UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
----- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
--------------
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ -----------
Commission File Number 0-3021
------
THE ST. PAUL COMPANIES, INC.
-----------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0518860
---------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
385 Washington St., Saint Paul, MN 55102
---------------------------------- --------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (651) 310-7911
--------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
The number of shares of the Registrant's Common Stock, without par
value, outstanding at May 9, 2001, was 214,437,297.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Consolidated Statements of Income (Unaudited),
Three Months Ended March 31, 2001 and 2000 3
Consolidated Balance Sheets, March 31, 2001
(Unaudited) and December 31, 2000 4
Consolidated Statements of Shareholders' Equity,
Three Months Ended March 31, 2001
(Unaudited) and Twelve Months Ended
December 31, 2000 6
Consolidated Statements of Comprehensive Income
(Unaudited), Three Months Ended March 31, 2001
and 2000 7
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 2001 and 2000 8
Notes to Consolidated Financial Statements
(Unaudited) 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 25
PART II. OTHER INFORMATION
Item 1 through Item 6 40
Signatures 41
EXHIBIT INDEX 42
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Unaudited
(In millions, except per share data)
Three Months Ended
March 31
------------------
2001 2000
------ ------
Revenues:
Premiums earned $1,627 $1,356
Net investment income 335 319
Asset management 85 93
Realized investment gains 77 335
Other 41 43
------ ------
Total revenues 2,165 2,146
------ ------
Expenses:
Insurance losses and loss adjustment expenses 1,183 1,028
Policy acquisition expenses 380 337
Operating and administrative expenses 304 261
------ ------
Total expenses 1,867 1,626
------ ------
Income from continuing operations
before income taxes 298 520
Income tax expense 89 171
------ ------
Income from continuing operations 209 349
Discontinued operations:
Operating gain (loss), net of taxes (1) 15
Loss on disposal, net of taxes (6) (6)
------ ------
Income (loss) from discontinued
operations, net of taxes (7) 9
------ ------
Net income $202 $358
====== ======
Basic earnings per common share:
Income from continuing operations $0.95 $1.56
Discontinued operations, net of taxes (0.04) 0.04
------ ------
Net income $0.91 $1.60
====== ======
Diluted earnings per common share:
Income from continuing operations $0.90 $1.47
Discontinued operations, net of taxes (0.03) 0.04
------ ------
Net income $0.87 $1.51
====== ======
Dividends declared on common stock $0.28 $0.27
====== ======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
Restated
March 31, December 31,
ASSETS 2001 2000
- ---------- --------- ------------
(Unaudited)
Investments:
Fixed maturities, at estimated fair value $16,123 $15,937
Equities, at estimated fair value 1,211 1,466
Real estate and mortgage loans 999 1,025
Venture capital, at estimated fair value 994 1,064
Securities lending collateral 1,185 1,231
Other investments 116 229
Short-term investments, at cost 923 1,100
------- -------
Total investments 21,551 22,052
Cash 53 52
Reinsurance recoverables:
Unpaid losses 4,869 4,651
Paid losses 359 324
Ceded unearned premiums 753 814
Receivables:
Underwriting premiums 2,921 2,937
Interest and dividends 276 277
Other 229 181
Deferred policy acquisition expenses 607 576
Deferred income taxes 948 930
Office properties and equipment, at cost less
accumulated depreciation of $454 (2000; $452) 492 492
Goodwill 523 510
Asset management securities held for sale 32 29
Other assets 1,935 1,677
------- -------
Total assets $35,548 $35,502
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In millions)
Restated
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
- ------------------------------------ --------- -----------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $18,235 $18,196
Unearned premiums 3,804 3,648
------- -------
Total insurance reserves 22,039 21,844
Debt 1,823 1,647
Payables:
Reinsurance premiums 864 1,060
Income taxes 172 170
Accrued expenses and other 939 1,031
Securities lending collateral 1,185 1,231
Other liabilities 1,066 955
------- -------
Total liabilities 28,088 27,938
------- -------
Company-obligated mandatorily redeemable preferred
securities of trusts holding solely subordinated
debentures of the Company 337 337
------- -------
Shareholders' equity:
Preferred:
SOP convertible preferred stock;
1.45 shares authorized; 0.9 shares
outstanding (0.8 shares in 2000) 115 117
Guaranteed obligation - SOP (57) (68)
------- -------
Total preferred shareholders' equity 58 49
------- -------
Common:
Common stock, 480 shares authorized;
215 shares outstanding (218 shares in 2000) 2,219 2,238
Retained earnings 4,245 4,243
Accumulated other comprehensive income,
net of taxes:
Unrealized appreciation 652 765
Unrealized loss on foreign currency translation (49) (68)
Unrealized loss on derivatives (2) -
------- -------
Total accumulated other comprehensive income 601 697
------- -------
Total common shareholders' equity 7,065 7,178
------- -------
Total shareholders' equity 7,123 7,227
------- -------
Total liabilities, redeemable preferred
securities and shareholders' equity $35,548 $35,502
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In millions)
Three Twelve
Months Ended Months Ended
March 31 December 31
----------- ------------
2001 2000
----------- ------------
(Unaudited)
Preferred shareholders' equity:
SOP convertible preferred stock:
Beginning of period $117 $129
Redemptions during period (2) (12)
------ ------
End of period 115 117
------ ------
Guaranteed obligation - SOP:
Beginning of period (68) (105)
Principal payments 11 37
------ ------
End of period (57) (68)
------ ------
Total preferred shareholders' equity 58 49
------ ------
Common shareholders' equity:
Common stock:
Beginning of period 2,238 2,079
Stock issued:
Stock incentive plans 22 95
Preferred shares redeemed 3 23
Conversion of company-obligated
preferred securities - 207
Reacquired common shares (44) (170)
Other - 4
------ ------
End of period 2,219 2,238
------ ------
Retained earnings:
Beginning of period 4,243 3,827
Net income 202 993
Dividends declared on common stock (60) (232)
Dividends declared on preferred stock, net of taxes (2) (8)
Reacquired common shares (144) (366)
Tax benefit on employee stock
options, and other changes 8 40
Premium on preferred shares redeemed (2) (11)
------ ------
End of period 4,245 4,243
------ ------
Unrealized appreciation, net of taxes:
Beginning of period 765 568
Change during the period (113) 197
------ ------
End of period 652 765
------ ------
Unrealized gain (loss) on foreign
currency translation, net of taxes:
Beginning of period (68) (26)
Currency translation adjustments 19 (42)
------ ------
End of period (49) (68)
------ ------
Unrealized loss on derivatives, net of taxes:
Beginning of period - -
Change during the period (2) -
------ ------
End of period (2) -
------ ------
Total common shareholders' equity 7,065 7,178
------ ------
Total shareholders' equity $7,123 $7,227
====== ======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Unaudited
(In millions)
Three Months Ended
March 31
--------------------
2001 2000
------ ------
Net income $202 $358
------ ------
Other comprehensive income (loss), net of taxes:
Change in unrealized appreciation (113) 142
Change in unrealized loss on
foreign currency translation 19 (14)
Change in unrealized loss on derivatives (2) -
------ ------
Other comprehensive income (loss) (96) 128
------ ------
Comprehensive income $106 $486
====== ======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In millions)
Three Months Ended
March 31
---------------------
2001 2000
------- -------
OPERATING ACTIVITIES
Net income $202 $358
Adjustments:
Loss (income) from discontinued operations 7 (9)
Change in insurance reserves 205 (20)
Change in reinsurance balances (453) (232)
Realized investment gains (77) (335)
Change in deferred policy acquisition costs (31) (23)
Change in accounts payable and accrued expenses (80) (192)
Change in income taxes payable/refundable 19 106
Provision for federal deferred tax expense 98 28
Depreciation and amortization 26 21
Changes in other assets and liabilities (110) 81
------- -------
Net Cash Used by Continuing Operations (194) (217)
Net Cash Provided by Discontinued Operations 39 29
------- -------
Net Cash Used by Operating Activities (155) (188)
------- -------
INVESTING ACTIVITIES
Purchase of investments (1,532) (1,593)
Proceeds from sales and maturities of investments 1,634 1,933
Net sale of short-term investments 181 105
Change in open security transactions 37 (19)
Purchases of office properties and equipment (17) (15)
Sales of office purchases and equipment - 2
Acquisitions - (37)
Other (15) 55
------- -------
Net Cash Provided by Continuing Operations 288 431
Net Cash Used by Discontinued Operations (264) (128)
------- -------
Net Cash Provided by Investing Activities 24 303
------- -------
FINANCING ACTIVITIES
Dividends paid on common and preferred stock (61) (61)
Proceeds from issuance of debt 164 96
Repayment of debt (11) (46)
Repurchase of common shares (188) (331)
Other (16) 39
------- -------
Net Cash Used by Continuing Operations (112) (303)
Net Cash Provided by Discontinued Operations 244 117
------- -------
Net Cash Provided (Used) by Financing Activities 132 (186)
------- -------
Increase (decrease) in cash 1 (71)
Cash at beginning of period 52 105
------- -------
Cash at end of period $ 53 $ 34
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
March 31, 2001
Note 1 - Basis of Presentation
- ------------------------------
The financial statements include The St. Paul Companies, Inc. and
subsidiaries (The St. Paul or the company), and have been
prepared in conformity with generally accepted accounting
principles.
