Six-Year Summary of Selected Financial Data
THE ST. PAUL COMPANIES
2000 1999 1998 1997 1996 1995
(In millions, except ratios and per share data)
CONSOLIDATED
Revenues from continuing operations $8,608 $ 7,569 $ 7,708 $ 8,308 $ 7,893 $ 7,273
Income from continuing operations 1,013 749 199 1,062 1,049 855
INVESTMENT ACTIVITY
Net investment income 1,616 1,557 1,571 1,573 1,509 1,471
Pretax realized investment gains 607 277 201 423 262 91
OTHER SELECTED FINANCIAL DATA (as of December 31)
Total assets 41,075 38,555 37,453 36,684 34,598 32,741
Debt 1,647 1,466 1,260 1,304 1,171 1,304
Capital securities 337 425 503 503 307 207
Common shareholders' equity 7,178 6,448 6,621 6,591 5,631 5,342
Common shares outstanding 218.3 224.8 233.7 233.1 230.9 235.4
PER COMMON SHARE DATA
Income from continuing operations 4.32 3.07 0.78 4.22 4.07 3.29
Year-end book value 32.88 28.68 28.32 28.27 24.39 22.69
Year-end market price 54.31 33.69 34.81 41.03 29.31 27.81
Cash dividends declared 1.08 1.04 1.00 0.94 0.88 0.80
PROPERTY-LIABILITY INSURANCE
Written premiums 5,884 5,112 5,276 5,682 5,683 5,561
Pretax income from continuing operations 1,467 971 298 1,488 1,257 1,040
GAAP underwriting loss (309) (425) (881) (139) (35) (127)
Statutory combined ratio:
Loss and loss expense ratio 70.0 72.9 82.2 69.8 68.9 71.5
Underwriting expense ratio 34.8 35.0 35.2 33.5 31.9 30.6
------ ------ ----- ----- ----- ------
Combined ratio 104.8 107.9 117.4 103.3 100.8 102.1
LIFE INSURANCE
Product sales 1,123 1,000 501 446 427 348
Premium income 306 187 119 137 145 174
Net income (loss) 43 44 13 51 (5) 19
Independent Auditors' Report
THE BOARD OF DIRECTORS AND SHAREHOLDERS
THE ST. PAUL COMPANIES, INC.:
We have audited the accompanying consolidated balance sheets of The St. Paul
Companies, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity, comprehensive
income and cash flows for each of the years in the three-year period ended
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The St.
Paul Companies, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, in 1999 the
Company changed its method of accounting for insurance-related assessments.
/s/ KPMG LLP
KPMG LLP
Minneapolis, Minnesota
January 23, 2001
Management's Responsibility for Financial Statements
Scope of Responsibility - Management prepares the accompanying financial
statements and related information and is responsible for their integrity and
objectivity. The statements were prepared in conformity with United States
generally accepted accounting principles. These financial statements include
amounts that are based on management's estimates and judgments, particularly our
reserves for losses and loss adjustment expenses. We believe that these
statements present fairly the company's financial position and results of
operations and that the other information contained in the annual report is
consistent with the financial statements.
Internal Controls - We maintain and rely on systems of internal accounting
controls designed to provide reasonable assurance that assets are safeguarded
and transactions are properly authorized and recorded. We continually monitor
these internal accounting controls, modifying and improving them as business
conditions and operations change. Our internal audit department also
independently reviews and evaluates these controls. We recognize the inherent
limitations in all internal control systems and believe that our systems provide
an appropriate balance between the costs and benefits desired. We believe our
systems of internal accounting controls provide reasonable assurance that errors
or irregularities that would be material to the financial statements are
prevented or detected in the normal course of business.
Independent Auditors - Our independent auditors, KPMG LLP, have audited the
consolidated financial statements. Their audit was conducted in accordance with
auditing standards generally accepted in the United States of America, which
includes the consideration of our internal controls to the extent necessary to
form an independent opinion on the consolidated financial statements prepared by
management.
Audit Committee - The audit committee of the board of directors, composed solely
of outside directors, assists the board of directors in overseeing management's
discharge of its financial reporting responsibilities. The committee meets with
management, our director of internal audit and representatives of KPMG LLP to
discuss significant changes to financial reporting principles and policies and
internal audit controls and procedures proposed or contemplated by management,
our internal auditors or KPMG LLP. Additionally, the committee assists the board
of directors in the selection, evaluation and, if applicable, replacement of our
independent auditors; and in the evaluation of the independence of the
independent auditors. Both internal audit and KPMG LLP have access to the audit
committee without management's presence.
Code of Conduct - We recognize our responsibility for maintaining a strong
ethical climate. This responsibility is addressed in the company's written code
of conduct.
/s/ Douglas W. Leatherdale /s/ Thomas A. Bradley
Douglas W. Leatherdale Thomas A. Bradley
Chairman, President and Chief Financial Officer
Chief Executive Officer
Consolidated Statements of Income
THE ST. PAUL COMPANIES
Year ended December 31 2000 1999 1998
(In millions, except per share data)
REVENUES
Premiums earned $ 5,898 $ 5,290 $ 5,553
Net investment income 1,616 1,557 1,571
Asset management 356 340 302
Realized investment gains 607 277 201
Other 131 105 81
----- ----- -----
Total revenues 8,608 7,569 7,708
----- ----- -----
EXPENSES
Insurance losses and loss adjustment expenses 3,913 3,720 4,465
Life policy benefits 494 367 273
Policy acquisition expenses 1,442 1,325 1,487
Operating and administrative expenses 1,306 1,140 1,363
----- ----- -----
Total expenses 7,155 6,552 7,588
----- ----- -----
Income from continuing operations before income taxes 1,453 1,017 120
Income tax expense (benefit) 440 238 (79)
----- ----- -----
Income from continuing operations before cumulative effect
of accounting change 1,013 779 199
Cumulative effect of accounting change, net of taxes -- (30) --
----- ----- -----
Income from continuing operations 1,013 749 199
----- ----- -----
Discontinued operations:
Operating loss, net of taxes -- (9) (110)
Gain (loss) on disposal, net of taxes (20) 94 --
----- ----- -----
Gain (loss) from discontinued operations (20) 85 (110)
----- ----- -----
Net Income $ 993 $ 834 $ 89
----- ----- -----
----- ----- -----
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations before cumulative effect $ 4.59 $ 3.37 $ 0.79
Cumulative effect of accounting change, net of taxes -- (0.13) --
Gain (loss) from discontinued operations, net of taxes (0.09) 0.37 (0.46)
----- ----- -----
Net Income $ 4.50 $ 3.61 $ 0.33
----- ----- -----
----- ----- -----
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations before cumulative effect $ 4.32 $ 3.19 $ 0.78
Cumulative effect of accounting change, net of taxes -- (0.12) --
Gain (loss) from discontinued operations, net of taxes (0.08) 0.34 (0.46)
----- ----- -----
Net Income $ 4.24 $ 3.41 $ 0.32
----- ----- -----
----- ----- -----
See notes to consolidated financial statements.
Consolidated Balance Sheets
THE ST. PAUL COMPANIES
December 31 2000 1999
(In millions)
ASSETS
Investments:
Fixed maturities $ 20,470 $ 19,080
Equities 1,466 1,617
Real estate and mortgage loans 1,249 1,504
Venture capital 1,064 866
Securities lending 1,233 1,216
Short-term investments 1,264 1,347
Other investments 353 299
--------- --------
Total investments 27,099 25,929
Cash 83 158
Reinsurance recoverables:
Unpaid losses 5,197 4,331
Paid losses 327 190
Ceded unearned premiums 814 639
Receivables:
Underwriting premiums 2,956 2,292
Interest and dividends 356 356
Other 181 223
Deferred policy acquisition costs 1,088 942
Deferred income taxes 898 1,262
Office properties and equipment 520 499
Goodwill 510 399
Asset management securities held for sale 29 45
Other assets 1,017 1,290
--------- --------
Total Assets $ 41,075 $ 38,555
--------- --------
--------- --------
LIABILITIES
Insurance reserves:
Losses and loss adjustment expenses $18,196 $ 17,720
Future policy benefits 5,460 4,885
Unearned premiums 3,647 3,048
--------- --------
Total insurance reserves 27,303 25,653
Debt 1,647 1,466
Payables:
Reinsurance premiums 1,060 654
Income taxes 172 311
Accrued expenses and other 1,185 1,138
Securities lending 1,233 1,216
Other liabilities 911 1,220
--------- --------
Total Liabilities 33,511 31,658
--------- --------
Company-obligated mandatorily redeemable preferred securities of subsidiaries
or trusts holding solely subordinated debentures of the company 337 425
SHAREHOLDERS' EQUITY
Preferred:
SOP convertible preferred stock 117 129
Guaranteed obligation - SOP (68) (105)
--------- --------
Total Preferred Shareholders' Equity 49 24
--------- --------
Common:
Common stock 2,238 2,079
Retained earnings 4,243 3,827
Accumulated other comprehensive income, net of taxes:
Unrealized appreciation 765 568
Unrealized loss on foreign currency translation (68) (26)
--------- --------
Total accumulated other comprehensive income 697 542
--------- --------
Total Common Shareholders' Equity 7,178 6,448
--------- --------
Total Shareholders' Equity 7,227 6,472
--------- --------
Total Liabilities, Redeemable Preferred Securities of
Subsidiaries or Trusts and Shareholders' Equity $ 41,075 $ 38,555
--------- --------
--------- --------
See notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
THE ST. PAUL COMPANIES
Year ended December 31 2000 1999 1998
(In millions)
PREFERRED SHAREHOLDERS' EQUITY
SOP convertible preferred stock:
Beginning of year $ 129 $ 134 $ 138
Redemptions during the year (12) (5) (4)
------- ------- -------
End of year 117 129 134
------- ------- -------
Guaranteed obligation - SOP:
Beginning of year (105) (119) (121)
Principal payments 37 14 2
------- ------- -------
End of year (68) (105) (119)
------- ------- -------
Total Preferred Shareholders' Equity 49 24 15
------- ------- -------
COMMON SHAREHOLDERS' EQUITY
Common stock:
Beginning of year 2,079 2,128 2,057
Stock issued:
Stock incentive plans 95 37 70
Preferred shares redeemed 23 9 8
Conversion of company-obligated preferred securities 207 -- --
Reacquired common shares (170) (102) (35)
Other 4 7 28
------- ------- -------
End of year 2,238 2,079 2,128
------- ------- -------
Retained earnings:
Beginning of year 3,827 3,480 3,720
Net income 993 834 89
Dividends declared on common stock (232) (235) (223)
Dividends declared on preferred stock, net of taxes (8) (8) (9)
Reacquired common shares (366) (254) (100)
Tax benefit on employee stock options, and other changes 40 14 6
Premium on preferred shares redeemed (11) (4) (3)
------- ------- -------
End of year 4,243 3,827 3,480
------- ------- -------
Unrealized appreciation, net of taxes:
Beginning of year 568 1,027 846
Change for the year 197 (459) 181
------- ------- -------
End of year 765 568 1,027
------- ------- -------
Unrealized loss on foreign currency translation, net of taxes:
Beginning of year (26) (14) (24)
Currency translation adjustments (42) (12) 10
------- ------- -------
End of year (68) (26) (14)
------- ------- -------
Total Common Shareholders' Equity 7,178 6,448 6,621
------- ------- -------
Total Shareholders' Equity $ 7,227 $ 6,472 $ 6,636
------- ------- -------
------- ------- -------
Consolidated Statements of Comprehensive Income
THE ST. PAUL COMPANIES
Year ended December 31 2000 1999 1998
(In millions)
Net income $ 993 $ 834 $ 89
Other comprehensive income (loss), net of taxes:
Change in unrealized appreciation 197 (459) 181
Change in unrealized loss on foreign currency translation (42) (12) 10
------- ------- -------
Other comprehensive income (loss) 155 (471) 191
------- ------- -------
Comprehensive income $ 1,148 $ 363 $ 280
------- ------- -------
------- ------- -------
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
THE ST. PAUL COMPANIES
Year ended December 31 2000 1999 1998
(In millions)
OPERATING ACTIVITIES
Net income $ 993 $ 834 $ 89
Adjustments:
Loss (income) from discontinued operations 20 (85) 110
Change in insurance reserves (86) (181) (146)
Change in reinsurance balances (803) (502) 25
Change in premiums receivable (450) (290) 53
Change in accounts payable and accrued expenses 21 151 50
Provision for federal deferred tax expense (benefit) 380 120 (114)
Change in asset management balances 9 31 (32)
Depreciation and amortization 113 122 133
Realized investment gains (607) (277) (201)
Cumulative effect of accounting change -- 30 --
Other (145) (9) 177
------- ------ ------
Net Cash Provided (Used) by Continuing Operations (555) (56) 144
Net Cash Provided (Used) by Discontinued Operations (8) 6 (75)
------- ------ ------
Net Cash Provided (Used) by Operating Activities (563) (50) 69
------- ------ ------
INVESTING ACTIVITIES
Purchases of investments (6,414) (6,153) (4,866)
Proceeds from sales and maturities of investments 6,949 6,152 4,810
Sales (purchases) of short-term investments 239 (539) (15)
Net proceeds from sale of subsidiaries 201 251 --
Change in open security transactions (65) 23 (8)
Venture capital distributions 57 63 50
Purchase of office property and equipment (104) (172) (95)
Sales of office property and equipment 10 70 2
Acquisitions, net of cash acquired (212) -- (98)
Other (18) 78 74
------- ------ ------
Net Cash Provided (Used) by Continuing Operations 643 (227) (146)
Net Cash Provided (Used) by Discontinued Operations 17 (52) 64
------- ------ ------
Net Cash Provided (Used) by Investing Activities 660 (279) (82)
------- ------ ------
FINANCING ACTIVITIES
Deposits on universal life and investment contracts 905 934 518
Withdrawals on universal life and investment contracts (507) (101) (186)
Dividends paid on common and preferred stock (241) (246) (226)
Proceeds from issuance of debt 498 250 239
Repayment of debt (363) (52) (225)
Repurchase of common shares (536) (356) (135)
Retirement of company-obligated mandatorily redeemable preferred securities of
subsidiaries or trusts -- (79) --
Stock options exercised and other 72 11 25
------- ------ ------
Net Cash Provided (Used) by Financing Activities (172) 361 10
------- ------ ------
Increase (Decrease) in Cash (75) 32 (3)
------- ------ ------
Cash at beginning of year 158 126 129
------- ------ ------
Cash at End of Year $ 83 $ 158 $ 126
------- ------ ------
------- ------ ------
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
THE ST. PAUL COMPANIES
1
Summary of Significant Accounting Policies
Accounting Principles - We prepare our financial statements in accordance with
United States generally accepted accounting principles ("GAAP"). We follow the
accounting standards established by the Financial Accounting Standards Board
("FASB") and the American Institute of Certified Public Accountants ("AICPA").
Consolidation - We combine our financial statements with those of our
subsidiaries and present them on a consolidated basis. The consolidated
financial statements do not include the results of material transactions between
our parent company and our subsidiaries or among our subsidiaries. Certain of
our foreign underwriting operations' results are recorded on a one-month to
one-quarter lag due to time constraints in obtaining and analyzing such results
for inclusion in our consolidated financial statements on a current basis. In
the event that significant events occur during the lag period, the impact is
included in the current period results.
Discontinued Operations - In 2000, we sold our nonstandard auto business. In
1999, we sold our standard personal insurance business. Accordingly, the results
of operations for all years presented reflect the results for these businesses
as discontinued operations.
Reclassifications - We reclassified certain amounts in our 1999 and 1998
financial statements and notes to conform with the 2000 presentation. These
reclassifications had no effect on net income, or common or preferred
shareholders' equity, as previously reported for those years.
Use of Estimates - We make estimates and assumptions that have an effect on the
amounts that we report in our financial statements. Our most significant
estimates are those relating to our reserves for property-liability losses and
loss adjustment expenses and life policy benefits. We continually review our
estimates and make adjustments as necessary, but actual results could turn out
to be significantly different from what we expected when we made these
estimates.
Stock Split - In May 1998, we declared a 2-for-1 stock split. All references in
these financial statements and related notes to per-share amounts and to the
number of shares of common stock reflect the effect of this stock split on all
periods presented.
ACCOUNTING FOR OUR PROPERTY-LIABILITY UNDERWRITING OPERATIONS
Premiums Earned - Premiums on insurance policies are our largest source of
revenue. We recognize the premiums as revenues evenly over the policy terms
using the daily pro rata method or, in the case of our Lloyd's business, the
one-eighths method. We record the premiums that we have not yet recognized as
revenues as unearned premiums on our balance sheet. Assumed reinsurance premiums
are recognized as revenues proportionately over the contract period. Premiums
earned are recorded in our statement of income, net of our cost to purchase
reinsurance.
Insurance Losses and Loss Adjustment Expenses - Losses represent the amounts we
paid or expect to pay to claimants for events that have occurred. The costs of
investigating, resolving and processing these claims are known as loss
adjustment expenses ("LAE"). We record these items
on our statement of income net of reinsurance, meaning that we reduce our gross
losses and loss adjustment expenses incurred by the amounts we have recovered or
expect to recover under reinsurance contracts.
Insurance Reserves - We establish reserves for the estimated total unpaid cost
of losses and LAE, which cover events that occurred in 2000 and prior years.
These reserves reflect our estimates of the total cost of claims that were
reported to us, but not yet paid, and the cost of claims incurred but not yet
reported to us ("IBNR"). Our estimates consider such variables as past loss
experience, current claim trends and the prevailing social, economic and legal
environments. We reduce our loss reserves for estimated amounts of salvage and
subrogation recoveries. Estimated amounts recoverable from reinsurers on unpaid
losses and LAE are reflected as assets. We believe that the reserves we have
established are adequate to cover the ultimate costs of losses and LAE. Final
claim payments, however, may differ from the established reserves, particularly
when these payments may not occur for several years. Any adjustments we make to
reserves are reflected in the results for the year during which the adjustments
are made.
Our liabilities for unpaid losses and LAE related to tabular workers'
compensation and certain assumed reinsurance coverage are discounted to the
present value of estimated future payments. Prior to discounting, these
liabilities totaled $890 million and $820 million at Dec. 31, 2000 and 1999,
respectively. The total discounted liability reflected on our balance sheet was
$681 million and $633 million at Dec. 31, 2000 and 1999, respectively. The
liability for workers' compensation was discounted using rates of up to 3.5%,
based on state-prescribed rates. The liability for certain assumed reinsurance
coverage was discounted using rates up to 7.5%, based on our return on invested
assets or, in many cases, on yields contractually guaranteed to us on funds held
by the ceding company, as permitted by the state of domicile.
Lloyd's - We participate in Lloyd's as an investor in underwriting syndicates
and as the owner of a managing agency. We record our pro rata share of syndicate
assets, liabilities, revenues and expenses, after making adjustments to convert
Lloyd's accounting to U.S. GAAP. The most significant U.S. GAAP adjustments
relate to income recognition. Lloyd's syndicates determine underwriting results
by year of account at the end of three years. We record adjustments to recognize
underwriting results as incurred, including the expected ultimate cost of losses
incurred. These adjustments to losses are based on actuarial analysis of
syndicate accounts, including forecasts of expected ultimate losses provided by
the syndicates. Financial information is available on a timely basis for the
syndicates controlled by the managing agency that we own, which make up the
majority of our investment in Lloyd's syndicates. Syndicate results are recorded
on a one-quarter lag due to time constraints in obtaining and analyzing such
results for inclusion in our consolidated financial statements on a current
basis.
Policy Acquisition Expenses - The costs directly related to writing an insurance
policy are referred to as policy acquisition expenses and consist of
commissions, state premium taxes and other direct underwriting expenses.
Although these expenses are incurred when we issue a policy, we defer and
amortize them over the same period as the corresponding premiums are recorded as
revenues.
On a regular basis, we perform an analysis of the deferred policy acquisition
costs in relation to the expected recognition of revenues, including anticipated
investment income, and reflect adjustments, if any, as period costs.
Guarantee Fund and Other Insurance-Related Assessments - Effective Jan. 1, 1999,
we adopted the provisions of the AICPA Statement of Position ("SOP") 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." We record our estimated future payments related to guarantee fund
assessments and our estimated ultimate exposure related to second-injury fund
assessments in accordance with the SOP. We recorded a pretax expense of $46
million ($30 million after-tax) in the first quarter of 1999 representing the
cumulative effect of adopting the provisions of the SOP, with the majority
related to our property-liability insurance business. The accrual is expected to
be disbursed as assessed during a period of up to 30 years.
ACCOUNTING FOR OUR LIFE INSURANCE OPERATIONS
Premiums - Premiums on life insurance policies with fixed and guaranteed
premiums and benefits, premiums on annuities with significant life contingencies
and premiums on structured settlement annuities are recognized when due.
Premiums received on universal life policies and investment-type annuity
contracts are not recorded as revenues; instead, they are recognized as deposits
on our balance sheet. Policy charges and surrender penalties are recorded as
revenues when incurred.
Policy Benefits - Ordinary life insurance reserves are computed under the net
level premium method, which makes no allowance for higher first-year expenses. A
uniform portion of each year's premium is used for calculating the reserve. The
reserves also reflect assumptions we make for future investment yields,
mortality and withdrawal rates. These assumptions reflect our experience,
modified to reflect anticipated trends, and provide for possible adverse
deviation. Reserve interest rate assumptions are graded and range from 2.5% to
6.0%.
Universal life and deferred annuity reserves are computed on the retrospective
deposit method, which produces reserves equal to the cash value of the
contracts. Such reserves are not reduced for charges that would be deducted from
the cash value of policies surrendered. Reserves on immediate annuities with
guaranteed payments are computed on the prospective deposit method, which
produces reserves equal to the present value of future benefit payments.
Policy Acquisition Expenses - The costs of acquiring new business, principally
commissions and certain expenses related to underwriting, policy issuance and
sales, which vary with and are primarily related to the production of new
business, have been capitalized as deferred policy acquisition costs. We
consider anticipated policy benefits, remaining costs of servicing the policies
and anticipated investment income in determining the recoverability of deferred
acquisition costs for interest-sensitive life and annuity products. Deferred
policy acquisition costs on ordinary life business are amortized over their
assumed premium paying periods based on assumptions consistent with those used
for computing policy benefit reserves. Universal life and investment annuity
acquisition costs are amortized in proportion to the present value of their
estimated gross profits over the products' assumed durations, which we regularly
evaluate and adjust as appropriate.
Equity-Indexed Annuities - Interest on our equity-indexed annuities is credited
to the equity portion of these annuities on specified policy anniversaries based
on formulas dictated by the policy contract, and calculated using the average
change in the indices during the specified period (one or two years). The
interest credited is subject to minimums guaranteed in the annuity contract. We
manage our exposure by purchasing one-and two-year options with similar terms as
the index component to provide us with the same return as we guarantee to the
annuity contract holder, subject to minimums guaranteed in the annuity contract.
We carry a reserve on these annuities at an amount equal to the premium
deposited, plus the change in the market value of the option purchased, subject
to minimums guaranteed in the annuity contract, plus the amortization of the
original purchase price of the option. The options are included in other
investments at market value, with changes in unrealized gains or losses
reflected in our statement of income.
ACCOUNTING FOR OUR ASSET MANAGEMENT OPERATIONS
The results of The John Nuveen Company are reflected as our asset management
segment. We held a 78% and 79% interest in Nuveen on Dec. 31, 2000 and 1999,
respectively. Nuveen's core businesses are asset management, and the
development, marketing and distribution of investment products and services for
advisors to the affluent and high-net-worth market segments. Nuveen provides
investment products, including individually managed accounts, mutual funds,
exchange-traded funds and defined portfolios through registered representatives
associated with unaffiliated firms including broker-dealers, commercial banks,
affiliates of insurance providers, financial planners, accountants, consultants
and investment advisors.
Nuveen regularly purchases and holds for resale municipal securities and defined
portfolio units. The level of inventory maintained by Nuveen will fluctuate
daily and is dependent upon the need to support on-going sales. These inventory
securities are carried at market value. Prior to the sale of their investment
banking operation in the third quarter of 1999, Nuveen also underwrote and
traded municipal bonds and maintained inventories of such securities in
connection with that business.
Nuveen's revenues include investment advisory fees, revenues from the
distribution of defined portfolios and managed fund investment products,
interest income, gains and losses from the sale of inventory securities, and
gains and losses from changes in the market value of investment products and
securities held temporarily.
We consolidate 100% of Nuveen's assets, liabilities, revenues and expenses, with
reductions on the balance sheet and statement of income for the minority
shareholders' proportionate interest in Nuveen's equity and earnings. Minority
interest of $88 million and $74 million was recorded in other liabilities at the
end of 2000 and 1999, respectively.
Nuveen repurchased and retired 1.2 million and 0.9 million of its common shares
from minority shareholders in 2000 and 1999, respectively, for a total cost of
$51 million in 2000 and $36 million in 1999. No shares were repurchased from The
St. Paul in those years; however our percentage ownership fell from 79% in 1999
to 78% in 2000 due to Nuveen's issuance of additional shares under various stock
option and incentive plans.
ACCOUNTING FOR OUR INVESTMENTS
Fixed Maturities - Our fixed maturity portfolio is composed primarily of
high-quality, intermediate-term taxable U.S. government, corporate and
mortgage-backed bonds, and tax-exempt U.S. municipal bonds. Our entire fixed
maturity investment portfolio is classified as available for sale. Accordingly,
we carry that portfolio on our balance sheet at estimated fair value. Fair
values are based on quoted market prices, where available, from a third-party
pricing service. If quoted market prices are not available, fair values are
estimated using values obtained from independent pricing services or a cash flow
estimate is used.
Equities - Our equity securities are also classified as available for sale and
carried at estimated fair value, which is based on quoted market prices obtained
from a third-party pricing service.
Real Estate and Mortgage Loans - Our real estate investments include apartments
and office buildings and other commercial land and properties that we own
directly or in which we have a partial interest through joint ventures with
other investors. Our mortgage loan investments consist of fixed-rate loans
collateralized by apartment, warehouse and office properties.
For direct real estate investments, we carry land at cost and buildings at cost
less accumulated depreciation and valuation adjustments. We depreciate real
estate assets on a straight-line basis
over 40 years. Tenant improvements are amortized over the term of the
corresponding lease. The accumulated depreciation of our real estate investments
was $133 million and $125 million at Dec. 31, 2000 and 1999, respectively.
We use the equity method of accounting for our real estate joint ventures, which
means we carry these investments at cost, adjusted for our share of earnings or
losses, and reduced by cash distributions from the joint ventures and valuation
adjustments.
We carry our mortgage loans at the unpaid principal balances less any valuation
adjustments, which approximates fair value. Valuation allowances are recognized
for loans with deterioration in collateral performance that is deemed other than
temporary. The estimated fair value of mortgage loans at Dec. 31, 2000 was $355
million.
Venture Capital - Our venture capital investments are interests in small- to
medium-sized companies. These investments are made through limited partnerships
or direct ownership. The limited partnerships are carried at our equity in the
estimated market value of the investments held by these limited partnerships.
The investments we own directly are carried at estimated fair value. Fair values
are based on quoted market prices obtained from third-party pricing services for
publicly traded stock, or an estimate of value as determined by an internal
management committee for privately-held stock. Certain publicly traded stock may
be carried at a discount of 10-35% of the quoted market price, due to the impact
of various restrictions which limit our ability to sell the stock.
