.

I wanted to ask a little bit about your M&A philosophy.

Clearly the capital managements announcements signal a fairly conservative bet; but I think in the past you have talked about your view that ultimately industry will consolidate.

I was wondering if you feel any differently about that and if your M&A view has changed over a longer-term perspective?

Thanks for your comment.

I tried to address that very specifically in the comments that I made.

Our focus at this point is to run our business, to grow it organically, that we have all of the tools and all of the geography presence that makes sense, and plenty of opportunities for us to create shareholder value with what we have got.

So our attention is not in the acquisition arena.

It just isn't.

Whether the industry consolidates or not is, I think, a different question and a speculative what.

But in terms of our own intention, I really do want to make it clear that our philosophy, our approach, our driver in the business is not to act as a consolidator and roll up the business.

It is to organically grow our business and use what we've got to create shareholder value.

So I don't know if that is -- I don't believe that is a change in our philosophy for the past two years.

As I said in my comments, we have not been active in that acquisition arena since that merger.

But certainly, it is useful to be able to clarify it to the investor arena and make sure that they understand our philosophy as well.

The clarification is very helpful.

On an entirely separate note, maybe you can talk a little bit more about the competition that you were seeing in the international segment and the environment there.

I will let Brian speak more specifically, but our international business, such as we call it, is actually our UK operation, our operation in Ireland, our Lloyd's business, and our surety business in Mexico.

So we are -- while we call international, I would characterize it as a lot more focused than -- oh, I'm sorry; and of course our Canadian business.

Bob, I apologize if you're listening, I just slipped.

They are good successful businesses.

They generate substantial returns on their own.

They have fully allocated capital and we measure profitability against their allocated capital.

They do just find.

In terms of thinking about the world more broadly, as many of you know, when I got involved with the St. Paul back in 2001, one of the early steps that we actually did was to close down a relatively substantial number of offices in the international arena.

We had offices in Australia, and on the continent in Europe, and in South Africa, and a whole host of places.

Ultimately, it didn't make sense to me and we closed them down.

I stand sort of by that decision.

I feel comfortable about our exposures.

The businesses that we run in the UK and Ireland and Canada are of the similar types that we run here.

There's nothing particularly unusual or dramatic about them in any special way.

Just a couple of comments to back up what Jay is saying.

In the UK, where our franchise is primarily a reflection of our Specialty Group businesses here in the U.S., I would say similar market dynamics to the U.S., but slightly more competitive from a pricing perspective.

So that is having a little bit of a drag there.

In Ireland, there has been significant tort reform in the last couple of years, which has dramatically affected pricing there.

Our experience to date has actually been that even with the significant double-digit pricing that has been going on in the last couple of years there, loss trends do look like they are responding and so --.

That means lowering.

Lowering, right, so the price reductions are actually warranted.

So we feel very good about the profitability of the book in Ireland, but growth opportunities are limited.

Then in Lloyd's, we have pulled back our capital a little bit there.

Expect to write a little bit less.

A lot of that is the weather-related dynamics, but a little bit tighter than what we are seeing here, not dramatically different.

Our focus at Lloyd's is really limited largely to three short-tail lines.

We are in the property business, we are in the marine business, and we are in the aviation insurance business.

Obviously there is some liability in the latter, but it is all relatively short-tail.

We are generally not a liability writer or a long-tail lines writer in Lloyd's.

Good, thank you.

Charlie Gates with Credit Suisse.

Congratulations on a great quarter.

Two questions.

My first question, maybe my history is wrong, but to the best of my knowledge if you go back through at least 2001, neither company, that is, St. Paul or Travelers, is engaged in material share repurchase.

Could you go through or could you speak briefly to your reassessment of that?

Charlie, thanks for your comment.

I think your history is right.

I think that neither Company at least going back to 2001 engaged in any share repurchases.

Our balance sheet is just at a very different position than it has been in, in the past.

A combination of the earnings that we had over the last couple of years; the sale of Nuveen and the infusion of those proceeds into the balance sheet; the internally generated capital; and I would attribute Nuveen as kind of an externally generated capital even though obviously it comes from internal sources.

And the growth opportunities in the marketplace today.

Speaking specifically if you look at all of the companies' retention ratios, what you will find is that all of the good companies are experiencing very, very high retention ratios.

As a consequence, the new, the attractive, well-priced new business flow is just not all that great.