These consolidated financial statements rely, in part, on
estimates. In the opinion of management, all necessary
adjustments, consisting of normal recurring adjustments, have
been reflected for a fair presentation of the results of
operations, financial position and cash flows in the accompanying
unaudited consolidated financial statements. The results for the
period are not necessarily indicative of the results to be
expected for the entire year.
On April 26, 2001, we announced that our subsidiary, St. Paul
Fire and Marine Insurance Company, had reached a definitive
agreement to sell its subsidiary, Fidelity and Guaranty Life
Insurance Company ("F&G Life") to Old Mutual plc, a London-based
international financial services company. F&G Life's results of
operations have been reclassified to discontinued operations for
all periods presented in this report. On our consolidated
balance sheets as of March 31, 2001 and Dec. 31, 2000, F&G Life's net
assets were included in "Other Assets," classified as net assets of
discontinued operations. See Footnote 12.
Reference should be made to the "Notes to Consolidated Financial
Statements" in our annual report to shareholders for the year
ended Dec. 31, 2000. The amounts in those notes have not changed
materially except as a result of transactions in the ordinary
course of business or as otherwise disclosed in these notes.
Some amounts in the 2000 consolidated financial statements have
been reclassified to conform with the 2001 presentation. These
reclassifications had no effect on net income, comprehensive
income or shareholders' equity, as previously reported.
In June, 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities.
This statement requires all derivatives to be recorded at fair
value on the balance sheet and establishes new accounting rules
for hedging. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FAS No. 133," which amended
SFAS No. 133 to make it effective for all quarters of fiscal
years beginning after June 15, 2000. In June 2000, the FASB
issued FASB 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. Effective Jan. 1, 2001, we
adopted the provisions of SFAS No. 133, as amended. See Footnote
11 on page 20 and Footnote 6 on page 14 of this report for
further information regarding the impact of the adoption on our
financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 2 - Earnings Per Common Share
- ----------------------------------
The following table provides the calculation of our earnings per
common share for the three months ended March 31, 2001 and 2000:
Three Months Ended
March 31
------------------
2001 2000
------- -------
(In millions, except per share data)
EARNINGS
Basic:
Net income, as reported $202 $358
Preferred stock dividends, net of taxes (2) (2)
Premium on preferred shares redeemed (2) (4)
------- -------
Net income available to common shareholders $198 $352
======= =======
Diluted:
Net income available to common shareholders $198 $352
Effect of dilutive securities:
Convertible preferred stock 2 2
Zero coupon convertible notes 1 1
Convertible monthly income preferred securities - 2
------- -------
Net income available to
common shareholders, as adjusted $201 $357
======= =======
COMMON SHARES
Basic:
Weighted average common shares outstanding 217 220
======= =======
Diluted:
Weighted average common shares outstanding 217 220
Effect of dilutive securities:
Stock options 4 1
Convertible preferred stock 6 7
Zero coupon convertible notes 3 2
Convertible monthly income
preferred securities - 7
------- -------
Total 230 237
======= =======
EARNINGS PER SHARE
Basic $0.91 $1.60
======= =======
Diluted $0.87 $1.51
======= =======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 3 - Investments
- --------------------
Investment Activity. Following is a summary of our investment
purchases, sales and maturities for continuing operations.
Three Months Ended March 31
---------------------------
2001 2000
-------- --------
(In millions)
Purchases:
Fixed maturities $931 $778
Equities 495 587
Real estate and mortgage loans 41 -
Venture capital 63 225
Other investments 2 3
-------- -------
Total purchases 1,532 1,593
-------- -------
Proceeds from sales and maturities:
Fixed maturities 933 810
Equities 498 573
Real estate and mortgage loans 51 77
Venture capital 7 460
Other investments 145 13
-------- --------
Total sales and maturities 1,634 1,933
-------- --------
Net sales $(102) $(340)
======== ========
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 3 - Investments (continued)
- -------------------------------
Change in Unrealized Appreciation. The increase (decrease) in
unrealized appreciation of investments recorded in common
shareholders' equity was as follows:
Restated
Three Months Ended Twelve Months Ended
March 31, 2001 December 31, 2000
------------------ -------------------
(In millions)
Fixed maturities $186 $467
Equities (251) (198)
Venture capital (131) (61)
Other (48) 47
-------- --------
Total change in pretax
unrealized appreciation
on continuing operations (244) 255
Change in deferred taxes 92 (92)
-------- --------
Total change in unrealized
appreciation on continuing
operations, net of taxes (152) 163
Change in pretax unrealized
appreciation on discontinued operations 60 52
Change in deferred taxes (21) (18)
-------- --------
Total change in unrealized
appreciation on discontinued
operations, net of taxes 39 34
-------- --------
Total change in unrealized
appreciation, net of taxes $(113) $197
======== ========
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 4 - Income Taxes
- ---------------------
The components of income tax expense (benefit) on income from
continuing operations were as follows :
Three Months Ended
March 31
------------------
2001 2000
------- -------
(In millions)
Federal current tax expense (benefit) $(12) $134
Federal deferred tax expense 98 28
------- -------
Total federal income tax expense 86 162
Foreign income tax expense - 6
State income tax expense 3 3
------- -------
Total income tax expense $ 89 $171
======= =======
Note 5 - Contingent Liabilities
- -------------------------------
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. Although it is possible that the settlement of a
contingency may be material to our results of operations and
liquidity in the period in which the settlement occurs, we
believe that the total amounts that we and our subsidiaries will
ultimately have to pay in all of these lawsuits will have no
material effect on our overall financial position.
In some cases, plaintiffs seek to establish coverage for their
liability under environmental protection laws. See
"Environmental and Asbestos Claims" in Management's Discussion
and Analysis for information on these claims.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 6 - Debt
- -------------
Debt consists of the following:
March 31, December 31,
2001 2000
---------------- ----------------
Book Fair Book Fair
Value Value Value Value
----- ------ ----- ------
(In millions)
Medium-term notes $ 606 $ 619 $ 617 $ 619
Commercial paper 275 275 138 138
7-7/8% senior notes 249 267 249 261
8-1/8% senior notes 249 276 249 267
8-3/8% senior notes 150 151 150 151
Zero coupon convertible notes 99 109 98 95
7-1/8% senior notes 80 83 80 82
Variable rate borrowings 64 64 64 64
Real estate debt 29 29 2 2
------ ------ ------ ------
Total obligations 1,801 1,873 $1,647 $1,679
====== ======
Fair value of interest
rate swap agreements 22 22
------ ------
Total debt reported
on balance sheet $1,823 $1,895
====== ======
At March 31, 2001, we were party to a number of 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 March 31, 2001 was an
asset of $22 million. Prior to our adoption of SFAS No. 133, as
amended, on Jan. 1, 2001, the fair value of these swap agreements
was not recorded on our balance sheet. Upon adoption, we
reflected the fair value of these swap agreements as an increase
to other assets and a corresponding increase to debt on our
balance sheet.
Note 7 - Segment Information
- ----------------------------
We have seven reportable business segments in our property-
liability insurance operation, consisting of the Commercial Lines
Group, Global Surety, Global Health Care, Other Specialty,
International, Reinsurance and Investment Operations. We also
have an asset management segment (The John Nuveen Company). We
evaluate the performance of our property-liability underwriting
segments based on GAAP underwriting results. The property-
liability investment operation is disclosed as a separate
reportable segment because that operation is managed at the
corporate level and the invested assets, net investment income
and realized gains are not allocated to individual underwriting
segments. The asset management segment is evaluated based on its
pretax income, which includes investment income.
As discussed in Note 12 on page 21 of this report, on April 26,
2001, we announced a definitive agreement to sell F&G Life, which
comprises our life insurance segment. As a result, F&G Life's
results of operations were included in discontinued operations on
our statements of income included in this report for the three
months ended March 31, 2001 and 2000.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
- ---------------------------------------
The reportable underwriting business segments in our property-
liability operation are reported separately because they offer
insurance products to unique customer classes and utilize
different underwriting criteria and marketing strategies. For
example, the Commercial Lines Group provides "commodity-type"
insurance products to the small and medium-sized commercial
markets. By contrast, each of our Specialty segments (Global
Surety, Global Health Care and Other Specialty) market
specialized insurance products and services tailored to meet the
individual needs of specific customer groups, such as doctors,
lawyers, officers and directors, as well as technology firms and
government entities. Customers in the Specialty segments
generally require specialized underwriting expertise and claim
settlement services.
The tabular information that follows provides revenue and income
data from continuing operations for each of our business segments
for the first quarters of 2001 and 2000. In the first quarter of
2001, we reclassified certain business that had previously been
included in the Other Specialty segment to the International
segment to more accurately reflect the manner in which this
business is managed. Data for 2000 in the tables have been
reclassified to be consistent with the 2001 presentation.
