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 June 30, 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 001-10898
---------
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 No.)
incorporation or organization)
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 August 10, 2001, was 208,947,154.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION --------
Consolidated Statements of Operations (Unaudited),
Three Months and Six Months Ended June 30, 2001 and 2000 3
Consolidated Balance Sheets, June 30, 2001
(Unaudited) and December 31, 2000 4
Consolidated Statements of Shareholders' Equity,
Six Months Ended June 30, 2001
(Unaudited) and Twelve Months Ended
December 31, 2000 6
Consolidated Statements of Comprehensive Income
(Unaudited), Six Months Ended June 30, 2001
and 2000 7
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 2001 and 2000 8
Notes to Consolidated Financial Statements
(Unaudited) 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 23
PART II. OTHER INFORMATION
Item 1 through Item 6 38
Signatures 38
EXHIBIT INDEX 39
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended
(In millions, except June 30 June 30
per share data) ------------------ ----------------
2001 2000 2001 2000
------ ------ ------ ------
Revenues:
Premiums earned $1,743 1,421 3,371 2,777
Net investment income 300 317 635 636
Asset management 85 84 170 177
Realized investment gains 7 110 83 445
Other 31 39 71 82
------ ------ ------ ------
Total revenues 2,166 1,971 4,330 4,117
------ ------ ------ ------
Expenses:
Insurance losses and loss
adjustment expenses 1,346 1,026 2,529 2,054
Policy acquisition expenses 356 321 736 658
Operating and administrative 331 323 634 584
------ ------ ------ ------
Total expenses 2,033 1,670 3,899 3,296
------ ------ ------ ------
Income from continuing
operations before
income taxes 133 301 431 821
Income tax expense 37 84 126 255
------ ------ ------ ------
Income from continuing
operations 96 217 305 566
Discontinued operations:
Operating gain (loss),
net of taxes - 2 (1) 15
Gain (loss) on disposal,
net of taxes 8 (7) 2 (12)
------ ------ ------ ------
Income (loss) from
discontinued operations,
net of taxes 8 (5) 1 3
------ ------ ------ ------
Net income $ 104 212 306 569
====== ====== ====== ======
Basic earnings per common share:
Income from continuing operations $0.43 1.00 1.37 2.57
Discontinued operations,
net of taxes 0.04 (0.02) 0.01 0.02
------ ------ ------ ------
Net income $0.47 0.98 1.38 2.59
====== ====== ====== ======
Diluted earnings per common
share:
Income from continuing operations $0.41 0.94 1.32 2.42
Discontinued operations,
net of taxes 0.04 (0.02) 0.01 0.01
------ ------ ------ ------
Net income $0.45 0.92 1.33 2.43
====== ====== ====== ======
Dividends declared on common stock $0.28 0.27 0.56 0.54
====== ====== ====== ======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
Restated
June 30, December 31,
ASSETS 2001 2000
- ---------- ----------- ------------
(Unaudited)
Investments:
Fixed maturities, at estimated fair value $15,823 $15,937
Equities, at estimated fair value 1,269 1,466
Real estate and mortgage loans 999 1,025
Venture capital, at estimated fair value 973 1,064
Securities lending collateral 1,003 1,207
Other investments 108 229
Short-term investments, at cost 850 1,124
------- --------
Total investments 21,025 22,052
Cash 94 52
Reinsurance recoverables:
Unpaid losses 5,121 4,651
Paid losses 382 324
Ceded unearned premiums 767 814
Receivables:
Underwriting premiums 2,983 2,937
Interest and dividends 269 277
Other 304 181
Deferred policy acquisition expenses 639 576
Deferred income taxes 986 930
Office properties and equipment, at cost less
accumulated depreciation of $464 (2000; $452) 486 492
Goodwill 519 510
Asset management securities held for sale 31 29
Other assets 1,871 1,677
------- -------
Total assets $35,477 $35,502
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In millions)
Restated
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
- ------------------------------------ -------- ------------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $18,411 $18,196
Unearned premiums 3,908 3,648
------- -------
Total insurance reserves 22,319 21,844
Debt 1,796 1,647
Payables:
Reinsurance premiums 933 1,060
Income taxes 127 170
Accrued expenses and other 946 1,031
Securities lending 1,023 1,231
Other liabilities 1,127 955
------- -------
Total liabilities 28,271 27,938
------- -------
Company-obligated mandatorily redeemable
preferred capital securities of trusts
holding solely subordinated debentures
of the Company 337 337
------- -------
Shareholders' equity:
Preferred:
SOP convertible preferred stock;
1.45 shares authorized; 0.8 shares
outstanding (0.8 shares in 2000) 114 117
Guaranteed obligation - SOP (58) (68)
------- -------
Total preferred shareholders' equity 56 49
------- -------
Common:
Common stock, 480 shares authorized;
211 shares outstanding (218 shares in 2000) 2,211 2,238
Retained earnings 4,143 4,243
Accumulated other comprehensive income:
Unrealized appreciation 522 765
Unrealized loss on foreign currency translation (62) (68)
Unrealized loss on derivatives (1) -
------- -------
Total accumulated other comprehensive income 459 697
------- -------
Total common shareholders' equity 6,813 7,178
------- -------
Total shareholders' equity 6,869 7,227
------- -------
Total liabilities, redeemable preferred
securities and shareholders' equity $35,477 $35,502
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In millions)
Six Twelve
Months Ended Months Ended
June 30 December 31
-------------- ------------
2001 2000
-------- --------
(Unaudited)
Preferred shareholders' equity:
Series B SOP convertible preferred stock:
Beginning of period $117 $129
Redemptions during period (3) (12)
-------- --------
End of period 114 117
-------- --------
Guaranteed obligation - SOP:
Beginning of period (68) (105)
Principal payments 10 37
-------- --------
End of period (58) (68)
-------- --------
Total preferred shareholders' equity 56 49
-------- --------
Common shareholders' equity:
Common stock:
Beginning of period 2,238 2,079
Stock issued under stock incentive plans 43 95
Stock issued for preferred shares redeemed 8 23
Conversion of company-obligated
preferred securities - 207
Reacquired common shares (86) (170)
Other 8 4
-------- --------
End of period 2,211 2,238
-------- --------
Retained earnings:
Beginning of period 4,243 3,827
Net income 306 993
Dividends declared on common stock (119) (232)
Dividends declared on preferred stock,
net of taxes (5) (8)
Reacquired common shares (303) (366)
Tax benefit on employee stock options,
and other changes 26 40
Premium on preferred shares redeemed (5) (11)
-------- --------
End of period 4,143 4,243
-------- --------
Unrealized appreciation, net of taxes:
Beginning of period 765 568
Change during the period (243) 197
-------- --------
End of period 522 765
-------- --------
Unrealized gain (loss)loss on foreign currency
translation, net of taxes:
Beginning of period (68) (26)
Change during the period 6 (42)
-------- --------
End of period (62) (68)
-------- --------
Unrealized loss on derivatives, net of taxes:
Beginning of period - -
Change during the period (1) -
-------- --------
End of period (1) -
-------- --------
Total common shareholders' equity 6,813 7,178
-------- --------
Total shareholders' equity $6,869 $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 Six Months Ended
June 30 June 30
------------------ ----------------
2001 2000 2001 2000