Securities Lending - We participate in a securities lending program whereby
certain securities from our portfolio are loaned to other institutions for short
periods of time. We receive a fee from the borrower in return. Our policy is to
require collateral equal to 102% of the fair value of the loaned securities. We
maintain full ownership rights to the securities loaned. In addition, we have
the ability to sell the securities while they are on loan. We have an
indemnification agreement with the lending agents in the event a borrower
becomes insolvent or fails to return securities. We record securities lending
collateral as an asset, with a corresponding liability for the same amount.
Realized Investment Gains and Losses - We record the cost of each individual
investment so that when we sell any of them, we are able to identify and record
that transaction's gain or loss on our statement of income.
We continually monitor the difference between the cost and estimated fair value
of our investments. If any of our investments experience a decline in value that
we believe is other than temporary, we establish a valuation allowance for the
decline and record a realized loss on the statement of income.
Unrealized Appreciation or Depreciation - For investments we carry at estimated
fair value, we record the difference between cost and fair value, net of
deferred taxes, as a part of common shareholders' equity. This difference is
referred to as unrealized appreciation or depreciation. In our life insurance
operations, deferred policy acquisition costs and certain reserves are adjusted
for the impact on estimated gross margins as if the net unrealized gains and
losses on securities had actually been realized. The change in unrealized
appreciation or depreciation during the year is a component of comprehensive
income.
CASH RESTRICTIONS
Lloyd's solvency requirements call for certain funds to be held in trust in
amounts sufficient to meet claims. These funds amounted to $102 million and $20
million at Dec. 31, 2000 and 1999,
respectively. At Dec. 31, 1999, we were bound by reinsurance contracts with
third parties to restrict cash in the amount of $31 million. There were no such
restrictions at Dec. 31, 2000.
GOODWILL
Goodwill is the excess of the amount we paid to acquire a company over the fair
value of its net assets, reduced by amortization and any subsequent valuation
adjustments. We amortize goodwill over periods of up to 40 years. The
accumulated amortization of goodwill was $216 million and $180 million at Dec.
31, 2000 and 1999, respectively.
IMPAIRMENTS OF LONG-LIVED ASSETS AND INTANGIBLES
We monitor the value of our long-lived assets to be held and used for
recoverability based on our estimate of the future cash flows (undiscounted and
without interest charges) expected to result from the use of the asset and its
eventual disposition considering any events or changes in circumstances which
indicate that the carrying value of an asset may not be recoverable. We monitor
the value of our goodwill based on our estimates of discounted future earnings.
If either estimate is less than the carrying amount of the asset, we reduce the
carrying value to fair value with a corresponding charge to expense. We monitor
the value of our long-lived assets, and certain identifiable intangibles, to be
disposed of and report them at the lower of carrying value or fair value less
our estimated cost to sell.
OFFICE PROPERTIES AND EQUIPMENT
We carry office properties and equipment at depreciated cost. We depreciate
these assets on a straight-line basis over the estimated useful lives of the
assets. The accumulated depreciation for office properties and equipment was
$464 million and $431 million at the end of 2000 and 1999, respectively.
INTERNALLY DEVELOPED SOFTWARE COSTS
Effective Jan. 1, 1999, we adopted SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," issued by the AICPA.
This SOP provides guidance for determining when computer software developed or
obtained for internal use should be capitalized and what costs should be
capitalized. It also provides guidance on the amortization of capitalized costs
and the recognition of impairment. At Dec. 31, 2000 and 1999, respectively, we
had $42 million and $27 million in unamortized internally developed computer
software costs and have charged to income $3 million and $2 million in
amortization expense during 2000 and 1999, respectively.
FOREIGN CURRENCY TRANSLATION
We assign functional currencies to our foreign operations, which are generally
the currencies of the local operating environment. Foreign currency amounts are
remeasured to the functional currency, and the resulting foreign exchange gains
or losses are reflected in the statement of income. Functional currency amounts
are then translated into U.S. dollars. The unrealized gain or loss from this
translation, net of tax, is recorded as a part of common shareholders' equity.
The change in unrealized foreign currency translation gain or loss during the
year, net of tax, is a component of comprehensive income. Both the remeasurement
and translation are calculated
using current exchange rates for the balance sheets and average exchange rates
for the statements of income.
FOREIGN CURRENCY HEDGE ACCOUNTING
We may use forward contracts to hedge our exposure to net investments in our
foreign operations from adverse movements in foreign currency exchange rates.
The effects of movements in foreign currency exchange rates on the hedging
instrument are recorded as unrealized gains or losses, net of tax, as part of
common shareholders' equity. If unrealized gains or losses on the foreign
currency hedge exceed the offsetting currency translation gain or loss on the
investments in the foreign operations, they are included in the statements of
income.
SUPPLEMENTAL CASH FLOW INFORMATION
Interest and Income Taxes Paid - We paid interest on debt and dividends on
capital securities of $134 million in 2000, $128 million in 1999 and $109
million in 1998. We paid federal income taxes of $161 million in 2000, $73
million in 1999 and $68 million in 1998.
Noncash Financing Activities - In August 2000, we issued 7,006,954 common shares
in connection with the conversion of over 99% of the $207 million of 6%
Convertible Monthly Income Preferred Securities issued by St. Paul Capital
L.L.C. (our wholly-owned subsidiary).
2
Acquisitions
MMI - In April 2000, we closed on our acquisition of MMI Companies, Inc.
("MMI"), a Deerfield, IL-based provider of medical services-related insurance
products and consulting services. The transaction was accounted for as a
purchase, with a total purchase price of approximately $206 million, in addition
to the assumption of $165 million in capital securities and debt. The purchase
price resulted in goodwill of approximately $101 million, which we are
amortizing on a straight-line basis over 15 years.
Related to the purchase, we recorded a charge of $28 million, including $4
million of employee-related costs and $24 million of occupancy-related costs.
The employee-related costs represented severance and related benefits such as
outplacement counseling to be paid to, or incurred on behalf of, terminated
employees. We estimated that approximately 130 employee positions would be
eliminated, at all levels throughout MMI. Through Dec. 31, 2000, 94 employees
had been terminated. The occupancy-related costs represented excess space
created by the terminations, calculated by determining the percentage of
anticipated excess space, by location, and the current lease costs over the
remaining lease period. The amounts payable under the existing leases were not
discounted, and sublease income was included in the calculation only for those
locations where sublease agreements were in place.
The following presents a rollforward of 2000 activity related to this charge.
Reserve
Pretax at Dec. 31,
Charge Payments 2000
(In millions)
Charges to earnings:
Employee-related $ 4 $(3) $ 1
Occupancy-related 24 (1) 23
--- --- ----
Total $28 $(4) $24
--- --- ----
--- --- ----
MMI's results of operations from the date of purchase were included in our 2000
consolidated results. The following table presents the pro forma results of our
operations for the year ended Dec. 31, 2000 and 1999, as though we had purchased
MMI at the beginning of each of the years presented. The pro forma data is
provided for illustrative purposes only, and does not purport to be indicative
of the results that would have actually occurred if the purchase of MMI had been
consummated at the beginning of the periods presented, or that may be obtained
in the future.
2000 1999
(In millions, except per share data)
Total revenues $8,711 $8,064
Net income 873 728
Diluted earnings per common share $ 3.73 $ 2.98
Prior to the acquisition, MMI recorded a $93 million provision to strengthen
their loss reserves, with $77 million reflected in their domestic operations and
$16 million reflected in Unionamerica, their U.K.-based international
operations.
During 2000, we experienced severe prior year loss development on the reserves
acquired from MMI, primarily related to their major accounts business. This was
consistent with the adverse prior year development experienced on the remainder
of our Global Healthcare major accounts business. The major accounts business
serves large healthcare entities, which have recently suffered from increasingly
significant amounts awarded in jury verdicts relating to professional liability
lawsuits. As a result of this overall deterioration, we are in the process of
performing a comprehensive review of our entire major accounts business. This
review, as well as our evaluation of the strategic value of the Unionamerica
entity going forward, will be considered in our assessment of the recoverability
of the goodwill we recorded as part of the MMI purchase. Until this review and
evaluation are completed, we cannot reasonably estimate to what extent, if any,
impairment of the goodwill has occurred.
Pacific Select - In February 2000, we closed on our acquisition of Pacific
Select Insurance Holdings, Inc. and its wholly-owned subsidiary Pacific Select
Property Insurance Co. (together, "Pacific Select"), a California insurer that
sells earthquake coverage to California homeowners. The transaction was
accounted for as a purchase, at a cost of approximately $37 million. We recorded
goodwill of approximately $11 million, which we are amortizing on a
straight-line basis over 10 years. Pacific Select's results of operations from
the date of purchase are included in our 2000 consolidated results.
USF&G - In April 1998, we issued 66.5 million of our common shares in a tax-free
exchange for all of the outstanding common stock of USF&G Corporation ("USF&G"),
a holding company for property-liability and life insurance operations. This
business combination was accounted for as a pooling of interests; accordingly,
the consolidated financial statements for all periods prior to the combination
were restated to include the accounts and results of operations of USF&G. There
were no material intercompany transactions between The St. Paul and USF&G prior
to the merger.
Prior to the merger, USF&G discounted all of its workers' compensation reserves
to present value, whereas The St. Paul did not discount any of its loss
reserves. Subsequent to the merger, The St. Paul and USF&G on a combined basis
discounted tabular workers' compensation reserves using an interest rate of up
to 3.5%. An adjustment was made, which represented the
net reduction in insurance losses and loss adjustment expenses, to conform the
discounting policies of the two companies with regard to these reserves.
3
Earnings Per Common Share
Year ended December 31 2000 1999 1998
(In millions)
EARNINGS
Basic
Net income, as reported $993 $834 $ 89
Preferred stock dividends, net of taxes (8) (8) (9)
Premium on preferred shares redeemed (11) (4) (3)
----- ---- ----
Net income available to common shareholders $974 $822 $ 77
----- ---- ----
----- ---- ----
Diluted
Net income available to common shareholders $974 $822 $ 77
Effect of dilutive securities:
Convertible preferred stock 6 6 --
Zero coupon convertible notes 3 3 --
Convertible monthly income preferred securities 5 8 --
----- ---- ----
Net income available to common shareholders, as adjusted $988 $839 $ 77
----- ---- ----
----- ---- ----
COMMON SHARES
Basic
Weighted average common shares outstanding 217 228 235
----- ---- ----
----- ---- ----
Diluted
Weighted average common shares outstanding 217 228 235
Effects of dilutive securities:
Stock options 3 2 4
Convertible preferred stock 7 7 --
Zero coupon convertible notes 2 2 --
Convertible monthly income preferred securities 4 7 --
----- ---- ----
Total 233 246 239
----- ---- ----
----- ---- ----
The assumed conversion of preferred stock, zero coupon notes and monthly income
preferred securities are each anti-dilutive to our net income per share for the
year ended Dec. 31, 1998, and therefore not included in the EPS calculation.
4
Investments
Valuation of Investments - The following presents the cost, gross unrealized
appreciation and depreciation, and estimated fair value of our investments in
fixed maturities, equities and venture capital.
Gross Gross
Unrealized Unrealized Estimated
December 31, 2000 Cost Appreciation Depreciation Fair Value
(In millions)
Fixed maturities:
U.S. government $ 1,900 $ 101 $ (1) $ 2,000
State and political subdivisions 5,104 258 (1) 5,361
Foreign governments 1,020 39 (8) 1,051
Corporate securities 8,685 175 (279) 8,581
Asset-backed securities 890 28 (16) 902
Mortgage-backed securities 2,541 48 (14) 2,575
------- -------- ------ --------
Total fixed maturities 20,140 649 (319) 20,470
Equities 1,125 418 (77) 1,466
Venture capital 657 438 (31) 1,064
------- -------- ------ --------
Total $21,922 $ 1,505 $(427) $23,000
------- -------- ------ --------
------- -------- ------ --------
Gross Gross
Unrealized Unrealized Estimated
December 31, 1999 Cost Appreciation Depreciation Fair Value
(In millions)
Fixed maturities:
U.S. government $ 2,139 $ 29 $ (14) $ 2,154
State and political subdivisions 5,239 145 (58) 5,326
Foreign governments 904 28 (5) 927
Corporate securities 7,920 45 (304) 7,661
Asset-backed securities 666 2 (21) 647
Mortgage-backed securities 2,414 14 (63) 2,365
------- ------- -------- --------
Total fixed maturities 19,282 263 (465) 19,080
Equities 1,077 600 (60) 1,617
Venture capital 399 529 (62) 866
------- ------- -------- --------
Total $20,758 $ 1,392 $ (587) $21,563
------- ------- -------- --------
------- ------- -------- --------
Statutory Deposits - At Dec. 31, 2000, our property-liability and life insurance
operations had investments in fixed maturities with an estimated fair value of
$693 million on deposit with regulatory authorities as required by law.
Restricted Investments - Unionamerica, MMI's international subsidiary, is
required as an accredited U.S. reinsurer to hold certain investments in trust in
the United States. These trust funds had a fair value of $258 million at Dec.
31, 2000. Additionally, Unionamerica has funds deposited with third parties to
be used as collateral to secure various liabilities on behalf of insureds,
cedants and other creditors. These funds had a fair value of $79 million at Dec.
31, 2000.
Fixed Maturities by Maturity Date - The following table presents the breakdown
of our fixed maturities by years to maturity. Actual maturities may differ from
those stated as a result of calls and prepayments.
Amortized Estimated
December 31, 2000 Cost Fair Value
(In millions)
One year or less $ 1,478 $ 1,489
Over one year through five years 5,189 5,286
Over five years through 10 years 5,266 5,275
Over 10 years 4,776 4,943
Asset-backed securities with various maturities 890 902
Mortgage-backed securities with various maturities 2,541 2,575
------- -------
Total $20,140 $20,470
------- -------
------- -------
5
Investment Transactions
Investment Activity - Following is a summary of our investment purchases, sales
and maturities.
Year ended December 31 2000 1999 1998
(In millions)
PURCHASES
Fixed maturities $ 3,676 $ 4,317 $ 3,152
Equities 2,169 1,403 1,250
Real estate and mortgage loans 12 171 211
Venture capital 446 218 153
Other investments 111 44 100
------- ------- -------
Total purchases 6,414 6,153 4,866
------- ------- -------
PROCEEDS FROM SALES AND MATURITIES
Fixed maturities:
Sales 2,185 2,195 957
Maturities and redemptions 1,550 2,002 2,012
Equities 2,183 1,438 1,341
Real estate and mortgage loans 285 182 339
Venture capital 663 283 64
Other investments 83 52 97
------- ------- -------
Total sales and maturities 6,949 6,152 4,810
------- ------- -------
Net purchases (sales) $ (535) $ 1 $ 56
------- ------- -------
------- ------- -------
Net Investment Income - Following is a summary of our net investment income.
Year ended December 31 2000 1999 1998
(In millions)
Fixed maturities $ 1,427 $ 1,375 $ 1,365
Equities 16 17 16
Real estate and mortgage loans 103 108 121
Venture capital (1) (1) --
Securities lending 5 2 1
Other investments 3 12 20
Short-term investments 88 71 75
------- ------- -------
Total 1,641 1,584 1,598
Investment expenses (25) (27) (27)
------- ------- -------
Net investment income $ 1,616 $ 1,557 $ 1,571
------- ------- -------
------- ------- -------
Realized and Unrealized Investment Gains (Losses) - The following summarizes our
pretax realized investment gains and losses, and the change in unrealized
appreciation of investments recorded in common shareholders' equity and in
comprehensive income.
Year ended December 31 2000 1999 1998
(In millions)
PRETAX REALIZED INVESTMENTS GAINS (LOSSES)
Fixed maturities:
Gross realized gains $ 45 $ 13 $ 9
Gross realized losses (99) (50) (21)
----- ----- ------
Total fixed maturities (54) (37) (12)
----- ----- ------
Equities:
Gross realized gains 296 224 241
Gross realized losses (201) (97) (77)
----- ----- ------
Total equities 95 127 164
----- ----- ------
Real estate and mortgage loans 4 27 14
Venture capital 554 158 25
Other investments 8 2 10
----- ----- ------
Total pretax realized investment gains $ 607 $ 277 $ 201
----- ----- ------
----- ----- ------
CHANGE IN UNREALIZED APPRECIATION
Fixed maturities $ 532 $(1,322) $200
Equities (199) 223 69
Venture capital (61) 255 45
Life deferred policy acquisition costs and policy benefits (12) 122 (1)
Single premium immediate annuity reserves -- 44 (17)
Other 47 (13) (17)
----- ----- ------
Total change in pretax unrealized appreciation on continuing operations 307 (691) 279
----- ----- ------
Change in deferred taxes (110) 241 (100)
----- ----- ------
Total change in unrealized appreciation on continuing operations, net of taxes 197 (450) 179
----- ----- ------
Change in pretax unrealized appreciation on discontinued operations -- (14) 3
Change in deferred taxes -- 5 (1)
----- ----- ------
Total change in unrealized appreciation on discontinued operations, net of taxes -- (9) 2
----- ----- ------
Total change in unrealized appreciation, net of taxes $ 197 $(459) $ 181
----- ----- ------
----- ----- ------
6
Deferred Policy Acquisition Costs
The following table presents the amortization of deferred policy acquisition
costs ("DPAC") for our property-liability and life insurance operations for each
of the last three years.
Year ended December 31 2000 1999 1998
(In millions)
Property-liability $1,396 $1,321 $1,431
Life 46 4 56
------ ------ ------
Total $1,442 $1,325 $1,487
------ ------ ------
------ ------ ------
Life - On a regular basis, our Life insurance operation performs an analysis of
the recoverability of DPAC for interest-rate-sensitive life insurance and
annuity products. This analysis takes into consideration anticipated policy
benefits, remaining costs of servicing the policies and anticipated investment
income in estimating future profits on these products, which can be impacted by
economic conditions during the period. DPAC related to ordinary life business is
amortized on a straight-line basis over their assumed premium paying periods,
while DPAC related to universal life and investment annuity business is
amortized in proportion to the present value of their estimated gross profits
over the products' assumed duration.
This ongoing analysis caused us to revise assumptions on interest rates and
estimated future profits during each of the years presented, resulting in
accelerated DPAC amortization in 1998, with the opposite impact in 1999 and, to
a lesser extent, in 2000. The 1999 DPAC benefited from increased profitability
from policy charges on our universal life business as well as improved
investment spreads on our universal life and annuity products. Improved
investment spreads also benefited 2000 DPAC, but were offset by higher than
assumed surrenders on our annuities. The 2000 amortization also includes
additional amortization from a larger DPAC asset, reflecting our recent sales
growth.
Included in the 1998 life insurance amortization is a $41 million charge to
reduce the carrying value of deferred policy acquisition costs, comprised of
three components. First, the persistency of certain in-force business,
particularly universal life and flexible premium annuities, sold through some
USF&G distribution channels, had begun to deteriorate after the USF&G merger
announcement. To mitigate this, management decided, in the second quarter of
1998, to increase credited rates on certain universal life business. This change
lowered the estimated future profits on this business, which triggered $19
million in accelerated DPAC amortization. Second, the low interest rate
environment during the first half of 1998 led to assumption changes as to the
future "spread" on certain interest sensitive products, lowering gross profit
expectations and triggering a $16 million DPAC charge. The remaining $6 million
of the charge resulted from a change in annuitization assumptions for certain
tax-sheltered annuity products.
Property-Liability - By contrast, our property-liability insurance operation's
deferred acquisition costs are less susceptible to changing economic conditions
and are amortized on a straight-line basis over the same period as the
corresponding premiums are recorded as revenues.
7
Derivative Financial Instruments
Derivative financial instruments are defined as futures, forward, swap or option
contracts and other financial instruments with similar characteristics. We have
had limited involvement with these instruments for purposes of hedging against
fluctuations in foreign currency exchange rates and interest rates. All
investments, including derivative instruments, have some degree of market and
credit risk associated with them. However, the market risk on our derivatives
substantially offsets the market risk associated with fluctuations in interest
rates, foreign currency exchange rates and market indices. We seek to reduce our
credit risk exposure by conducting derivative transactions only with reputable,
investment-grade counterparties. Additionally, with respect to the options
hedging our equity-indexed annuity product, we establish limits on options
purchased from each counterparty.
We purchase foreign exchange forward contracts to minimize the impact of
fluctuating foreign currencies on our results of operations. We enter into
interest rate swap agreements for the purpose of managing the effect of interest
rate fluctuations on some of our debt and investments. Our reinsurance operation
has entered into certain swap agreements as a means of providing nontraditional
insurance protection to its customers. Individually, and in the aggregate, the
impact of these transactions on our financial position and results of operations
is not material.
Our Life operation manages its exposure on equity-indexed annuity products by
purchasing one- and two-year options tied to the performance of leading market
indices. At Dec. 31, 2000, we held options with a notional amount of $1.14
billion and a market value of $32 million, which had gross unrealized
depreciation of $30 million.
Effective Jan. 1, 2001, we will adopt the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 137 and SFAS No. 138 (SFAS No. 133). The statement requires the
recognition of all derivatives as either assets or liabilities on the balance
sheet, carried at fair value. The adoption of SFAS No. 133 is not expected to
have a material impact on our financial position at the date of adoption, or on
our results of operations for the period of adoption.
8
Reserves for Losses, Loss Adjustment Expenses and Life Policy Benefits
Reconciliation of Loss Reserves - The following table represents a
reconciliation of beginning and ending consolidated property-liability insurance
loss and loss adjustment expense ("LAE") reserves for each of the last three
years.
Year ended December 31 2000 1999 1998
(In millions)
Loss and LAE reserves at beginning of year, as reported $ 17,720 $ 18,012 $ 17,755
Less reinsurance recoverables on unpaid losses at beginning of year (3,678) (3,199) (3,051)
-------- -------- --------
Net loss and LAE reserves at beginning of year 14,042 14,813 14,704
Activity on reserves of discontinued operations:
Losses incurred (4) 279 657
Losses paid (141) (473) (617)
-------- -------- --------
Net activity (145) (194) 40
-------- -------- --------
Net reserves of acquired companies 984 -- --
-------- -------- --------
Provision for losses and LAE for claims incurred on continuing operations:
Current year 4,178 3,928 4,682
Prior years (265) (208) (217)
-------- -------- --------
Total incurred 3,913 3,720 4,465
-------- -------- --------
Losses and LAE payments for claims incurred on continuing operations:
Current year (970) (959) (1,136)
Prior years (4,138) (3,411) (3,245)
-------- -------- --------
Total paid (5,108) (4,370) (4,381)
-------- -------- --------
Unrealized foreign exchange loss (gain) (141) 73 (15)
-------- -------- --------
Net loss and LAE reserves at end of year 13,545 14,042 14,813
Plus reinsurance recoverables on unpaid losses at end of year 4,651 3,678 3,199
-------- -------- --------
Loss and LAE reserves at end of year, as reported $ 18,196 $ 17,720 $ 18,012
-------- -------- --------
-------- -------- --------
The "activity on reserves of discontinued operations" represents certain
activity related to the sale of our standard personal insurance business. The
reserve balances associated with certain portions of the business sold are
included in our total reserves, but the related incurred losses are excluded
from continuing operations in our statements of income for all periods
presented.
In 1998, we recorded a pretax provision of $215 million to reflect the
application of our loss reserving policies to USF&G's loss and LAE reserves
subsequent to the merger. In the above table, $50 million of the charge is
reflected in the provision for current year losses and LAE, and the remaining
$165 million is reflected in the provision for prior year losses and LAE. An
additional charge of $35 million related to our standard personal insurance
business is reflected in 1998 activity on reserves for discontinued operations.
Prior to the merger, both companies, in accordance with generally accepted
accounting principles, recorded their best estimate of reserves within a range
of estimates bounded by a high point and a low point. Subsequent to the
consummation of the merger in April 1998, we obtained the raw data underlying,
and documentation supporting, USF&G's Dec. 31, 1997 reserve analysis. Our
actuaries reviewed such information and concurred with the reasonableness of
USF&G's range of estimates for their reserves. However, applying their judgment
and
interpretation to the range, our actuaries, who would be responsible for
setting reserve amounts for the combined entity, concluded that strengthening
the reserves would be appropriate, resulting in the $215 million adjustment. The
adjustment was allocated to the following business segments: Commercial Lines
Group ($159 million); Global Healthcare ($1 million); and Other Global Specialty
($55 million).
In 1996, we acquired Northbrook Holdings, Inc. and its three insurance
subsidiaries ("Northbrook") from Allstate Insurance Company. In the Northbrook
purchase agreement, we agreed to pay Allstate additional consideration of up to
$50 million in the event a redundancy developed on the acquired Northbrook
reserves between the purchase date and July 31, 2000. During 2000, we made a
payment to Allstate in the amount of $50 million under this agreement. This
amount was included in "Other liabilities" on our Dec. 31, 1999 balance sheet.
Life Benefit Reserves - The following table shows our life insurance operation's
future policy benefit reserves by type.
December 31 2000 1999
(In millions)
Single premium annuities:
Deferred $3,513 $3,093
Immediate 1,356 1,173
Universal/term/group life 591 619
------ ------
Gross balance 5,460 4,885
Less reinsurance recoverables on unpaid losses 546 653
------ ------
Total net reserves $4,914 $4,232
------ ------
------ ------
Environmental and Asbestos Reserves - Our underwriting operations continue to
receive claims under policies written many years ago alleging injury or damage
from environmental pollution or seeking payment for the cost to clean up
polluted sites. We have also received asbestos injury claims arising out of
product liability coverages under general liability policies.
The following table summarizes the environmental and asbestos reserves reflected
in our consolidated balance sheet at Dec. 31, 2000 and 1999. Amounts in the
"net" column are reduced by reinsurance.
2000 1999
December 31 Gross Net Gross Net
(In millions)
Environmental $ 665 $ 563 $ 698 $ 599
Asbestos 397 299 398 298
------ ------ ------ ------
Total environmental and asbestos reserves $1,062 $ 862 $1,096 $ 897
------ ------ ------ ------
------ ------ ------ ------
9
Income Taxes
Method for Computing Income Tax Expense (Benefit) - We are required to compute
our income tax expense under the liability method. This means deferred income
taxes reflect what we estimate we will pay or receive in future years. A current
tax liability is recognized for the estimated taxes payable for the current
year.
Income Tax Expense (Benefit) - Income tax expense or benefits are recorded in
various places in our financial statements. A summary of the amounts and places
follows.
Year ended December 31 2000 1999 1998
(In millions)
STATEMENTS OF INCOME
Expense (benefit) on continuing operations $ 440 $ 238 $ (79)
Benefit on operating loss of discontinued operations -- (4) (57)
Expense (benefit) on gain or loss on disposal of discontinued operations (5) 90 --
----- ----- -----
Total income tax expense (benefit) included in statements of income 435 324 (136)
STATEMENTS OF SHAREHOLDERS' EQUITY
Expense (benefit) relating to stock-based compensation and the change in unrealized
appreciation and unrealized foreign exchange 86 (253) 87
----- ----- -----
Total income tax expense (benefit) included in financial statements $ 521 $ 71 $ (49)
----- ----- -----
----- ----- -----
Components of Income Tax Expense (Benefit) - The components of income tax
expense (benefit) on continuing operations are as follows.
Year ended December 31 2000 1999 1998
(In millions)
Federal current tax expense $ 21 $ 105 $ 13
Federal deferred tax expense (benefit) 380 120 (114)
----- ----- -----
Total federal income tax expense (benefit) 401 225 (101)
Foreign income taxes 26 2 14
State income taxes 13 11 8
----- ----- -----
Total income tax expense (benefit) on continuing operations $ 440 $ 238 $ (79)
----- ----- -----
----- ----- -----
Our Tax Rate Is Different from the Statutory Rate - Our total income tax expense
on income from continuing operations differs from the statutory rate of 35% of
income from continuing operations before income taxes as shown in the following
table.