Three Months Ended
March 31
------------------
2001 2000
--------- --------
Revenues (In millions)
Property-liability insurance:
Commercial Lines Group $ 421 $ 388
Global Surety 104 113
Global Health Care 182 133
Other Specialty 424 329
International 170 77
------ ------
Total primary insurance operations 1,301 1,040
Reinsurance 326 316
------ ------
Total property-liability premiums earned 1,627 1,356
------ ------
Investment Operations:
Net investment income 330 318
Realized investment gains 52 331
------ ------
Total investment operations 382 649
Other 36 30
------ ------
Total property-liability insurance 2,045 2,035
------ ------
Asset Management 87 100
------ ------
Total reportable segments 2,132 2,135
Parent company, other operations
and consolidating eliminations 33 11
------ ------
Total revenues $2,165 $2,146
====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
- ---------------------------------------
During the first quarter of 2000, we eliminated the one - quarter
reporting lag for our reinsurance business in the United Kingdom
("St. Paul Re - UK"). First-quarter 2000 consolidated results,
and our Reinsurance segment results, therefore included six
months' revenues and expenses for St. Paul Re - UK. The
incremental impact of this change resulted in an additional $146
million of net written premiums, $53 million of earned premiums,
$32 million of loss and loss adjustment expenses; $19 million of
underwriting expenses, $2 million of GAAP underwriting profit;
$64 million of revenues; and $17 million of income before taxes
being recorded in the first quarter of 2000.
Three Months Ended
March 31
-------------------
2001 2000
-------- --------
(In millions)
Income (Loss) Before Income Taxes
Property-liability insurance:
Commercial Lines Group $ 72 $ (22)
Global Surety 17 19
Global Health Care (130) (19)
Other Specialty 10 (21)
International (38) (12)
------ ------
Total primary insurance operations (69) (55)
Reinsurance (18) (44)
------ ------
Total GAAP underwriting result (87) (99)
------ ------
Investment Operations:
Net investment income 330 318
Realized investment gains 52 331
------ ------
Total investment operations 382 649
------ ------
Other (4) (32)
------ ------
Total property-liability insurance 291 518
------ ------
Asset Management:
Pretax income before minority interest 45 43
Minority interest (10) (10)
------ ------
Total asset management 35 33
------ ------
Total reportable segments 326 551
Parent company, other operations
and consolidating eliminations (28) (31)
------ ------
Total income before income taxes $298 $520
====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 8 - Reinsurance
- --------------------
Our consolidated 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
involves transferring certain insurance risks (along with the
related written and earned premiums) we have underwritten to
other insurance companies who agree to share these risks. The
primary purpose of ceded reinsurance is to protect us against
earnings volatility and from potential losses in excess of the
amount we are prepared to accept.
We expect those with whom we have ceded reinsurance to honor
their obligations. In the event these companies are unable to
honor their obligations, we will pay these amounts. We have
established allowances for possible nonpayment of amounts due to
us.
In both 2001 and 2000, we were party to 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 is triggered when our insurance losses
and loss adjustment expenses spanning all segments of our
business reach a certain level. In addition, our Reinsurance
segment was party to separate aggregate excess-of-loss
reinsurance treaties unrelated to the corporate program in both
years. All of these treaties are collectively referred to
hereafter as the "reinsurance treaties."
Under terms of the reinsurance treaties, we transfer, or "cede,"
insurance losses and loss adjustment expenses to our reinsurers,
along with the related written and earned premiums. In the first
quarter of 2001, coverage under the corporate program was not
triggered; but we ceded $9 million and $3 million of written and
earned premiums, respectively, representing the initial premium
paid to our reinsurer. Under the separate Reinsurance segment
treaty, we ceded $3 million of written and earned premiums and
$26 million of insurance losses and loss adjustment expenses, for
a net benefit of $23 million, in the first quarter of 2001.
Our first-quarter 2000 income from continuing operations
benefited from cessions made under the corporate program, and
cessions made under the separate treaty exclusive to our
Reinsurance segment. Under the corporate program, we ceded
written premiums of $80 million, earned premiums of $65 million,
and insurance losses and loss adjustment expenses of $111
million, resulting in a net benefit $46 million to our pretax
income from continuing operations. The losses and loss
adjustment expenses ceded and $61 million of the earned premiums
ceded under the corporate program in the first quarter of 2000
were the result of adverse development on losses originally
incurred during the 1999 accident year. Under the separate
Reinsurance segment treaty, we ceded written and earned premiums
of $17 million, and insurance losses and loss adjustment expenses
of $32 million, resulting in a net pretax benefit of $15 million.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 8 - Reinsurance (continued)
- -------------------------------
The effect of assumed and ceded reinsurance on premiums written,
premiums earned and insurance losses, loss adjustment expenses
follows:
Three Months Ended
March 31
------------------
(In millions) 2001 2000
----- -----
Written premiums:
Direct $1,613 $1,122
Assumed 570 595
Ceded (337) (317)
----- -----
Net premiums written $1,846 $1,400
===== =====
Earned premiums:
Direct $1,482 $1,161
Assumed 522 499
Ceded (377) (304)
----- -----
Total premiums earned $1,627 $1,356
===== =====
Insurance losses and loss
adjustment expenses:
Direct $1,220 $839
Assumed 411 573
Ceded (448) (384)
----- -----
Total net insurance losses and
loss adjustment expenses $1,183 $1,028
===== =====
Note 9 - Restructuring Charges
- ------------------------------
Since 1998, we have recorded three restructuring charges related
to actions taken to improve our operations. Note 15 in our 2000
Annual Report to Shareholders provides more detailed information
regarding these charges.
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 charges, $33 million in occupancy-
related charges and $2 million in equipment charges.
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, primarily in our commercial
insurance operations. The remaining charge of $8 million related
to costs to be incurred to exit lease obligations.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 9 - Restructuring Charges (continued)
- -----------------------------------------
In connection with our merger with USF&G, in the second quarter
of 1998 we recorded a pretax charge to earnings of $292 million,
primarily consisting of severance and other employee-related
costs related to the anticipated termination of approximately
2,000 positions, facilities exit costs, asset impairments and
transaction costs.
As of March 31, 2001, all actions have been taken and all
obligations have been met regarding these three charges, with the
exception of certain remaining lease commitments. During the first
quarter, we reduced the reserve by $1 million related to sublease
and buyout activity which has reduced our estimated remaining
lease commitments. We expect to be obligated under certain
lease commitments for at least 7 years.
The following presents a rollforward of activity related to these
commitments:
Original Reserve Reserve
Pre-tax at Dec. 31, at Mar. 31,
(In millions) Charge 2000 Payments Adjustment 2001
----------- -------- ---------- -------- ---------- ----------
Lease
commitments
charged to
earnings: $75 $43 $(3) $(1) $39
==== ==== ==== === ====
Note 10 - Acquisitions
- -----------------------
In February 2000, we closed on our purchase 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. Pacific Select's results of
operations from the date of purchase are included in our
consolidated results.
In April 2000, we closed on our acquisition of MMI Companies,
Inc. (MMI), a Deerfield, Illinois-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
final purchase price adjustments resulted in goodwill of approximately
$89 million, which we expect to amortize on a straight-line basis
over 15 years. MMI's results of operations from the date of
purchase are included in our consolidated results.
In connection with the MMI purchase, we established a reserve of
$28 million, including $4 million in employee-related costs and
$24 million in occupancy-related costs. The employee-related
costs represent 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 Mar. 31, 2001, 111 employees had been terminated,
with payments totaling $4 million. Our remaining obligations for
employee-related costs at MMI are expected to be less than $1
million.
The occupancy-related cost represents 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 ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 10 - Acquisitions (continued)
- ---------------------------------
The following presents a rollforward of activity related to these
accruals:
(In millions)
-----------
Original Reserve Reserve
Charges to Pretax at Dec. 31, at Mar. 31,
earnings: Charge 2000 Payments Adjustments 2001
--------- -------- ---------- -------- ----------- ----------
Employee-
related $ 4 $ 1 $(1) $ - $ -
Occupancy-
related 24 23 (6) (8) 9
----- ----- ----- ----- -----
Total $28 $24 $(7) $(8) $ 9
===== ===== ===== ===== =====
During the first quarter of 2001, we entered into a lease buyout
related to a portion of the space, resulting in a cash payment
of $5 million. We also reduced the reserve by $8 million,
primarily representing additional lease payments we were no
longer obligated to make related to the buyout.
During 2000, we experienced severe prior year loss development on
the reserves acquired from MMI, primarily related to its major
accounts business. This was consistent with the adverse prior
year development experienced on the remainder of our Global
Health Care major accounts business. The major accounts business
serves large health care entities, which have recently suffered
from increasingly significant amounts awarded in jury verdicts.
As a result of this overall deterioration, we are in the process
of performing a comprehensive review of our entire Health Care
segment. This review, as well as our evaluation of the ongoing
strategic value of Unionamerica, MMI's United Kingdom - based
subsidiary, 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.