------ ------ ------ ------
Net income $104 $212 $306 $569
------ ------ ------ ------
Other comprehensive income (loss),
net of taxes:
Change in unrealized appreciation (130) (45) (243) 97
Change in unrealized loss
on foreign currency translation (13) (7) 6 (21)
Change in unrealized loss
on derivatives 1 - (1) -
------ ------ ------ ------
Other comprehensive income (loss) (142) (52) (238) 76
------ ------ ------ ------
Comprehensive income (loss) $ (38) $160 $ 68 $645
====== ====== ====== ======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In millions)
Six Months Ended
June 30
----------------------
2001 2000
------ ------
OPERATING ACTIVITIES
Net income $306 $569
Adjustments:
Gain from discontinued operations (1) (3)
Change in insurance reserves 601 232
Change in reinsurance balances (661) (615)
Realized investment gains (83) (445)
Change in deferred acquisition costs (65) (46)
Change in accounts payable and accrued expenses (81) (196)
Change in insurance premiums receivable (71) (210)
Change in income taxes payable/refundable (31) 177
Provision for federal deferred tax expenses 147 117
Depreciation and amortization 49 49
Change in other assets and liabilities (155) (128)
------ ------
Net Cash Used by Continuing Operations (45) (499)
Net Cash Provided by Discontinued Operations 101 75
------ ------
Net Cash Provided (Used) by
Operating Activities 56 (424)
------ ------
INVESTING ACTIVITIES
Purchase of investments (2,968) (2,957)
Proceeds from sales and maturities of investments 3,198 3,515
Net sales of short-term investments 267 165
Change in open security transactions 44 7
Purchases of office properties and equipment (34) (52)
Sales of office properties and equipment 3 7
Acquisitions, net of cash acquired - (206)
Proceeds from sale of subsidiaries - 201
Other (13) 86
------ ------
Net Cash Provided by Continuing Operations 497 766
Net Cash Used by Discontinued Operations (365) (246)
------ ------
Net Cash Provided by Investing Activities 132 520
------ ------
FINANCING ACTIVITIES
Dividends paid on common and preferred stock (124) (120)
Proceeds from issuance of debt 292 498
Repayment of debt (161) (415)
Repurchase of common shares (389) (333)
Stock options exercised and other (1) 34
------ ------
Net Cash Used by Continuing Operations (383) (336)
Net Cash Provided by Discontinued Operations 238 187
------ ------
Net Cash Used by Financing Activities (145) (149)
------ ------
Effect of exchange rate changes on cash (1) -
------ ------
Increase (decrease) in cash 42 (53)
Cash at beginning of period 52 105
------ ------
Cash at end of period $ 94 $ 52
====== ======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
June 30, 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 ("GAAP").
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 June 30, 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 The St. Paul's annual report to shareholders for
the year ended December 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 Share
- ---------------------------
The following table provides the calculation of our earnings per
common share for the three months and six months ended June 30,
2001 and 2000.
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2001 2000 2001 2000
------ ------ ------ ------
(In millions, except per share data)
EARNINGS
Basic:
Net income, as reported $104 $212 $306 $569
Dividends on preferred stock,
net of taxes (2) (2) (4) (4)
Premium on preferred shares redeemed (3) (2) (5) (6)
------ ------ ------ ------
Net income available to
common shareholders $ 99 $208 $297 $559
====== ====== ====== ======
Diluted:
Net income available to
common shareholders $ 99 $208 $297 $559
Effect of dilutive securities:
Convertible preferred stock 2 2 3 3
Zero coupon convertible notes 1 1 2 1
Convertible monthly income
preferred securities - 2 - 4
------ ------ ------ ------
Net income available to
common shareholders, as adjusted $102 $213 $302 $567
====== ====== ====== ======
COMMON SHARES
Basic:
Weighted average common
shares outstanding 214 212 215 216
====== ====== ====== ======
Diluted:
Weighted average common
shares outstanding 214 212 215 216
Effect of dilutive securities:
Stock options 4 2 4 1
Convertible preferred stock 7 7 7 7
Zero coupon convertible notes 2 2 2 3
Convertible monthly income
preferred securities - 7 - 7
------ ------ ------ ------
Total 227 230 228 234
====== ====== ====== ======
EARNINGS PER SHARE
Basic $0.47 $0.98 $1.38 $2.59
====== ====== ====== ======
Diluted $0.45 $0.92 $1.33 $2.43
====== ====== ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 3 - Investments
- --------------------
Investment Activity. The following is a summary of our
investment purchases, sales and maturities for continuing
operations.
Six Months Ended June 30
------------------------
2001 2000
------- -------
(In millions)
Purchases:
Fixed maturities $1,896 $1,459
Equities 868 1,189
Real estate and mortgage loans 48 -
Venture capital 147 299
Other investments 9 10
------- -------
Total purchases 2,968 2,957
------- -------
Proceeds from sales and maturities:
Fixed maturities 2,061 1,720
Equities 866 1,170
Real estate and mortgage loans 99 80
Venture capital 22 532
Other investments 150 13
------- -------
Total sales and maturities 3,198 3,515
------- -------
Net sales $(230) $(558)
======= =======
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
Six Months Ended Twelve Months Ended
June 30, 2001 December 31, 2000
---------------- -------------------
(In millions)
Fixed maturities $ 70 $467
Equities (228) (198)
Venture capital (216) (61)
Other (50) 47
------ ------
Total change in pretax
unrealized appreciation
on continuing operations (424) 255
Change in deferred taxes 167 (92)
------ ------
Total change in unrealized
appreciation on continuing
operations, net of taxes $ (257) $163
Change in pretax unrealized
appreciation on discontinued
operations 21 52
Change in deferred taxes (7) (18)
------ ------
Total change in pretax
appreciation on discontinued
operations, net of taxes 14 34
------ ------
Total change in pretax
appreciation, net of taxes $(243) $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 Six Months Ended
June 30 June 30
------------------ ----------------
2001 2000 2001 2000
------ ------ ------ ------
(In millions)
Federal current tax
expense (benefit) $ (13) $ (4) $ (25) $ 130
Federal deferred tax expense 51 88 147 117
------ ------ ------ ------
Total federal income
tax expense 38 84 122 247
Foreign income tax
expense (benefit) (2) (5) (1) 1
State income tax expense 1 5 5 7
------ ------ ------ ------
Total income tax expense $ 37 $ 84 $ 126 $ 255
====== ====== ====== ======
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:
June 30, December 31,
2001 2000
-------------- ----------------
Book Fair Book Fair
Value Value Value Value
----- ----- ----- ------
(In millions)
Medium-term notes $ 606 $ 612 $ 617 $ 619
Commercial paper 403 403 138 138
7-7/8% senior notes 249 264 249 261
8-1/8% senior notes 249 271 249 267
Zero coupon convertible notes 101 103 98 95
7-1/8% senior notes 80 82 80 82
Variable rate borrowings 64 64 64 64
Real estate debt 29 30 2 2
8-3/8% senior notes - - 150 151
----- ----- ----- -----
Total obligations 1,781 1,829 $1,647 $1,679
Fair value of interest ===== =====
rate swap agreements 15 15
----- -----
Total debt reported on
balance sheet $1,796 $1,844
===== =====
In June 2001, our $150 million, 8-3/8% senior notes matured. The
repayment of these notes was funded through a combination of
internally-generated funds and the issuance of commercial paper.