Year ended December 31 2000 1999 1998
(In millions)
Federal income tax expense at statutory rate $ 509 $ 356 $ 42
Increase (decrease) attributable to:
Nontaxable investment income (95) (103) (112)
Valuation allowance -- 2 (35)
Nondeductible merger expense -- -- 31
Other 26 (17) (5)
----- ----- -----
Total income tax expense (benefit) on continuing operations $ 440 $ 238 $ (79)
----- ----- -----
----- ----- -----
Effective tax rate on continuing operations 30.3% 23.4% NM
----- ----- -----
----- ----- -----
NM = Not meaningful
Major Components of Deferred Income Taxes on Our Balance Sheet - Differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements that will result in taxable or deductible amounts in
future years are called temporary differences. The tax effects of temporary
differences that give rise to the deferred tax assets and deferred tax
liabilities are presented in the following table.
December 31 2000 1999
(In millions)
DEFERRED TAX ASSETS
Loss reserves $ 800 $ 1,032
Unearned premium reserves 160 147
Alternative minimum tax credit carryforwards 265 168
Net operating loss carryforwards 159 232
Deferred compensation 121 115
Other 632 547
------- -------
Total gross deferred tax assets 2,137 2,241
Less valuation allowance (32) (8)
------- -------
Net deferred tax assets 2,105 2,233
------- -------
------- -------
DEFERRED TAX LIABILITIES
Unrealized appreciation of investments 393 295
Deferred acquisition costs 345 281
Real estate 128 137
Prepaid compensation 88 73
Other 253 185
------- -------
Total gross deferred tax liabilities 1,207 971
------- -------
Deferred income taxes $ 898 $ 1,262
------- -------
------- -------
If we believe that all of our deferred tax assets will not result in future tax
benefits, we must establish a valuation allowance for the portion of these
assets that we think will not be realized. The net change in the valuation
allowance for deferred tax assets was an increase of $24 million in 2000 as part
of our purchase of MMI, and an increase of $2 million in 1999, both relating to
our foreign underwriting operations. Based upon a review of our anticipated
future earnings and all other available evidence, both positive and negative, we
have concluded it is "more likely than not" that our net deferred tax assets
will be realized.
Net Operating Loss ("NOL") and Foreign Tax Credit ("FTC") Carryforwards - For
tax return purposes, as of Dec. 31, 2000, we had NOL carryforwards that expire,
if unused, in 2004-2020 and FTC carryforwards that expire, if unused, in
2001-2005. The amount and timing of realizing the benefits of NOL and FTC
carryforwards depends on future taxable income and limitations imposed by tax
laws. The approximate amounts of those NOLs on a regular tax basis and an
alternative minimum tax ("AMT") basis were $454 million and $293 million,
respectively. The approximate amounts of the FTCs on a regular tax basis and an
AMT basis were $58 million and $56 million, respectively. The benefits of the
NOL and FTC carryforwards have been recognized in our financial statements.
Undistributed Earnings of Subsidiaries - U.S. income taxes have not been
provided on $69 million of our foreign operations' undistributed earnings as of
Dec. 31, 2000, as such earnings are intended to be permanently reinvested in
those operations. Furthermore, any taxes paid to foreign governments on these
earnings may be used as credits against the U.S. tax on any dividend
distributions from such earnings.
We have not provided taxes on approximately $289 million of undistributed
earnings related to our majority ownership of The John Nuveen Company as of Dec.
31, 2000, because we currently do not expect those earnings to become taxable to
us.
IRS Examinations - The IRS is currently examining USF&G's pre-merger
consolidated returns for the years 1992 through 1997. The IRS has examined The
St. Paul's pre-merger consolidated returns through 1994 and is currently
examining the years 1995 through 1997. During 2000, we reached a partial
settlement with the IRS regarding certain issues that were raised during the
course of their audit. We believe that this settlement, when combined with any
additional taxes assessed as a result of any further adjustments for these
examinations, would not materially affect our overall financial position,
results of operations or liquidity.
10
Capital Structure
The following summarizes our capital structure.
December 31 2000 1999
(In millions)
Debt $1,647 $1,466
Company-obligated mandatorily redeemable preferred
securities of subsidiaries or trusts holding solely
subordinated debentures of the Company 337 425
Preferred shareholders' equity 49 24
Common shareholders' equity 7,178 6,448
------- ------
Total capital $9,211 $8,363
------- ------
------- ------
Ratio of debt to total capital 18% 18%
Debt
Debt consisted of the following.
2000 1999
Book Fair Book Fair
December 31 Value Value Value Value
(In millions)
Medium-term notes $617 $ 619 $ 617 $ 598
7 7/8% senior notes 249 261 -- --
8 1/8% senior notes 249 267 -- --
8 3/8% senior notes 150 151 150 153
Commercial paper 138 138 400 400
Zero coupon convertible notes 98 95 94 93
7 1/8% senior notes 80 82 80 78
Variable rate borrowings 64 64 64 64
Real estate mortgages 2 2 15 15
Floating rate notes -- -- 46 46
------ ------ ------ ------
Total debt $1,647 $1,679 $1,466 $1,447
------ ------ ------ ------
------ ------ ------ ------
Fair Value - The fair value of our commercial paper borrowings approximated
their book value because of their short-term nature. The fair values of our
variable rate borrowings and floating rate notes approximated their book values
due to the floating interest rates of these instruments. For our other debt,
which has longer terms and fixed interest rates, our fair value estimate was
based on current interest rates available on debt securities in the market that
have terms similar to ours. At Dec. 31, 2000, we were party to eight interest
rate swap agreements related to several of our debt securities outstanding. The
notional amount of these swaps totaled $380 million, and their aggregate fair
value at Dec. 31, 2000, which was not recorded in our financial statements, was
an asset totaling $15 million.
Medium-Term Notes - The medium-term notes bear interest rates ranging from 5.9%
to 8.3%, with a weighted average rate of 6.9%. Maturities range from five to 15
years after the issuance date.
7 7/8% Senior Notes - On April 17, 2000, we issued $250 million of senior notes
due April 15, 2005. Proceeds were used to repay commercial paper debt and for
general corporate purposes.
8 1/8% Senior Notes - On April 17, 2000, we issued $250 million of senior notes
due April 15, 2010. Proceeds were used to repay commercial paper debt and for
general corporate purposes.
8 3/8% Senior Notes - The senior notes mature in June 2001.
Commercial Paper - Our commercial paper is supported by a $400 million credit
agreement that expires in 2002. The credit agreement requires us to meet certain
provisions. We were in compliance with all provisions of the agreement as of
Dec. 31, 2000 and 1999.
Interest rates on commercial paper issued in 2000 ranged from 5.5% to 6.7%; in
1999 the range was 4.6% to 6.6%; and in 1998 the range was 4.5% to 6.3%.
Zero Coupon Convertible Notes - The zero coupon convertible notes are redeemable
beginning in 1999 for an amount equal to the original issue price plus accreted
original issue discount. In addition, on March 3, 1999 and March 3, 2004, the
holders of the zero coupon convertible notes had/have the right to require us to
purchase their notes for the price of $640.82 and $800.51, respectively, per
$1,000 of principal amount due at maturity. In 1999, we repurchased
approximately $34 million face amount of the zero coupon convertible notes, for
a total cash consideration of $21 million. These notes mature in 2009.
7 1/8% Senior Notes - The senior notes mature in 2005.
Variable Rate Borrowings - A number of our real estate entities are parties to
variable rate loan agreements aggregating $64 million. The borrowings mature in
the year 2030, with principal paydowns starting in the year 2006. The interest
rate is set weekly by a third party, and was 5.05% at Dec. 31, 2000.
Real Estate Mortgage - The real estate mortgage represents a portion of the
purchase price of one of our investments. The mortgage bears a fixed rate of
8.1% and matures in February 2002. During 2000, we repaid $13 million of
mortgage debt associated with two of our real estate investments.
Floating Rate Notes - A special purpose offshore subsidiary of The St. Paul was
a party to a reinsurance agreement under which it issued $46 million of floating
rate notes and certificates on Feb. 18, 1999. These amounts were paid in full on
Feb. 18, 2000.
Interest Expense - Our interest expense on debt was $115 million in 2000, $96
million in 1999 and $75 million in 1998.
Maturities - The amount of debt, other than commercial paper, that becomes due
in each of the next five years is as follows: 2001, $195 million; 2002, $51
million; 2003, $67 million; 2004, $55 million; and 2005, $433 million.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES OR
TRUSTS HOLDING SOLELY SUBORDINATED DEBENTURES OF THE COMPANY
In 1995, we issued, through St. Paul Capital L.L.C. (SPCLLC), 4,140,000
company-obligated mandatorily redeemable preferred securities, generating
proceeds of $207 million. These securities were also known as convertible
monthly income preferred securities ("MIPS"). The MIPS paid a monthly dividend
at an annual rate of 6% of the liquidation preference of $50 per security.
During 2000, SPCLLC provided notice to the holders of the MIPS that it was
exercising its right to cause the conversion rights of the owners of the MIPS
to expire. The MIPS were convertible into 1.6950 shares of our common stock
(equivalent to a conversion price of $29.50 per share). Prior to the
expiration date, holders of over 99% of the MIPS exercised their conversion
rights and, in August 2000, we issued 7,006,954 common shares in connection
with the conversion. The remaining MIPS were redeemed for cash at $50 per
security, plus accumulated preferred dividends.
In conjunction with our purchase of MMI in April 2000, we assumed all
obligations under their preferred capital securities. In December 1997, MMI
issued $125 million 30-year mandatorily redeemable preferred capital securities
through MMI Capital Trust I, formed for the sole purpose of issuing the
securities. The capital securities pay a preferred dividend of 7 5/8%
semi-annually in arrears, and have a mandatory redemption date of Dec. 15, 2027.
In 1997 and 1996, USF&G issued three series of capital securities. After
consummation of the merger with USF&G in 1998, The St. Paul assumed all
obligations relating to these capital securities. These Series A, Series B and
Series C Capital Securities were issued through separate wholly-owned business
trusts ("USF&G Capital I," "USF&G Capital II" and "USF&G Capital III,"
respectively) formed for the sole purpose of issuing the securities. We have
effectively fully and unconditionally guaranteed all obligations of the three
business trusts.
In December 1996, USF&G Capital I issued 100,000 shares of 8.5% Series A Capital
Securities, generating proceeds of $100 million. The proceeds were used to
purchase $100 million of USF&G Corporation 8.5% Series A subordinated
debentures, which mature on Dec. 15, 2045. The debentures are redeemable under
certain circumstances related to tax events at a price of $1,000 per debenture.
The proceeds of such redemptions will be used to redeem a like amount of the
Series A Capital Securities.
In January 1997, USF&G Capital II issued 100,000 shares of 8.47% Series B
Capital Securities, generating proceeds of $100 million. The proceeds were used
to purchase $100 million of USF&G Corporation 8.47% Series B subordinated
debentures, which mature on Jan. 10, 2027. The debentures are redeemable at our
option at any time beginning in January 2007 at scheduled redemption prices
ranging from $1,042 to $1,000 per debenture. The debentures are also redeemable
prior to January 2007 under certain circumstances related to tax and other
special events. The proceeds of such redemptions will be used to redeem a like
amount of the Series B Capital Securities.
In July 1997, USF&G Capital III issued 100,000 shares of 8.312% Series C Capital
Securities, generating proceeds of $100 million. The proceeds were used to
purchase $100 million of USF&G Corporation 8.312% Series C subordinated
debentures, which mature on July 1, 2046. The debentures are redeemable under
certain circumstances related to tax events at a price of $1,000 per debenture.
The proceeds of such redemptions will be used to redeem a like amount of the
Series C Capital Securities.
Under certain circumstances related to tax events, we have the right to shorten
the maturity dates of the Series A, Series B and Series C debentures to no
earlier than June 24, 2016, July 10, 2016 and April 8, 2012, respectively, in
which case the stated maturities of the related Capital Securities will likewise
be shortened.
During 1999, The St. Paul repurchased and retired approximately $79 million
(principal amount) of its company-obligated mandatorily redeemable preferred
securities of subsidiaries in open market transactions. The amount retired
included $27 million of 8.5% Series A, $22 million of 8.47% Series B, and $30
million of 8.312% Series C securities.
PREFERRED SHAREHOLDERS' EQUITY
The preferred shareholders' equity on our balance sheet represents the par value
of preferred shares outstanding that we issued to our Stock Ownership Plan
("SOP") Trust, less the remaining principal balance on the SOP Trust debt. The
SOP Trust borrowed funds from a U.S. underwriting subsidiary to finance the
purchase of the preferred shares, and we guaranteed the SOP debt.
The SOP Trust may at any time convert any or all of the preferred shares into
shares of our common stock at a rate of eight shares of common stock for each
preferred share. Our board of directors has reserved a sufficient number of our
authorized common shares to satisfy the conversion of all preferred shares
issued to the SOP Trust and the redemption of preferred shares to meet employee
distribution requirements. Upon the redemption of preferred shares, we issue
shares of our common stock to the trust to fulfill the redemption obligations.
COMMON SHAREHOLDERS' EQUITY
Common Stock and Reacquired Shares - We are governed by the Minnesota Business
Corporation Act. All authorized shares of voting common stock have no par value.
Shares of common stock reacquired are considered unissued shares. The number of
authorized shares of the company is 480 million.
Our cost for reacquired shares in 2000, 1999 and 1998 was $536 million, $356
million and $135 million, respectively. We reduced our capital stock account and
retained earnings for the cost of these repurchases.
A summary of our common stock activity for the last three years is as follows.
Year ended December 31 2000 1999 1998
(Shares)
Outstanding at beginning of year 224,830,894 233,749,778 233,129,721
Shares issued:
Stock incentive plans and other 3,686,827 1,896,229 4,243,354
Conversion of preferred stock 661,523 287,951 204,765
Conversion of MIPS 7,006,954 -- --
Acquisition -- 27,936 --
Reacquired shares (17,878,182) (11,131,000) (3,828,062)
----------- ----------- -----------
Outstanding at end of year 218,308,016 224,830,894 233,749,778
----------- ----------- -----------
----------- ----------- -----------
Undesignated Shares - Our articles of incorporation allow us to issue five
million undesignated shares. The board of directors may designate the type of
shares and set the terms thereof. The board designated 1,450,000 shares as
Series B Convertible Preferred Stock in connection with the formation of our
Stock Ownership Plan.
Dividend Restrictions - We primarily depend on dividends from our subsidiaries
to pay dividends to our shareholders, service our debt and pay expenses. Various
state laws and regulations limit the amount of dividends we may receive from our
U.S. property-liability underwriting subsidiaries and our life insurance
subsidiary. Although $1.6 billion will be available for dividends in 2001,
business and regulatory considerations may impact the amount of dividends
actually paid. During 2000, we received cash dividends of $483 million from our
U.S. underwriting subsidiaries.
11
Retirement Plans
Pension Plans - We maintain funded defined benefit pension plans for most of our
employees. Benefits are based on years of service and the employee's
compensation while employed by the company. Pension benefits generally vest
after five years of service.
Our pension plans are noncontributory. This means that employees do not pay
anything into the plans. Our funding policy is to contribute amounts sufficient
to meet the minimum funding requirements of the Employee Retirement Income
Security Act and any additional amounts that may be necessary. This may result
in no contribution being made in a particular year.
Plan assets are invested primarily in equities and fixed maturities, and
included 804,035 shares of our common stock with a market value of $44 million
and $27 million at Dec. 31, 2000 and 1999, respectively.
We maintain noncontributory, unfunded pension plans to provide certain company
employees with pension benefits in excess of limits imposed by federal tax law.
Postretirement Benefits Other than Pension - We provide certain healthcare and
life insurance benefits for retired employees and their eligible dependents. We
currently anticipate that most of our employees will become eligible for these
benefits if they retire while working for us. The cost of these benefits is
shared with the retiree. The benefits are generally provided through our
employee benefits trust, to which periodic contributions are made to cover
benefits paid during the year. We accrue postretirement benefits expense during
the period of the employee's service.
A healthcare inflation rate of 5.82% was assumed to change to 10.00% in 2001,
decrease annually to 5.00% in 2006 and then remain at that level. A
one-percentage-point change in assumed healthcare cost trend rates would have
the following effects.
1-Percentage- 1-Percentage-
Point Increase Point Decrease
(In millions)
Effect on total of service and interest cost components $3 $(2)
Effect on postretirement benefit obligation 29 (23)
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period ended Dec.
31, 2000, and a statement of the funded status as of Dec. 31, 2000 and 1999. For
the year ended Dec. 31, 1999, the plans' benefit obligations included the impact
of curtailment gains related to employee terminations under the third quarter
1999 cost reduction action and the sale of standard personal insurance.
Pension Benefits Postretirement Benefits
2000 1999 2000 1999
(In millions)
Change in benefit obligation:
Benefit obligation at beginning of year $ 777 $ 1,006 $ 189 $ 214
Service cost 27 38 5 8
Interest cost 61 60 14 14
Plan amendment -- -- -- 16
Actuarial loss (gain) 129 (197) 27 (37)
Foreign currency exchange rate change (1) -- -- --
Acquisition 14 -- -- --
Benefits paid (46) (100) (14) (9)
Curtailment gain -- (30) -- (17)
------- ------- ----- -----
Benefit obligation at end of year $ 961 $ 777 $ 221 $ 189
------- ------- ----- -----
------- ------- ----- -----
Change in plan assets:
Fair value of plan assets at beginning of year $ 1,226 $ 1,135 $ 20 $ 22
Actual return on plan assets 8 187 3 (2)
Foreign currency exchange rate change (2) -- -- --
Acquisition 19 -- -- --
Employer contribution 1 4 14 9
Benefits paid (46) (100) (14) (9)
------- ------- ----- -----
Fair value of plan assets at end of year $ 1,206 $ 1,226 $ 23 $ 20
------- ------- ----- -----
------- ------- ----- -----
Funded status $ 245 $ 449 $(198) $(169)
Unrecognized transition asset (2) (3) -- --
Unrecognized prior service cost (gain) (4) (7) 9 10
Unrecognized net actuarial loss (gain) 36 (208) 4 (22)
------- ------- ----- -----
Prepaid (accrued) benefit cost $ 275 $ 231 $(185) $(181)
------- ------- ----- -----
------- ------- ----- -----
Pension Benefits Postretirement Benefits
2000 1999 2000 1999
Weighted average assumptions as of December 31:
Discount rate 6.75% 7.25% 7.25% 7.50%
Expected return on plan assets 10.00% 10.00% 7.00% 8.00%
Rate of compensation increase 4.00% 4.00% 4.00% 4.00%
The following table provides the components of our net periodic benefit cost for
the years 2000, 1999 and 1998.
Pension Benefits Postretirement Benefits
2000 1999 1998 2000 1999 1998
(In millions)
Components of net periodic benefit cost:
Service cost $ 27 $ 38 $ 31 $ 5 $ 8 $ 6
Interest cost 61 60 58 14 14 13
Expected return on plan assets (123) (114) (98) (2) (2) (2)
Amortization of transition asset (2) (1) (2) -- -- --
Amortization of prior service cost (3) (4) (4) 1 1 --
Recognized net actuarial loss (gain) (2) -- 6 -- -- --
----- ----- ---- ----- ---- ----
Net periodic pension cost (income) (42) (21) (9) 18 21 17
----- ----- ---- ----- ---- ----
Curtailment gain -- (32) -- -- (15) --
----- ----- ---- ----- ---- ----
Net periodic benefit cost (income) after curtailment $ (42) $ (53) $ (9) $ 18 $ 6 $ 17
----- ----- ---- ----- ---- ----
----- ----- ---- ----- ---- ----
During 2000, employees hired prior to May 2000 were given the choice of
remaining in our defined benefit pension plan and postretirement healthcare
benefits plan, or switching to a new cash balance pension plan and/or cash
balance retiree health plan. Employees choosing to switch to the cash balance
plan(s) were credited with opening balances effective Jan. 1, 2001. For 2001 and
thereafter, the cash balance plans will be accounted for under, and included in
the results of, the defined benefit pension plan.
STOCK OWNERSHIP PLAN
As of Jan. 1, 1998, the Preferred Stock Ownership Plan ("PSOP") and the
Employee Stock Ownership Plan ("ESOP") were merged into The St. Paul
Companies, Inc. Stock Ownership Plan ("SOP"). The plan allocates preferred
shares semiannually to those employees participating in our Savings Plus
Plan. Under the SOP, we match 100% of employees' contributions up to a
maximum of 4% of their salary plus shares equal to the value of dividends on
previously allocated shares. Additionally, this plan now provides an annual
allocation to qualified U.S. employees based on company performance.
To finance the preferred stock purchase for future allocation to qualified
employees, the SOP (formerly the PSOP) borrowed $150 million at 9.4% from our
U.S. underwriting subsidiary. As the principal and interest of the trust's loan
is paid, a pro rata amount of our preferred stock is released for allocation to
participating employees. Each share pays a dividend of $11.72 annually and is
currently convertible into eight shares of common stock. Preferred stock
dividends on all shares held by the trust are used to pay this SOP obligation.
In addition to dividends paid to the trust, we make additional cash
contributions to the SOP as necessary in order to meet the SOP's debt
obligation.
The SOP (formerly the ESOP) borrowed funds to finance the purchase of common
stock for future allocation to qualified participating U.S. employees. The final
principal payment on the trust's loan was made in the first quarter of 1998. As
the principal of the trust loan was paid, a pro rata amount of our common stock
was released for allocation to eligible participants. Starting in the second
quarter of 1998 common stock dividends on shares allocated under the former ESOP
are paid directly to participants.
All common shares and the common stock equivalent of all preferred shares held
by the SOP are considered outstanding for diluted EPS computations and dividends
paid on all shares are charged to retained earnings.
We follow the provisions of Statement of Position 76-3, "Accounting Practices
for Certain Employee Stock Ownership Plans," and related interpretations in
accounting for this plan. We recorded expense of $14 million, $26 million and $8
million for the years 2000, 1999 and 1998, respectively.
The following table details the shares held in the SOP.
2000 1999
December 31 Common Preferred Common Preferred
(Shares)
Allocated 5,546,251 448,819 6,578,570 370,122
Committed to be released -- 49,646 -- 130,896
Unallocated -- 309,663 -- 393,248
--------- ------- --------- -------
Total 5,546,251 808,128 6,578,570 894,266
--------- ------- --------- -------
--------- ------- --------- -------
The SOP allocated 83,585 preferred shares in 2000, 183,884 preferred shares in
1999 and 53,949 preferred shares in 1998. Unallocated preferred shares had a
fair market value of $135 million and $107 million at Dec. 31, 2000 and 1999,
respectively. The remaining unallocated preferred shares at Dec. 31, 2000, will
be released for allocation annually through Jan. 31, 2005.
12
Stock Incentive Plans
We have made fixed stock option grants to certain U.S.-based employees, certain
employees of our non-U.S. operations, and outside directors. These were
considered "fixed" grants because the
measurement date for determining compensation costs was fixed on the date of
grant. We have also made variable stock option grants to certain company
executives. These were considered "variable" grants because the measurement date
is contingent upon future increases in the market price of our common stock.
We follow the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," FASB Interpretation 44, "Accounting
for Certain Transactions involving Stock Compensation (an interpretation of APB
Opinion No. 25)," and other related interpretations in accounting for our stock
option plans. We also follow the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" for our option plans. SFAS No. 123
requires pro forma net income and earnings per share information, which is
calculated assuming we had accounted for our stock option plans under the "fair
value" method described in that Statement.
Since the exercise price of our fixed options equals the market price of our
stock on the day the options are granted there is no related compensation cost.
We have recorded compensation cost associated with our variable options and
restricted stock awards, and the former USF&G's Long-Term Incentive Program, of
$28 million, $8 million and $10 million in 2000, 1999 and 1998, respectively.
FIXED OPTION GRANTS
U.S.-Based Plans - Our fixed option grants for certain U.S.-based employees and
outside directors give these individuals the right to buy our stock at the
market price on the day the options were granted. Fixed stock options granted
under the stock incentive plan adopted by our shareholders in May 1994 (as
subsequently amended) become exercisable no less than one year after the date of
grant and may be exercised up to ten years after grant date. Options granted
under our option plan in effect prior to May 1994 may be exercised at any time
up to 10 years after the grant date. At the end of 2000, approximately 5,300,000
shares were available for grant under our stock incentive plan.
Non-U.S. Plans - We also have separate stock option plans for certain employees
of our non-U.S. operations. The options granted under these plans were priced at
the market price of our common stock on the grant date. Generally, they can be
exercised from three to 10 years after the grant date. Approximately 511,000
option shares were available at Dec. 31, 2000 for future grants under our
non-U.S. plans.
Global Stock Option Plan ("GSOP") - We have a separate fixed stock option plan
for employees who are not eligible to participate in the U.S. and non-U.S. plans
described above. Options granted to eligible employees under the GSOP are
contingent upon the company achieving threshold levels of profitability, and the
number of options granted is determined by the level of profitability achieved.
Generally, options granted under this plan can be exercised from three to 10
years after the grant date. At Dec. 31, 2000, approximately 1,500,000 option
shares were available for future grants under the GSOP.
The following table summarizes the activity for our fixed option plans for the
last three years. All grants were made at fair value on the date of grant.
Weighted
Average
Option Exercise
Shares Price
Outstanding Jan. 1, 1998 12,542,811 $ 25.76
Granted 3,693,511 42.65
Exercised (3,663,620) 23.04
Canceled (1,428,810) 37.23
---------- ---------
Outstanding Dec. 31, 1998 11,143,892 30.78
Granted 3,531,418 30.16
Exercised (1,578,903) 22.63
Canceled (1,033,435) 39.07
---------- ---------
Outstanding Dec. 31, 1999 12,062,972 30.96
Granted 6,539,436 33.94
Exercised (3,372,916) 26.42
Canceled (919,110) 36.41
---------- ---------
Outstanding Dec. 31, 2000 14,310,382 $ 33.04
---------- ---------
---------- ---------
The following table summarizes the options exercisable at the end of the last
three years and the weighted average fair value of options granted during those
years. The fair value of options is estimated on the date of grant using the
Black-Scholes option-pricing model, with the following weighted average
assumptions used for grants in 2000, 1999 and 1998, respectively: dividend yield
of 3.0%, 2.8% and 3.0%; expected volatility of 41.0%, 23.8% and 18.9%; risk-free
interest rates of 6.5%, 5.3% and 5.6%; and an expected life of 6.5 years, 6.5
years and 5.9 years.
2000 1999 1998
Options exercisable at year-end 5,751,780 7,940,793 8,078,734
Weighted average fair value of options granted during the year $ 12.96 $ 7.59 $ 8.91
The following tables summarize the status of fixed stock options outstanding and
exercisable at Dec. 31, 2000.
Options Outstanding
Weighted
Average Weighted
Remaining Average
Range of Number of Contractual Exercise
Exercise Prices Options Life Price
$11.13-29.00 2,374,824 3.8 years $23.77
29.19-29.31 1,623,058 9.0 years 29.30
29.63-30.19 2,315,010 8.2 years 29.98
31.27-35.00 1,090,170 6.9 years 33.08
35.25-35.31 4,460,681 9.3 years 35.25
35.73-50.44 2,446,639 7.2 years 43.33
---------- --------- ------
$11.13-50.44 14,310,382 7.6 years $33.04
---------- --------- ------
---------- --------- ------
Options Exercisable
Weighted
Average
Range of Number of Exercise
Exercise Prices Options Price
$11.13-29.00 2,374,824 $23.77
29.19-29.31 -- --
29.63-30.19 493,283 29.98
31.27-35.00 810,295 33.39
35.25-35.31 -- --
35.73-50.44 2,073,378 42.94
--------- ------
$11.13-50.44 5,751,780 $32.57
--------- ------
--------- ------
VARIABLE STOCK OPTION GRANT
In 1999, we made a variable option grant of 375,000 shares from our 1994 stock
incentive plan to one of our key executives. This was in addition to 1,966,800
option shares granted prior to 1998. One-half of the options vested when the
market price of our stock reached a 20-consecutive-trading-day average of $50
per share, which occurred in November 2000. The remaining options will vest when
our stock price reaches a 20-consecutive-trading-day average of $55 per share.