Note 11 - Adoption of Accounting Pronouncement
- -----------------------------------------------
Effective Jan. 1, 2001, we adopted the provisions of SFAS No.
133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. According to the statement, hedging
instruments may be specifically designated into one of three
categories based on their intended use. The applicable category
dictates the accounting for each derivative. The following
categories and the related impacts and disclosures required by
SFAS No. 133 are applicable to The St. Paul:
Fair Value Hedges: We have several pay floating, receive fixed
interest rate swaps that are designated as fair value hedges of
selected portions of our fixed rate debt. The terms of the swaps
match those of the debt instruments, and the swaps are therefore
considered 100% effective. The transitional impact of adopting
SFAS No. 133 for the fair value of the hedges was $15 million,
which is recorded in other assets on the balance sheet with an
equivalent offset recorded in debt. The related income statement
impacts are offsetting; as a result, there was no transitional
income statement impact of adopting SFAS No. 133 for fair value
hedges. The impact related to first quarter 2001 movement in
interest rates was a $7 million increase in the fair value of the
swaps and the related debt on the balance sheet, with the income
statement impacts again offsetting.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 11 - Adoption of Accounting Pronouncement (continued)
- ----------------------------------------------------------
Cash Flow Hedges: We have purchased foreign currency forward
contracts that are designated as cash flow hedges. They are
utilized to minimize our exposure to fluctuations in foreign
currency values that result from forecasted foreign currency
payments, as well as from foreign currency payables and
receivables. The transitional impact of adopting SFAS No. 133
for cash flow hedges was a gain of less than $200,000, which was
included in other comprehensive income. In the first quarter, we
recognized a $3 million loss on the cash flow hedges, which is
also included in other comprehensive income. The amounts
included in other comprehensive income will be reclassified into
earnings concurrent with the timing of the hedged cash flows,
which is not expected to occur within the next twelve months. In
the first quarter, we recognized a loss in the income statement
of less than $300,000 representing the portions of the forward
contracts deemed ineffective.
Hedges of the Net Investment in a Foreign Operation: We have
purchased quarterly foreign currency forward contracts that are
designated as hedges of our net investment in certain foreign
operations which we utilize to minimize the impact of foreign
currency fluctuations. Since these hedges are purchased and
mature within a given quarter, there was no transitional impact
of adopting SFAS No. 133. In the first quarter, we recognized a
loss of less than $200,000 on these contracts which is recorded
in other comprehensive income on the balance sheet. The loss is
offset by an equivalent gain in unrealized foreign currency
translation adjustments on the balance sheet.
Non-Hedge Derivatives: We have entered into a variety of other
financial instruments considered to be derivatives, but which are
not designated as hedges, that we utilize to minimize the
potential impact of market movements in certain investment
portfolios. There was no transition adjustment related to the
adoption of SFAS No. 133, and we recorded less than $400,000 of
operating and administrative expense in the first quarter of
2001, relating to the change in the market value of these
derivatives during the quarter.
Note 12 - Discontinued Operations
- ----------------------------------
Life Insurance Segment
- ----------------------
On April 26, 2001, we announced an agreement by our subsidiary,
St. Paul Fire and Marine Insurance Company ("Fire and Marine"),
to sell its life insurance company, Fidelity and Guaranty Life
Insurance Company, and its subsidiary, Thomas Jefferson Life,
(together, "F&G Life") to Old Mutual plc ("Old Mutual") for $335
million in cash and $300 million in shares of Old Mutual stock.
The consideration is subject to possible adjustment related to
F&G Life's investment portfolio. If the market value of
specified securities within that portfolio changes between March
31, 2001 and the closing date, or if any securities within that
portfolio experience specified credit rating downgrades prior to
closing, the consideration is subject to adjustment. Pursuant to
the purchase agreement, Fire and Marine must hold the Old Mutual
stock received for one year after the closing of the transaction.
The consideration is also subject to possible additional
adjustment based on the market price of Old Mutual's stock at the
end of that one-year period, as described in greater detail in
the purchase agreement. The sale is subject to regulatory
approvals and other conditions, and is expected to close later in
2001. We expect to realize a modest gain on the sale of F&G
Life, the exact amount of which will be determined at closing.
The measurement date for the sale of F&G Life occurred prior to
the filing of this Quarterly Report on Form 10-Q; as a result,
our consolidated statements of income presented herein reflect
F&G Life's results of operations in discontinued operations for
the three months ended March 31, 2001 and 2000. In the first
quarter of 2001, F&G Life recorded a net loss of $424,000, which
was driven by after-tax realized investment losses of $15
million. Those losses were primarily the result of writedowns in
the carrying value of certain fixed maturity investments. In the
first quarter of 2000, F&G Life recorded net income of $13
million. In addition, on our consolidated balance sheet as of
March 31, 2001, F&G Life's net assets of $626 million were
included in "Other Assets," classified as net assets of
discontinued operations.
Presented on the following pages are The St. Paul's pro forma
consolidated, condensed income statement for the year ended Dec.
31, 2000, which assumes the sale of F&G Life occurred at the
beginning of 2000, and The St. Paul's restated consolidated
balance sheet as of Dec. 31, 2000. Included are condensed
historical statements as
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 12 - Discontinued Operations (continued)
- --------------------------------------------
reported before the sale of F&G Life, pro forma adjustments, and
the pro forma statements after the sale. 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 sale of the life insurance segment had been consummated at
the beginning of 2000, or that may be obtained in the future.
Statements of Income
Twelve Months Ended Dec.31, 2000
--------------------------------
Restated
(In millions, except Previously for Sale
per share data) Reported F&G Life of F&G Life
---------- ---------- ------------
Revenues:
Premiums earned $5,898 $306 $5,592
Net investment income 1,616 354 1,262
Asset management 356 - 356
Realized investment
gains (losses) 607 (25) 632
Other 146 1 145
------- ------- -------
Total revenues 8,623 636 7,987
------- ------- -------
Expenses:
Insurance losses and
loss adjustment expenses 3,913 - 3,913
Life policy benefits 494 494 -
Policy acquisition
expenses 1,442 46 1,396
Operating and
administrative expenses 1,320 43 1,277
------- ------- -------
Total expenses 7,169 583 6,586
------- ------- -------
Income from
continuing operations
before income taxes 1,454 53 1,401
Income tax expense 441 10 431
------- ------- -------
Income from
continuing operations 1,013 43 970
Discontinued operations,
net of taxes (20) (43) 23
------- ------- -------
Net income $ 993 $ - $ 993
======= ======= =======
Basic earnings per
common share:
Income from
continuing operations $4.59 $0.20 $4.39
Discontinued operations,
net of taxes (0.09) (0.20) $0.11
------- ------- -------
Net income $4.50 $ - $4.50
======= ======= =======
Diluted earnings per
common share:
Income from
continuing operations $4.32 $0.18 $4.14
Discontinued operations,
net of taxes (0.08) (0.18) $0.10
------- ------- -------
Net income $4.24 $ - $4.24
======= ======= =======
For purposes of calculating basic earnings per share, weighted
average shares outstanding totaled 216.7 million. For purposes
of calculating diluted earnings per share, weighted average
shares outstanding totaled 232.9 million.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 12 - Discontinued Operations (continued)
- ---------------------------------------------
Balance Sheet
As of December 31, 2000
----------------------------------------------------
Net Assets of Restated
Previously Discontinued for Sale of
(in millions) Reported F&G Life Operations F&G Life
----------- ---------- -------- ------------- -----------
Assets:
Fixed maturities $20,470 $ 4,533 $ - $15,937
Other investments 6,629 514 - 6,115
-------- -------- -------- --------
Total investments 27,099 5,047 - 22,052
Reinsurance recoverable
on unpaid losses 5,196 545 - 4,651
Other assets 8,910 698 587 8,799
-------- -------- -------- --------
Total assets 41,205 6,290 587 35,502
======== ======== ======== ========
Liabilities:
Losses and loss
adjustment expense
reserves 18,196 - - 18,196
Future policy benefits 5,460 5,460 - -
Unearned premium reserves 3,648 - - 3,648
-------- -------- -------- --------
Total insurance reserves 27,304 5,460 - 21,844
Other liabilities 6,674 243 - 6,431
-------- -------- -------- --------
Total liabilities 33,978 5,703 - 28,275
-------- -------- -------- --------
Shareholders' equity 7,227 587 587 7,227
-------- -------- -------- --------
Total liabilities
and shareholders'
equity $41,205 $6,290 $587 $35,502
======== ======== ======== ========
Standard Personal Insurance Business
- ------------------------------------
On Sept. 30, 1999, we completed the sale of our standard personal
insurance operations to Metropolitan Property and Casualty
Insurance Company (Metropolitan). As a result, the standard
personal insurance operations were accounted for as discontinued
operations for all periods presented herein. We recorded a $32
million pretax charge for various costs incurred in the
disposition of the operations. All of the obligations of this
charge have been met, with the exception of $5 million in
occupancy-related charges. These obligations will exist until
lease commitments in place at the time of the sale expire, or
until we buy them out before expiration.