At June 30, 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 June 30, 2001 was an asset of $15
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 six
months ended June 30, 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 three months and six months ended June 30, 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 Six Months Ended
June 30 June 30
----------------- ------------------
2001 2000 2001 2000
------ ------ ------ ------
(In millions)
Revenues
Property-liability
insurance:
Commercial Lines Group $436 $392 $858 $780
Global Surety 109 107 213 220
Global Health Care 182 178 364 312
Other Specialty 437 333 861 661
International 257 169 427 246
------ ------ ------ ------
Total primary insurance
operations 1,421 1,179 2,723 2,219
Reinsurance 322 242 648 558
------ ------ ------ ------
Total property-liability
premiums earned 1,743 1,421 3,371 2,777
------ ------ ------ ------
Investment operations:
Net investment income 295 312 625 631
Realized investment gains 6 107 58 438
------ ------ ------ ------
Total investment
operations 301 419 683 1,069
Other 24 32 59 61
------ ------ ------ ------
Total property-
liability insurance 2,068 1,872 4,113 3,907
------ ------ ------ ------
Asset management 87 88 174 188
------ ------ ------ ------
Total reportable segments 2,155 1,960 4,287 4,095
Parent company, other
operations and consolidating
eliminations 11 11 43 22
------ ------ ------ ------
Total revenues $2,166 $1,971 $4,330 $4,117
====== ====== ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
- ---------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2001 2000 2001 2000
----- ----- ----- -----
(In millions)
Income (Loss) Before Income Taxes
Property-liability
insurance:
Commercial Lines Group $36 $54 $109 $ 32
Global Surety 15 12 32 31
Global Health Care (123) (45) (254) (64)
Other Specialty 41 4 51 (17)
International (51) (59) (89) (71)
----- ----- ----- -----
Total primary insurance (82) (34) (151) (89)
Reinsurance (31) (33) (49) (78)
----- ----- ----- -----
Total GAAP
underwriting result (113) (67) (200) (167)
----- ----- ----- -----
Investment operations:
Net investment income 295 312 625 631
Realized investment gains 6 107 58 438
----- ----- ----- -----
Total investment
operations 301 419 683 1,069
Other (41) (33) (45) (64)
----- ----- ----- -----
Total property-
liability insurance 147 319 438 838
----- ----- ----- -----
Asset management:
Pretax income before
minority interest 45 43 90 86
Minority interest (11) (10) (21) (20)
----- ----- ----- -----
Total asset management 34 33 69 66
----- ----- ----- -----
Total reportable segments 181 352 507 904
Parent company, other
operations and consolidating
eliminations (48) (51) (76) (83)
----- ----- ----- -----
Total income before
income taxes $133 $301 $431 $821
===== ===== ===== =====
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 entered into separate aggregate excess-
of-loss reinsurance treaties effective Jan. 1 of each year (the
"corporate program"). Coverage under the corporate program 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 six
months ended June 30, 2001 coverage under the corporate program
was not triggered; but we ceded $9 million and $5 million of
written and earned premiums, respectively, representing the
initial premium paid to our reinsurer. Under the separate
Reinsurance segment treaty, we ceded $45 and $43 million of
written and earned premiums, respectively, and $102 million of
insurance losses and loss adjustment expenses, for a net benefit
of $59 million, in the first six months of 2001.
In the six months ended June 30, 2000 our 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 $70 million,
and insurance losses and loss adjustment expenses of $111
million, resulting in a net benefit of $41 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 $56 million, and insurance losses and loss adjustment expenses
of $120 million, resulting in a net pretax benefit of $64 million
in the six months ended June 30, 2000.
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 and loss adjustment expenses
are as follows:
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
(In millions) 2001 2000 2001 2000
---- ---- ---- ----
Written premiums:
Direct $1,606 $1,288 $3,219 $2,410
Assumed 778 521 1,348 1,116
Ceded (531) (318) (868) (636)
----- ----- ----- -----
Net premiums written 1,853 1,491 3,699 2,890
===== ===== ===== =====
Earned premiums:
Direct 1,546 1,286 3,028 2,447
Assumed 715 420 1,237 918
Ceded (518) (285) (894) (588)
----- ----- ----- -----
Total premiums earned 1,743 1,421 3,371 2,777
===== ===== ===== =====
Insurance losses and loss
adjustment expenses:
Direct 1,206 995 2,426 1,834
Assumed 650 463 1,061 1,036
Ceded (510) (432) (958) (816)
----- ----- ----- -----
Total net insurance
losses and loss
adjustment expenses $1,346 $1,026 $2,529 $2,054
===== ===== ===== =====
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.
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 of 2001,
we reduced the reserve by $1 million related to sublease and
buyout activity which 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
(In millions) Pre-tax at Dec. 31, at June 30,
----------- Charge 2000 Payments Adjustment 2001
------- ---------- -------- ---------- ----------
Lease
commitments
charged to
earnings: $75 $43 $(6) $(1) $36
=== === ==== ==== ===
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 an excess of
purchase price over net tangible assets acquired of approximately
$85 million, which we expect to amortize 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 June 30, 2001, 118 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 Pre-tax at Dec. 31, at June 30,
earnings: Charge 2000 Payments Adjustment 2001
--------- -------- ---------- -------- ---------- ----------
Employee-
related $ 4 $ 1 $(1) $ - $ -
Occupancy-
related 24 23 (7) (8) 8
----- ----- ----- ----- -----
Total $28 $24 $(8) $(8) $8
===== ===== ===== ===== =====
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 have performed a
comprehensive review of our entire Global Health Care segment.