The exercise price of each option is equal to the market price of our stock on
the grant date. Any of these options not exercised prior to Dec. 1, 2001 will
expire on that date.
The following table summarizes the activity for our variable option grants for
the last three years.
Weighted
Average
Option Exercise
Shares Price
Outstanding Jan. 1, 1998 1,966,800 $30.05
Canceled (468,600) 29.38
--------- ------
Outstanding Dec. 31, 1998 1,498,200 30.26
--------- ------
Granted 375,000 29.63
Canceled (152,400) 29.38
--------- ------
Outstanding Dec. 31, 1999 1,720,800 30.20
--------- ------
Exercised (134,300) 29.38
Canceled (594,525) 30.47
--------- ------
Outstanding Dec. 31, 2000 991,975 $30.15
--------- ------
--------- ------
The weighted average fair value of options granted during 1999 was $2.66 per
option. The fair value of the variable options was estimated on the date of
grant using a variable option-pricing model with the following weighted average
assumptions: dividend yield of 2.8%; expected volatility of 22.9%; risk-free
interest rate of 4.7%; and an expected life of 2.8 years.
RESTRICTED STOCK AND DEFERRED STOCK AWARDS
Up to 20% of the 19.9 million shares authorized under our 1994 stock incentive
plan may be granted as restricted stock awards. The stock is restricted because
recipients receive the stock only upon completing a specified objective or
period of employment, generally one to five years. The shares are considered
issued when awarded, but the recipient does not own and cannot sell the shares
during the restriction period. During the restriction period, the recipient
receives compensation in an amount equivalent to the dividends paid on such
shares. Up to 3,200,000 shares were available for restricted stock awards at
Dec. 31, 2000.
We also have a Deferred Stock Award Plan for stock awards to non-U.S. employees.
Deferred stock awards are the same as restricted stock awards, except that
shares granted under the deferred plan are not issued until the vesting
conditions specified in the award are fulfilled. Up to 20,000 shares were
available for deferred stock awards at Dec. 31, 2000.
PRO FORMA INFORMATION
Had we calculated compensation expense on a combined basis for our stock option
grants based on the "fair value" method described in SFAS No. 123, our net
income and earnings per share would have been reduced to the pro forma amounts
as indicated.
Year ended December 31 2000 1999 1998
(In millions, except per share data)
NET INCOME
As reported $993 $834 $89
Pro forma 986 825 76
BASIC EARNINGS PER SHARE
As reported 4.50 3.61 0.33
Pro forma 4.46 3.57 0.27
DILUTED EARNINGS PER SHARE
As reported 4.24 3.41 0.32
Pro forma 4.23 3.38 0.27
13
Commitments and Contingencies
Investment Commitments - We have long-term commitments to fund venture capital
investments totaling $228 million as of Dec. 31, 2000. We estimate these
commitments will be paid as follows: $77 million in 2001; $81 million in 2002;
$52 million in 2003 and $18 million in 2004.
Financial Guarantees - We are contingently liable for a financial guarantee
issued by our reinsurance operation in the form of a credit enhancement, with
total exposure of approximately $21 million as of Dec. 31, 2000.
Lease Commitments - A portion of our business activities is conducted in rented
premises. We also enter into leases for equipment, such as office machines and
computers. Our total rental expense was $83 million in 2000, $82 million in 1999
and $88 million in 1998.
Certain leases are noncancelable, and we would remain responsible for payment
even if we stopped using the space or equipment. On Dec. 31, 2000, the minimum
annual rents for which we would be liable under these types of leases are as
follows: $118 million in 2001, $106 million in 2002, $80 million in 2003, $68
million in 2004, $55 million in 2005 and $220 million thereafter.
We are also the lessor under various subleases on our office facilities. The
minimum rentals to be received under noncancelable subleases are as follows: $20
million in 2001, $18 million in 2002, $18 million in 2003, $15 million in 2004,
$13 million in 2005 and $41 million thereafter.
Legal Matters - In the ordinary course of conducting business, we and some of
our subsidiaries have been named as defendants in various lawsuits. Some of
these lawsuits attempt to establish liability under insurance contracts issued
by our underwriting operations. Plaintiffs in these lawsuits are asking for
money damages or to have the court direct the activities of our operations in
certain ways.
In May 1997, we completed the sale of our insurance brokerage, Minet, to Aon
Corporation. We agreed to indemnify Aon against any future professional
liability claims for events that occurred prior to the sale. Since this
indemnification relates to claims that had not yet been discovered or reported,
it is not possible to estimate a range of the potential liability. The company
monitors its exposure under these claims on a regular basis. We believe reserves
for reported claims are adequate, but the company does not have information on
unreported claims to estimate a range of additional liability. We purchased
insurance to cover a portion of our exposure to such claims.
It is possible that the settlement of these lawsuits or payments for
Minet-related liability claims
may be material to our results of operations and liquidity in the period in
which they occur. However, we believe the total amounts that we and our
subsidiaries will ultimately have to pay in all of these matters will have no
material effect on our overall financial position.
14
Discontinued Operations
Standard Personal Insurance Business - In June 1999, we made a decision to sell
our standard personal insurance business and on July 12, 1999, reached an
agreement to sell this business to Metropolitan Property and Casualty Insurance
Company ("Metropolitan"). On Sept. 30, 1999, we completed the sale of this
business to Metropolitan. As a result, the standard personal insurance
operations through June 1999 have been accounted for as discontinued operations
for all periods presented herein, and the results of operations subsequent to
that period have been included in the gain on sale of discontinued operations.
Metropolitan purchased Economy Fire & Casualty Company and its subsidiaries
("Economy"), as well as the rights and interests in those non-Economy policies
constituting our remaining standard personal insurance operations. Those rights
and interests were transferred to Metropolitan by way of a reinsurance and
facility agreement ("Reinsurance Agreement").
The Reinsurance Agreement relates solely to the non-Economy standard personal
insurance policies, and was entered into solely as a means of accommodating
Metropolitan through a transition period. The Reinsurance Agreement allows
Metropolitan to write non-Economy business on our policy forms while
Metropolitan obtains the regulatory license, form and rate approvals necessary
to write non-Economy business through their own insurance subsidiaries. Any
business written on our policy forms during this transition period is then fully
ceded to Metropolitan under the Reinsurance Agreement. We recognized no gain or
loss on the inception of the Reinsurance Agreement and will not incur any net
revenues or expenses related to the Reinsurance Agreement. All economic risk of
post-sale activities related to the Reinsurance Agreement has been transferred
to Metropolitan. We anticipate that Metropolitan will pay all claims incurred
related to this Reinsurance Agreement. In the event Metropolitan is unable to
honor their obligations to us, we will pay these amounts.
As part of the sale to Metropolitan, we guaranteed the adequacy of Economy's
loss and loss expense reserves. Under that guarantee, we will pay for any
deficiencies in those reserves and will share in any redundancies that develop
by Sept. 30, 2002. We remain liable for claims on non-Economy policies that
result from losses occurring prior to closing. By agreement, Metropolitan will
adjust those claims and share in redundancies in related reserves that may
develop. As of Dec. 31, 2000, we had determined that we could not reasonably
estimate to any probable certainty whether any deficiency or redundancy existed
in the pre-sale reserves, and we have not recorded a liability or a receivable
related to those reserves. Any losses incurred by us under these agreements will
be reflected in discontinued operations in the period they are incurred. For the
year ended Dec. 31, 2000, we recorded a pretax loss of $9 million in
discontinued operations. We have no other contingent liabilities related to the
sale.
As a result of the sale, approximately 1,600 standard personal insurance
employees of The St. Paul effectively transferred to Metropolitan on Oct. 1,
1999.
We received gross proceeds on the sale of $597 million, less the payment of the
reinsurance premium of $325 million, for net proceeds of $272 million. We
recognized a pretax gain on disposal of $130 million, after adjusting for a $26
million pension and postretirement curtailment
gain and disposition costs of $32 million. The gain on disposal combined with a
$128 million pretax gain on discontinued operations (subsequent to our decision
to sell), resulting in a total pretax gain of $258 million. Included in the
pretax gain on discontinued operations was a $145 million reduction in loss and
loss adjustment expense reserves. In the third quarter of 1999, based on
favorable trends noted in the standard personal insurance reserve analysis, and
considering the pending sale and its economic consequences, we concluded that
this reserve reduction was appropriate.
The $26 million pretax curtailment gain represented the impact of a reduced
number of employees in the pension and post-retirement plans due to the sale of
the standard personal insurance business.
The $32 million pretax disposition costs netted against the gain represented
costs directly associated with the decision to dispose of the standard personal
insurance segment and included $14 million of employee-related costs, $8 million
of occupancy-related costs, $7 million of transaction costs, $2 million of
record separation costs and $1 million of equipment charges. The
employee-related costs related to the expected termination of 385 employees due
to the sale of the personal insurance segment. Approximately 350 employees were
terminated related to this action. In 2000, we reduced the employee-related
reserve by $3 million due to a number of voluntary terminations, which reduced
the expected severance to be paid.
The following presents a rollforward of 2000 activity related to this charge.
Original Reserve Reserve
Pretax at Dec. 31, at Dec. 31,
Charge 1999 Payments Adjustments 2000
(In millions)
Charges to earnings:
Employee-related $14 $ 9 $ (6) $(3) $--
Occupancy-related 8 8 (1) -- 7
Transaction costs 7 5 (5) -- --
Record separation costs 2 N/A N/A N/A N/A
Equipment charges 1 N/A N/A N/A N/A
--- ---- ---- --- ---
Total $32 $ 22 $(12) $(3) $ 7
--- ---- ---- --- ---
--- ---- ---- --- ---
Nonstandard Auto Business - In December 1999, we decided to sell our nonstandard
auto business marketed under the Victoria Financial and Titan Auto brands. On
Jan. 4, 2000, we announced an agreement to sell this business to The Prudential
Insurance Company of America ("Prudential") for $200 million in cash, subject to
certain balance sheet adjustments at closing. As a result, the nonstandard auto
business results of operations were accounted for as discontinued operations for
the year ended Dec. 31, 1999. Included in "discontinued operations -- gain on
disposal, net of tax" in our 1999 statement of income was an estimated loss on
the sale of approximately $83 million, which included the estimated results of
operations through the disposal date. All prior period results of nonstandard
auto have been reclassified to discontinued operations.
On May 1, 2000, we closed on the sale of our nonstandard auto business to
Prudential, receiving total cash consideration of approximately $175 million
(net of a $25 million dividend paid to our property-liability operations prior
to closing). During 2000, we recorded an additional pretax loss of $16 million
relating to this business.
The following table summarizes our discontinued operations, including our
standard personal insurance business and nonstandard auto business, for the
three-year period ended Dec. 31, 2000.
Year ended December 31 2000 1999 1998
(In millions)
Operating loss, before income taxes $-- $ (13) $(167)
Income tax benefit -- (4) (57)
----- ----- -----
Operating loss, net of taxes -- (9) (110)
----- ----- -----
Gain/(loss) on disposal, before income taxes (25) 184 --
Income tax expense (benefit) (5) 90 --
----- ----- -----
Gain/(loss) on disposal, net of taxes (20) 94 --
----- ----- -----
Gain/(loss) from discontinued operations $ (20) $ 85 $(110)
----- ----- -----
----- ----- -----
15
Restructuring and Other Charges
Third Quarter 1999 Charge - In August 1999, we announced a cost reduction
program designed to enhance our efficiency and effectiveness in a highly
competitive environment. In the third quarter of 1999, we recorded a pretax
charge of $60 million related to this program, including $25 million in
employee-related costs, $33 million in occupancy-related costs and $2 million in
equipment charges. The charge was included in "Operating and administrative
expenses" in the 1999 statement of income and in "Property-liability insurance
- -- other" in the table titled "Income (Loss) from Continuing Operations Before
Income Taxes and Cumulative Effect of Accounting Change" in Note 18.
The employee-related costs represented severance and related benefits such as
outplacement counseling, vacation buy-out and medical coverage to be paid to
terminated employees. The charge related to the anticipated termination of
approximately 700 employees at all levels throughout the Company. Approximately
590 employees were terminated under this action.
The occupancy-related costs represented excess space created by the cost
reduction action. The charge was calculated by determining the percentage of
anticipated excess space, by location, and the current lease costs over the
remaining lease period. The amounts payable under the existing leases were not
discounted, and sublease income was included in the calculation only for those
locations where sublease agreements were in place.
The equipment charges represented the elimination of personal computers directly
related to the number of employees being severed under this cost reduction
action and the elimination of network servers and other equipment resulting from
this action. The amount was calculated as the net book value of this equipment
less estimated sale proceeds.
All actions to be taken under this plan were completed in 2000.
The following presents a rollforward of 2000 activity related to this charge.
Original Reserve Reserve
Pretax at Dec. 31, at Dec. 31,
Charge 1999 Payments 2000
(In millions)
Charges to earnings:
Employee-related $ 25 $ 14 $(14) $--
Occupancy-related 33 31 (7) 24
Equipment charges 2 N/A N/A N/A
---- ---- ---- ----
Total $ 60 $ 45 $(21) $ 24
---- ---- ---- ----
---- ---- ---- ----
Fourth Quarter 1998 Charge - Late in the fourth quarter of 1998, we recorded a
pretax restructuring charge of $34 million. The majority of the charge, $26
million, related to the anticipated termination of approximately 520 employees
in the following operations, Claims, Commercial Lines Group, Information
Systems, Global Healthcare and Other Global Specialty. The remaining charge of
$8 million related to costs to be incurred to exit lease obligations. The charge
was reflected in "Operating and administrative expenses" in the 1998 statement
of income and in "Property-liability insurance -- other" in the table titled
"Income (Loss) from Continuing Operations Before Income Taxes and Cumulative
Effect of Accounting Change" in Note 18.
Approximately 500 employees were terminated under this restructuring plan.
Termination actions taking place under this plan were substantially completed by
the end of 1999.
The following table provides information about the components of the charge
taken in the fourth quarter of 1998, the balance of accrued amounts at Dec. 31,
2000 and 1999, and payment activity during the year ended Dec. 31, 2000. The
table also reflects adjustments made to the reserve during 2000. We reduced the
severance reserve by $2 million due to a number of voluntary terminations, which
reduced the expected severance and outplacement payments to be made.
Original Reserve Reserve
Pretax at Dec. 31, at Dec. 31,
Charge 1999 Payments Adjustments 2000
(In millions)
Charges to earnings:
Employee-related $26 $ 3 $(1) $(2) $--
Occupancy-related 8 2 -- -- 2
--- --- --- --- ---
Total $34 $ 5 $(1) $(2) $ 2
--- --- --- --- ---
--- --- --- --- ---
Second Quarter 1998 Charge - Related to our merger with USF&G (as discussed in
Note 2), we recorded a pretax charge to earnings of $292 million in 1998,
primarily consisting of severance and other employee-related costs, facilities
exit costs, asset impairments and transaction costs. We estimated that
approximately 2,000 positions would be eliminated due to the combination of the
two organizations, resulting from efficiencies to be realized by the larger
organization and the elimination of redundant functions. All levels of
employees, from technical staff to senior management, were affected by the
reductions. Approximately 2,200 positions were eliminated, and the cost of
termination benefits paid was $137 million. Termination actions taking place
under this plan have been completed.
The following table provides information about the components of the charge
taken in the second quarter of 1998, the balance of accrued amounts at Dec. 31,
2000 and 1999, and payment activity during the year ended Dec. 31, 2000. The
table also reflects a $2 million adjustment to the executive severance reserve
since certain executives covered under the USF&G Senior Executive Severance Plan
remained with the Company and were no longer eligible to receive the amounts
accrued.
Original
Pretax
Charge
(In millions)
Charges to earnings:
USF&G Corp. headquarters $36
Long-lived assets 23
Software depreciation acceleration 10
Computer leases and equipment 10
Other equipment and furniture 8
---
Subtotal $87
---
---
Original Reserve Reserve
Pretax at Dec. 31, at Dec. 31,
Charge 1999 Payments Adjustments 2000
(In millions)
Accrued charges subject to rollforward:
Executive severance $ 89 $ 3 $ (1) $ (2) $--
Other severance 52 1 (1) -- --
Branch lease exit costs 34 24 (7) -- 17
Transaction costs 30 -- -- -- --
---- ---- ---- ---- ----
Subtotal 205 28 (9) (2) 17
---- ---- ---- ---- ----
Total $292 $ 28 $ (9) $ (2) $ 17
---- ---- ---- ---- ----
---- ---- ---- ---- ----
On our 1998 Statement of Income, $269 million of the charge was recorded in the
"Operating and administrative" expense caption and $23 million was recorded in
the "Realized investment gains" revenue caption. The charge was recorded in the
following captions in the table titled "Income (Loss) from Continuing Operations
Before Income Taxes and Cumulative Effect of Accounting Change" in Note 18: $143
million in Property-liability insurance -- other; $14 million in
Property-liability insurance -- realized gains; $9 million in Life insurance;
and $126 million in Parent company, other operations and consolidating
eliminations.
The following discussion provides more information regarding the rationale for,
and calculation of, each component of the 1998 merger-related charge.
USF&G Corporate Headquarters - The Founders Building had been one of USF&G's
headquarters buildings in Baltimore, MD. Upon consummation of the merger, it was
determined that the headquarters for the combined entity would reside in St.
Paul, MN, and that a significant number of personnel working in Baltimore would
be terminated, thus vacating a substantial portion of the Founders Building. We
developed a plan to lease that space to outside parties and thus categorized it
as an "asset to be held or used" as defined in SFAS No. 121 for purposes of
evaluating the potential impairment of its $64 million carrying value. That
evaluation, based on the anticipated undiscounted future cash flows from
potential lessees, indicated that an impairment in the carrying value had
occurred, and the building was written down by $36 million to its fair value of
$28 million. The writedown was reflected in our 1998 "Parent and other" results.
We continue to depreciate this building over its estimated remaining life.
Long-Lived Assets - Upon consummation of the merger, we determined that several
of USF&G's real estate investments were not consistent with our real estate
investment strategy. A plan was developed to sell a number of apartment
buildings and various other miscellaneous holdings, with an expected disposal
date in 1999. In applying the provisions of SFAS No. 121 we determined that four
of these miscellaneous investments should be written down to fair value, based
on our plan to sell them. Fair value was determined based on a discounted cash
flow analysis, or based on market prices for similar assets. The impairment
writedown was reflected in our 1998 Statement of Income in "Realized investment
gains." The investments are as follows:
1. Description of investment: Percentage rents retained after sale of a
portfolio of stores to a third party.
Carrying amount: $22 million prior to writedown of $17 million; after
adjusting for payments received since the writedown, the current amount
is $3 million, with $2.4 million held in our Property-liability
Investment segment and $0.4 million held in our Life Insurance segment.
We are currently in negotiations with a potential buyer for this asset.
2. Description of investment: 138-acre land parcel in New Jersey, with
farm buildings being rented out.
Carrying amount: $5 million prior to writedown of $2 million; sold in
1999 with a pretax realized loss of $1 million.
3. Description of investment: Receivable representing cash flow guarantee
payments related to real estate partnerships.
Carrying amount: $5 million prior to writedown of $2 million; sold in
1999 with no further gain or loss.
4. Description of investment: Limited partnership interests in three
citrus groves.
Carrying amount: $5 million prior to writedown of $2 million; two of
the partnership interests have been exchanged for an investment in a
new partnership, with one of the original citrus grove partnership
interests remaining. This partnership is carried at a current balance
of less than $1 million, held in Parent company and other operations.
These investment writedowns are reflected in the following 1998 segment results
in the table titled "Income (Loss) from Continuing Operations Before Income
Taxes and Cumulative Effect of Accounting Change" in Note 18: $14 million in
Property-liability investment; $6 million in Parent company and other; and $3
million in Life.
Acceleration of Software Depreciation - We conducted an extensive technology
study upon consummation of the merger as part of the business plan to integrate
our two companies. The resulting strategy to standardize technology throughout
the combined entity and maintain one data center in St. Paul, MN, resulted in
the identification of duplicate software applications. As a result, the
estimated useful life for that software was shortened, resulting in an
additional charge to earnings.
Computer Leases and Equipment - The technology study also identified redundant
computer hardware, resulting in lease buy-out transactions and disposals of
computer equipment.
Other Equipment and Furniture - The decision to combine all corporate
headquarters in St. Paul, MN created excess equipment and furniture in
Baltimore, MD. The charge was calculated based on the book value of assets at
that location.
Executive Severance - Represented the obligations The St. Paul was required to
pay in accordance with the USF&G Senior Executive Severance Plan in place at the
time of the merger. The plan provided for payments to participants in the event
the participant was terminated without cause by the company or for good reason
by the participant within two years of the effective date of a transaction
covered by the plan.
Other Severance - Represented severance and related benefits such as
outplacement counseling, vacation buy-out and medical coverage to be paid to
terminated employees not covered under the USF&G Senior Executive Severance
Plan.
Branch Lease Exit Costs - As a result of the merger, excess space was created in
several locations due to the anticipated staff reduction in the combined
organization. The charge for branch lease exit costs was calculated by
determining the percentage of anticipated excess space at each site and the
current lease costs over the remaining lease period. In certain
locations, the lease was expected to be terminated. For leases not expected to
be terminated, the amount of expenses included in the charge was calculated as
the percentage of excess space (20% to 100%) multiplied by the net of: remaining
rental payments plus capitalized leasehold improvements less actual sub-lease
income. No amounts were discounted to present value in the calculation.
Transaction Costs - This amount consisted of registration fees, costs of
furnishing information to stockholders, consultant fees, investment banker fees,
and legal and accounting fees.
16
Reinsurance
Our financial statements reflect the effects of assumed and ceded reinsurance
transactions. Assumed reinsurance refers to our acceptance of certain insurance
risks that other insurance companies have underwritten. Ceded reinsurance means
other insurance companies agree to share certain risks with us. The primary
purpose of our ceded reinsurance program, including the aggregate excess-of-loss
coverages discussed below, is to protect us from potential losses in excess of
what we are prepared to accept. We expect the companies to which we have ceded
reinsurance to honor their obligations. In the event these companies are unable
to honor their obligations to us, we will pay these amounts. We have established
allowances for possible nonpayment of amounts due to us.
We report balances pertaining to reinsurance transactions "gross" on the balance
sheet, meaning that reinsurance recoverables on unpaid losses and ceded unearned
premiums are not deducted from insurance reserves but are recorded as assets.
The largest concentrations of our total reinsurance recoverables and ceded
unearned premiums at Dec. 31, 2000 were with General Reinsurance Corporation
("Gen Re") and Metropolitan Property and Casualty Insurance Company
("Metropolitan"). Gen Re (with approximately 28% of our recoverables) is rated
"A+ +" by A.M. Best, "Aaa" by Moody's and "AAA" by Standard & Poor's for its
financial strength. Metropolitan (with approximately 10% of our recoverables) is
rated "A" by A.M. Best, "Aa3" by Moody's and "AA" by Standard & Poor's for its
financial strength.
During each of the years 2000 and 1999, we entered into two aggregate
excess-of-loss reinsurance treaties. One of these treaties in each year was
corporate-wide, with coverage triggered when our insurance losses and LAE across
all lines of business reached a certain level, as prescribed by terms of the
treaty (the "corporate program"). Additionally, our Reinsurance segment
benefited from cessions made under a separate treaty in each year unrelated to
the corporate treaty. The combined impact of these treaties (together, the
"reinsurance treaties") is included in the table that follows.
Year ended December 31 2000 1999
(In millions)
Corporate program:
Ceded written premiums $419 $211
Ceded losses and loss adjustment expenses 709 384
Ceded earned premiums 419 211
---- ----
Net pretax benefit 290 173
---- ----
Reinsurance segment treaty:
Ceded written premiums 55 62
Ceded losses and loss adjustment expenses 122 150
Ceded earned premiums 55 62
---- ----
Net pretax benefit 67 88
---- ----
Combined total:
Ceded written premiums 474 273
Ceded losses and loss adjustment expenses 831 534
Ceded earned premiums 474 273
---- ----
Net pretax benefit $357 $261
---- ----
---- ----
The effect of assumed and ceded reinsurance on premiums written, premiums earned
and insurance losses, loss adjustment expenses and life policy benefits is as
follows (including the impact of the reinsurance treaties).
Year ended December 31 2000 1999 1998
(In millions)
PREMIUMS WRITTEN
Direct $ 6,219 $ 4,622 $ 4,569
Assumed 2,064 1,645 1,380
Ceded (2,399) (1,155) (673)
------- ------- -------
Net premiums written $ 5,884 $ 5,112 $ 5,276
------- ------- -------
------- ------- -------
PREMIUMS EARNED
Direct $ 5,819 $ 4,621 $ 4,796
Assumed 2,019 1,537 1,372
Ceded (2,246) (1,055) (734)
------- ------- -------
Net premiums earned 5,592 5,103 5,434
Life 306 187 119
------- ------- -------
Total premiums earned $ 5,898 $ 5,290 $ 5,553
------- ------- -------
------- ------- -------
INSURANCE LOSSES, LOSS ADJUSTMENT
EXPENSES AND POLICY BENEFITS
Direct $ 4,068 $ 3,532 $ 4,095
Assumed 1,798 1,124 910
Ceded (1,953) (936) (540)
------- ------- -------
Net insurance losses and
loss adjustment expenses 3,913 3,720 4,465
Life policy benefits 494 367 273
------- ------- -------
Total net insurance losses, loss
adjustment expenses and policy benefits $ 4,407 $ 4,087 $ 4,738
------- ------- -------
------- ------- -------
17
Statutory Accounting Practices
Our underwriting operations are required to file financial statements with state
and foreign regulatory authorities. The accounting principles used to prepare
these statutory financial statements follow prescribed or permitted accounting
principles, which differ from GAAP. Prescribed statutory accounting practices
include state laws, regulations and general administrative rules issued by the
state of domicile as well as a variety of publications and manuals of the
National Association of Insurance Commissioners ("NAIC"). Permitted statutory
accounting practices encompass all accounting practices not so prescribed, but
allowed by the state of domicile, none of which are material to statutory
surplus at Dec. 31, 2000.
On a statutory accounting basis, our property-liability underwriting operations
reported net income of $1.2 billion in 2000, $945 million in 1999 and $196
million in 1998. Our life insurance operations reported statutory net income
(loss) of $(20) million, $(28) million and $24 million in 2000, 1999 and 1998,
respectively. Statutory surplus (shareholder's equity) of our property-
liability underwriting operations was $6.3 billion and $5.5 billion as of Dec.
31, 2000 and 1999, respectively. Statutory surplus of our life insurance
operation was $244 million and $206 million as of Dec. 31, 2000 and 1999,
respectively.
The NAIC has published revised statutory accounting policies in connection with
its codification project which became effective Jan. 1, 2001. We cannot at this
time reasonably estimate the impact of codification on our combined statutory
surplus or statutory net income, however we do not expect the implementation of
codification to impair our risk-based capital or dividend-paying ability.