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 ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 12 - Discontinued Operations (continued)
- ---------------------------------------------
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 Mar. 31, 2001, 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 incurred by us under these
agreements will be reflected in discontinued operations in the
period they are incurred. For the first three months of 2001, we
recorded a pretax loss of $12 million in discontinued operations.
We have no other contingent liabilities related to the sale.
Nonstandard Auto Business
- -------------------------
On Jan. 4, 2000, we announced an agreement to sell our
nonstandard auto business to The Prudential Insurance Company of
America (Prudential) for $200 million in cash. As a result, the
nonstandard auto business results of operations were accounted
for as discontinued operations for all periods presented. 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).
Note 13 - Statutory Accounting Practices
- ----------------------------------------
The National Association of Insurance Commissioners has published
revised statutory accounting practices in connection with its
codification project which became effective, and which we
adopted, as of Jan. 1, 2001. The cumulative effect to our
property-liability insurance operations of the adoption of these
practices was to increase statutory surplus by $328 million.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
March 31, 2001
On April 26, 2001, The St. Paul Companies, Inc. announced that
its subsidiary, St. Paul Fire and Marine Insurance Company ("Fire
and Marine"), had reached a definitive agreement to sell Fidelity
and Guaranty Life Insurance Company ("F&G Life") to Old Mutual
plc ("Old Mutual"), a London-based international financial
services company. F&G Life's results of operations have been
reclassified to discontinued operations for all periods presented
in the following discussion.
Consolidated Highlights
-----------------------
The following table summarizes our results for the first quarters
of 2001 and 2000.
Three Months Ended
March 31
------------------
(In millions, except per share data) 2001 2000
----- -----
Pretax income (loss):
Property-liability insurance:
GAAP underwriting result $ (87) $(99)
Net investment income 330 318
Realized investment gains 52 331
Other (4) (32)
----- -----
Total property-liability insurance 291 518
Asset management 35 33
Parent and other (28) (31)
----- -----
Income from continuing operations
before income taxes 298 520
Income tax expense 89 171
----- -----
Income from continuing operations 209 349
Discontinued operations, net of taxes (7) 9
----- -----
Net income $ 202 $ 358
===== =====
Diluted net income per common share $0.87 $1.51
===== =====
Consolidated Results
- --------------------
Our pretax income from continuing operations of $298 million in
the first quarter of 2001 was more than $220 million less than
comparable 2000 pretax income of $520 million. The decline
resulted from a significant reduction in realized investment
gains in our property-liability insurance operations. Realized
gains in last year's first quarter were unusually high due to the
sale of several venture capital investments. Property-liability
underwriting results were $12 million better than last year's
first quarter, primarily due to improved loss experience in our
Commercial Lines Group segment of business. Our effective tax
rate in last year's first quarter was higher than the comparable
2001 rate, primarily due to the substantial amount of realized
investment gains, which are taxed at the 35% federal statutory
rate.
Subsequent Event - Agreement to Sell F&G Life Insurance Company
- ---------------------------------------------------------------
On April 26, 2001, we announced that Fire and Marine had signed a
definitive agreement to sell F&G Life to Old Mutual. Under terms
of the agreement, Fire and Marine will receive $335 million in
cash, and shares of Old Mutual common stock valued at $300
million on the closing date. The consideration is subject to
possible adjustment related to F&G Life's investment portfolio.
If the market value of specified securities within that portfolio
changes between March 31, 2001 and the closing date, or if any
securities within that portfolio experience specified credit
rating downgrades prior to closing, the consideration is subject
to adjustment. Pursuant to the purchase
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
agreement, Fire and Marine must hold the Old Mutual stock
received for one year after the closing of the transaction. The
consideration is also subject to possible adjustment based on the
market price of Old Mutual's stock at the end of that one-year
period, as described in greater detail in the purchase agreement.
The sale is subject to regulatory approvals and other conditions,
and is expected to close later in 2001. We expect to realize a
modest gain on the sale of F&G Life, the exact amount of which
will be determined at closing.
F&G Life's results of operations for the three months ended March
31, 2001 and 2000 are included in discontinued operations on our
consolidated statements of income. In the first quarter of 2001,
F&G Life recorded a net loss of $424,000, which was driven by
after-tax realized investment losses of $15 million. Those
losses were primarily the result of writedowns in the carrying
value of certain fixed maturity investments. In the first
quarter of 2000, F&G Life recorded net income of $13 million.
F&G Life's product sales totaled $457 million in the first
quarter of 2001, compared with sales of $227 million in the same
2000 period.
Discontinued Operations - Personal Insurance and Nonstandard Auto
- -----------------------------------------------------------------
In 1999, we sold our standard personal insurance operations to
Metropolitan Property and Casualty Insurance Company
(Metropolitan). Metropolitan purchased Economy Fire & Casualty
Company and subsidiaries (Economy), and the rights and interests
in those non-Economy policies constituting the remainder of our
standard personal insurance operations. Those rights and
interests were transferred to Metropolitan by way of a
reinsurance and facility agreement. We guaranteed the adequacy
of Economy's loss and loss expense reserves, and we remain liable
for claims on non-Economy policies that result from losses
occurring prior to the Sept. 30, 1999 closing date. Under the
reserve guarantee, we will pay for any deficiencies in those
reserves and will share in any redundancies that develop by Sept.
30, 2002. As of March 31, 2001, 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 incurred by us under these agreements are
reflected in discontinued operations in the period during which
they are incurred. In the first quarters of 2001 and 2000, we
recorded pretax losses of $6 million and $5 million,
respectively, in discontinued operations.
In May 2000, we completed the sale of our nonstandard auto
insurance operations to Prudential Insurance Company of America
(Prudential). Prudential purchased the nonstandard auto business
marketed under the Victoria Financial and Titan Auto brands. In
the first quarter of 2000, we recorded pretax income of $1
million in discontinued operations related to these operations,
representing their results of operations for the first three
months of the year.
Common Share Repurchases
- ------------------------
In the first quarter of 2001, we repurchased and retired 4.2
million of our common shares for a total cost of $187 million, or
an average of $44.23 per share. These repurchases were funded
through a combination of internally-generated funds and the
issuance of commercial paper. The shares repurchased in the
first quarter represented approximately 2% of our total shares
outstanding at the beginning of the year.
Adoption of SFAS No. 133
- ------------------------
On January 1, 2001, we adopted the provisions of Statement of
Financial Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS Nos. 137
and 138. Provisions of SFAS No. 133 require the recognition of
derivatives as either assets or liabilities on the balance sheet
and the measurement of those instruments at fair value. We have
limited involvement with derivative instruments, primarily for
purposes of hedging against fluctuations in market indices,
foreign currency exchange rates and interest rates. Our adoption
of SFAS No 133, as amended, did not have a material impact on our
financial position or results of operations.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance
----------------------------
Overview
- --------
Our first-quarter 2001 consolidated written premiums of $1.85
billion were 32% higher than comparable 2000 premiums of $1.40
billion. Several factors had a significant impact on our
reported premium volume in both years. First, we acquired MMI
Companies, Inc. ("MMI"), an international health care risk
services company, in the second quarter of 2000. MMI accounted
for $97 million of incremental written premiums in the first
quarter of 2001. Second, last year's first-quarter total
included $146 million of written premiums resulting from our
elimination of the one-quarter reporting lag for our reinsurance
operations based in the United Kingdom ("St Paul Re - UK").
Third, our reported written premium volume in the first quarters
of 2001 and 2000 was reduced by $12 million and $97 million
respectively, by cessions made under certain reinsurance treaties
(described below). Excluding all of these factors in both years,
consolidated written premiums of $1.76 billion in the first
quarter of 2001 were 30% higher than comparable first-quarter
2000 premium volume of $1.35 billion. Premium growth occurred
throughout virtually all of our business segments, driven by
price increases, new business and strong renewal retention rates.
In both 2001 and 2000, we were party to 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 is triggered when our insurance losses
and loss adjustment expenses spanning all segments of our
business reach a certain level. In addition, our Reinsurance
segment was party to separate aggregate excess-of-loss
reinsurance treaties unrelated to the corporate program in both
years. All of these treaties are collectively referred to
hereafter as the "reinsurance treaties."
Under terms of the reinsurance treaties, we transfer, or "cede,"
insurance losses and loss adjustment expenses to our reinsurers,
along with the related written and earned premiums. The
following table describes the combined impact of these cessions
on our property-liability underwriting segments for the first
quarters of 2001 and 2000. In the first quarter of 2001,
coverage under the corporate program was not triggered; the
written and earned premiums ceded represent the initial premium
paid to our reinsurer.