Based on the results of this review and specific actions
identified to restore this segment to future profitability, as
well as our evaluation of the ongoing strategic value of the
Unionamerica entity, MMI's United Kingdom - based subsidiary, we
have determined that the excess of purchase price over net
tangible assets acquired we recorded as part of the MMI purchase
has not been impaired.
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 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 the six months ended June 30, 2001 movement
in interest rates was a $500,000 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 six months ended
June 30, 2001, we recognized a $1.5 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 six months ended June 30, 2001 we
recognized a loss in the income statement of less than $1 million
representing the portions of the forward contracts deemed
ineffective.
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 $600,000 of
operating and administrative expense in the six months ended June
30, 2001 relating to the change in the market value of these
derivatives during the period.
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, The St. Paul, or any direct or indirect
wholly owned subsidiary of The St. Paul, 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 in the
third quarter of 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.
Our consolidated statements of operations presented herein
reflect F&G Life's results of operations in discontinued
operations. In the first six months of 2001, F&G Life recorded
net income of $14 million, compared with net income of $15
million in the same period of 2000. In addition, on our
consolidated balance sheet as of June 30, 2001, F&G Life's net
assets of $614 million were included in "Other Assets,"
classified as net assets of discontinued operations.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 12 - Discontinued Operations (continued)
- ---------------------------------------------
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 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 June 30, 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 six months of 2001, we
recorded a pretax loss of $19 million in discontinued operations,
related to pre-sale non-Economy claims. 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
June 30, 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. The transaction is expected to be finalized in
the third quarter of 2001. F&G Life's results of operations have
been reclassified to discontinued operations for all periods
presented in the following discussion.
Consolidated Results
--------------------
The following table summarizes The St. Paul's results for the
second quarter and first six months of 2001 and 2000.
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
(In millions, except per share data) 2001 2000 2001 2000
---------------------------------- ----- ----- ----- -----
Pretax income (loss):
Property-liability insurance:
GAAP underwriting result $(113) $ (67) $(200) $(167)
Net investment income 295 312 625 631
Realized investment 6 107 58 438
Other (41) (33) (45) (64)
----- ----- ----- -----
Total property-liability insurance 147 319 438 838
Asset management 34 33 69 66
Parent and other (48) (51) (76) (83)
----- ----- ----- -----
Pretax income from
continuing operations 133 301 431 821
Income tax expense 37 84 126 255
----- ----- ----- -----
Income from continuing operations 96 217 305 566
Discontinued operations, net of taxes 8 (5) 1 3
----- ----- ----- -----
Net income $104 $212 $306 $569
===== ===== ===== =====
Diluted net income per share $0.45 $0.92 $1.33 $2.43
===== ===== ===== =====
Consolidated Results
- --------------------
Our pretax income from continuing operations of $133 million in
the second quarter of 2001 was 56% below comparable pretax income
of $301 million in the same 2000 period. Through the first half
of 2001, pretax income from continuing operations was nearly $400
million below the comparable period of 2000. The decline in both
second quarter and year-to-date earnings was primarily due to a
significant decrease in realized investment gains in our property-
liability operations. Realized gains in 2000 were unusually high
due to the sale of several venture capital investments. In
addition, underwriting results in our property-liability
operations for the second quarter and first six months of 2001
deteriorated from comparable 2000 levels, primarily due to
adverse prior-year loss development in our Health Care segment.
Agreement to Sell F&G Life Insurance Company
- --------------------------------------------
In April 2001 Fire and Marine 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 agreement, Fire and Marine
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
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 in the third quarter of 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 and six
months ended June 30, 2001 and 2000 are included in discontinued
operations on our consolidated statements of income. In the
first half of 2001, F&G Life recorded net income of $14 million,
compared with net income of $15 million in the same period of
2000. F&G Life's product sales totaled $701 million in the first
half of 2001, compared with sales of $487 million in the same
2000 period.
Discontinued Operations - Personal Insurance
- --------------------------------------------
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 June 30, 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 half of 2001 and 2000, we
recorded pretax losses of $19 million and $8 million,
respectively, in discontinued operations related to these
agreements.
Common Share Repurchases
- ------------------------
In the second quarter of 2001, we repurchased and retired 4.1
million of our common shares for a total cost of $202 million,
bringing our six month repurchase total to 8.3 million shares at
a total cost of $389 million, or $46.68 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 six months of 2001 represented
approximately 4% 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 Accounting 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. We
also 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. Our adoption
of SFAS No 133, as amended, did not have a material impact on our
financial position or results of operations.
Subsequent Event- Agreement to Purchase London Guarantee Insurance Company
- --------------------------------------------------------------------------
On August 3, 2001 we announced a definitive agreement to purchase
London Guarantee Insurance Company for US$80 million/C$125
million. London Guarantee, headquartered in Toronto, is a
specialty property-liability insurance company focused on
providing surety products, and management liability, bond, and
professional indemnity products. The company generated
approximately C$65 million in net written premiums in 2000. The
transaction is expected to close within three to five months,
after regulatory approval has been received and the appropriate
closing conditions are met.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance
----------------------------
Overview
- --------
Our consolidated written premiums totaled $1.85 billion in the
second quarter of 2001, 24% higher than premium volume of $1.49
billion in the same period of 2000. Through the first half of
2001, our reported premium volume of $3.70 billion grew $808
million, or 28%, over comparable 2000 written premiums of $2.89
billion. Several factors impacted the comparability of our 2001
and 2000 year-to-date premium volume. First, we acquired MMI
Companies, Inc. ("MMI"), an international health care risk
services company, in April 2000. MMI accounted for $97 million
of incremental written premiums in the first half of 2001.
Second, last year's six-month premium total included $31 million
of incremental premiums resulting from the elimination of the one-
quarter reporting lag for our reinsurance operations based in the
United Kingdom ("St. Paul Re - UK"). Third, our reported premium
volume for the first six months of 2001 and 2000 was reduced by
$54 million and $136 million, respectively, by cessions made
under certain reinsurance treaties (described below). Excluding
all of these factors in both years, six-month consolidated
premiums of $3.66 billion in 2001 were 22% higher than comparable
2000 premium volume of $3.0 billion. The growth in premiums in
2001 was due to price increases and strong renewal retention
rates throughout nearly all of our business segments, as well as
new business in several of those segments.
In both 2001 and 2000, we entered into separate aggregate excess-
of-loss reinsurance treaties effective Jan. 1 of each year (the
"corporate reinsurance program"). Coverage under the corporate
reinsurance program 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 reinsurance
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 in 2001 and 2000.