18
Segment Information
We have eight reportable segments in our insurance operations, which consist of
Commercial Lines Group, Global Healthcare, Global Surety, Other Global
Specialty, International, Reinsurance, Property-Liability Investment Operations,
and Life Insurance. The insurance operations are managed separately because each
targets different customers and requires different marketing strategies. We also
have an Asset Management segment, consisting of our majority ownership in The
John Nuveen Company.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. We evaluate performance based on
underwriting results for our property-liability insurance segments, investment
income and realized gains for our investment operations, and on pretax operating
results for the life insurance and asset management segments. Property-liability
underwriting assets are reviewed in total by management for purposes of
decision-making. We do not allocate assets to these specific underwriting
segments. Assets are specifically identified for our life insurance and asset
management segments.
Geographic Areas - The following summary presents financial data of our
continuing operations based on their location.
Year ended December 31 2000 1999 1998
(In millions)
REVENUES
U.S. $7,428 $6,762 $6,914
Non-U.S. 1,180 807 794
------ ------ ------
Total revenues $8,608 $7,569 $7,708
------ ------ ------
------ ------ ------
Segment Information - The summary on the next page presents revenues and pretax
income from continuing operations for our reportable segments. In the first
quarter of 2000, we implemented a new segment reporting structure for our
property-liability insurance business following the fourth-quarter 1999
realignment of our primary insurance underwriting operations into a Global
Specialty Practices organization. As part of that realignment, a portion of our
non-U.S. primary insurance business is now included in the respective business
segment to which it pertains, which differs from our prior practice of including
all non-U.S. business in the International segment. Our Global Specialty
segments are managed on a global basis. Under our new segment structure, our
International segment includes our operations at Lloyd's, insurance business
that we do not manage on a global basis (primarily standard commercial business
in international markets) and Unionamerica, MMI's international business. Also,
our Global Healthcare underwriting operation is now reported as a separate
business segment, which differs from its prior classification as a component of
the Specialty Commercial segment. This change
reflects the increasing size of this business, including MMI's U.S. business,
relative to our total underwriting operations. Finally, we reclassified our
Construction business center, previously included in the Commercial Lines Group
segment, to our Other Global Specialty segment, to reflect the more specialized
nature of this business. All prior periods presented have been revised to
reflect these reclassifications.
In 1999, we sold our standard personal insurance business. In 2000, we sold our
nonstandard auto business. For 1998, as originally reported, these two
operations were combined and reported as the Personal Insurance segment. Both of
these operations have been accounted for as discontinued operations for all
periods presented and are not included in our segment data.
The revenues of our Life Insurance and Asset Management segments include their
respective investment income and realized investment gains. The table also
presents identifiable assets for our property-liability underwriting operations
in total, and our Life Insurance and Asset Management segments. Included in the
table amounts are Life Insurance segment revenues of $149 million, $92 million
and $47 million for the years ended Dec. 31, 2000, 1999 and 1998, respectively,
related to structured settlement annuities sold primarily to our Commercial
Lines Group segment.
Year ended December 31 2000 1999 1998
(In millions)
REVENUES FROM CONTINUING OPERATIONS
Underwriting:
Commercial Lines Group $1,585 $1,516 $1,856
Global Healthcare 626 645 606
Global Surety 410 387 345
Other Global Specialty 1,347 1,354 1,339
International 434 282 249
------ ------ ------
Total primary insurance operations 4,402 4,184 4,395
Reinsurance 1,190 919 1,039
------ ------ ------
Total underwriting 5,592 5,103 5,434
Investment operations:
Net investment income 1,247 1,256 1,293
Realized investment gains 624 274 188
------ ------ ------
Total investment operations 1,871 1,530 1,481
Other 95 73 64
------ ------ ------
Total property-liability insurance 7,558 6,706 6,979
Life insurance 636 476 393
Asset management 376 353 308
------ ------ ------
Total reportable segments 8,570 7,535 7,680
Parent company, other operations and consolidating eliminations 38 34 28
------ ------ ------
Total revenues $8,608 $7,569 $7,708
------ ------ ------
------ ------ ------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Underwriting:
Commercial Lines Group $ 99 $ (172) $ (592)
Global Healthcare (244) (70) (126)
Global Surety 51 40 76
Other Global Specialty (9) (243) (188)
International (100) (59) (58)
------ ------ ------
Total primary insurance operations (203) (504) (888)
Reinsurance (106) 79 7
------ ------ ------
Total underwriting (309) (425) (881)
Investment operations:
Net investment income 1,247 1,256 1,293
Realized investment gains 624 274 188
------ ------ ------
Total investment operations 1,871 1,530 1,481
Other (95) (134) (302)
------ ------ ------
Total property-liability insurance 1,467 971 298
Life insurance 53 66 21
Asset management 135 123 104
------ ------ ------
Total reportable segments 1,655 1,160 423
Parent company, other operations and consolidating eliminations (202) (143) (303)
------ ------ ------
Total income from continuing operations before
income taxes and cumulative effect of
accounting change $1,453 $1,017 $ 120
------ ------ ------
------ ------ ------
December 31 2000 1999
(In millions)
IDENTIFIABLE ASSETS
Property-liability insurance $33,508 $31,823
Life insurance 6,290 5,624
Asset management 650 591
------- -------
Total reportable segments 40,448 38,038
Parent company, other operations, consolidating
eliminations and discontinued operations 627 517
------- -------
Total assets $41,075 $38,555
------- -------
------- -------
Note 15, "Restructuring and Other Charges," describes charges we recorded during
1999 and 1998, and where they are included in the above tables.
The $215 million 1998 provision to strengthen loss reserves is recorded as
follows: $159 million in Commercial Lines Group; $1 million in Global
Healthcare; and $55 million in Other Global Specialty.
Also included in the 1998 life insurance caption is a $41 million charge to
reduce the carrying value of deferred policy acquisition costs, as discussed in
more detail in Note 6 "Deferred Policy Acquisition Costs."
19
Comprehensive Income
Comprehensive income is defined as any change in our equity from transactions
and other events originating from nonowner sources. In our case, those changes
are comprised of our reported net income, changes in unrealized appreciation and
changes in unrealized foreign currency translation adjustments. The following
summaries present the components of our comprehensive income, other than net
income, for the last three years.
Income Tax
Year ended December 31, 2000 Pretax Effect After-Tax
(In millions)
Unrealized appreciation arising during period $ 902 $ 318 $ 584
Less: reclassification adjustment for realized gains included in net income 595 208 387
----- ----- -----
Net change in unrealized appreciation 307 110 197
----- ----- -----
Net change in unrealized loss on foreign currency translation (41) 1 (42)
----- ----- -----
Total other comprehensive income $ 266 $ 111 $ 155
----- ----- -----
----- ----- -----
Income Tax
Year ended December 31, 1999 Pretax Effect After-Tax
(In millions)
Unrealized depreciation arising during period $(457) $(159) $(298)
Less: reclassification adjustment for realized gains included in net income 248 87 161
----- ----- -----
Net change in unrealized appreciation (705) (246) (459)
----- ----- -----
Net change in unrealized loss on foreign currency translation (10) 2 (12)
----- ----- -----
Total other comprehensive loss $(715) $(244) $(471)
----- ----- -----
----- ----- -----
Income Tax
Year ended December 31, 1998 Pretax Effect After-Tax
(In millions)
Unrealized appreciation arising during period $ 459 $ 163 $ 296
Less: reclassification adjustment for realized gains included in net income 177 62 115
----- ----- -----
Net change in unrealized appreciation 282 101 181
----- ----- -----
Net change in unrealized loss on foreign currency translation 8 (2) 10
----- ----- -----
Total other comprehensive income $ 290 $ 99 $ 191
----- ----- -----
----- ----- -----
20
Quarterly Results of Operations (Unaudited)
The following is an unaudited summary of our quarterly results for the last two
years.
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter
(In millions, except per share data)
Revenues $2,253 $2,105 $2,031 $2,219
Income from continuing operations 362 219 230 202
Discontinued operations (4) (7) 1 (10)
Net income 358 212 231 192
Earnings per common share:
Basic:
Income from continuing operations 1.62 1.01 1.04 0.90
Discontinued operations (0.02) (0.03) -- (0.03)
Net income 1.60 0.98 1.04 0.87
Diluted:
Income from continuing operations 1.53 0.95 0.98 0.86
Discontinued operations (0.02) (0.03) -- (0.03)
Net income 1.51 0.92 0.98 0.83
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
(In millions, except per share data)
Revenues $1,909 $1,933 $1,785 $1,942
Income from continuing operations after effect
of accounting change 167 219 137 226
Discontinued operations (2) (15) 190 (88)
Net income 165 204 327 138
Earnings per common share:
Basic:
Income from continuing operations after effects
of accounting change 0.71 0.96 0.59 0.98
Discontinued operations (0.01) (0.07) 0.84 (0.38)
Net income 0.70 0.89 1.43 0.60
Diluted:
Income from continuing operations after effects
of accounting change 0.68 0.90 0.56 0.93
Discontinued operations (0.01) (0.06) 0.78 (0.36)
Net income 0.67 0.84 1.34 0.57
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consolidated Overview
Earnings increase in 2000 as competitive landscape improves
In recent years, The St. Paul has taken aggressive and wide-ranging actions to
establish a specialty identity in the global insurance marketplace, while
improving efficiency and building the foundation for profitable growth through a
renewed commitment to quality in our pursuit of new business. In 2000, the
success of those actions was evident in our ability to capitalize on our
competitive advantages in a rapidly improving pricing environment. We achieved
premium growth in virtually all of our underwriting segments in 2000, as we
continued to identify new opportunities to apply our focused, specialty
underwriting approach in commercial insurance markets worldwide.
The following table summarizes our results for each of the last three years.
Year ended December 31 2000 1999 1998
(In millions, except per share data)
Pretax income (loss):
Property-liability insurance $ 1,467 $ 971 $ 298
Life insurance 53 66 21
Asset management 135 123 104
Parent company and other operations (202) (143) (303)
------- ------- -------
Pretax income from continuing operations 1,453 1,017 120
Income tax expense (benefit) 440 238 (79)
------- ------- -------
Income from continuing operations before cumulative effect of
accounting change 1,013 779 199
Cumulative effect of accounting change, net of taxes -- (30) --
------- ------- -------
Income from continuing operations 1,013 749 199
Discontinued operations, net of taxes (20) 85 (110)
------- ------- -------
Net income $ 993 $ 834 $ 89
------- ------- -------
------- ------- -------
Per share (diluted) $ 4.24 $ 3.41 $ 0.32
------- ------- -------
------- ------- -------
The 43% growth in pretax income from continuing operations in 2000 was driven by
a significant increase in realized investment gains and an improvement in
property-liability underwriting results. Our property-liability results in 2000
and 1999 included pretax benefits of $357 million and $261 million,
respectively, from aggregate excess-of-loss reinsurance treaties, as described
on page 23 of this report. Pretax income in 1999 was reduced by a $60 million
charge related to a cost reduction program.
In our life insurance operation ("F&G Life"), where investment impairment losses
resulted in a decline in pretax income from 1999, product sales in excess of $1
billion nonetheless led to another year of strong operating results. The diverse
range of high-quality investment products offered by The John Nuveen Company,
our asset management subsidiary, became increasingly attractive to affluent
investors in a volatile market environment in 2000, contributing to record
earnings for the sixth consecutive year. The increase in the "parent company and
other operations" pretax loss in 2000 was largely due to expenses associated
with a stock compensation plan for certain corporate executives and an increase
in advertising and interest expenses.
In 1998, our pretax income from continuing operations was reduced by earnings
charges totaling $582 million, which consisted of the following components:
- - $292 million of charges related to our merger with USF&G Corporation
("USF&G");
- - a $215 million provision to strengthen loss reserves;
- - a $41 million writedown of F&G Life's deferred acquisition cost asset; and
- - $34 million of expenses related to the restructuring of our commercial
insurance operations.
These charges were recorded in our 1998 results as follows: $406 million in
property-liability insurance operations; $50 million in our life insurance
segment; and $126 million in "parent company and other operations." Excluding
the impact of these charges in 1998, our 1999 pretax income from continuing
operations was $315 million, or 45%, higher than the 1998 total, reflecting the
benefit of reinsurance treaties, efficiencies realized from the USF&G merger and
marked improvement in several of our property-liability underwriting segments.
CONSOLIDATED REVENUES
The following table summarizes the source of our consolidated revenues from
continuing operations for the last three years.
Year ended December 31 2000 1999 1998
(In millions)
Insurance premiums earned:
Property-liability $ 5,592 $ 5,103 $ 5,434
Life 306 187 119
Net investment income 1,616 1,557 1,571
Realized investment gains 607 277 201
Asset management 356 340 302
Other 131 105 81
------- ------- -------
Total revenues $ 8,608 $ 7,569 $ 7,708
------- ------- -------
Change from prior year 14% (2%)
The strong growth in revenues over 1999 was centered in our property-liability
operations, where price increases, new business and two acquisitions were the
primary factors driving a 10% increase in insurance premiums earned. Excluding
the impact of the aggregate excess-of-loss reinsurance treaties in both 2000 and
1999, property-liability insurance premiums in 2000 grew 13% over 1999. Strong
returns generated by our venture capital investments accounted for the $330
million increase in realized investment gains over 1999. The slight increase in
net investment income in 2000 was due to 19% growth in our life insurance
segment, which more than offset a slight decline in our property-liability
operations. In 1999, the 2% decline in consolidated revenues from 1998 was
almost entirely due to $273 million of premiums ceded under the reinsurance
treaties.
2000 ACQUISITIONS
In April 2000, we completed our acquisition of MMI Companies, Inc. ("MMI"), an
international healthcare risk services company that provides integrated products
and services in operational consulting, clinical risk management, and insurance
in the U.S. and London markets. The acquisition was accounted for as a purchase
for a total cost of approximately $206 million in cash and the assumption of
$165 million of MMI debt and capital securities. Approximately $101 million of
the purchase price represented goodwill. We recorded a pretax charge of $28
million related to the purchase, consisting of $24 million of occupancy-related
costs for leased space to be vacated
and $4 million of employee-related costs for the anticipated termination of
approximately 130 positions.
The results of MMI's domestic U.S. operations are reported in our Global
Healthcare segment, and the results of MMI's U.K.-based operation, Unionamerica
Insurance Company Limited ("Unionamerica"), are included in our International
segment. MMI added the following amounts to our property-liability results of
operations in 2000.
2000
(In millions)
Written premiums $ 197
Earned premiums 264
GAAP underwriting loss (319)
Net investment income 55
In February 2000, we completed our acquisition of Pacific Select Insurance
Holdings, Inc. ("Pacific Select"), a California company that sells earthquake
insurance coverages to homeowners in that state. We accounted for the
acquisition as a purchase at a cost of approximately $37 million. Pacific
Select's results of operations from the date of acquisition are included in the
Catastrophe Risk business center of our Commercial Lines Group segment. Pacific
Select contributed $21 million of net written premiums and $17 million of GAAP
underwriting profits to our 2000 results.
DISCONTINUED OPERATIONS
In May 2000, we completed the sale of our nonstandard auto insurance operations
to Prudential Insurance Company of America ("Prudential"). In 1999, we sold our
standard personal insurance operations to Metropolitan Property and Casualty
Insurance Company ("Metropolitan"). The results of the operations sold are
reflected as discontinued operations for all periods presented in this report.
The following table presents the components of discontinued operations reported
in our consolidated statement of income for each of the last three years.
Year ended December 31 2000 1999 1998
(In millions)
NONSTANDARD AUTO INSURANCE:
Operating income, net of taxes $ -- $ 13 $ 10
Loss on disposal, net of taxes (9) (83) --
---- ---- -----
Total nonstandard auto insurance (9) (70) 10
---- ---- -----
STANDARD PERSONAL INSURANCE:
Operating loss, net of taxes -- (22) (120)
Gain (loss) on disposal, net of taxes (11) 177 --
---- ---- -----
Total standard personal insurance (11) 155 (120)
---- ---- -----
Total discontinued operations $(20) $ 85 $(110)
---- ---- -----
---- ---- -----
Nonstandard Auto Insurance - Prudential purchased the nonstandard auto insurance
business marketed under the Victoria Financial and Titan Auto brands for $175
million in cash (net of a $25 million dividend paid by these operations to our
property-liability insurance operations prior to closing). We recorded an
estimated after-tax loss of $83 million on the sale in 1999, representing the
estimated excess of carrying value of these entities at closing date over
proceeds to be received from the sale, plus estimated income through the
disposal date. This excess primarily consisted of goodwill. We recorded an
additional after-tax loss on disposal of $9 million in 2000,
primarily representing additional losses incurred through the disposal date in
May.
Standard Personal Insurance - In 1999, Metropolitan purchased Economy Fire &
Casualty Company and subsidiaries ("Economy"), as well as the rights and
interests in those policies constituting our remaining standard personal
insurance operations. Those rights and interests were transferred to
Metropolitan by way of a reinsurance and facility agreement (the "Reinsurance
Agreement"), pursuant to which we transferred assets of approximately $325
million to Metropolitan, representing the estimated unearned premium on the
policies in force.
The Reinsurance Agreement related solely to the non-Economy standard personal
insurance policies and was entered into solely as a means of accommodating
Metropolitan through a transition period. The Reinsurance Agreement allows
Metropolitan to write non-Economy business on our policy forms while
Metropolitan obtains the regulatory license, form and rate approvals necessary
to write non-Economy business through their own insurance subsidiaries. Any
business written on our policy forms during this transition period is then fully
ceded to Metropolitan under the Reinsurance Agreement. We recognized no gain or
loss on the inception of the Reinsurance Agreement and will not incur any net
revenues or expenses related to the Reinsurance Agreement. All economic risk of
post-sale activities related to the Reinsurance Agreement has been transferred
to Metropolitan. We anticipate that Metropolitan will pay all claims incurred
related to this Reinsurance Agreement. In the event Metropolitan is unable to
honor their obligations to us, we will pay these amounts.
As part of the sale to Metropolitan, we guaranteed the adequacy of Economy's
loss and loss expense reserves. Under that guarantee, we will pay for any
deficiencies in those reserves and will share in any redundancies that develop
by Sept. 30, 2002. We remain liable for claims on non-Economy policies that
result from losses occurring prior to closing. By agreement, Metropolitan will
adjust those claims and share in redundancies in related reserves that may
develop. As of Dec. 31, 2000, we had determined that we could not reasonably
estimate to any probable certainty whether any deficiency or redundancy existed
in the pre-sale reserves and we have not recorded a liability or receivable
related to those reserves. Any losses we incur under these agreements will be
reflected in discontinued operations in the period they are incurred. We have no
other contingent liabilities related to the sale.
We recorded a pretax gain of $258 million on the sale in 1999, consisting of the
following components: a gain on disposal of $130 million and a $128 million
pretax gain on discontinued operations, which included a $145 million reduction
in insurance loss and loss adjustment reserves. The reserve reduction in 1999
was caused by a number of factors. During 1999, we had begun to see the
favorable impact of certain corrective actions taken during 1998 in these
operations. The loss reserving process and evaluation in 1999 was also
influenced by the integration of The St. Paul and USF&G claim operations and
practices, as well as the related consolidation of loss reserve data, systems
and actuarial staff. Additionally, considering the pending sale and its economic
consequences, these reserves were evaluated at a more detailed level prior to
the sale. All of these factors influenced our conclusion to change our best
estimate of required reserves at Sept. 30, 1999. Included in the calculation of
our gain on disposal in 1999 was a pretax charge of $32 million for costs
directly associated with the decision to dispose of these operations. These
costs included $14 million of employee-related costs, $8 million of
occupancy-related costs, $7 million of transaction costs and $3 million of other
miscellaneous costs.
In 2000, we recorded an $11 million reduction in the after-tax gain on disposal,
representing $7 million of additional development on non-Economy losses
occurring prior to closing, and $4 million of adjustments to the tax expense
recorded on the gain on disposal.
ELIMINATION OF ONE-QUARTER REPORTING LAG FOR ST. PAUL RE - UK
In the first quarter of 2000, we eliminated the one-quarter reporting lag for
our reinsurance operations based in the United Kingdom ("St. Paul Re - UK") and
now report the results of those operations on a current basis. As a result, our
consolidated results for 2000 include St. Paul Re - UK's results for the fourth
quarter of 1999 and all of 2000. The incremental impact on our operations of
eliminating the reporting lag, which consists of St. Paul Re - UK's results for
the three months ended Dec. 31, 2000, was not material to our results of
operations for the year ended Dec. 31, 2000.
USF&G MERGER CHARGES
In April 1998, we merged with USF&G, a Baltimore, Md.-based insurance holding
company, in a tax-free exchange of stock accounted for as a pooling of
interests.
We recorded $292 million of merger-related charges in 1998, resulting from
management's comprehensive review of the two companies as part of formulating an
integration plan to merge their respective operations. The review identified
redundant job functions, staffing levels, geographical locations, leased space
and technology platforms. The merger-related charges consisted of the following
components.
- - $141 million of severance and other employee-related expenses. We estimated
that approximately 2,000 positions would be eliminated due to the combination of
the two organizations, affecting all levels of employees from senior management
to technical staff. Approximately 2,200 positions were eliminated, and $137
million in severance and other employee-related costs were paid.
- - $70 million of facilities exit costs, consisting of a $36 million writedown in
the carrying value of a former USF&G headquarters building in Baltimore and $34
million of expenses related to the consolidation of redundant branch office
locations. Through Dec. 31, 2000, we had paid $17 million of branch lease exit
costs.
- - $81 million of other costs, including $30 million of transaction costs; a $23
million writedown in the carrying value of several USF&G real estate
investments; $10 million of accelerated depreciation expense on redundant
software; $10 million of expense for writedowns and lease buy-outs of redundant
computer equipment; and an $8 million writedown in the carrying value of excess
furniture and equipment.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Our net income in 1999 included a pretax expense of $46 million ($30 million
after-tax), representing the cumulative effect of adopting the AICPA's Statement
of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." The SOP provides guidance for recognizing and
measuring liabilities for guaranty and other insurance-related assessments. In
the third quarter of 1999, the State of New York enacted a law which changed its
assessment method from a loss-based assessment method to a written premium-based
method. As a result, we reduced our previously recorded pretax accrual by $12
million, which was recorded in income from continuing operations. The accrual is
expected to be disbursed as assessed during a period of up to 30 years.
GLOBAL SPECIALTY REPORTING STRUCTURE
At the beginning of 2000, we implemented a new segment reporting structure for
our property-liability insurance business following the fourth-quarter 1999
realignment of our primary insurance underwriting operations into a "Global
Specialty Practices" organization. The most significant change involved the
inclusion of certain non-U.S. primary business in the respective business
segment to which it pertains, which differed from our prior practice of
including all non-U.S. business in our International segment. In addition, our
Construction business center was moved from the Commercial Lines Group segment
to the Other Global Specialty segment, and our Global Healthcare operations are
now reported as a separate business segment. The new reporting format is more
closely aligned with the global management of the majority of our specialty
insurance products and services. Our International segment includes our
operations at Lloyd's and insurance business that we do not manage on a global
basis, primarily standard commercial business in international markets. The
International segment also includes the results of MMI's U.K.-based operation,
Unionamerica. All data for 1999 and 1998 is presented on a basis consistent with
our new reporting structure.
The following pages include a detailed discussion of the 2000 results produced
by our six distinct business segments that underwrite property-liability
insurance and provide related services for particular market sectors. We also
review the performance of our property-liability underwriting operations'
investment segment. After the property-liability discussion, we discuss the
results for F&G Life and The John Nuveen Company.
Property-Liability Insurance Overview
Price increases, underwriting discipline lead to better results in 2000; success
of specialty focus evident in new business growth and improved efficiency
After many years of intense competitive pressures, during which pricing levels
throughout the property-liability industry failed to keep pace with rising loss
costs, the pricing environment improved in virtually all market sectors in 2000.
As operating conditions improved, we capitalized on the specialty underwriting
focus we have honed over the last several years, achieving significant business
growth in many of our targeted specialty commercial market sectors. At the same
time, the efficiencies realized from our new global organizational structure,
streamlined field operations and cost-reduction efforts were also evident in our
2000 results. Our corporate reinsurance program also played a role in our
improvement over 1999.
WRITTEN PREMIUMS
The following table summarizes our reported written premiums for the last three
years.
Year ended December 31 2000 1999 1998
(Dollars in millions)
Written premiums $ 5,884 $ 5,112 $ 5,276
Percentage change from prior year 15% (3%)
Our reported totals in 2000 and 1999 were reduced by $474 million and $273
million, respectively, for premiums transferred, or "ceded," under specific
reinsurance treaties described in more detail below. Excluding the impact of
those cessions, 2000 written premiums totaled $6.36 billion, 18% higher than
comparable 1999 premium volume of $5.38 billion. The nearly $1 billion increase
over 1999 was primarily due to price increases and new business throughout most
of our underwriting segments and the addition of MMI, which accounted for $197
million of written premiums subsequent to its acquisition in April. The adjusted
1999 total was 2% higher than 1998 premium volume, due to new business in our
International and Global Surety segments, which offset premium declines in our
Commercial Lines Group.
UNDERWRITING RESULT
The GAAP underwriting result, a common measurement of a property-liability
insurer's performance, represents premiums earned less losses incurred and
underwriting expenses. The statutory combined ratio, representing the sum of the
loss ratio and expense ratio, is also a common measure of underwriting
performance. The lower the ratio, the better the result. The following table
summarizes our reported underwriting results and combined ratios for the last
three years.
Year ended December 31 2000 1999 1998
(Dollars in millions)
GAAP underwriting result $ (309) $ (425) $ (881)
Loss and loss adjustment expense ratio 70.0 72.9 82.2
Underwriting expense ratio 34.8 35.0 35.2
------ ------ ------
Statutory combined ratio 104.8 107.9 117.4
------ ------ ------
------ ------ ------
Our reported underwriting results in both 2000 and 1999 benefited from the
impact of separate aggregate excess-of-loss reinsurance treaties that we entered
into effective Jan. 1 of each year (the "corporate program"). Coverage under the
corporate program treaties was triggered when our insurance losses and loss
adjustment expenses spanning all segments of our business reached a
certain level prescribed by terms of the treaties. In addition, our Reinsurance
segment results in both years benefited from separate aggregate excess-of-loss
reinsurance treaties unrelated to the corporate program. All of these treaties
are collectively referred to hereafter as the "reinsurance treaties."
Under terms of the reinsurance treaties, we transferred, or "ceded," insurance
losses and loss adjustment expenses to our reinsurers, along with the related
written and earned premiums. For the corporate program, we paid the ceded earned
premiums shortly after coverage under the treaties was invoked. We will recover
the ceded losses and loss adjustment expenses from our reinsurer as we settle
the related claims, which may occur over several years. For the separate
Reinsurance segment treaties, we remit the premiums ceded (plus accrued
interest) to our counterparty when the related losses and loss adjustment
expenses are settled. The reinsurance treaties impacted our reported results as
follows.
Year ended December 31 2000 1999
(In millions)
CORPORATE PROGRAM:
Ceded written premiums $419 $211
Ceded losses and loss adjustment expenses 709 384
Ceded earned premiums 419 211
---- ----
Net pretax benefit 290 173
---- ----
REINSURANCE SEGMENT TREATY:
Ceded written premiums 55 62
Ceded losses and loss adjustment expenses 122 150
Ceded earned premiums 55 62
---- ----
Net pretax benefit 67 88
---- ----
COMBINED TOTAL:
Ceded written premiums 474 273
Ceded losses and loss adjustment expenses 831 534
Ceded earned premiums 474 273
---- ----
Net pretax benefit $357 $261
---- ----
---- ----
The combined pretax benefit (detriment) of the reinsurance treaties was
allocated to our business segments as follows.