Three Months
Ended March 31
----------------
(in millions) 2001 2000
----------- ----- -----
Corporate program:
-----------------
Ceded written premiums $9 $ 80
Ceded earned premiums 3 65
Ceded losses and loss
adjustment expenses - 111
----- -----
Net pretax benefit (detriment) (3) 46
----- -----
Reinsurance segment treaty:
--------------------------
Ceded written premiums 3 17
Ceded earned premiums 3 17
Ceded losses and loss
adjustment expenses 26 32
----- -----
Net pretax benefit 23 15
----- -----
Combined total:
--------------
Ceded written premiums 12 97
Ceded earned premiums 6 82
Ceded losses and loss
adjustment expenses 26 143
----- -----
Net pretax benefit $ 20 $ 61
===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
The pretax benefit (detriment) of the reinsurance treaties was
allocated to our business segments as follows:
Three Months
Ended March 31
--------------
(in millions) 2001 2000
----------- ---- ----
Commercial Lines Group $ (1) $ -
Other Specialty (1) -
International (1) 13
---- ----
Total Primary Insurance (3) 13
Reinsurance 23 48
---- ----
Total Property-Liability
Insurance $ 20 $ 61
==== ====
Our reported consolidated loss ratio, which measures insurance
losses and loss adjustment expenses as a percentage of earned
premiums, was 72.7 for the first quarter of 2001, compared with a
reported loss ratio of 75.8 in the same 2000 period. Excluding
the reinsurance treaties in both years, however, and the impact
of eliminating the one-quarter reporting lag in last year's first
quarter, our first-quarter 2001 consolidated loss ratio was 74.0,
significantly better than the comparable 2000 loss ratio of 82.3.
The improvement was centered in our Commercial Lines Group, Other
Specialty and Reinsurance segments, but was offset somewhat by
adverse prior year loss development in our Global Health Care and
International segments.
During the first quarter of 2001, the pricing environment
continued to be favorable throughout virtually all of the
commercial and reinsurance markets in which we sell our products
and services. We expect to achieve additional price increases
during the remainder of the year. In addition, we continued to
achieve improvement in current underwriting year results in the
majority of our primary insurance operations, reflecting our
success to date in improving the quality of our business through
disciplined risk selection.
Our reported consolidated expense ratio, measuring underwriting
expenses as a percentage of written premiums, was 31.1 for the
first quarter of 2001, compared with the 2000 first-quarter ratio
of 31.8. Excluding the impact of the reinsurance treaties in
both years and the elimination of St. Paul Re - UK's reporting
lag in 2000, the first-quarter 2001 ratio of 30.9 was slightly
higher than the adjusted 2000 ratio of 30.0, primarily due to an
increase in expenses in our Global Surety and Reinsurance
segments. Our expense ratio in recent quarters has benefited
from efficiencies realized as a result of continuing expense
reduction initiatives.
The table on the following page summarizes key financial results
(from continuing operations) by property-liability underwriting
business segment (Underwriting results are presented on a GAAP
basis; combined ratios are presented on a statutory accounting
basis). In the first quarter of 2001, certain business that had
previously been included in our "Other Specialty" segment was
reclassified to our "International" segment to more accurately
reflect the manner in which this business is managed. Data for
2000 in the table have been reclassified to be consistent with
the 2001 presentation.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Three Months
% of 2001 Ended March 31
Written --------------
(Dollars in millions) Premiums 2001 2000
------------------- -------- ---- ----
Commercial Lines Group:
Written Premiums 27% $491 $392
Underwriting Result $72 $(22)
Combined Ratio 79.7 106.4
Global Surety:
Written Premiums 6% $105 $123
Underwriting Result $17 $19
Combined Ratio 84.3 80.1
Global Health Care:
Written Premiums 9% $177 $113
Underwriting Result $(130) $(19)
Combined Ratio 170.8 115.4
Other Specialty:
Written Premiums 25% $462 $319
Underwriting Result $10 $(21)
Combined Ratio 98.0 106.0
International:
Written Premiums 8% $153 $63
Underwriting Result $(38) $(12)
Combined Ratio 126.0 123.9
--- ------ ------
Total Primary Insurance:
Written Premiums 75% $1,388 $1,010
Underwriting Result $(69) $(55)
Combined Ratio 104.7 106.0
Reinsurance:
Written Premiums 25% $458 $390
Underwriting Result $(18) $(44)
Combined Ratio 100.0 114.2
--- ------ ------
Total Property-Liability
Insurance:
Written Premiums 100% $1,846 $1,400
GAAP Underwriting Result === $(87) $(99)
Statutory Combined Ratio:
Loss and Loss Expense Ratio 72.7 75.8
Underwriting Expense Ratio 31.1 31.8
------ ------
Combined Ratio 103.8 107.6
====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Underwriting Results by Segment
- -------------------------------
Commercial Lines Group
The Commercial Lines Group ("CLG") segment includes our standard
commercial, nonstandard commercial and catastrophe risk business
centers, as well as the results of our limited involvement in
insurance pools. The following table summarizes key financial
data for this segment excluding the impact of the corporate
reinsurance program.
Three Months
Ended March 31
(Dollars in millions) --------------
------------------- 2001 2000
---- ----
Net written premiums $494 $392
Percentage change from 2000 26%
GAAP underwriting result $73 ($21)
Statutory combined ratio:
Loss and loss adjustment
expense ration 49.2 72.2
Underwriting expense ratio 30.4 34.2
----- -----
Combined ratio 79.6 106.4
===== =====
The strong growth in written premium volume over 2000 was driven
by price increases, strong renewal retention rates and new
business. Price increases in our standard and nonstandard
commercial operations averaged 11.8% in the first quarter of
2001, after averaging 10.3% for the year ended Dec. 31, 2000.
Our renewal retention rates continued to grow in the first three
months of the year despite the magnitude of price increases.
The reported loss ratio and underwriting profit in the CLG
segment for the first quarter of 2001 benefited from the impact
of an approximately $100 million reduction in previously
established reserves during the quarter. Those reserves
pertained to certain business written in years prior to 1989, and
were reduced based on actuarial analysis which indicated that
ultimate losses on that business would fall short of the
established reserves. Excluding the reserve reduction, the CLG
loss ratio for the first quarter of 2001 was 72.9, slightly worse
than the comparable 2000 ratio. The nearly four-point
improvement in the expense ratio reflects the impact of our
aggressive efficiency initiatives in recent years, as well as the
significant growth in written premium volume.
Global Surety
Our Global Surety segment underwrites surety bonds, which
guarantee that third parties will be indemnified against the
nonperformance of contractual obligations. The table on the
following page summarizes key financial data for this segment for
the first three months of 2001 and 2000. The Surety segment was
not impacted by the reinsurance treaties in either year.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Three Months
Ended March 31
--------------
(Dollars in millions) 2001 2000
------------------- ---- ----
Net written premiums $106 $123
Percentage change from 200 (14%)
GAAP underwriting result $17 $19
Statutory combined ratio:
Loss and loss adjustment
expense ratio 31.3 35.9
Underwriting expense ratio 52.7 44.2
----- -----
Combined ratio 84.0 80.1
===== =====
The decline in written premium volume compared with 2000
reflected the impact of tightened underwriting standards
implemented over the last several quarters in anticipation of an
economic slowdown in both the United States and Mexico. The
improvement in the loss ratio over 2000 was due to favorable
development on losses incurred in prior years, as well as
improved loss experience in Mexico. The increase in the expense
ratio was driven by higher reinsurance costs in the first quarter
of 2001.
Global Health Care
Our Global Health Care segment provides property-liability
insurance throughout the entire health care delivery system. The
following table summarizes key financial data for the Global
Health Care segment for the first quarter of 2001 and 2000
excluding the impact of the corporate reinsurance program.
Three Months
Ended March 31
--------------
(Dollars in millions) 2001 2000
------------------- ---- ----
Net written premiums $178 $113
Percentage change from 2000 57%
GAAP underwriting result ($130) ($19)
Statutory combined ratio:
Loss and loss adjustment
expense ratio 146.5 90.6
Underwriting expense ratio 23.9 24.8
----- -----
Combined ratio 170.4 115.4
===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
The 57% increase in written premium volume was primarily due to our
acquisition of MMI in the second quarter of 2000, which contributed
$48 million of incremental premium volume in the first quarter of
2001. In addition, price increases averaging 24.4% across this
segment in the first quarter of 2001 accounted for a significant
portion of the growth over 2000. In our major accounts line of
business, which serves large health care entities in major
metropolitan areas, price increases averaged 40% in the first
quarter of 2000.
The deterioration in underwriting results in 2001 was primarily the
result of adverse loss development throughout our domestic
operations on reserves established in prior years. Amounts awarded
in jury verdicts in professional liability lawsuits have increased
sharply, resulting in an increase in our estimate of insurance
losses incurred. The adverse development occurred throughout our
operations, including, but not limited to, the business acquired in
the MMI transaction in April 2000. We are currently conducting a
comprehensive review of our entire Health Care segment, which is
expected to be completed in the second quarter of this year. The
results of that review will be considered in our assessment of the
recoverability of the goodwill recorded in connection with the
purchase of MMI. Until this review is completed, we cannot
reasonably estimate to what extent, if any, impairment of that
goodwill has occurred.