In the three months ended June 30, 2001 and 2000, and in the six
months ended June 30, 2001, coverage under the corporate reinsurance
program was not triggered; the written and earned premiums ceded in
those periods represent the initial premium paid to our reinsurer.
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
(In millions) 2001 2000 2001 2000
----------- ---- ---- ---- ----
Corporate program:
Ceded written premiums $ - $ - $ 9 $ 80
Ceded earned premiums 2 5 5 70
Ceded losses and loss
adjustment expenses - - - 111
--- --- --- ---
Net pretax benefit (detriment) (2) (5) (5) 41
--- --- --- ---
Reinsurance segment treaty:
Ceded written premiums 42 39 45 56
Ceded earned premiums 40 39 43 56
Ceded losses and loss
adjustment expenses 76 88 102 120
--- --- --- ---
Net pretax benefit 36 49 59 64
--- --- --- ---
Combined total:
Ceded written premiums 42 39 54 136
Ceded earned premiums 42 44 48 126
Ceded losses and loss
adjustment expenses 76 88 102 231
--- --- --- ---
Net pretax benefit $ 34 $ 44 $ 54 $ 105
=== === === ===
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 Six Months
Ended June 30 Ended June 30
------------- -------------
(In millions) 2001 2000 2001 2000
----------- ---- ---- ---- ----
Commercial Lines Group $ - $ - $ (1) $ -
Global Health Care (1) - (1) -
Other Specialty - - (1) -
International - (1) (1) 12
---- ---- ---- ----
Total Primary Insurance (1) (1) (4) 12
Reinsurance 35 45 58 93
---- ---- ---- ----
Total Property
Liability Insurance $ 34 $ 44 $ 54 $105
==== ==== ==== ====
Our reported consolidated loss ratio, which measures insurance
losses and loss adjustment expenses as a percentage of earned
premiums, was 77.2 in the second quarter of 2001, five points
worse than the second-quarter 2000 loss ratio of 72.2. The 2001
ratio included a 6.1 point detriment from a $107 million
provision to strengthen prior-year loss reserves in our Global
Health Care segment. The second-quarter 2000 ratio included a
7.2 point benefit resulting from a $102 million reduction in
reserves related to favorable prior year development on workers'
compensation coverages. Excluding those factors, the adjusted
2001 second-quarter ratio of 71.1 was significantly better than
the adjusted second-quarter 2000 loss ratio of 79.4. The
improvement was centered in our Commercial Lines Group and Other
Specialty business segments. Catastrophe losses in the second
quarter totaled $69 million, the majority of which were the
result of Tropical Storm Allison, which struck the southeastern
United States in May. In last year's second quarter, catastrophe
losses of $67 million were largely the result of additional loss
development from European storms at the end of 1999.
Through the first six months of 2001, the pricing environment
throughout virtually all of the commercial and reinsurance
markets in which we operate continued to be favorable. Price
increases throughout our United States primary insurance
operations averaged 14% in the first half of the year. We expect
to achieve continued price increases in the second half of 2001.
In the majority of our business segments, current underwriting
year results continued to improve, reflecting the success of our
efforts to improve the quality of our business through
disciplined risk selection, and the impact of sustained price
increases over the last 18 months.
Our reported consolidated expense ratio, measuring underwriting
expenses as a percentage of premiums written, was 29.3 for the
second quarter and 30.2 for the first half of 2001, compared to
expense ratios of 32.9 and 32.3 for the respective periods of
2000. Excluding the reinsurance treaties in both years, the year-
to-date 2001 expense ratio of 29.8 was over a point better than
the comparable 2000 ratio of 30.9. The improvement over 2000
reflects the combined effect of significant premium growth and
the efficiencies realized as a result of our expense reduction
initiatives over the last two years.
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).
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
% of Three Months Six Months
2001 Ended June 30 Ended June 30
(Dollars in millions) Written ------------- -------------
------------------- Premiums 2001 2000 2001 2000
-------- ----- ----- ----- -----
Commercial Lines Group:
Written Premiums 25% $444 403 935 795
Underwriting Result $36 54 109 32
Combined Ratio 91.7 86.5 85.9 96.4
Global Health Care:
Written Premiums 9% $147 127 324 240
Underwriting Result $(123) (45) (254) (64)
Combined Ratio 175.3 133.2 172.9 125.1
Global Surety:
Written Premiums 6% $108 117 213 240
Underwriting Result $15 12 32 31
Combined Ratio 85.5 87.7 85.0 83.8
Other Specialty:
Written Premiums 25% $477 361 939 679
Underwriting Result $41 4 51 (17)
Combined Ratio 89.7 97.9 93.8 102.0
International:
Written Premiums 14% $369 249 522 312
Underwriting Result $(51) (59) (89) (71)
Combined Ratio 119.0 129.8 120.1 125.7
--- ----- ----- ----- -----
Total Primary Insurance:
Written Premiums 79% $1,545 1,257 2,933 2,266
Underwriting Result $(82) (34) (151) (89)
Combined Ratio 105.6 102.7 105.2 104.2
Reinsurance:
Written Premiums 21% $308 234 766 624
Underwriting Result $(31) (33) (49) (78)
Combined Ratio 111.1 116.8 105.1 115.1
--- ----- ----- ----- -----
Total Property-Liability
Insurance:
Written Premiums 100% $1,853 1,491 3,699 2,890
GAAP Underwriting Result $(113) (67) (200) (167)
Statutory Combined Ratio:
Loss and Loss Expense Ratio 77.2 72.2 75.0 74.0
Underwriting Expense Ratio 29.3 32.9 30.2 32.3
----- ----- ----- -----
Combined Ratio 106.5 105.1 105.2 106.3
===== ===== ===== =====
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, which had a minimal impact on year-to-date
results in 2001.
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Dollars in millions) 2001 2000 2001 2000
------ ------ ------ ------
Net written premiums $444 $403 $938 795
Percentage change from 2000 10% 18%
GAAP underwriting profit $36 $54 $110 $32
Statutory combined ratio:
Loss and loss adjustment
expense ratio 62.5 53.2 55.9 62.7
Underwriting expense ratio 29.2 33.3 29.8 33.7
----- ----- ----- -----
Combined ratio 91.7 86.5 85.7 96.4
===== ===== ===== =====
Premium growth in the second quarter and first six months of 2001
was driven by price increases, strong renewal retention rates and
new business. In the first half of the year, price increases
averaged 12.0% in our standard and nonstandard commercial
operations. Despite these increases, our renewal retention rates
continued to grow in the second quarter. We expect price
increases on renewal business to continue in the second half of
2001.