Year ended December 31 2000 1999
(In millions)
Commercial Lines Group $ (18) $ 98
Global Healthcare 42 --
Global Surety 18 --
Other Global Specialty 92 --
International 96 --
----- -----
Total Primary Insurance 230 98
Reinsurance 127 163
----- -----
Total Property-Liability Insurance $ 357 $ 261
----- -----
----- -----
Excluding the reinsurance treaty benefits from both years, our 2000 underwriting
loss of $666 million was slightly better than the 1999 loss of $686 million.
Significant improvements in our Commercial Lines Group and Other Global
Specialty segments were offset by deterioration in our Global Healthcare,
International and Reinsurance segments. Our reported underwriting loss of $881
million in 1998 included a $215 million provision to strengthen loss reserves
after our merger with USF&G, as discussed in more detail on page 35 of this
report.
The reinsurance treaties and several other factors had a significant impact on
our reported loss and expense ratios, as detailed in the following discussion.
Loss Ratio - The loss ratio measures insurance losses and loss adjustment
expenses incurred as a percentage of earned premiums. Excluding the reinsurance
treaty benefits, our 2000 reported loss ratio of 70.0 rises to an adjusted ratio
of 78.2, and our 1999 reported loss ratio of 72.9 rises to an adjusted ratio of
79.1. Three additional factors impacted the adjusted loss ratio in 2000 when
compared with 1999. First, we recorded a $102 million reduction in workers'
compensation loss reserves during the year as the result of favorable
development on losses incurred in prior years. Second, we reduced our estimate
of ultimate losses on certain reinsurance business by $56 million (as discussed
on page 32 of this report). Finally, the adjusted 2000 loss ratio included
substantial losses incurred by MMI, primarily resulting from provisions to
strengthen loss reserves in certain lines of business subsequent to our
acquisition. Excluding all of these factors in 2000, our adjusted loss ratio of
76.3 was 2.8 points better than the adjusted 1999 ratio. The improvement was
centered in our Commercial Lines Group and Other Global Specialty segments.
Our 2000 adjusted loss ratio also benefited from a decline in pretax catastrophe
losses compared with 1999. Those losses totaled $165 million in 2000, down from
losses of $257 million in 1999. Approximately $75 million of the 2000 total
resulted from additional loss development arising from severe windstorms that
struck portions of Europe in late 1999. In addition, we incurred $30 million of
losses from flooding in the United Kingdom near the end of 2000. Major events
contributing to catastrophe losses in 1999 included Hurricane Floyd, earthquakes
in Taiwan and Turkey, and European windstorms.
In 1998, the provision to strengthen loss reserves accounted for 4.0 points of
the reported loss ratio of 82.2. Our 1999 adjusted loss ratio of 79.1 was
slightly worse than the 1998 ratio of 78.2 (as adjusted to remove the reserve
provision), with the deterioration centered in several of our specialty
commercial insurance business centers. Catastrophe losses of $267 million in
1998 were $10 million higher than those incurred in 1999; the majority of 1998
losses resulted from numerous storms across the United States.
Expense Ratio - The expense ratio measures underwriting expenses as a percentage
of premiums written. No underwriting expenses were ceded under the reinsurance
treaties. However, our reported expense ratios in both 2000 and 1999 included
effects of the reinsurance treaties due to the ceded written premiums. The 2000
ratio also reflected the impact of the MMI acquisition and a $66 million
increase in the estimate of contingent commission expenses (discussed on page 32
of this report). Excluding all of these factors in both years, our adjusted
expense ratio of 31.2 was over two points better than the adjusted 1999 expense
ratio of 33.3. The improvement was partially due to our substantial premium
growth in 2000. More significantly, it was an indication of the success of our
extensive efforts over the last two years to reduce expenses and improve
efficiency throughout our underwriting operations.
Those efforts included our 1999 cost reduction program, which involved the
consolidation of field office locations and the elimination of approximately 590
employee positions. We recorded a pretax charge of $60 million related to this
program in 1999, consisting of $33 million of occupancy-related expenses, $25
million of employee-related expenses and $2 million of equipment charges.
Through Dec. 31, 2000, we had paid $25 million of severance and other
employee-related expenses. We also paid $9 million in occupancy-related
expenses. All actions to be taken under this plan were completed in 2000.
Also included in our efficiency initiatives was the 1998 restructuring of our
Commercial Lines Group and Specialty Commercial underwriting segments. We
recorded a pretax charge of $34 million in 1998, the majority of which ($26
million) related to the anticipated elimination of approximately 520 employee
positions. The remainder represented the estimated costs to exit lease contracts
as part of our plan to streamline field office operations. Approximately 500
employees were terminated and the cost of termination benefits paid totaled $19
million. Termination actions under this restructuring plan have been completed.
In 1999 we reduced the remaining severance accrual by $5 million due to
voluntary terminations that had reduced our estimate of future severance and
out-placement payments. In 2000, with substantially all payments having been
made to terminated employees, we reduced the remaining $2 million severance
accrual. In 1999, we reduced the lease accrual by $6 million to reflect
subleases entered into on vacated spaces.
PROPERTY-LIABILITY OUTLOOK FOR 2001
We will remain aggressive in implementing additional price increases in 2001
while continuing to exert underwriting discipline in our risk selection
throughout all of our operations. We believe our global specialty focus and
organizational efficiency provide opportunities for profitable growth. As part
of our overall ceded reinsurance program, we will continue to enter into
aggregate excess-of-loss reinsurance treaties as we deem appropriate.
PROPERTY-LIABILITY UNDERWRITING RESULTS BY SEGMENT
The following table summarizes written premiums, underwriting results and
combined ratios for each of our property-liability underwriting business
segments for the last three years. All data for 1999 and 1998 were reclassified
to conform to our new Global Specialty reporting format implemented in 2000.
Following the table are detailed analyses of our 2000 segment results and a look
ahead to 2001 for each segment.
% of 2000
Year ended Written
December 31 Premiums 2000 1999 1998
(Dollars in millions)
PRIMARY INSURANCE:
Commercial Lines Group
Written premiums 28% $ 1,657 $ 1,450 $ 1,714
Underwriting result $ 99 $ (172) $ (592)
Combined ratio 93.9 110.6 134.1
Adjusted combined ratio* 92.7 115.7 125.5
Global Healthcare
Written premiums 10% $ 600 $ 545 $ 518
Underwriting result $ (244) $ (70) $ (126)
Combined ratio 139.8 114.8 123.4
Adjusted combined ratio* 142.5 -- 123.2
Global Surety
Written premiums 7% $ 426 $ 419 $ 386
Underwriting result $ 51 $ 40 $ 76
Combined ratio 85.8 83.1 78.1
Adjusted combined ratio* 91.0 -- --
Other Global Specialty
Written premiums 27% $ 1,579 $ 1,389 $ 1,319
Underwriting result $ (9) $ (243) $ (188)
Combined ratio 97.6 117.1 114.5
Adjusted combined ratio* 104.3 -- 110.4
International
Written premiums 8% $ 451 $ 344 $ 282
Underwriting result $ (100) $ (59) $ (58)
Combined ratio 120.5 117.3 119.4
Adjusted combined ratio* 133.1 -- --
TOTAL PRIMARY INSURANCE
Written premiums 80% $ 4,713 $ 4,147 $ 4,219
Underwriting result $ (203) $ (504) $ (888)
Combined ratio 103.3 111.4 121.7
Adjusted combined ratio* 108.2 113.4 116.7
Reinsurance
Written premiums 20% $ 1,171 $ 965 $ 1,057
Underwriting result $ (106) $ 79 $ 7
Combined ratio 110.0 92.0 98.7
Adjusted combined ratio* 118.5 108.5 --
TOTAL PROPERTY-LIABILITY INSURANCE
Written premiums 100% $ 5,884 $ 5,112 $ 5,276
Underwriting result $ (309) $ (425) $ (881)
Statutory combined ratio:
Loss and loss expense ratio 70.0 72.9 82.2
Underwriting expense ratio 34.8 35.0 35.2
-------- -------- --------
Combined ratio 104.8 107.9 117.4
-------- -------- --------
Adjusted combined ratio* 110.4 112.4 113.4
-------- -------- --------
-------- -------- --------
* For purposes of comparison, adjusted 2000 and 1999 combined ratios exclude the
benefit of the reinsurance treaties (described on page 23 of this report), and
adjusted 1998 combined ratios exclude the impact of a $215 million provision to
strengthen loss reserves subsequent to The St. Paul's merger with USF&G
(described on page 35 of this report).
PROPERTY-LIABILITY INSURANCE
Primary Insurance Operations
Our primary insurance underwriting operations consist of five business segments
which underwrite property-liability insurance and provide insurance-related
products and services to commercial and professional customers. We utilize a
network of independent insurance agents and brokers to distribute the majority
of our insurance products. Based on 1999 premium volume, The St. Paul ranked as
the 14th-largest U.S. property-liability underwriter.
Commercial Lines Group
The Commercial Lines Group segment includes our standard and nonstandard
commercial operations, as well as our catastrophe risk business center. In our
Standard Commercial operation, the Middle Market business center serves midsize
and large commercial enterprises, and the Small Commercial business center
serves small businesses, such as retailers, wholesalers, service companies,
professional offices, manufacturers and contractors. Our Nonstandard Commercial
operation offers complete insurance programs through its Large Accounts and
National Programs business centers and also serves the trucking industry through
its Transportation business center. Catastrophe Risk underwrites property
insurance focused on catastrophe exposures for large commercial customers, as
well as certain coverages for homeowners. The Commercial Lines Group segment
also includes the results of our limited involvement in insurance pools.
The following table summarizes key financial data for each of the last three
years in the Commercial Lines Group ("CLG") segment. Data for 2000 and 1999
exclude the impact of the corporate reinsurance program. In 2000, the corporate
program resulted in an $11 million increase in reported written premiums and an
$18 million reduction in reported underwriting profits, due to a reallocation
among our segments of benefits derived from the 1999 corporate treaty. In 1999,
the corporate program reduced reported written premiums by $119 million and
improved reported underwriting results by $98 million. Data for 1998 exclude
$159 million of the provision to strengthen reserves after the USF&G merger.
Year ended December 31 2000 1999 1998
(Dollars in millions)
Written premiums $ 1,646 $ 1,569 $ 1,714
Percentage change from prior year 5% (8%)
GAAP underwriting result $ 117 $ (270) $ (433)
Statutory combined ratio:
Loss ratio 59.8 80.8 88.5
Expense ratio 32.9 34.9 37.0
-------- -------- --------
Combined ratio 92.7 115.7 125.5
-------- -------- --------
-------- -------- --------
2000 vs. 1999 - The growth in written premium volume in 2000 was driven by
significant price increases throughout the CLG segment. In our Standard
Commercial operations, the largest sector of this segment with 2000 written
premiums of $1.3 billion, price increases averaged 9% for the year and renewal
retention ratios remained strong. In our Nonstandard Commercial operations,
price increases averaging 17% for the year were largely offset by a decline in
retention ratios, reflecting our ongoing efforts to remove unprofitable accounts
from these operations. Catastrophe Risk written premiums of $96 million for the
year were 23% higher than in 1999, due to our acquisition of Pacific Select in
February 2000.
The considerable improvement in underwriting results in 2000 was centered in our
Standard Commercial operations and reflected the impact of profit improvement
initiatives implemented since the merger with USF&G in 1998. The Standard
Commercial loss ratio on business written in 2000 improved 13.7 points over
the comparable 1999 ratio. During the last two years, we have implemented
significant price increases and tightened underwriting standards aimed at
eliminating underperforming accounts from our book of business. Favorable
loss development on reserves established in prior years was also a major
factor in Standard Commercial's improvement over 1999.
Our Catastrophe Risk business center, benefiting from the lack of significant
catastrophe losses and the addition of Pacific Select during the year, was also
a strong contributor to the improvement in CLG. Results for the CLG segment in
total included $69 million of the reduction in previously established workers'
compensation reserves. The two-point improvement in the CLG expense ratio in
2000 was a result of our aggressive efforts over the last two years to reduce
expenses and improve efficiency. Fixed expenses, consisting primarily of
salaries and related costs, declined $12 million in 2000 despite the increase in
premium volume.
1999 vs. 1998 - The 8% decline in premium volume compared with 1998 was centered
in our Middle Market business center and reflected our efforts, begun in late
1998, to reduce our business volume in this sector because of a deteriorating
pricing environment. Those efforts resulted in a $200 million reduction in
Middle Market written premiums compared with 1998, which was partially offset by
an increase in Small Commercial volume. CLG's underwriting loss declined
markedly from 1998 as our pricing and efficiency efforts began to have a
positive effect on segment results. Favorable prior year loss development and a
decline in catastrophe losses were also factors contributing to the improvement
over 1998.
Outlook for 2001 - With the majority of our restructuring and re-underwriting
efforts completed, we are optimistic about further growth and continued
profitability in the CLG segment in 2001. We will continue to emphasize quality
in our risk selection. We expect the rate of price increases recorded in 2000 to
continue in 2001. We will be actively engaged in developing our new product
distribution strategy, which will open direct access to customers and enable
strategic partnership opportunities with companies, banks and other financial
institutions, as well as independent agents.
GLOBAL SPECIALTY PRACTICES
Global Healthcare
The Global Healthcare segment provides a wide range of insurance products and
services throughout the entire healthcare delivery system, including individual
physicians and other providers, physician groups, hospitals, managed care
organizations and long-term care facilities. The results of MMI's U.S.
operations are included in this segment.
The following table summarizes key financial data for each of the last three
years in this segment. Data for 2000 exclude the impact of the corporate
reinsurance treaty, which reduced written premiums by $60 million and improved
GAAP underwriting results by $42 million. Data for 1998 exclude $1 million of
the post-USF&G merger provision to strengthen loss reserves.
Year ended December 31 2000 1999 1998
(Dollars in millions)
Written premiums $ 660 $545 $ 518
Percentage change from prior year 21% 5%
GAAP underwriting result $(286) $(70) $(125)
Statutory combined ratio:
Loss ratio 116.8 87.8 97.2
Expense ratio 25.7 27.0 26.0
----- ----- -----
Combined ratio 142.5 114.8 123.2
----- ----- -----
----- ----- -----
2000 vs. 1999 - Global Healthcare premium volume in 2000 included $98 million of
premiums from MMI's domestic operations. The $545 million premium total in 1999
included a one-time premium of $37 million recorded on one three-year policy.
Excluding that premium and MMI's incremental contribution in 2000, premium
volume in 2000 was 11% higher than 1999. The increase was driven by price
increases, new business in selected coverages and higher renewal retention
ratios on accounts targeted for renewal. New business volume was centered in
coverages for individual physicians and other healthcare providers, where price
increases averaged 7% for the year. We recorded virtually no new business in our
major accounts operation, which serves large healthcare entities.
The significant deterioration in underwriting results compared with 1999 was
driven by losses incurred in our long-term care and major accounts books of
business, including business acquired in the MMI purchase. Amounts awarded in
jury verdicts against the large entities served by the major accounts business
center increased sharply in 2000, causing us to strengthen previously
established loss reserves for these coverages.
MMI's domestic operations accounted for $256 million of the Global Healthcare
underwriting loss in 2000, a substantial portion of which resulted from losses
in its major accounts business. Excluding MMI's underwriting losses, results
from the remainder of the Global Healthcare segment improved slightly over 1999,
due to the corrective pricing and underwriting initiatives implemented over the
last several years. Major accounts notwithstanding, neither the market
environment nor loss cost trends in our remaining Global Healthcare business
centers deteriorated significantly in 2000.
1999 vs. 1998 - Premium growth in 1999 was largely due to the one-time $37
million premium on one policy. Excluding that transaction, written premiums
declined 2% from 1998, primarily due to the nonrenewal of certain unprofitable
business in our major accounts operation. In addition, new business volume in
other coverages declined from 1998 due to our unwillingness to compete in
markets where pricing was inadequate. Underwriting results improved markedly
over 1998, driven by a decline in the severity of losses incurred in
professional liability coverages other than major accounts and long-term care
facilities. In those two lines, adverse prior year loss development led
us to severely restrict new and renewal business volume. Global Healthcare
results in 1999 also benefited from certain changes in premium accrual
estimates.
Outlook for 2001 - As a result of the overall deterioration in our major
accounts results in 2000, including a portion of the business acquired from MMI,
we are performing a comprehensive review of our strategic options regarding
these operations. The results of this review will be considered in our
assessment of the recoverability of the related goodwill we recorded as part of
the MMI purchase. Until this review is completed, we cannot reasonably estimate
to what extent, if any, impairment of that goodwill has occurred.
We believe the other lines of business offer a reasonable opportunity for
profitability with the necessary price increases we are currently pursuing. We
will continue to leverage our longstanding expertise in the domestic medical
liability market by pursuing new business and profitable growth in selected
non-U.S. markets.
GLOBAL SPECIALTY PRACTICES
Global Surety
The Global Surety segment underwrites surety bonds, which guarantee that third
parties will be indemnified against the nonperformance of contractual
obligations. This segment includes our subsidiary Afianzadora Insurgentes, the
largest surety bond underwriter in Mexico, with a market share of nearly 40%.
Based on 1999 premium volume, our surety operations are the largest in North
America and in the world.
The following table summarizes results for this segment for the last three
years. Results presented for 2000 exclude the impact of the corporate
reinsurance program, which reduced reported written premiums by $27 million and
improved underwriting results by $18 million.
Year ended December 31 2000 1999 1998
(Dollars in millions)
Written premiums $ 453 $ 419 $ 386
Percentage change from prior year 8% 9%
GAAP underwriting result $ 33 $ 40 $ 76
Statutory combined ratio:
Loss ratio 40.2 32.2 23.7
Expense ratio 50.8 50.9 54.4
------ ------ -----
Combined ratio 91.0 83.1 78.1
------ ------ -----
------ ------ -----
2000 vs. 1999 - The 8% increase in premium volume over 1999 was driven by strong
economic conditions in both the United States and Mexico, which fueled growth in
the construction industry and, in turn, the demand for contract surety products.
The pace of premium growth in 2000 was slightly below prior year levels,
reflecting tightened underwriting standards implemented during the year in
anticipation of a potential economic slowdown. The underwriting profit declined
from 1999, due to increased claim activity on two large accounts in Mexico.
Results in our domestic U.S. operations improved over 1999, however, primarily
as the result of favorable development on losses incurred in prior years.
1999 vs. 1998 - Premium growth in 1999 was also driven by economic expansion in
the U.S. and Mexico. In addition, 1999 premium volume reflected the successful
retention of targeted key accounts in an increasingly competitive marketplace.
The underwriting profit in 1998 was significantly higher than in 1999, primarily
due to a reduction in reserves established in prior years which did not occur to
the same extent in 1999. The 3.5 point improvement in the expense ratio from
1998 to 1999 reflected the efficiencies realized subsequent to the 1998 merger
with USF&G.
Outlook for 2001 - With the potential for an economic slowdown in 2001 that
could reduce public construction levels, we will remain aggressive in managing
the composition of our book of surety business. Continuing a process begun in
2000, we will not pursue selected classes of surety business considered to be
"at-risk" in a slowing economy, and we will strive to ensure that our pricing on
new and renewal business is commensurate with the risk assumed. Corrective
underwriting initiatives are underway aimed at improving our results in Mexico.
In January 2001, we completed the acquisition of Australian Pacific Surety
Corporation Limited, an underwriting agency specializing in surety bonding in
the Australian and New Zealand markets. We believe our underwriting expertise
and leadership position in the global surety marketplace provide a strong
foundation for continued profitable results in 2001 and beyond.
GLOBAL SPECIALTY PRACTICES
Other Global Specialty
The Other Global Specialty segment is composed of the following business centers
that serve specific commercial customer groups. Construction delivers
value-added products and services, including traditional insurance and financial
and risk management solutions, to a broad range of contractors and owners of
construction projects. Technology offers a comprehensive portfolio of specialty
products and services to companies involved in telecommunications, information
technology, medical and biotechnology, and electronics manufacturing. Financial
and Professional Services ("FPS") provides all coverages for financial
institutions, including property, liability, professional liability and
management liability coverages; financial products coverages for corporations
and nonprofit organizations; and errors and omissions coverages for a variety of
professionals such as lawyers, insurance agents and real estate agents. Public
Sector Services markets insurance products and services to cities, counties,
townships and special governmental districts. Global Marine provides insurance
related to ocean and inland waterways traffic. Excess & Surplus Lines
underwrites liability insurance, umbrella and excess liability coverages, and
coverages for unique risks. Oil and Gas provides specialized property and
casualty products for customers involved in the exploration and production of
oil and gas.
The following table summarizes results for this segment for the last three
years. Data for 2000 exclude the impact of the corporate reinsurance program in
2000, which reduced reported written premiums by $133 million and improved
reported GAAP underwriting results by $92 million. Data for 1998 exclude $55
million of the post-merger provision to strengthen loss reserves.
Year ended December 31 2000 1999 1998
(Dollars in millions)
Written premiums $1,712 $1,389 $1,319
Percentage change from prior year 23% 5%
GAAP underwriting result $ (101) $ (243) $ (133)
Statutory combined ratio:
Loss ratio 75.7 85.6 78.1
Expense ratio 28.6 31.5 32.3
------- ------- -------
Combined ratio 104.3 117.1 110.4
------- ------- -------
------- ------- -------
2000 vs. 1999 - Virtually every business center in this segment posted written
premium increases over 1999, but the most significant growth occurred in our
Technology and FPS operations. Technology written premiums of $346 million were
52% ahead of the comparable 1999 total, driven by substantial new business
volume, price increases averaging 9.5% and a strong renewal retention rate. In
FPS, a significant increase in non-U.S. business pushed 2000 written premiums to
$390 million, 41% higher than 1999's total of $277 million.
Early in the year, our underwriting subsidiary in the United Kingdom was
appointed by the Law Society of England and Wales as its professional indemnity
insurance provider. By year-end 2000, we had generated $65 million of FPS
written premiums from this business. In our Construction business center,
premium volume of $488 million grew 10% over 1999, reflecting price increases
that averaged 15% for the year. Public Sector Services' written premiums of $237
million grew 23% over 1999, driven by price increases averaging 9% and strong
growth in international business.
The Construction and Global Marine business centers were the most significant
contributors to the marked improvement in underwriting results over 1999.
Construction recorded a $65 million reduction in underwriting losses in 2000,
which included $33 million of the reduction in prior year workers' compensation
reserves. Favorable prior year loss development and the nonrenewal of
under-performing accounts also contributed to the improvement over 1999. In
Global Marine, where underwriting results were $59 million better than 1999,
the improvement was largely the result of our late-1999 withdrawal from
unprofitable river transportation business in the Midwest.
Our fast-growing Technology business center posted an underwriting profit of $19
million, $23 million better than the comparable 1999 result. Favorable current
and prior year loss experience accounted for 2000's profitable performance. The
FPS underwriting result was $43 million worse than 1999, primarily due to
adverse prior year loss development in our U.S. operations and an increase in
losses in our international operations.
The nearly three-point improvement in the expense ratio over 1999 was an
indication of the strides in efficiency achieved in this segment in 2000 as a
result of our new global specialty organization. The 12% increase in
underwriting expenses was significantly less than the 23% increase in premium
volume for the year.
1999 vs. 1998 - The 5% increase in premium volume over 1998 was centered in the
Technology business center, where 1999 premiums of $227 million were 21% higher
than 1998 premiums of $188 million. Technology's growth in 1999 was a result of
new product offerings, strong renewal retention rates and a stable pricing
environment. Written premiums in the Construction business center grew $33
million, or 8%, over 1998, due to price increases averaging 5% and a strong
domestic construction industry. Global Marine's 1999 premium volume of $99
million fell 16% below 1998 levels, reflecting a weak ship-building market and
the nonrenewal of unprofitable business.
The significant deterioration in underwriting results in 1999 was primarily due
to an increase in losses in our Global Marine, Technology and Excess & Surplus
Lines operations, and less underwriting profit in FPS. Global Marine was plagued
by losses in the Midwest river transportation business in 1999, which we ceased
writing at the end of the year when we sold the renewal rights to that book of
business. Technology incurred several large losses and an increase in
catastrophe losses in 1999, leading to a $25 million deterioration in
underwriting results. Excess & Surplus Lines' results in 1999 suffered from
several large losses and adverse prior year loss development in certain lines of
business. In FPS, the underwriting profit of $9 million fell short of the 1998
profit of $45 million, due to a decline in the magnitude of favorable prior year
development in 1999.
Outlook for 2001 - We expect further growth and improvement throughout this
segment in 2001, driven by additional price increases and our continued focus on
quality risk selection. We believe our Construction business center is
well-positioned to weather a potential economic slowdown, due to pricing and
underwriting actions implemented over the last two years. We expect strong
domestic and international growth in our Technology operations, building on our
strong market position through the addition of underwriting staff and the
development of new products to meet the emerging needs of Internet technology
firms. In FPS, where our underlying performance remains solid, the priority will
be continuing our growth and obtaining price increases where needed to maintain
the profitability of this business. In January 2001, we completed our purchase
of the right to seek to renew PENCO's book of municipality insurance, which is
expected to lead to growth in our Public Sector Services operation. PENCO is a
program administrator for Willis North America Inc., with annual municipality
insurance premiums of approximately $60 million in 2000.
International
Our International segment consists of our operations at Lloyd's; specialty
business that is not managed on a global basis; and, beginning in April 2000,
MMI's London-based insurance operation, Unionamerica. Our International
operations have a specialty commercial focus with particular emphasis on
liability coverages. At Lloyd's, we provide capital to 11 underwriting
syndicates and own a managing agency. We have built a local market presence in
14 countries that account for nearly 80% of the world's insurance market. In
addition to Canada, we underwrite insurance in Europe, Africa, Australia and
Latin America. This segment also provides coverage for the non-U.S. risks of
U.S. corporate policyholders and vice versa.
The following table summarizes results for this segment for the last three
years. Data for 2000 exclude the impact of the corporate reinsurance program,
which reduced our reported written premiums by $129 million and improved
reported underwriting results by $96 million.
Year ended December 31 2000 1999 1998
(Dollars in millions)
Written premiums $ 580 $ 344 $ 282
Percentage change from prior year 69% 22%
GAAP underwriting result $(196) $ (59) $ (58)
Statutory combined ratio:
Loss ratio 102.5 83.4 83.1
Expense ratio 30.6 33.9 36.3
------- ------- -------
Combined ratio 133.1 117.3 119.4
------- ------- -------
------- ------- -------
2000 vs. 1999 - The addition of Unionamerica accounted for $99 million of
written premium volume in 2000. Excluding Unionamerica, International's 40%
increase in premiums over 1999 was driven by growth in our Lloyd's operations,
where we expanded our investment in several specialty underwriting syndicates.
Premiums generated at Lloyd's in 2000 totaled $331 million, compared with $201
million in 1999. We also achieved modest growth in standard commercial business
in several international markets, most notably in the United Kingdom and Canada.
Underwriting results in the International segment in 2000 suffered from
significant adverse prior year loss development at Unionamerica and
deterioration in certain Lloyd's syndicate results. Subsequent to our
acquisition of MMI, we strengthened Unionamerica's loss reserves and ceased
writing new business in that entity. Underwriting losses at Unionamerica since
the acquisition totaled $63 million. At Lloyd's, our underwriting losses totaled
$87 million for the year compared with losses of $37 million in 1999. The 2000
losses were centered in a syndicate specializing in financial and professional
liability coverages, and an aviation syndicate which incurred significant losses
from a number of airline accidents, including the Concorde crash in July. The
improvement in the expense ratio in 2000 reflects efficiencies achieved in our
International operations and a decline in start-up costs associated with
establishing a presence in our targeted markets in the late 1990's.