During the remainder of 2001, we will pursue further price
increases in our Health Care segment. We will cease to underwrite
business in those market sectors and geographic locations in which
we are unable to achieve appropriate pricing levels for our
products.
Other Specialty
The Other Specialty segment includes the following business
centers: Construction, Technology, Financial and Professional
Services, Global Marine, Public Sector Services, Excess & Surplus
Lines, and Oil and Gas. The following table summarizes results
for this segment excluding the impact of the corporate reinsurance
program.
Three Months
Ended March 31
--------------
(Dollars in millions) 2001 2000
------------------- ---- ----
Net written premiums $464 $319
Percentage change from 2000 46%
GAAP underwriting result $11 ($21)
Statutory combined ratio:
Loss and loss adjustment
expense ratio 70.1 76.0
Underwriting expense ratio 27.6 30.0
----- -----
Combined ratio 97.7 106.0
===== =====
All business centers in this segment achieved growth in premium
volume over the first quarter of 2000, generally due to
significant price increases, new business and strong renewal
retention rates. In our Construction business center, where
premiums of $159 million were 51% higher than the same period of
2000, price increases averaged 15.1% in the first quarter.
Financial and Professional Services premium volume of $95 million
in the first quarter grew 32% over 2000's first quarter,
reflecting price increases averaging 9.1% and new business in
selected international markets. In our Technology operation,
premium volume of $94 million grew by 51% over the first quarter
of 2000. Price increases in this market sector averaged 11.9% in
the first quarter.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
The improvement in underwriting results in the Other Specialty
segment was centered in the Technology business center, which
recorded a $15 million underwriting profit, compared with a $1
million underwriting loss in last year's first quarter.
Favorable development on prior year losses accounted for the
majority of the improvement over 2000. First-quarter Global
Marine underwriting results were $8 million better than the
comparable 2000 period, reflecting the impact of our efforts to
improve the quality of this book of business. In the Excess &
Surplus Lines business center, underwriting results deteriorated
compared with the first quarter of 2000 due to adverse prior year
loss development.
International
Our International segment consists of our operations at Lloyd's,
specialty business written outside of the United States that is
not managed on a global basis and MMI's London-based insurance
operation, Unionamerica. The following table summarizes this
segment's results for the first quarters of 2001 and 2000
excluding the impact of the corporate reinsurance program.
Three Months
Ended March 31
--------------
(Dollars in millions) 2001 2000
------------------- ---- ----
Net written premiums $154 $86
Percentage change from 2000 78%
GAAP underwriting result ($37) ($26)
Statutory combined ratio:
Loss and loss adjustment
expense ratio 89.6 95.8
Underwriting expense ratio 35.8 34.2
----- -----
Combined ratio 125.4 130.0
===== =====
The significant increase in written premiums over 2000 was
primarily due to the addition of Unionamerica, which accounted
for $49 million of premium volume in the first quarter. Although
we ceased underwriting new business through Unionamerica
Insurance Company in 2000, we are contractually obligated to
underwrite business in several of Unionamerica's syndicates at
Lloyd's.
At The St. Paul's other operations at Lloyd's, written premiums
of $49 million grew 36% over the first quarter of 2000, primarily
due to significant price increases. Our Lloyd's operations
accounted for $18 million of the underwriting loss in the first
quarter of 2001, driven by deteriorating claim experience and
provisions to strengthen insurance reserves in several
syndicates. Our European operations accounted for the majority
of the remaining underwriting loss in the first quarter. We
continue to implement corrective underwriting, pricing and
efficiency initiatives throughout our International segment, and
we expect to see improved results by the end of 2001. We
continue to reduce our business volume in those market sectors
where pricing remains inadequate.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Reinsurance
Our Reinsurance segment ("St. Paul Re") underwrites 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.
The following table summarizes key financial data for the
Reinsurance segment for the first quarters of 2001 and 2000,
excluding the impact of the reinsurance treaties.
Three Months
Ended March 31
--------------
(Dollars in millions) 2001 2000
------------------- ---- ----
Net written premiums $463 $464
Percentage change from 2000 -
GAAP underwriting result ($40) ($92)
Statutory combined ratio:
Loss and loss adjustment
expense ratio 75.9 102.3
Underwriting expense ratio 30.8 22.2
----- -----
Combined ratio 106.7 124.5
===== =====
Premium volume in last year's first quarter included $146 million
of incremental premiums resulting from the elimination of the one-
quarter reporting lag for our reinsurance operations based in the
United Kingdom. Excluding that adjustment, premium volume in
2001 grew 46% over the first quarter of 2000. The significant
increase was driven by price increases throughout worldwide
reinsurance markets on business renewed in January. In addition,
St. Paul Re's nontraditional insurance operations continued to
achieve growth in the first quarter.
St. Paul Re's underwriting result in the first three months of
2001 benefited from the impact of price increases and corrective
underwriting initiatives implemented in recent quarters, as well
as the lack of significant catastrophe losses. The primary
sources of St. Paul Re's underwriting loss in the first quarter
were the sinking of the Petrobras oil platform, and a provision
to strengthen insurance reserves for North American casualty
business. Underwriting results in last year's first quarter were
severely impacted by catastrophe losses, primarily resulting from
additional loss development from severe windstorms that struck
Europe at the end of 1999. The elimination of the quarter-
reporting lag had a minimal impact on underwriting results in the
first quarter of 2000.
Investment Operations
First-quarter 2001 pretax net investment income in our property-
liability insurance operations totaled $330 million, $12 million
ahead of the same period of 2000. The increase was driven by
strong returns generated by our real estate investment portfolio,
and incremental investment income resulting from the acquisition
of MMI in April 2000. For the remainder of 2001, we anticipate
little or no growth in investment income compared with 2000
levels, due to declining yields on new investments, and negative
underwriting cash flows over the last several quarters which have
resulted in the net sale of fixed maturity investments to fund a
portion of our operational cash
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
requirements. Our underwriting cash flows have been negatively
affected by an increase in insurance loss and loss adjustment
expense payments, centered in our Health Care and International
business segments, which have more than offset the increase in
premium collections resulting from price increases and new
business. In addition, cumulative premium payments totaling $630
million since the fourth quarter of 1999 related to our corporate
reinsurance program have reduced funds available for investment.
We expect our cash flows to gradually improve throughout the
remainder of the year due to continued price increases and the
initiatives we continue to implement throughout our property-
liability operations to improve loss experience.
Pretax realized investment gains in our property-liability
insurance operations of $52 million fell significantly short of
the comparable 2000 total of $331 million, which represented the
highest quarterly total in our history. A significant decline in
equity values during the first quarter of 2001 resulted in a
reduction in the amount of investment gains realized from our
equity and venture capital investment portfolios compared with
the same period of 2000. Pretax realized gains in 2001 were
reduced by writedowns in the carrying value of various venture
capital investments totaling $33 million. In March 2001, we
realized a pretax gain of $77 million on the sale of our
investment in RenaissanceRe Holdings Ltd., a Bermuda-based
reinsurer. The record first-quarter realized gain total in 2000
was driven by gains of $282 million generated by our venture
capital investment portfolio, the largest of which, $117 million,
resulted from the sale of our investment in Flycast
Communications Corp., a leading provider of Internet direct
response solutions. We also sold two other direct holdings in
last year's first quarter which generated gains of $37 million
and $31 million, and our investments in various venture capital
partnerships accounted for an additional $98 million of pretax
gains.
The market value of our $15.3 billion fixed maturities portfolio
exceeded its cost by $612 million at March 31, 2001.
Approximately 95% of that portfolio is rated at investment grade
(BBB or above). The weighted average pretax yield on those
investments was 6.9% at March 31, 2001, up slightly from 6.8% a
year ago.
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 the 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 continue to evolve.
The following table represents a reconciliation of total gross
and net environmental reserve development for the three months
ended March 31, 2001, and the years ended Dec. 31, 2000 and 1999.
Amounts in the "net" column are reduced by reinsurance
recoverables.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Environmental and Asbestos Claims (continued)
--------------------------------------------
2001
Environmental (three months) 2000 1999
------------- ------------ ------------ ------------
(In millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Beginning reserves $665 $563 $698 $599 $783 $645
Incurred losses 26 21 25 14 (33) 1
Paid losses (21) (18) (58) (50) (52) (47)
----- ---- ----- ---- ----- ----
Ending reserves $670 $566 $665 $563 $698 $599
===== ==== ===== ==== ===== ====
The following table represents a reconciliation of total gross
and net reserve development for asbestos claims for the three
months ended March 31, 2001, and the years ended Dec. 31, 2000
and 1999.
2001
Asbestos (three months) 2000 1999
-------- ------------ ------------ ------------
(In millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Beginning reserves $397 $299 $398 $298 $402 $277
Incurred losses 2 12 41 33 28 51
Paid losses (9) (10) (42) (32) (32) (30)
----- ---- ----- ---- ----- ----
Ending reserves $390 $301 $397 $299 $398 $298
===== ==== ===== ==== ===== ====
Our reserves for environmental and asbestos losses at March 31,
2001 represent our best estimate of our ultimate liability for
such losses, based on all information currently available.