The reported second-quarter 2001 loss ratio included a 7.2 point
impact of catastrophe losses totaling $31 million, the majority
of which resulted from Tropical Storm Allison. Catastrophe
losses in the second quarter of 2000 were $5 million. The
reported year-to-date loss ratio in 2001 benefited from a $100
million reduction in previously established reserves in the first
quarter, which resulted from an actuarial analysis of reserves
for certain business written prior to 1989. In 2000, the year-to-
date loss ratio included the benefit of a $69 million reduction
in previously established workers' compensation reserves.
Excluding those reserve reductions in both years, the adjusted
six-month 2001 loss ratio of 67.5 was four points better than the
adjusted 2000 ratio of 71.5, despite the $26 million increase in
catastrophe losses in 2001. The significant improvement in the
second-quarter and year-to-date expense ratios in 2001 reflected
the combined impact of our aggressive expense reduction
initiatives over the last several years and the significant
growth in written premium volume.
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 Global Health
Care excluding the impact of the corporate reinsurance program,
which had a minimal impact on second-quarter and six-month
results in 2001.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
(Dollars in millions) 2001 2000 2001 2000
------------------- ------ ------ ------ ------
Net written premiums $147 $127 $325 $240
Percentage change from 2000 16% 35%
GAAP underwriting loss $(122) $(45) $(253) $(64)
Statutory combined ratio:
Loss and loss adjustment
expense ratio 148.9 97.3 147.6 94.4
Underwriting expense ratio 26.4 35.9 25.1 30.7
----- ----- ----- -----
Combined ratio 175.3 133.2 172.7 125.1
===== ===== ===== =====
Premium growth in the second quarter and first six months of 2001
was predominantly due to price increases, which averaged 21.9%
across this segment in the first half of the year. In addition,
approximately $48 million of the increase in year-to-date premium
volume resulted from our acquisition of MMI in April 2000. We
have severely curtailed the amount of new business in the Global
Health Care segment in 2001 due to an unfavorable pricing
environment in many of the lines of business and geographical
locations in which we offer our products.
The severe deterioration in the second-quarter 2001 loss ratio in
comparison to the same 2000 period was due to a $107 million
provision to strengthen loss reserves for the accident years 1997
through 1999. Our actuarial analysis indicated that the severity
of losses incurred throughout our domestic operations, including,
but not limited to, business acquired in the MMI transaction, had
increased to a degree that warranted the recording of additional
reserves for those accident years. Amounts awarded in jury
verdicts in professional liability lawsuits have continued to
increase sharply, resulting in an increase in our estimate of
ultimate losses incurred and causing a severe impact on our
second-quarter and year-to-date results in 2001. We have
undertaken an initiative in 2001 to accelerate the resolution of
high-severity claims in order to minimize the impact of the
increase in the cost of jury verdicts. This initiative
accelerated paid losses into the current period that would have
otherwise been included in future periods, and has contributed to
the increase in severity which prompted the reserve strengthening
in the second quarter. Severity trends for business written in
accident years 2000 and 2001 have not exhibited the same
deterioration experienced in the earlier accident years,
indicating that the actions we have implemented in the last two
years to significantly raise prices, exit unfavorable geographic
locations and restrict the terms and conditions of coverage
offered have favorably impacted loss experience for those years.
In the second quarter of 2001, we completed a comprehensive
review of our entire Health Care segment. Based on the results
of that review and specific actions identified to restore this
segment to future profitability , as well as our evaluation of
the strategic value of the Unionamerica entity, MMI's United
Kingdom-based subsidiary, we have determined that the excess
purchase price over net tangible assets acquired we recorded as
part of the MMI acquisition has not been impaired.
In the second half of 2001, we will continue to pursue price
increases in the Health Care segment. Of the 28 states in which
we filed for approval for rate increases on July 2001 renewals
for physicians and surgeons coverage, we received approval in 23
states, with price increases averaging 20%.
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 second quarter and first six 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 Six Months Ended
June 30 June 30
------------------ -----------------
(Dollars in millions) 2001 2000 2001 2000
------------------- ------ ------ ------ ------
Net written premiums $108 $117 $214 $240
Percentage change from 2000 (8)% (11)%
GAAP underwriting profit $15 $12 $32 $31
Statutory combined ratio:
Loss and loss adjustment
expense ratio 35.5 35.3 33.4 35.6
Underwriting expense ratio 50.0 52.4 51.3 48.2
----- ----- ----- -----
Combined ratio 85.5 87.7 84.7 83.8
===== ===== ===== =====
The decline in written premium volume compared with 2000 reflects
the impact of tightened underwriting standards implemented in
anticipation of an economic slowdown in both the United States
and Mexico. Such a slowdown could have a negative impact on the
construction industry, and, in turn, on our contract surety
operations. The improvement in Global Surety's year-to-date 2001
loss ratio over the same 2000 period was primarily due to
favorable current-year loss experience. The increase in the
expense ratio over 2000 was driven by higher reinsurance costs in
the first half of 2001.
Other Specialty
- ---------------
The Other Specialty segment includes the following business
centers: Construction, Technology, Global Marine, Financial &
Professional Services, Public Sector Services, Excess & Surplus
Lines and Oil & Gas. The following table summarizes results for
this segment excluding the impact of the corporate reinsurance
program, which had a minimal impact on year-to-date results in
2001.
Three Months Ended Six Months Ended
June 30 June 30
------------------- ----------------
(Dollars in millions) 2001 2000 2001 2000
------------------- ------ ------ ------ ------
Net written premiums $477 $361 $941 $679
Percentage change from 2000 32% 39%
GAAP underwriting profit (loss) $41 $4 $52 $(17)
Statutory combined ratio:
Loss and loss adjustment
expense ratio 61.7 67.4 65.8 71.7
Underwriting expense ratio 28.0 30.5 27.8 30.3
----- ----- ----- -----
Combined ratio 89.7 97.9 93.6 102.0
===== ===== ===== =====
Significant price increases, strong renewal retention rates and
new business throughout the business centers comprising this
segment accounted for the growth in second-quarter and year-to-
date premium volume over the equivalent periods of 2000. In our
Construction operation, premium volume of $149 million in the
second quarter was 37% ahead of the same period last year, and
year-to-date premiums of $308 million grew 44% over 2000. Price
increases in this operation averaged 17.0% for the first half of
2001. Our Technology business center
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
recorded premiums of $107 million and $201 million for the second
quarter and first six months of 2001, respectively, representing
growth rates of 37% and 43% over the respective periods of 2000.
Technology price increases averaged 12.4% for the first six
months of the year. Year-to-date written premiums of $190
million in Financial & Professional Services were 26% ahead of
2000, driven by new business in international markets and price
increases averaging 9.8%.
The 5.7 point improvement in the second-quarter loss ratio over
the same 2000 period was centered in Financial & Professional
Services and, to a lesser extent, in Excess & Surplus Lines, and
was primarily the result of favorable development on prior-year
losses in both business centers. Second-quarter and six-month
results in 2000 included a $33 million benefit from a reduction
in previously established workers' compensation reserves.