1999 vs. 1998 - In 1999, premium growth was also centered at Lloyd's, as we
selectively expanded our underwriting capacity in several syndicates offering
the potential for profitable growth. Underwriting results in 1999 were virtually
level with 1998, with deterioration in several Lloyd's syndicate results largely
offset by significant improvement in standard commercial results in Canada.
Outlook for 2001 - We have implemented aggressive corrective measures in this
segment in an effort to rebound from 2000's disappointing results, and we expect
significant improvement as 2001 progresses. At Lloyd's, we have enhanced our
underwriting expertise through the addition of new personnel in several of our
syndicates, and we have sharply reduced our aviation exposures. We have no
current plans for further geographical expansion in 2001 but rather will
focus on profitable growth in those markets where we currently operate.
Despite our cessation of underwriting new business at Unionamerica in 2000, we
are evaluating the strategic value of this entity going forward and its
relevance to the recoverability of the related goodwill recorded as part of the
MMI purchase. Until that evaluation is complete, we cannot reasonably estimate
to what extent, if any, impairment of that goodwill has occurred.
REINSURANCE
St. Paul Re
Our Reinsurance segment, St. Paul Re, underwrites traditional treaty and
facultative reinsurance for property, liability, ocean marine, surety and
certain specialty classes of coverage and also underwrites "nontraditional"
reinsurance, which combines traditional underwriting risk with financial risk
protection. St. Paul Re underwrites reinsurance for leading property-liability
insurance companies worldwide. Through Discover Re, our Reinsurance segment also
underwrites primary insurance and reinsurance and provides related insurance
products and services to self-insured companies and insurance pools, in addition
to ceding to and reinsuring captive insurers, all within the alternative risk
transfer market. Based on written premium volume through the first nine months
of 2000, our reinsurance operations ranked as the 6th-largest reinsurer in the
United States.
The following table summarizes results for this segment for the last three
years. Data for 2000 and 1999 exclude the impact of the reinsurance treaties,
which reduced our reported written premiums by $135 million and $154 million,
respectively, and improved reported GAAP underwriting results by $127 million
and $163 million, respectively.
Year ended December 31 2000 1999 1998
(Dollars in millions)
Written premiums $1,306 $1,119 $1,057
Percentage change from prior year 17% 6%
GAAP underwriting result $ (233) $ (84) $ 7
Statutory combined ratio:
Loss ratio 85.1 79.0 65.9
Expense ratio 33.4 29.5 32.8
------- ------- -------
Combined ratio 118.5 108.5 98.7
------- ------- -------
------- ------- -------
2000 vs. 1999 - Premium growth in 2000 was driven by new business opportunities
in the nontraditional reinsurance market and significant price increases across
virtually all lines of traditional reinsurance coverages. The operating
environment in global reinsurance markets continued to improve in 2000, as
demand for reinsurance products grew and price increases took hold. In July
2000, St. Paul Re created a new Financial Solutions business center to focus on
the rapidly growing nontraditional market, in which elements of traditional
underwriting risk are combined with financial risk protection to meet specific
financial objectives of corporate customers. Nontraditional business accounted
for $142 million of the premium growth over 1999 at St. Paul Re. In addition,
price increases and new business fueled an $84 million increase in North
American casualty premium volume in 2000.
The deterioration in underwriting results was due to significant adverse loss
development from years prior to 2000. Catastrophe losses incurred in 2000
totaled $135 million, of which $115 million represented additional losses on
events occurring in 1999 and prior years. Major catastrophes in 1999 included
severe windstorms in Europe, earthquakes in Taiwan and Turkey, and Hurricane
Floyd. Flooding in the United Kingdom, which accounted for $20 million of
Reinsurance segment losses, was the only major event in 2000 contributing to the
2000 catastrophe total. Adverse prior year loss development on retrocessional
business written in St. Paul Re's London operations also played a significant
role in 2000's underwriting loss. In addition, our North American casualty
business accounted for approximately $130 million of underwriting losses in
2000. The elimination of the one-quarter reporting lag for St. Paul Re's
U.K.-based operations added $10 million to underwriting losses in 2000.
During 2000, St. Paul Re reduced its estimate of ultimate losses on certain
nontraditional reinsurance business by $56 million, and made a corresponding
increase in its estimate of reserves for contingent commissions by $66
million. Although these changes in estimate did not have a significant impact
on underwriting results for the year, they did distort the components of the
combined ratio in the table above. Excluding these changes, the loss ratio
would have been 89.4, and the expense ratio would have been 28.3 (both
excluding the benefits of the reinsurance treaties).
1999 vs. 1998 - The 6% increase in 1999 written premiums over 1998 resulted from
a change in the method we used to estimate reinsurance premiums that have been
earned, but not reported ("EBNR"), which added $61 million of written premiums
to St. Paul Re's reported total. Excluding that change, premium volume in 1999
was level with 1998. Excess capacity and inadequate pricing levels plagued the
traditional reinsurance marketplace in 1999, leading to a reduction in St. Paul
Re's traditional premium volume. New business opportunities in the
nontraditional market, however, substantially offset that decline. The
deterioration in underwriting results compared with 1998 was primarily due to an
increase in catastrophe losses, from $86 million in 1998 to $143 million in
1999. In addition, the change in the method of estimating EBNR had a net result
of increasing underwriting losses by $9 million.
Outlook for 2001 - We anticipate improvement in St. Paul Re's results in 2001.
Price increases on business renewed in January 2001 averaged 17% across the
entire segment and exceeded 50% for certain coverages. We are also aggressively
addressing the factors that contributed to 2000's disappointing results. In our
North American casualty business, we have sharply reduced our business volume in
those market sectors where pricing remains inadequate. We have virtually
eliminated our involvement in the London retrocessional reinsurance market. We
have also implemented significant price increases on our catastrophe coverages,
particularly in Europe. We expect further growth in St. Paul Re's Financial
Solutions business in 2001.
PROPERTY-LIABILITY INSURANCE
Investment Operations
The primary objective of our investment strategy is to maximize investment
returns while generating sufficient liquidity to fund our cash requirements,
primarily consisting of claim payments. The funds we invest are generated by
underwriting cash flows, consisting of the excess of premiums collected over
losses and expenses paid, and by investment cash flows, which consist of income
received on existing investments and proceeds from sales and maturities of
investments.
We maintain a high-quality portfolio of investment instruments. The majority of
funds available for investment are deployed in a widely diversified portfolio of
predominantly investment-grade fixed maturities. We also invest lesser amounts
in equity securities, venture capital and real estate with the goal of producing
long-term growth in the value of our invested asset base and ultimately
enhancing shareholder value. The latter three investment classes have the
potential for higher returns but also involve a greater degree of risk,
including less stable rates of return and less liquidity.
In 2000 our property-liability investment portfolio generated pretax investment
income of $1.25 billion, virtually level with 1999 pretax income of $1.26
billion. In 1998, pretax investment income totaled $1.29 billion. Our
acquisition of MMI in April 2000, which added approximately $1 billion of fixed
maturity investments to our operations, accounted for $55 million of pretax
investment income in 2000. Excluding the MMI impact and $11 million of
additional investment income resulting from the elimination of the quarter
reporting lag for our U.K.-based reinsurance operations, pretax investment
income in 2000 fell approximately 5% short of the 1999 total. Negative
underwriting cash flows in 2000, including ceded premium payments totaling $326
million related to our corporate reinsurance program, resulted in net sales of
fixed maturity investments during the year to fund operational cash flow
requirements. In 1999 and 1998, negative underwriting cash flows, combined with
merger-related and restructuring payments, also resulted in net sales of fixed
maturity investments.
The following table summarizes the composition and carrying value of our
property-liability investment segment's portfolio at the end of 2000 and 1999.
More information on each investment class follows the table.
December 31 2000 1999
(In millions)
CARRYING VALUE
Fixed maturities $15,791 $15,230
Equities 1,396 1,536
Real estate and mortgage loans 1,025 1,268
Venture capital 1,064 866
Securities lending collateral 1,231 1,216
Short-term investments 992 1,167
Other investments 183 107
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Total investments $21,682 $21,390
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Fixed Maturities - Our fixed maturities portfolio is composed of high-quality,
intermediate-term taxable U.S. government, corporate and mortgage-backed bonds
and tax-exempt U.S. municipal bonds. We manage our bond portfolio
conservatively, investing almost exclusively in investment-grade (BBB- or
better) securities. Approximately 94% of our portfolio at the end of 2000 was
rated investment grade, with the remaining 6% split between high yield and
nonrated securities, most of which we believe would be considered
investment-grade if rated. Fixed maturity investments produced pretax investment
income of $1.16 billion in 2000, compared with $1.17 billion and
$1.20 billion in 1999 and 1998, respectively.
Our decision whether to purchase taxable or tax-exempt securities is driven by
corporate tax considerations and the relationship between taxable and tax-exempt
yields at the time of purchase. In 2000, as in 1999 and 1998, a significant
majority of our new purchases consisted of taxable bonds. The average yield on
taxable bonds purchased in 2000 was 7.7%, compared with 7.2% in 1999 and 6.4% in
1998. Taxable bonds accounted for 68% of our fixed maturity portfolio at
year-end 2000. The bond portfolio in total carried a weighted average pretax
yield of 6.8% at Dec. 31, 2000, unchanged from year-end 1999.
The amortized cost of our bond portfolio at the end of 2000 was $15.37 billion,
compared with $15.26 billion at the end of 1999. The increase was primarily due
to the addition of $1 billion in bonds from MMI, which offset the net sale of
bonds in 2000 to fund our cash flow requirements. We carry bonds on our balance
sheet at market value, with the corresponding appreciation or depreciation
recorded in shareholders' equity, net of taxes. The market values of our bonds
fluctuate with changes in market interest rates and changes in yield
differentials between fixed-maturity asset classes.
At the end of 2000, the pretax unrealized appreciation of our bond portfolio was
$424 million, compared with unrealized depreciation of $26 million at the end of
1999. During the first half of 2000, the Federal Reserve raised short-term
interest rates three times to address inflationary pressures. As the year
progressed, however, emphasis shifted to preserving growth amid building signs
of an economic slowdown. By the fourth quarter, it was widely anticipated in
financial markets that the Federal Reserve would act to reduce interest rates in
the first half of 2001. As a result, the market value of our bond portfolio
increased as the year came to a close.
Equities - Our equity holdings consist of a diversified portfolio of common
stocks which accounted for 5% of total investments (at cost) at Dec. 31, 2000.
Equity values in the United States retreated in 2000, led by declines in the
technology sector, the same market sector that had driven market indices to
record levels a year earlier. In 2000, the total return on our domestic equity
portfolio, although negative, outperformed the leading market index. Despite the
decline in equity values during the year, the $1.40 billion carrying value of
our portfolio at Dec. 31, 2000 included $326 million of pretax unrealized
appreciation. At the end of 1999, the pretax unrealized appreciation included in
the $1.54 billion carrying value totaled $516 million.
Real Estate and Mortgage Loans - Real estate ($840 million) and mortgage loans
($185 million) comprised 5% of our total property-liability investments at the
end of 2000. Our real estate holdings primarily consist of commercial office and
warehouse properties that we own directly or in which we have a partial interest
through joint ventures. Our properties are geographically distributed throughout
the United States and had an occupancy rate of 95% at year-end 2000. These
investments produced pretax income of $63 million in 2000 and generated cash
flows totaling $90 million. We did not make any significant real estate
purchases in 2000.
We acquired the portfolio of mortgage loans in the 1998 merger with USF&G. The
loans, which are collateralized by income-producing real estate, produced
investment income of $27 million in 2000. Net paydowns and repayments of the
loans totaled $204 million in 2000. We did not originate any new loans during
the year.
Venture Capital - Venture capital comprised 3% of our invested assets (at cost)
at the end of 2000. These private investments span a variety of industries but
are concentrated in communications, business Internet, consumer technology and
healthcare. In 2000, we invested $296 million in this asset class, compared with
$237 million in 1999. Our portfolio produced a total pretax return on beginning
of the year net assets of 52%, primarily the result of pretax realized gains
totaling $554 million for the year. The combined 2000 and 1999 total return on
our venture capital investments was $920 million. The carrying value of the
venture capital portfolio at year-end 2000 and 1999 included unrealized
appreciation of $406 million and $468 million, respectively.
Securities Lending Collateral - These investments are collateral for our
securities lending operations. Through our lending agent, we loan certain
securities from our fixed-maturity portfolio to other approved institutions. We
receive a fee from the borrower in return, as well as collateral equal to 102%
of the fair value of our securities on loan. We retain full ownership of these
securities and are indemnified by the lending agent in the event a borrower
becomes insolvent or fails to return securities. We record securities lending
collateral as an asset, with a corresponding liability for the same amount.
Realized Investment Gains and Losses - The following table summarizes our
property-liability operations' realized gains and losses by investment class for
each of the last three years.
Year ended December 31 2000 1999 1998
(In millions)
PRETAX REALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $ (29) $ (19) $ 1
Equities 87 118 158
Real estate and mortgage loans 4 18 8
Venture capital 554 158 25
Other investments 8 (1) (4)
------ ------ ------
Total $ 624 $ 274 $ 188
------ ------ ------
------ ------ ------
Venture capital gains in 2000 and 1999 were primarily driven by sales of and
distributions from investments in technology-related companies. The single
largest gain in 2000, $117 million, resulted from the sale of our direct
investment in Flycast Communications Corp., a leading provider of Internet
direct response solutions.
2001 Investment Outlook - We do not expect our investment income to increase in
2001. Significant negative underwriting cash flows over the last several years,
including premium payments totaling a combined $474 million in 2000 and 1999
related to our corporate reinsurance program, have resulted in net sales of
fixed maturity investments to fund operational cash requirements. In 2001, we
expect underwriting cash flows to improve due to price increases throughout our
continuing operations; however, that improvement is not expected to be
significant due to anticipated cash payments associated with the run-off of
reserves in discontinued lines of business.
With funds provided from maturing securities in 2001, our new investment
purchases are expected to focus on investment-grade, taxable bonds, with
additional funds allocated to our other asset classes as market conditions
warrant. We expect the reduction in interest rates to have a positive impact on
equity markets as the year progresses, and our equity investment activities will
be responsive to opportunities that develop. We do not expect venture capital
realized gains to approach 2000's record level, but we remain confident in our
ability to generate superior returns in this asset class over the long-term.
PROPERTY-LIABILITY UNDERWRITING
Loss and Loss Adjustment Expense Reserves
Our loss reserves reflect estimates of total losses and loss adjustment expenses
we will ultimately have to pay under insurance policies and reinsurance
treaties. These include losses that have been reported but not settled and
losses that have been incurred but not reported to us ("IBNR"). Loss reserves
for certain workers' compensation business and certain assumed reinsurance
contracts are discounted to present value. We reduce our loss reserves for
estimates of salvage and subrogation.
For reported losses, we establish reserves on a "case" basis within the
parameters of coverage provided in the insurance policy or reinsurance
agreement. For IBNR losses, we estimate reserves using established actuarial
methods. Our case and IBNR reserve estimates consider such variables as past
loss experience, changes in legislative conditions, changes in judicial
interpretation of legal liability and policy coverages, and inflation. We
consider not only monetary increases in the cost of what we insure, but also
changes in societal factors that influence jury verdicts and case law and, in
turn, claim costs.
Because many of the coverages we offer involve claims that may not ultimately be
settled for many years after they are incurred, subjective judgments as to our
ultimate exposure to losses are an integral and necessary component of our loss
reserving process. We record our reserves by considering a range of estimates
bounded by a high and low point. Within that range, we record our best estimate.
We continually review our reserves, using a variety of statistical and actuarial
techniques to analyze current claim costs, frequency and severity data, and
prevailing economic, social and legal factors. We adjust reserves established in
prior years as loss experience develops and new information becomes available.
Adjustments to previously estimated reserves are reflected in our financial
results in the periods in which they are made.
After the consummation of our merger with USF&G in April 1998, we recorded a
$250 million loss provision to reflect the application of The St. Paul's
reserving policies to USF&G's loss reserves. Our actuaries reviewed the raw data
underlying, and documentation supporting, USF&G's year-end 1997 reserve analysis
and concurred with the reasonableness of USF&G's range of estimates for those
reserves. However, applying their judgment and interpretation to the range, The
St. Paul's actuaries, who would be responsible for setting reserve amounts for
the merged entity, concluded that strengthening of the reserves would be
appropriate, resulting in the $250 million adjustment. Of that provision, $35
million was allocated to the standard personal insurance operations that were
sold in 1999, and that amount is included in discontinued operations for 1998.
Note 8 to the financial statements, on page 59 of this report, includes a
reconciliation of our beginning and ending loss and loss adjustment expense
reserves for each of the years 2000, 1999 and 1998. That reconciliation shows
that we have recorded reductions in the loss provision from continuing
operations for claims incurred in prior years totaling $265 million, $208
million and $217 million in 2000, 1999 and 1998, respectively.
In 2000, the favorable prior year loss development was widespread across lines
of business with the exception of the Global Healthcare segment. In 1999,
favorable prior year loss development in several lines of business, including
workers' compensation and assumed reinsurance, was offset by adverse development
in our Global Marine operation and certain commercial business centers. In 1998,
the reduction in prior year losses was impacted by the provision to strengthen
loss reserves subsequent to our merger with USF&G.
In our Global Healthcare operation, while there were favorable adjustments to
prior year losses in 1999 and 1998, we recorded an increase in our estimate of
prior year losses in 2000. Loss activity has indicated an increase in the
severity of claims incurred in the years 1995 through 1997. Accordingly, we
have continued to hold a cautious view of ultimate loss provision for those
years, resulting in an increase in the prior year loss provision in 2000.
The favorable prior year development recorded on workers' compensation coverages
in recent years reflected the impact of legal and regulatory reforms throughout
the country in the early 1990's that caused us to reduce our estimate of
ultimate loss costs.
PROPERTY-LIABILITY UNDERWRITING
Environmental and Asbestos Claims
We continue to receive claims alleging injury or damage from environmental
pollution or seeking payment for the cost to clean up polluted sites. We also
receive asbestos injury claims arising out of product liability coverages under
general liability policies. The vast majority of these claims arise from
policies written many years ago. Our alleged liability for both environmental
and asbestos claims is complicated by significant legal issues, primarily
pertaining to the scope of coverage. In our opinion, court decisions in certain
jurisdictions have tended to broaden insurance coverage beyond the intent of
original insurance policies.
Our ultimate liability for environmental claims is difficult to estimate because
of these legal issues. Insured parties have submitted claims for losses not
covered in their respective insurance policies, and the ultimate resolution of
these claims may be subject to lengthy litigation, making it difficult to
estimate our potential liability. In addition, variables, such as the length of
time necessary to clean up a polluted site and controversies surrounding the
identity of the responsible party and the degree of remediation deemed
necessary, make it difficult to estimate the total cost of an environmental
claim.
Estimating our ultimate liability for asbestos claims is equally difficult. The
primary factors influencing our estimate of the total cost of these claims are
case law and a history of prior claim development, both of which are still
developing.
The following table represents a reconciliation of total gross and net
environmental reserve development for each of the years in the three-year period
ended Dec. 31, 2000. Amounts in the "net" column are reduced by reinsurance
recoverables.
2000 1999 1998
Gross Net Gross Net Gross Net
(In millions)
ENVIRONMENTAL
Beginning reserves $ 698 $ 599 $ 783 $ 645 $ 867 $ 677
Incurred losses 25 14 (33) 1 (16) 26
Paid losses (58) (50) (52) (47) (68) (58)
------ ------ ------ ------ ------ ------
Ending reserves $ 665 $ 563 $ 698 $ 599 $ 783 $ 645
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
The following table represents a reconciliation of total gross and net reserve
development for asbestos claims for each of the years in the three-year period
ended Dec. 31, 2000.
2000 1999 1998
Gross Net Gross Net Gross Net
(In millions)
ASBESTOS
Beginning reserves $ 398 $ 298 $ 402 $ 277 $ 397 $ 279
Incurred losses 41 33 28 51 44 13
Paid losses (42) (32) (32) (30) (39) (15)
------ ------ ------ ------ ------ ------
Ending reserves $ 397 $ 299 $ 398 $ 298 $ 402 $ 277
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Our reserves for environmental and asbestos losses at Dec. 31, 2000, represent
our best estimate of our ultimate liability for such losses, based on all
information currently available to us. Because of the inherent difficulty in
estimating such losses, however, we cannot give assurances that our ultimate
liability for environmental and asbestos losses will, in fact, match our current
reserves. We continue to evaluate new information and developing loss patterns,
but we believe any future additional loss provisions for environmental and
asbestos claims will not materially impact the results of our operations,
liquidity or financial position.
Total gross environmental and asbestos reserves of $1.06 billion at Dec. 31,
2000, represented approximately 6% of gross consolidated reserves of $18.20
billion.
Sales surpass $1 billion again in 2000; diverse product portfolio provides
stability in volatile market environment
LIFE INSURANCE
F&G Life
Our life insurance segment consists of Fidelity and Guaranty Life Insurance
Company and subsidiaries ("F&G Life"). F&G Life's products include deferred
annuities (including tax-sheltered annuities and equity-indexed annuities),
structured settlement annuities and immediate annuities. F&G Life also
underwrites traditional and universal life insurance products. F&G Life's
products are sold throughout the United States through independent agents,
managing general agents, specialty brokerage firms and in selected institutional
markets.
Highlights of F&G Life's financial performance for the last three years were as
follows.
Year ended December 31 2000 1999 1998
(In millions)
Sales (annualized premiums) $ 1,123 $ 1,000 $ 501
Premiums and policy charges 306 187 119
Policy surrenders 435 217 207
Net investment income 354 298 276
Pretax earnings 53 66 21
Life insurance in force 17,169 12,398 10,774
F&G Life's pretax earnings in both 2000 and 1999 benefited from an increase in
assets under management, driven by product sales in excess of $1 billion in both
years, improved yields on investments and strong operating cash flows. These
benefits were partially offset, however, by increases in product development and
distribution channel expansion expenses, surrender costs and realized investment
losses. Net investment income grew 19% in 2000, as a result of improved yields
on an increasing asset base generated by strong cash flows.
Pretax earnings in 2000 and 1999 included realized investment losses of $25
million and $9 million, respectively, which were largely attributable to
impairment losses in the fixed maturities portfolio. Pretax earnings in 2000
also include $2.6 million of interest expense on an intercompany note payable to
The St. Paul's property-liability operations. Excluding realized investment
losses in both years and the intercompany interest in 2000, pretax earnings of
$80 million in 2000 were $5 million higher than comparable 1999 earnings.
After-tax earnings on a similar basis improved even more significantly over 1999
levels, reflecting the impact of F&G Life's strategy to allocate 1% of its
investment portfolio to tax-favored securities. These investments, while
typically contributing little or no operating earnings, lowered F&G Life's
effective tax rate from 29% in 1999 to 24% in 2000.
The following table shows life insurance and annuity sales (premiums and
deposits) by product type and distribution system.
Year ended December 31 2000 1999 1998
(In millions)
PRODUCT TYPE:
Single premium deferred annuities $ 459 $ 78 $ 134
Equity-indexed annuities 307 686 209
Structured settlement annuities 177 95 49
Single premium immediate annuities 69 54 19
Tax-sheltered annuities 45 49 64
Other annuities 19 16 11
Life insurance 47 22 15
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Total $1,123 $1,000 $ 501
------ ------ ------
------ ------ ------
DISTRIBUTION SYSTEM:
Brokerage $ 795 $ 822 $ 367
Structured settlement brokers 198 113 55
Institutional markets 66 -- --
Tax-sheltered annuity distributors 45 49 68
Other 19 16 11
------ ------ ------
Total $1,123 $1,000 $ 501
------ ------ ------
------ ------ ------
The 12% increase in sales volume over 1999 resulted from growth in fixed
interest rate annuity sales, which was partially offset by a decline in
equity-indexed annuity ("EIA") sales. Sales of fixed interest rate annuities in
2000 continued their momentum from late 1999, as the overall level of market
interest rates increased and volatility in equity markets resulted in a shift
away from EIA sales. The demand for annuity products is affected by fluctuating
interest rates and the relative attractiveness of alternate financial products,
particularly equity-based products. Credited interest rates on EIA products are
based on formulas tied to leading market indices. The significant EIA sales in
1999 were concentrated in the first half of the year and were driven by the
popularity of F&G Life's first-generation portfolio of EIA products introduced
in mid-1998. Traditional life insurance sales in 2000 more than doubled over
1999 sales levels, reflecting the continued success of a new term life product
line launched in 1999 targeted at the mortgage protection market. This new
product line was the primary factor contributing to the 38% increase in life
insurance in force in 2000.
Premiums and policy charges in 2000 increased 64% over 1999, resulting from
growth in the sale of structured settlement annuities and life-contingent single
premium immediate annuities ("SPIA"). Structured settlement annuities are sold
primarily to property-liability insurers to fund the settlement of insurance
claims. The continued expansion of the structured settlement program into The
St. Paul's property-liability claim organization accounted for the increase in
2000 sales volume. The growth in SPIA sales resulted from an increase in
marketing emphasis on this product. Policy charges from surrenders on
tax-sheltered and equity-indexed annuities also contributed to the overall
increase in premiums and policy charges in 2000.
Sales of structured settlement annuities, annuities with life contingencies and
term life insurance are recognized as premiums earned under GAAP.
Investment-type contracts, however, such as our equity-indexed, deferred and
tax-sheltered annuities, and our universal life-type contracts, are recorded
directly to our balance sheet on a deposit accounting basis and are not
recognized as premium revenue under GAAP.
F&G Life manages its exposure on its EIA products by purchasing options with
terms similar to the market index component to provide the same return as F&G
Life guarantees to the annuity contract holder, subject to minimums guaranteed
in the annuity contract. At Dec. 31, 2000, F&G Life held options with a notional
amount of $1.14 billion and a market value of $32 million.
Deferred annuities and universal life products are subject to surrender by
policyholders. Nearly all of our surrenderable annuity policies allow a refund
of the cash value balance less a surrender charge. Several products contributed
to the increase in surrender activity in 2000. Surrenders on tax-sheltered
annuities increased due to F&G Life's transition from one exclusive distribution
partner to a new network of approximately 15 distributors. EIA surrenders have
increased naturally, as a result of the significant growth in the size of the
EIA book of business. F&G Life has written more than $1.2 billion of EIA
business since these products were introduced in mid-1998. In addition,
surrenders have increased on fixed interest rate annuities as a larger amount of
these annuity policies have reached the end of their interest rate guarantee
periods.
1999 vs. 1998 - Pretax earnings in 1999 grew significantly over comparable 1998
earnings, due to growth in assets under management, driven by strong product
sales. In addition, an increase in interest rates favorably impacted net
investment spreads in 1999 which, combined with greater estimated future gross
profits, resulted in lower amortization of deferred policy acquisition costs
("DPAC"). Pretax earnings in 1998 were reduced by a $41 million writedown of
DPAC and $9 million of merger-related charges. Product sales of $1 billion in
1999 doubled over the 1998 total due to the success of the EIA product first
introduced in mid-1998. Premium and policy charges of $187 million grew 57% over
1998 primarily due to an increase in structured settlement annuity sales,
resulting from the expansion of F&G Life's structured settlement program into
The St. Paul's property-liability claim organization. Net investment income grew
8% in 1999.
Outlook for 2001 - F&G Life expects the life insurance and annuity products
introduced in 2000, combined with new product introductions planned in 2001, to
lead to continued sales growth in 2001. F&G Life will continue to focus on
innovative new product development to maintain its competitive edge. It expects
to broaden the depth and penetration of its existing distribution channels,
striving for a balanced mix of production. F&G Life anticipates that the
continued development of its e-commerce platform, SalesLink,(SM) will lead to
enhanced sales processes and service levels for its producers.