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
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 our results of operations, liquidity or
financial position.
Total gross environmental and asbestos reserves at March 31,
2001, of $1.06 billion represented approximately 6% of gross
consolidated reserves of $18.23 billion.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Asset Management
----------------
Our asset management segment consists of our 79% majority
ownership interest in The John Nuveen Company (Nuveen). Nuveen
provides customized individual accounts, mutual funds, exchange-
traded funds and defined portfolios through financial advisors
serving affluent and high net worth clients. Highlights of
Nuveen's performance for the first quarters of 2001 and 2000 were
as follows:
Three Months
Ended March 31
--------------
(In millions) 2001 2000
----------- ----- -----
Revenues $ 87 $100
Expenses 42 57
----- -----
Pretax earnings 45 43
Minority interest (10) (10)
----- -----
The St. Paul's
share of pretax earnings $ 35 $ 33
===== =====
Assets under management $61,289 $59,965
====== ======
Nuveen's total revenues in the first quarter of 2001 were down
13% compared with the same period of 2000, primarily due to a
decline in defined portfolio distribution revenue. Sales of
equity and fixed-income retail managed accounts, however, which
are customized individual portfolios offered to the high net
worth market, grew 36% to $1.9 billion in the first quarter of
2001. Nuveen's diverse array of high-quality investment products
continues to meet the investment needs of affluent investors in a
highly volatile market environment. Nuveen's net flows (equal to
the sum of sales, reinvestments and exchanges, less redemptions)
during the first quarter of 2001 totaled $2.6 billion, compared
with net flows of $140 million in the first quarter of 2000.
Managed assets at the end of the first quarter consisted of $29.6
billion of exchange-traded funds, $19.8 billion of managed
accounts, $11.4 billion of mutual funds and $441 million of money
market funds. Total assets under management at the end of March
were down slightly from the year-end 2000 total of $62.0 billion,
reflecting a decline in the market value of equity securities
under management.
Capital Resources
-----------------
Common shareholders' equity of $7.07 billion at March 31, 2001
declined $111 million from the year-end 2000 total of $7.18
billion, primarily due to our share repurchases and a decline in
the unrealized appreciation of our equity and venture capital
investment portfolios. In the first three months of 2001, we
repurchased and retired 4.2 million shares of our common stock
for a total cost of $187 million, or an average of $44.23 per
share. The first-quarter repurchases were financed through a
combination of internally-generated funds and commercial paper
borrowings. From November 1998 through March 2001, we have
repurchased and retired 37.1 million of our common shares for a
total cost of $1.2 billion, or an average of $32.75 per share.
Total debt obligations at March 31, 2001 of $1.80 billion
increased by $154 million over the year-end 2000 total of $1.65
billion, largely due to the issuance of $137 million of
additional commercial paper during the quarter to finance a
portion of our common share repurchases. We also incurred $27
million of mortgage debt associated with our investment in a real
estate property in London. Approximately 34% of our consolidated
debt outstanding at March 31, 2001 consisted of medium-term notes
bearing a weighted-average interest rate of 6.9%. Our ratio of
total debt to total capitalization of 19% at the end of the first
quarter increased slightly over the year-end 2000 ratio of 18%.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Capital Resources (continued)
----------------------------
We have no current plans for major capital expenditures during
the remainder of 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 April 1, 2001 through May 11,
2001, we repurchased 438,600 common shares at a total cost of $19
million. As of May 11, 2001 we had the capacity to make up to
$469 million in additional share repurchases under a repurchase
program authorized by our board of directors in February 2001.
We repurchase our shares in the open market and through private
transactions when we deem such repurchases to be a prudent use of
capital.
The company's ratio of earnings to fixed charges was 7.73 for the
first three months of 2001, compared with 14.20 for the same
period of 2000. The company's ratio of earnings to combined
fixed charges and preferred stock dividend requirements was 7.15
for the first three months of 2001, compared with 12.95 for the
same period of 2000. Fixed charges consist of interest expense,
dividends on preferred capital securities and that portion of
rental expense deemed to be representative of an interest factor.
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. Net cash flows used by continuing
operations totaled $194 million in the first quarter of 2001,
compared with cash used by continuing operations of $217 million
in the same period of 2000. Negative underwriting cash flows,
driven by significant loss payments in several of our business
segments and premium payments related to our corporate
reinsurance program, were the primary cause of our negative
operational cash flows in both 2001 and 2000. We expect our
operational cash flows to gradually improve during the remainder
of 2001 as the full impacts of continuing price increases and
improvements in the quality of our book of business are realized.
On a long-term basis, we believe our operational cash flows will
benefit from the corrective pricing and underwriting actions
under way in our property-liability operations. 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
should the need arise.
Impact of Accounting Pronouncements to be Adopted in the Future
- ---------------------------------------------------------------
In September 2000, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Standards (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 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.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Forward-looking Statement Disclosure
------------------------------------
This report 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; satisfaction of the conditions to closing of the sale of
our life insurance business; 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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note 5 to the
consolidated financial statements is incorporated
herein by reference.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The St. Paul's annual shareholders' meeting was held on
May 1, 2001.
(1) All thirteen persons nominated for directors by the
board of directors were named in proxies for the
meeting which were solicited pursuant to Regulation
14A under the Securities Exchange Act of 1934.
There was no solicitation in opposition to
management's nominees as listed in the proxy
statements. All thirteen nominees were elected by
the following votes:
In favor Withheld
-------------- -----------
Carolyn H. Baldwin 194,683,607 1,761,721
H. Furlong Baldwin 194,532,971 1,912,357
John H. Dasburg 181,686,633 14,758,695
Janet M. Dolan 194,726,586 1,718,742
Kenneth M. Duberstein 194,669,389 1,775,939
Pierson M. Grieve 194,591,035 1,854,293
Thomas R. Hodgson 194,712,839 1,732,489
David G. John 194,762,351 1,682,977
William H. Kling 194,657,500 1,787,828
Douglas W. Leatherdale 189,761,482 6,683,846
Bruce K. MacLaury 194,708,171 1,737,157
Glen D. Nelson 194,706,304 1,739,024
Gordon M. Sprenger 194,723,273 1,722,055
(2) By a vote of 194,547,020 in favor, 1,198,787
against and 699,572 abstaining, the shareholders
ratified the selection of KPMG LLP as the
independent auditors for The St. Paul.
(3) By a vote of 113,267,926 in favor, 63,476,512
against and 1,125,491 abstaining, the shareholders
approved certain amendments to The St. Paul's
Amended and Restated 1994 Stock Incentive Plan.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. An Exhibit Index is set forth as the
last page in this document.
(b) Reports on Form 8-K.
1) The St. Paul filed a Form 8-K Current
Report dated March 9, 2001, relating to the
announcement of the resignation of Paul J.
Liska as Executive Vice President and Chief
Financial Officer of The St. Paul, effective
April 1, 2001.
2) The St. Paul filed a Form 8-K Current
Report dated April 26, 2001, relating to the
announcement of an agreement to sell Fidelity
and Guaranty Life Insurance Company to Old
Mutual plc, a London-based international
financial services company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
THE ST. PAUL COMPANIES, INC.
(Registrant)
Date: May 14, 2001 By /s/ Bruce A. Backberg
---------------------
Bruce A. Backberg
Senior Vice President
(Authorized Signatory)
Date: May 14, 2001 By /s/ John C. Treacy
------------------
John C. Treacy
Vice President and
Corporate Controller
(Principal Accounting Officer)
EXHIBIT INDEX
-------------
Exhibit
- -------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession.....................................
(a) Stock Purchase Agreement between St. Paul Fire and Marine
Insurance Company and Old Mutual PLC related to sale
of Fidelity and Guaranty Life Insurance Company**...........(1)
(3) (i) Articles of incorporation*...................................
(ii) By-laws*....................................................
(4) Instruments defining the rights of security holders,
including indentures*.........................................
(10) Material contracts...............................................
(a) Senior Executive Severance Policy, as Amended**..............(1)
(b) Amendment to the Amended and Restated 1994 Stock
Incentive Plan**............................................(1)
(11) Statement re computation of per share earnings**.................(1)
(12) Statement re computation of ratios**.............................(1)
(15) Letter re unaudited interim financial information*................
(18) Letter re change in accounting principles*........................
(19) Report furnished to security holders*.............................
(22) Published report regarding matters submitted to
vote of security holders*......................................
(23) Consents of experts and counsel*..................................
(24) Power of attorney*................................................
(27) Financial data schedule*..........................................
(99) Additional exhibits*..............................................
* These items are not applicable.
** This exhibit is included only with the copies of this
report that are filed with the Securities and Exchange
Commission. However, a copy of the exhibit may be obtained
from the Registrant for a reasonable fee by writing to The
St. Paul Companies, Inc., 385 Washington Street, Saint
Paul, MN 55102, Attention: Corporate Secretary.
(1) Filed herewith.