Excluding that benefit from year-to-date 2000 results, the loss
ratio of 65.8 for the first half of 2001 was nearly 11 points
better than the adjusted 2000 ratio of 76.7. Financial &
Professional Services, Technology, Construction and Global Marine
were all major contributors to the significant improvement in
year-to-date results in 2001, reflecting the favorable impact of
significant price increases over the last 12 months and the
underlying improvement in the quality of our business in these
market sectors.
International
- -------------
Our International segment consists of our operations at Lloyd's,
specialty business underwritten 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 second quarter and
first six months of 2001 and 2000 excluding the impact of the
corporate reinsurance program, which is detailed on page 26 of
this report.
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
(Dollars in millions) 2001 2000 2001 2000
------------------- ------ ------ ------ ------
Net written premiums $369 $249 $522 $335
Percentage change from 2000 48% 56%
GAAP underwriting loss $(51) $(58) $(88) $(83)
Statutory combined ratio:
Loss and loss adjustment
expense ratio 98.6 102.7 95.0 99.7
Underwriting expense ratio 20.4 27.1 24.9 28.9
----- ----- ----- -----
Combined ratio 119.0 129.8 119.9 128.6
===== ===== ===== =====
The 48% increase in second-quarter 2001 premium volume over the
same 2000 period was primarily the result of our increased
involvement at Lloyd's, which accounted for $272 million of the
International segment's premium volume for the quarter.
Significant price increases at Lloyd's and in primary insurance
markets throughout the world were also a major contributor to
premium growth in the second quarter. In addition to these
factors, the increase in year-to-date premium volume over 2000
was partially due to incremental premiums from Unionamerica,
which was acquired in the MMI transaction in April 2000.
Although we ceased writing new business through Unionamerica
Insurance Company in 2001, we are contractually obligated to
underwrite business in certain of Unionamerica's syndicates at
Lloyd's.
International's loss ratios for the second quarter and first six
months of 2001 showed slight improvement over the comparable
periods of 2000, primarily due to price increases over the last
several quarters and improved loss experience in several Lloyd's
syndicates. We are in the process of reorganizing our operations
at Lloyd's, focusing on increasing our capacity in selected
syndicates that offer potential for profitable growth. We
continue to implement corrective underwriting, pricing and
efficiency initiatives throughout the entire International
segment, and we expect further improvement in results during the
second half of 2001.
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 business, 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 excluding the impact of the reinsurance
treaties, which is detailed on page 26 of this report.
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
(Dollars in millions) 2001 2000 2001 2000
------------------- ------- ------- ------ -------
Net written premiums $350 $273 $812 $737
Percentage change from 2000 28% 10%
GAAP underwriting loss $(66) $(77) $(106) $(170)
Statutory combined ratio:
Loss and loss adjustment
expense ratio 87.6 105.5 82.1 103.1
Underwriting expense ratio 31.8 26.3 31.3 23.7
----- ----- ----- -----
Combined ratio 119.4 131.8 113.4 126.8
===== ===== ===== =====
Premium growth in 2001 was driven by significant price increases
across virtually all lines of traditional reinsurance coverages
and new business opportunities in the nontraditional insurance
market. Year-to-date premium volume last year included $31
million of incremental premiums resulting from the elimination of
the one-quarter reporting lag for St. Paul Re - UK. Excluding
those premiums, St. Paul Re's 2001 year-to-date premium volume
was $106 million, or 15%, higher than the adjusted 2000 total.
The improvement in St. Paul Re's loss ratio for the second
quarter and first six months of 2001 reflected the impact of
price increases and corrective underwriting initiatives over the
last several quarters, as well as a decline in catastrophe losses
incurred. Catastrophe losses totaled $21 million and $16
million for the second quarter and first six months of 2001,
respectively, compared with losses of $63 million and $110
million in the respective periods of 2000. Catastrophe losses for
the first quarter of 2001 included $5 million of positive
development on prior accident years, causing year-to-date totals
to be less than quarter-only. Tropical Storm Allison and spring
storms in the Midwest were the primary source of catastrophe
losses in the second quarter of 2001, while additional loss
development from 1999 European windstorms accounted for the
majority of losses in the same period of 2000. The deterioration
in expense ratios compared with 2000 was primarily the result of
an increase in contingent commissions in St. Paul Re's
nontraditional business, and an increase in ceded commissions on
premium adjustments from 1999 and 2000 reinsurance treaties. The
increase in both types of commissions was indicative of favorable
loss experience on that business.
Investment Operations
- ---------------------
The St. Paul's property-liability insurance operations produced
pretax investment income of $295 million in the second quarter of
2001, down 5% from income of $312 million in the same period of
2000. Our year-to-date pretax investment income of $625 million,
however, was only slightly below comparable 2000 income of $631
million, primarily due to strong returns generated by our real
estate portfolio in the first quarter of the year.
Negative underwriting cash flows have resulted in the net sale of
fixed-maturity investments to fund a portion of our operational
cash flow requirements, which has been the primary factor in the
decline in investment income in the last several quarters.
Underwriting cash flows have been negatively impacted by an
increase in insurance loss and loss adjustment expense payments,
particularly in our Health Care and International segments, which
has more than offset the increase in premium collections from new
business and significant price increases. Cumulative premium
payments totaling $639 million since the fourth quarter of 1999
related to our corporate reinsurance program have also reduced
funds available for investment. In addition, in January 2001 we
undertook an initiative to hasten the
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Investment Operations (continued)
- --------------------------------
settlement of potentially high-severity pending claims throughout
our property-liability operations, which has resulted in an
acceleration of claim payments in the first half of the year. We
expect our underwriting cash flows to improve in the last half of
the year due to continued price increases and further improvement
in loss experience throughout our property-liability business
segments.
Pretax realized investment gains in our property-liability
insurance operations totaled $6 million in the second quarter,
compared with $107 million in the same period of 2000. Through
the first six months of 2001, realized gains of $58 million were
much lower than the year-to-date 2000 total of $438 million. An
uncertain economic outlook contributed to a decline in equity
values and a lack of venture capital activity during the first
half of 2001, resulting in a significant reduction in realized
gains in comparison to 2000. 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. Last
year's record six-month total was dominated by gains from our
venture capital portfolio, including the single largest gain
($117 million) from the sale of our investment in Flycast
Communications Corp., a leading provider of Internet direct
response solutions. We also sold several other direct holdings,
and our investments in various venture capital partnerships also
contributed to the six-month 2000 realized gain total.