Nuveen posts sixth-consecutive year of record earnings in a challenging
environment
ASSET MANAGEMENT
The John Nuveen Company
We hold a 78% interest in The John Nuveen Company ("Nuveen"), which constitutes
our asset management segment. Nuveen's core businesses are asset management and
the development, marketing and distribution of investment products and services
for advisors to the affluent and high-net-worth market segments. Nuveen provides
investment products, including individually managed accounts, mutual funds,
exchange-traded funds and defined portfolios through registered representatives
associated with unaffiliated firms including broker-dealers, commercial banks,
affiliates of insurance providers, financial planners, accountants, consultants
and investment advisors. Nuveen is listed on the New York Stock Exchange,
trading under the symbol "JNC."
The following table summarizes Nuveen's key financial data for the last three
years.
Year ended December 31 2000 1999 1998
(In millions)
Revenues $ 376 $ 353 $ 308
Expenses 201 193 171
-------- -------- --------
Pretax income 175 160 137
Minority interest (40) (37) (33)
-------- -------- --------
The St. Paul's share of pretax income $ 135 $ 123 $ 104
-------- -------- --------
-------- -------- --------
Assets under management $62,011 $59,784 $55,267
Nuveen provides consultative services to financial advisors on managed assets
for fee-based customers and structured investment services for transaction-based
advisors. These activities generate two principal sources of revenue: ongoing
advisory fees earned on assets under management, including individually managed
accounts, mutual funds and exchange-traded funds; and distribution revenues
earned upon the sale of defined portfolio and mutual fund products.
In 2000, an increase in average assets under management resulted in a 3%
increase in advisory fee revenue, while a significant increase in defined
portfolio sales drove a 40% increase in distribution revenue. These increases
were partially offset by a decline in revenue attributable to Nuveen's sale of
its investment banking operations in the third quarter of 1999. The increase in
expenses over 1999 was largely due to advertising expenses associated with
Nuveen's new brand awareness campaign. Expenses in total, however, increased at
a slower rate than revenues in 2000.
Gross sales of investment products of $10.8 billion in 2000 were 23% lower than
1999 sales of $14.1 billion. Managed account sales declined in 2000, primarily
due to investors' shifting from large-cap core growth stocks to aggressive
growth stocks in the first half of the year and concerns about market volatility
in the second half of the year. Tax-exempt municipal mutual fund sales also
declined in 2000 as a result of an increase in interest rates, which made
higher-yielding taxable securities more attractive to investors. Defined
portfolio sales of $4.0 billion, however, grew 52% over 1999, driven by
increased demand for technology and other sector products, as well as the
success of Nuveen's Peroni Mid-Year and Top Ten trusts, which together generated
$900 million of new sales by the end of the year. Nuveen's consolidated net
flows (equal to the sum of sales, reinvestments and exchanges less redemptions)
totaled $4.7 billion in 2000, compared with $9.6 billion in 1999.
At the end of 2000, managed assets consisted of $28.4 billion of exchange-traded
funds, $21.7 billion of managed accounts and $11.9 billion of mutual funds.
Municipal securities accounted for 66% of assets under management at the end
of 2000, unchanged from Dec. 31, 1999. Including defined portfolios, Nuveen
managed or oversaw approximately $73 billion in assets at Dec. 31, 2000.
Nuveen repurchased common shares from minority shareholders in 2000, 1999 and
1998 for total costs of $51 million, $36 million and $27 million, respectively.
No shares were repurchased from The St. Paul in those years. However our
percentage ownership fell from 79% in 1999 to 78% in 2000 due to Nuveen's
issuance of additional shares under various stock option and incentive plans. As
part of an ongoing repurchase program, Nuveen had authority from its board of
directors at Dec. 31, 2000, to repurchase up to approximately 1.6 million
additional common shares.
1999 vs. 1998 - In 1999, Nuveen's revenues grew 16% over 1998 as a result of an
increase in average assets under management and significant growth in defined
portfolio sales during the year. Gross sales of investment products of $14.1
billion in 1999 were 81% higher than 1998 sales of $7.8 billion, driven by
significant additions to managed accounts and strong growth in equity defined
portfolio sales. The $4.5 billion increase in assets under management at Dec.
31, 1999, compared with a year earlier, was primarily the result of an increase
in net flows.
Outlook for 2001 - Following the significant market volatility of 2000, Nuveen's
high quality products and long-term investing discipline are expected to attract
more financial advisors and investors seeking balance and consistent growth in
2001. In this environment, Nuveen anticipates renewed investor interest in
individually managed accounts and exchange-traded products. In addition to new
exchange-traded closed-end municipal bond funds, Nuveen expects to introduce its
first equity exchange-traded product and a series of open-end exchange-traded
funds that are expected to be the first in the industry to track Treasury
indices.
Common equity surpasses $7 billion; share repurchases continue to enhance
shareholder value
THE ST. PAUL COMPANIES
Capital Resources
Capital resources consist of funds deployed or available to be deployed to
support our business operations. The following table summarizes the components
of our capital resources at the end of each of the last three years.
Year ended December 31 2000 1999 1998
(In millions)
Shareholders' equity:
Common equity:
Common stock and retained earnings $6,481 $5,906 $5,608
Unrealized appreciation of investments and other 697 542 1,013
------- ------- -------
Total common shareholders' equity 7,178 6,448 6,621
Preferred shareholders' equity 49 24 15
------- ------- -------
Total shareholders' equity 7,227 6,472 6,636
Debt 1,647 1,466 1,260
Capital securities 337 425 503
------- ------- -------
Total capitalization $9,211 $8,363 $8,399
------- ------- -------
------- ------- -------
Ratio of debt to total capitalization 18% 18% 15%
------- ------- -------
------- ------- -------
Common Equity - The 11% increase in common shareholders' equity over year-end
1999 was driven by our strong net income of just under $1 billion for the year,
the conversion of capital securities into common stock and an increase in the
unrealized appreciation of our bond portfolio. The following summarizes the
major transactions impacting our common shareholders' equity in the last three
years.
- - Conversion of Capital Securities - In 2000, our wholly owned subsidiary, St.
Paul Capital LLC, provided notice to the holders of its $207 million, 6%
Convertible Monthly Income Preferred Securities ("MIPS") that it was exercising
its right to cause the conversion rights of the owners of the MIPS to expire.
Each of the 4,140,000 MIPS outstanding was convertible into 1.695 shares of our
common stock. The MIPS were classified on our balance sheet as
"Company-obligated mandatorily redeemable preferred capital securities of
subsidiaries or trusts holding solely subordinated debentures of the Company,"
as a separate line between liabilities and shareholders' equity. Prior to the
expiration date, almost all of the MIPS holders exercised their conversion
rights, resulting in the issuance of 7.0 million of our common shares and an
increase to our common equity of $207 million. The remaining MIPS were redeemed
for cash at $50 per security plus accumulated dividends.
- - Common Share Repurchases - In 2000, we repurchased and retired 17.9 million of
our common shares for a total cost of $536 million, or an average cost of
approximately $30 per share. The shares repurchased in 2000 represented 8% of
our total shares outstanding at the beginning of the year. In 1999, we
repurchased 11.1 million shares for a total cost of $356 million (approximately
$32 per share), and in 1998, our share repurchases totaled 3.8 million shares
for a total cost of $135 million (approximately $35 per share). The share
repurchases in each year were financed through a combination of internally
generated funds and new debt issuances. Since our issuance of 66.5 million
shares in April 1998 to consummate the merger with USF&G, we had repurchased and
retired 32.8 million shares for a total cost of $1.03 billion through Dec. 31,
2000.
- - Common Dividends - We declared common dividends totaling $232 million in 2000,
$235 million in 1999 and $226 million in 1998. In February 2001, The St. Paul's
board of directors increased our quarterly dividend rate to $0.28 per share,
a 4% increase over the 2000 quarterly rate of $0.27 per share. We have paid
dividends in every year since 1872. During those 129 years of uninterrupted
dividend payments, our dividend rate has increased in 69 years, including the
last 15 consecutive years.
Preferred Equity - Preferred shareholders' equity consisted of the par value of
the Series B preferred shares we issued to our Stock Ownership Plan (SOP) Trust,
less the remaining principal balance of the SOP Trust debt. During 2000, we made
$37 million in principal payments on the Trust.
Debt - Total debt outstanding at the end of 2000 of $1.65 billion was 12% higher
than the year-end 1999 total of $1.47 billion. During 2000, we issued $500
million of senior notes, the proceeds of which were used to repay commercial
paper and for other general corporate purposes. Of the $500 million issued, $250
million bears an interest rate of 7.875% and is due in April 2005, and $250
million bears an interest rate of 8.125% and is due in April 2010. Commercial
paper borrowings declined from $400 million at the end of 1999 to $138 million
at Dec. 31, 2000. In addition, we repaid $46 million of floating rate notes in
2000 that had been issued by a special purpose offshore reinsurance entity we
had created in 1999, and also repaid $13 million of mortgage debt associated
with two of our real estate investments. At Dec. 31, 2000, medium-term notes,
bearing a weighted average interest rate of 6.9%, accounted for $617 million, or
37%, of our consolidated debt outstanding. No medium-term notes matured during
the year.
At Dec. 31, 1999, consolidated debt outstanding was $206 million higher than the
year-end 1998 total of $1.26 billion. The increase was primarily due to the
issuance of additional commercial paper throughout the year, which brought the
year-end 1999 outstanding balance to $400 million, compared with $257 million at
Dec. 31, 1998. In addition, several of our real estate investment entities
entered into variable rate borrowings in 1999 totaling $64 million, and the
special purpose reinsurance entity issued the $46 million of floating rate
notes.
In March 1999, we purchased $34 million (principal amount) of our zero coupon
convertible notes from note holders for a total cash consideration of $21
million, representing the original issue price plus the original issue discount
accrued to the date of purchase. We purchased these notes at the option of the
note holders. The zero coupon note repurchases, along with several medium-term
note maturities totaling $20 million during the first half of the year, were
primarily funded by commercial paper borrowings.
Our total interest expense was $115 million in 2000, $96 million in 1999 and $75
million in 1998.
Capital Securities - These securities consist of company-obligated mandatorily
redeemable preferred securities issued by four business trusts wholly owned by
The St. Paul. Three of the trusts, acquired in the USF&G merger, each issued
$100 million of preferred securities bearing dividend rates of 8.5%, 8.47% and
8.312%, respectively. In 1999, we repurchased and retired securities from these
three trusts with an aggregate principal value of $79 million, comprised of the
following components: $27 million at 8.5%; $22 million at 8.47%; and $30 million
at 8.312%. The repurchases were made in open market transactions and were
primarily funded by commercial paper borrowings.
The fourth trust was acquired in our purchase of MMI in 2000. In 1997, MMI
issued $125 million of 30-year mandatorily redeemable preferred securities
through MMI Capital Trust I, formed for the sole purpose of issuing those
securities. The securities bear a 7.625% dividend rate and have a mandatory
redemption date of Dec. 15, 2027.
Our total dividend expense on capital securities was $31 million in 2000, $36
million in 1999 and $38 million in 1998.
Acquisitions and Divestitures - We purchased MMI in April 2000 for approximately
$206 million in cash and the assumption of $165 million of short-term debt and
capital securities. The short-term debt of $45 million was retired subsequent to
the acquisition. The cash portion of this transaction and the repayment of debt
was financed with internally generated funds. In addition, our purchase of
Pacific Select in February 2000 for approximately $37 million in cash was
financed with internally generated funds.
In May 2000, we completed the sale of our nonstandard auto operations for a
total cash consideration of approximately $175 million (net of a $25 million
dividend paid by these operations to our property-liability operations prior to
closing). In September 1999, we completed the sale of our standard personal
insurance operations to Metropolitan for net proceeds of approximately $272
million. Proceeds from both transactions were used for general corporate
purposes.
Our merger with USF&G in 1998 was a tax-free exchange accounted for as a
pooling-of-interests. We issued 66.5 million of our common shares for all of the
outstanding shares of USF&G. The transaction was valued at $3.7 billion, which
included the assumption of USF&G's debt and capital securities.
Capital Commitments - We have no current plans for major capital expenditures in
2001, other than possible additional repurchases of our common stock. If any
other expenditures were to occur, they would likely involve acquisitions
consistent with our specialty commercial focus. From Jan. 1, 2001, through Feb.
6, 2001, we repurchased 1.8 million common shares at a total cost of $86
million. As of Feb. 6, 2001, we had the capacity to make up to $89 million in
additional share repurchases under a repurchase program authorized by our board
of directors in May 2000. In February 2001, our board of directors authorized us
to repurchase up to an additional $500 million of common shares in private
transactions or on the open market. We made no major capital improvements during
any of the last three years.
THE ST. PAUL COMPANIES
Liquidity
Liquidity is a measure of our ability to generate sufficient cash flows to meet
the short- and long-term cash requirements of our business operations. Our
underwriting operations' short-term cash needs primarily consist of paying
insurance loss and loss adjustment expenses and day-to-day operating expenses.
Those needs are met through cash receipts from operations, which consist
primarily of insurance premiums collected and investment income. Our investment
portfolio is also a source of additional liquidity, through the sale of readily
marketable fixed maturities, equity securities and short-term investments, as
well as longer-term investments such as real estate and venture capital
holdings. After satisfying our cash requirements, excess cash flows from these
underwriting and investment activities are used to build the investment
portfolio and thereby increase future investment income.
Cash outflows from continuing operations totaled $555 million in 2000, compared
with outflows of $56 million in 1999 and cash inflows of $144 million in 1998.
The deterioration in 2000 was primarily due to significant loss payments in our
Reinsurance, Global Healthcare and International business segments and premium
payments totaling $345 million related to our corporate reinsurance program. Our
underwriting cash flows in 1999 and 1998 were negatively impacted by the
reductions in written premium volume and investment receipts in our
property-liability operations, as well as cash disbursements associated with our
merger with USF&G and the restructuring of our commercial insurance operations.
Also in 1999, we made premium payments totaling $129 million related to our
corporate reinsurance program. The sale of fixed-maturity investments to fund
operational cash flow requirements resulted in lower levels of investment cash
flows in each of the last three years.
On a long-term basis, we believe our operational cash flows in our
property-liability operations will continue to benefit from the corrective
pricing and underwriting actions that we have implemented over the last several
years in our property-liability operations. In addition, the restructuring and
expense reduction initiatives implemented in 1999 and 1998 are expected to
continue to benefit our operational cash flow position. Our financial strength
and conservative level of debt provide us with the flexibility and capacity to
obtain funds externally through debt or equity financings on both a short-term
and long-term basis.
We are not aware of any current recommendations by regulatory authorities that,
if implemented, might have a material impact on our liquidity, capital resources
or operations.
THE ST. PAUL COMPANIES
Exposures to Market Risk
Interest Rate Risk - Our exposure to market risk for changes in interest rates
is concentrated in our investment portfolio, and to a lesser extent, our debt
obligations. However, changes in investment values attributable to interest rate
changes are mitigated by corresponding and partially offsetting changes in the
economic value of our insurance reserves and debt obligations. We monitor this
exposure through periodic reviews of our asset and liability positions. Our
estimates of cash flows, as well as the impact of interest rate fluctuations
relating to our investment portfolio and insurance reserves, are modeled and
reviewed quarterly.
The following table provides principal runoff estimates by year for our Dec. 31,
2000, inventory of interest-sensitive financial instrument assets. Also provided
are the weighted average interest rates associated with each year's runoff.
Principal runoff projections for collateralized mortgage obligations were
prepared using third-party prepayment analyses. Runoff estimates for mortgage
passthroughs were prepared using average prepayment rates for the prior three
months. Principal runoff estimates for callable bonds are either to maturity or
to the next call date depending on whether the call was projected to be "in the
money" assuming no change in interest rates. No projection of the impact of
reinvesting the estimated cash flow runoff is included in the table, regardless
of whether the runoff source is a short-term or long-term fixed maturity
security.
We have assumed that our "available for sale" securities are similar enough to
aggregate those securities for purposes of this disclosure.
Weighted
Principal Average
December 31, 2000 Cash Flows Interest Rate
(In millions)
FIXED MATURITIES, SHORT-TERM INVESTMENTS AND MORTGAGE LOANS
2001 $4,376 5.7%
2002 1,981 7.2%
2003 1,916 7.3%
2004 1,686 7.8%
2005 1,773 6.5%
Thereafter 10,949 6.7%
-------
Total $22,681
-------
-------
Fair Value at Dec. 31, 2000 $22,089
The following table provides principal runoff estimates by year for our Dec. 31,
2000, inventory of interest-sensitive debt obligations and related weighted
average interest rates by stated maturity dates.
Weighted
Principal Average
December 31, 2000 Cash Flows Interest Rate
(In millions)
MEDIUM-TERM NOTES, ZERO COUPON NOTES AND SENIOR NOTES
2001 $195 8.1%
2002 49 7.5%
2003 67 6.5%
2004 55 7.1%
2005 428 7.5%
Thereafter 694 6.8%
-------
Total $1,488
-------
-------
Fair Value at Dec. 31, 2000 $1,475
Foreign Currency Exposure - Our exposure to market risk for changes in foreign
exchange rates is concentrated in our invested assets denominated in foreign
currencies. Cash flows from our foreign operations are the primary source of
funds for our purchase of these investments. We purchase these investments
primarily to hedge insurance reserves and other liabilities denominated in the
same currency, effectively reducing our foreign currency exchange rate exposure.
At Dec. 31, 2000, approximately 7.2% of our invested assets were denominated in
foreign currencies, with no individual currency accounting for more than 4% of
that total.
Equity Price Risk - Our portfolio of marketable equity securities, which we
carry on our balance sheet at market value, has exposure to price risk. This
risk is defined as the potential loss in market value resulting from an adverse
change in prices. Our objective is to earn competitive relative returns by
investing in a diverse portfolio of high-quality, liquid securities. Portfolio
characteristics are analyzed regularly and market risk is actively managed
through a variety of modeling techniques. Our holdings are diversified across
industries, and concentrations in any one company or industry are limited by
parameters established by senior management.
Our portfolio of venture capital investments also has exposure to market risks,
primarily relating to the viability of the various entities in which we have
invested. These investments by their nature involve more risk than other
investments, and we actively manage our market risk in a variety of ways. First,
we allocate a comparatively small amount of funds to venture capital. At the end
of 2000, the cost of these investments accounted for only 3% of total invested
assets. Second, the investments are diversified to avoid concentration of risk
in a particular industry. Third, we perform extensive research prior to
investing in a new venture to gauge prospects for success. Fourth, we regularly
monitor the operational results of the entities in which we have invested.
Finally, we generally sell our holdings in these firms soon after they become
publicly traded, thereby reducing exposure to further market risk.
At Dec. 31, 2000, our marketable equity securities and venture capital
investments were recorded at their fair value of $2.53 billion. A hypothetical
10% decline in each stock's price would have resulted in a $253 million impact
on fair value.
Equity-Indexed Annuity Products - F&G Life's equity-indexed annuity products are
tied to the performance of leading market indices. Interest is credited to the
equity portion of these annuities on specified policy anniversaries, based on
the formulas dictated by the policy contract, and calculated using the average
change in the indices during the specified period (one or two years). F&G Life
hedges its exposure by purchasing options with terms similar to the index
component to provide it with the same return as it guarantees to the annuity
contract holder, subject to minimums guaranteed in the annuity contract. At Dec.
31, 2000, F&G Life held options with a notional amount of $1.14 billion, with a
market value of $32 million.
THE ST. PAUL COMPANIES
Impact of Accounting Pronouncements to Be Adopted in the Future
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," which amended SFAS
No. 133 to make it effective for all quarters of fiscal years beginning after
June 15, 2000, and prohibits retroactive application to financial statements of
prior periods. In June 2000, the FASB issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," as an additional
amendment to SFAS No. 133, to address a limited number of issues causing
implementation difficulties. We intend to implement the provisions of SFAS No.
133, as amended, in the first quarter of 2001. Our property-liability operations
currently have limited involvement with derivative instruments, primarily for
purposes of hedging against fluctuations in market indices, foreign currency
exchange rates and interest rates. Our life insurance operation purchases
options to hedge its obligation to pay credited rates on equity-indexed annuity
products. We expect the impact of adoption to be immaterial to our financial
position and results of operations for the period of adoption.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of FASB Statement No. 125." The Statement revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it retains most of the provisions of SFAS No.
125 without reconsideration. The Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001, with the collateral and disclosure requirements effective for
fiscal years ending after Dec. 15, 2000. We intend to implement SFAS No. 140 in
the periods during which its provisions become effective, and we expect the
impact of adoption to be immaterial to our financial position and results of
operations for future periods.
Forward-Looking Statement Disclosure
This discussion contains certain forward-looking statements within the meaning
of the Private Litigation Reform Act of 1995. Forward-looking statements are
statements other than historical information or statements of current condition.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks"
or "estimates," or variations of such words and similar expressions are also
intended to identify forward-looking statements. Examples of these
forward-looking statements include statements concerning: market and other
conditions and their effect on future premiums, revenues, earnings, cash flow
and investment income; price increases, improved loss experience and expense
savings resulting from the restructuring actions announced in recent years.
In light of the risks and uncertainties inherent in future projections, many of
which are beyond our control, actual results could differ materially from those
in forward-looking statements. These statements should not be regarded as a
representation that anticipated events will occur or that expected objectives
will be achieved. Risks and uncertainties include, but are not limited to, the
following: competitive considerations, including the ability to implement price
increases and possible actions by competitors; general economic conditions
including changes in interest rates and the performance of financial markets;
changes in domestic and foreign laws, regulations and taxes; changes in the
demand for, pricing of, or supply of insurance or reinsurance; catastrophic
events of unanticipated frequency or severity; loss of significant customers;
judicial decisions and rulings; and various other matters. We undertake no
obligation to release publicly the results of any future revisions we may make
to forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
BAR GRAPHS + PIE CHART
INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE
(In dollars)
Record realized investment gains, improved underwriting results in our
property-liability operations and earnings growth at The John Nuveen Company all
contributed to the solid increase in our earnings in 2000.
96 97 98 99 00
$4.07 4.22 0.78 3.07 4.32
COMBINED RATIO
The improvement in our 2000 combined ratio primarily reflects the progress we've
made in reducing insurance loss costs and improving operational efficiencies.
96 97 98 99 00
Loss Ratio 68.9 69.8 82.2 72.9 70.0
Expense Ratio 31.9 33.5 35.2 35.0 34.8
----- ----- ----- ----- -----
100.8 103.3 117.4 107.9 104.8
NET INVESTMENT INCOME
(Dollars in millions)
Our purchase of MMI in 2000 added approximately $1.1 billion of high-quality
bonds to our property-liability investment portfolio. Investment income on those
bonds, coupled with higher yields on new investments, served to substantially
offset a decline in investment income resulting from the sale of bonds during
the year to fund a portion of our operational cash needs.
96 97 98 99 00
$1,234 1,319 1,293 1,256 1,247
PROPERTY-LIABILITY BOND PORTFOLIO RATINGS
Our high-quality bond portfolio produced pretax investment income of $1.2
billion in 2000. Taxable securities, which comprised 68% of our portfolio at
year-end 2000, have accounted for the majority of new bond purchases in recent
years.
AAA AA A BBB Other
51% 18% 16% 9% 6%
COMMON SHAREHOLDERS' EQUITY
(Dollars in billions)
Our strong net income of just under $1 billion in 2000 pushed equity past the $7
billion mark at the end of the year -- a record high for The St. Paul.
96 97 98 99 00
$5.6 6.6 6.6 6.4 7.2
TOTAL CAPITALIZATION
(Dollars in billions)
A strong capital base and conservative levels of debt have long been a hallmark
of The St. Paul, providing the flexibility to respond to new opportunities that
emerge in the marketplace.
96 97 98 99 00
Debt $1.2 1.3 1.3 1.5 1.6
Redeemable Preferred
Securities and Equity 6.1 7.1 7.1 6.9 7.6
--- --- --- --- ---
$7.3 8.4 8.4 8.4 9.2
DIVIDENDS PAID PER COMMON SHARE
(In dollars)
We have paid a common dividend every year since 1872; in 69 of those years,
including each of the last 15, we've increased our dividend.
96 97 98 99 00
$0.86 0.925 0.985 1.03 1.07
SHAREHOLDER INFORMATION
CORPORATE PROFILE
The St. Paul is a group of companies providing commercial property-liability and
life insurance and nonlife reinsurance products and services worldwide.
YOUR DIVIDENDS
A quarterly dividend of $0.28 per share was declared on Feb. 6, 2001, payable
April 17, 2001, to shareholders of record as of March 31, 2001.
Dividends have been paid every year since 1872. During those 129 years of
uninterrupted dividend payments, total payments have been increased in 69 years.
The chart at the lower right contains dividend information for 2000 and 1999.
AUTOMATIC DIVIDEND REINVESTMENT PROGRAM
This program provides a convenient way for shareholders to increase their
holding of company stock. Approximately 55 percent of shareholders of record
participate.
An explanatory brochure and enrollment card may be obtained by calling our stock
transfer agent -- Wells Fargo Bank Minnesota, N.A. at 888-326-5102, or contact
them at the address below.
STOCK TRANSFER AGENT AND REGISTRAR
For address changes, dividend checks, direct deposits of dividends, account
consolidations, registration changes, lost stock certificates, stock holdings
and the Dividend Reinvestment Program, please contact:
Wells Fargo Bank Minnesota, N.A.
Shareowner Services Department
P.O. Box 64854
Saint Paul, MN 55164-0854
Telephone: 888-326-5102
www.wellsfargo.com/com/shareowner_services
STOCK TRADING
The company's stock is traded nationally on the New York Stock Exchange, where
it is assigned the symbol SPC. The stock is also listed on the London Stock
Exchange under the symbol SPA. The number of holders of record, including
individual owners, of our common stock was 18,470 as of Feb. 1, 2001.
Options on the company's stock trade on the Chicago Board Options Exchange under
the symbol SPQ.
ANNUAL SHAREHOLDERS' MEETING
The annual shareholders' meeting will be at 2:00 p.m., Tuesday, May 1, 2001, at
the corporate headquarters, 385 Washington Street, Saint Paul, Minn. A proxy
statement will be sent around March 30 to each shareholder of record on March
15, 2001.
FORM 10-K AVAILABLE
The Form 10-K report filed with the Securities and Exchange Commission is
available without charge to shareholders upon request. Write to our corporate
secretary: Bruce Backberg, The St. Paul Companies, 385 Washington Street, Saint
Paul, MN 55102.
ADDITIONAL INFORMATION
For additional investor relations information, shareholders may contact Laura
Gagnon, vice president - finance and investor relations at (651) 310-7696. Or,
general information about the company is available on our Web site
(www.stpaul.com).
STOCK PRICE AND DIVIDEND RATE
The table below sets forth the amount of cash dividends declared per share and
the high and low closing sales prices of company stock for each quarter during
the past two years.
Cash
Dividend
2000 High Low Declared
1st Quarter $34 1/4 $21 3/4 $0.27
2nd Quarter 39 3/16 29 7/8 0.27
3rd Quarter 50 5/8 34 5/8 0.27
4th Quarter 56 3/8 44 1/16 0.27
Cash dividend paid in 2000 was $1.07.
Cash
Dividend
1999 High Low Declared
1st Quarter $35 3/4 $28 9/16 $0.26
2nd Quarter 36 3/4 28 11/16 0.26
3rd Quarter 33 3/4 27 1/2 0.26
4th Quarter 36 1/16 25 9/16 0.26
Cash dividend paid in 1999 was $1.03.