In our case, we have got $20 billion of premiums at 10% growth rate would obviously be $2 billion.

You can calculate whatever earnings you like for the year based upon the guidance, but we're not going to grow at 10%.

We're just generating in our current operations a level of capital that are not needed to support the growth that we are generating.

We have a balance sheet position that really is meeting all of the targets that we had previously established.

So it is really just that.

Our balance sheet has met the targets that we have established.

The earnings generation ability of the Company really is extraordinary, as you are seeing in the quarter.

The market conditions are not such that we can put that capital to work.

So if we can't put it to work, we're going to give it back to you, and you will find other ways, I am sure, to utilize it.

My follow-up question.

Seemingly on a daily basis, the price of gasoline goes up a nickel a day almost.

Seemingly on a daily basis, the price of gasoline goes up almost a nickel a gallon on a daily basis.

How do you see that impacting your personal auto insurance business in the coming months?

Well, we watch the same things, Charlie, and saw some experience running through last year when we saw prices spike up.

We have seen frequencies be relatively flat to in some cases down over the last couple of years.

We don't anticipate that it will encourage frequencies to move a lot, really, as we watch it.

There are some hypotheses that people will still want to travel for summer vacations; they just won't fly, they will drive, which would push them up.

There are some that will suggest people will stay home, which would push them down.

Either way it runs, it is too short-tail of a question to impact our ability to factor things into pricing.

So we will watch it and see what happens, but it really doesn't impact our ability to move differently in the marketplace.

I would observe, Charlie, and it's a phenomenon that is not unique in any way to us, other companies report the same thing, that automobile frequencies are at historical lows, and they continue at that level without any indication that they are changing.

So it has been an interesting phenomenon to watch.

One of the reasons that we had the favorable prior-year development that we have experienced is that the frequencies have over the last several years actually declined from original estimates.

That combined with the weather is what has really generated the favorable development.

That is what we have been seeing, and it will be interesting to watch if the price of gasoline does indeed cause a change in that frequency number.

Thank you.

Jay Cohen with Merrill Lynch.

Two questions.

The first is on the expense ratio.

Kind of go back several years and it looks like the expense ratio now is actually higher than it was, if you put the two separate Companies, St. Paul and Travelers together, back in '03.

I understand the reasons why that is.

But do you have a kind of a longer-term goal as far as where you want that expense ratio to be?

I don't know that we think about it quite that way.

We do think about Return on Capital Employed being at the mid-teens level, return on equity.

We price our products and we track them carefully to achieve benchmark returns of between 13% and 18% in specific lines, specific territories, based upon the duration of the underlying liability.

Longer-tail business, higher return, obviously.

The expense ratio, as Jay mentioned, is being to some extent adversely impacted right now because of the way we calculate it.

The fee income in National Accounts is actually an offset to the expenses.

Our National Accounts business we have substantial levels of expenses but very little premium, because it is a fee-based business.

So the combined ratio, the expense component of it takes the fee income in National and reduces the expenses.

As the fee income in National has indeed gone down, even though as Jay pointed out, the G&A levels are down year-over-year, the expense ratio has ticked up, a combination of the National Accounts fee income phenomenon as well as the fact that premiums are just generally flat.

We think about the investments.

It has been really an amazing phenomenon.

If you look at our headcount since the time of the merger, it is essentially flat overall.

What we have done is to drive -- we talked originally about a 10% reduction in headcount, which we have largely achieved, from the duplicative functions of the merger.

We have actually reinvested that in line activity, whether it is in support of the claim functions that Doreen has been working on, or the work that Joe has been working on in Quantum.

So essentially we have been able to convert back-office investment into front-line investment and really fund the investments just that way.

So we watch it carefully.

I don't really think about -- and I am happy to give it some more thought -- but I don't really think about a targeted expense ratio.

We try and be relentlessly efficient in non-strategic areas, and to be very thoughtful and very forward-looking in the areas where investing money in our business makes a lot of sense.

That is how we tend to approach it.

That's fine.

Jay, a separate question for you, Jay Benet.

Can you compare what new money yields are now versus what expiring yields are in your portfolio?

Yes, in terms of new money rates, we are at that point now where when securities mature, when bonds mature, we are not losing yield on new money rates.

So I think we passed the inflection point.

As you can see from the portfolio in this particular quarter, whereas in prior quarters we had a slight unrealized gain position, and we have an unrealized loss position this quarter, that is entirely driven by interest rate movement.

So I think that speaks to your question in terms of what is happening with regard to new money yields.

They are up.

What is running off our book, partially because of the mark-to-market back at the merger, and the increase in the -- let's call it the 10-year rate.

I have got a concept in my mind, but we should really test it and get back to you with an answer.

But they are up.

There are up, I don't recall by how much.

You have passed the inflection point from your standpoint, or at least reached it?

Yes.

Great, thanks.

We want to be mindful.

There is another call at 10 Eastern, so we have got time for another question or two and then we are going to have to end the call.

Alain Karaoglan with Deutsche Bank.

I have a couple of questions.

First, though, I want to thank you for the vastly improved press release and the disclosure in that.

I really appreciate it.

It helps put things in perspective.

The two questions are, first, related to catastrophe exposure.

You mentioned that you are doing a lot in coastal areas.

Does that include both the Southeast and the Northeast?

Are you doing anything also with respect to your earthquake exposure?

On the coastal question, we are clearly looking at everything from main to the Mexican Texas border relative to Atlantic wind.

The actions that we are taking with fairly dramatically moving terms and conditions as well as price are really Texas through the Gulf to Florida and up into the Carolinas.

North of that, the marketplace has not moved dramatically.

We are moving some stuff there with selection, etc., but the movement North of that is pretty minimal.

We are always looking at our earthquake exposure.

The thing that the last couple of years has changed in our minds in evaluating earthquake exposure is the dynamic of -- the models underestimated the severity of dramatic events, and a lot of those factors would affect any kind of catastrophe.

So we are factoring that in, and looking at that as we go.

But not any specific program to move away from things.

I would make two points and, again, these are somewhat subtle.

We were not a Company that last year was grossly surprised by what happened to us in the storms.

The models were the models, but we did not have what I would characterize as a wakeup call because we found ourselves surprisingly overexposed.

We were always a conservative Company from a catastrophe -- at least we think we were -- a conservative Company from a catastrophe exposure perspective.

The fact is that frequency is higher than we thought it was.

Severity is higher, or at least we are modeling it.

As a consequence, our gross exposure is higher than we thought it was a year ago, and our net exposure is higher than we thought it was.

But not at levels that deeply concern us or cause us to take dramatic leaps in the marketplace.

Last year, we could have withstood two Katrinas, two Ritas, and two Wilmas, and given all the other results we had for the year, still have posted a several hundred million dollar operating profit for the year.

That is sort of a measure of where our gross numbers are.

So we don't think about ourselves as being a tremendously overexposed Company.

We have made great progress in bringing the risk and reward equations back in line, so that the exposure that we are taking we are being paid for appropriately.

So that is sort of the overall view of our exposure in the marketplace.

One other comment on quake.

You know, last November we sold our cat risk business.

That really had two fundamental businesses.

One was primarily a Florida property wind-exposed and the second was a California earthquake.

So that would have reduced our exposure to California quake.

Okay, the second question relates to loss cost trends.

What are you assuming in your pricing going forward or the pricing that you are putting through today, in terms of the loss cost trends?

Are you assuming that the frequency that has been favorable and declining in the past few years is going to continue?

Or you are assuming it is going to stop and frequency may trend up?

It differs business to business, line to line.

In aggregate, we're still assuming, relative to history, very good frequency trends.

In some cases, though, that does mean kind of a flattening out of the curve from what we have been seeing.

So at some point, you figure that the decline is going to stop.

But it differs business to business.

We are not assuming overall or in any specific business that I can recall that they continue to improve.

Right.

In a lot of cases we are kind of flatlining frequency from here; and in some cases, depending upon the line, we are actually assuming a modest uptick in frequency.

Let me ask specifically then, Jay, in personal auto and casualty line?

In personal auto we are making an assumption, and we will think about it from a pure premium perspective, the combination of loss cost severity and frequency.

We are assuming that there will be low single digit increases.

(multiple speakers) mostly driven by --.

Mostly driven by severity.

But again from a pricing perspective we think about them combined.

So it is clearly driven that way, so it's low single digits.

Thank you very much.

I think this will be the last question that we will be able to take.

At this time, ladies and gentlemen, we're out of time.

Thank you all for your participation in today's conference.

All parties may now disconnect.

Enjoy your day.