Despite the decline in investment values, the quality of our
portfolio remains high, and we have not recorded any significant
permanent impairments in the carrying value of our investment
holdings. The market value of our $15.1 billion fixed maturities
portfolio was nearly $500 million higher than its cost on June
30, 2001. Approximately 95% of our portfolio is rated at
investment grade (BBB or above), and its weighted average pretax
yield at June 30, 2001 was 6.8%. The combined carrying value of
our equity and venture capital investments at June 30, 2001
included pretax unrealized appreciation of $317 million.
Environmental and Asbestos Claims
---------------------------------
We continue to receive claims alleging injury or damage from
environmental pollution or seeking payment for the cost to clean
up polluted sites. We also receive asbestos injury claims
arising out of product liability coverages under general
liability policies. The vast majority of these claims arise from
policies written many years ago. Our alleged liability for both
environmental and asbestos claims is complicated by significant
legal issues, primarily pertaining to the scope of coverage. In
our opinion, court decisions in certain jurisdictions have tended
to broaden insurance coverage beyond the intent of original
insurance policies.
Our ultimate liability for environmental claims is difficult to
estimate because of these legal issues. Insured parties have
submitted claims for losses not covered in their respective
insurance policies, and the ultimate resolution of these claims
may be subject to lengthy litigation, making it difficult to
estimate our potential liability. In addition, variables, such
as the length of time necessary to clean up a polluted site and
controversies surrounding the identity of the responsible party
and the degree of remediation deemed necessary, make it difficult
to estimate the total cost of an environmental claim.
Estimating our ultimate liability for asbestos claims is equally
difficult. The primary factors influencing our estimate of the
total cost of these claims are case law and a history of prior
claim development, both of which continue to evolve.
The following table represents a reconciliation of total gross
and net environmental reserve development for the six months
ended June 30, 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 (six months) 2000 1999
------------- ----------- ----------- -----------
(In millions) Gross Net Gross Net Gross Net
----------- ----- ---- ----- ---- ----- ----
Beginning reserves $665 $563 $698 $599 $783 $645
Incurred losses 35 31 25 14 (33) 1
Paid losses (34) (31) (58) (50) (52) (47)
---- ---- ---- ---- ---- ----
Ending reserves $666 $563 $665 $563 $698 $599
==== ==== ==== ==== ==== ====
The following table represents a reconciliation of total gross
and net reserve development for asbestos claims for the six
months ended June 30, 2001, and the years ended Dec. 31, 2000 and
1999.
2001
Asbestos (six months) 2000 1999
-------- ----------- ---------- -----------
(In millions) Gross Net Gross Net Gross Net
----------- ----- ---- ----- ---- ----- ----
Beginning reserves $397 $299 $398 $298 $402 $277
Incurred losses 27 36 41 33 28 51
Paid losses (25) (21) (42) (32) (32) (30)
---- ---- ---- ---- ---- ----
Ending reserves $399 $314 $397 $299 $398 $298
==== ==== ==== ==== ==== ====
Our reserves for environmental and asbestos losses at June 30,
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 June 30, 2001
of $1.07 billion represented approximately 6% of gross
consolidated reserves of $18.40 billion.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Asset Management
----------------
Our asset management segment consists of our 77% majority
ownership interest in The John Nuveen Company (Nuveen). Nuveen
provides customized individual accounts, mutual funds, exchange-
traded funds and defined portfolios to help financial advisors
serve their affluent and high net worth clients. Highlights of
Nuveen's performance for the second quarter and first six months
of 2001 and 2000 were as follows:
Three Months Six Months
Ended June 30 Ended June 30
--------------- ---------------
(In millions) 2001 2000 2001 2000
----------- ----- ----- ----- -----
Revenues $87 $88 $174 $188
Expenses 42 45 84 102
---- ---- ---- ----
Pretax earnings 45 43 90 86
Minority interest (11) (10) (21) (20)
---- ---- ---- ----
The St. Paul's share
of pretax earnings $34 $33 $69 $66
==== ==== ==== ====
Assets under management $62,990 $60,299
====== ======
Nuveen's revenues for the second quarter and first six months of
2001 declined from comparable 2000 levels, due to a reduction in
defined portfolio distribution revenue. Sales of equity and
fixed-income retail managed accounts, however, totaled $2.0
billion in the second quarter, 38% higher than the same period of
2000. The strong increase in the sales of these accounts, which
are customized investment portfolios marketed to the high-net-
worth market, pushed year-to-date total gross product sales to
$7.1 billion, a 19% increase over the first half of 2000. Equity
products accounted for 60% of Nuveen's year-to-date gross sales
total. The success of Nuveen's diverse selection of products for
affluent investors continues to result in strong positive net
asset flows (sales, plus reinvestments and exchanges, less
redemptions) in a volatile and uncertain market environment. Net
asset flows were $2.1 billion in the second quarter of 2001, 79%
higher than net flows of $1.1 billion in the same 2000 period.
Managed assets at the halfway point of 2001 consisted of $30.0
billion of exchange-traded funds, $21.1 billion of managed
accounts, $11.5 billion of mutual funds and $428 million of money
market funds. Total assets under management of $62.99 billion
grew nearly $1 billion over the year-end 2000 managed asset
total.
In July 2001, Nuveen completed its acquisition of Symphony Asset
Management, LLC, an institutional money manager specializing in
alternative investment strategies. This acquisition will add
over $4 billion to Nuveen's assets under management.
Capital Resources
-----------------
Common shareholders' equity totaled $6.81 billion at June 30,
2001, down $366 million from the year-end 2000 total of $7.18
billion. The decline reflected the impact of our significant
share repurchases in the first half of the year and a reduction
in the unrealized appreciation of our equity and venture capital
investment portfolio. Through the first six months of 2001, we
repurchased 8.3 million of our common shares for a total cost of
$389 million, and an average cost of $46.68 per share. The
repurchases were financed through a combination of internally-
generated funds and commercial paper borrowings. From November
1998 through June 2001, we have repurchased and retired 41.2
million of our common shares for a total cost of $1.42 billion,
or an average cost of $34.39 per share.
Total debt obligations at June 30, 2001 of $1.78 billion was $133
million higher than the year-end 2000 total of $1.65 billion. In
June 2001, our $150 million, 8.375% senior notes matured. That
decline in our debt was more than offset by the issuance of $265
million of commercial paper, which financed the maturity of the
senior notes and a portion of our share repurchases. The ratio
of total debt to total capitalization was 20% at June 30, 2001,
compared with 18% at the end of 2000.
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 of existing businesses
consistent with our specialty commercial focus. From July 1,
2001 through August 10, 2001, we repurchased 2.6 million common
shares for a total cost of $111 million. As of August 11, 2001,
we had approximately $174 million of capacity to repurchase
additional common shares under a repurchase program authorized by
the company's 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.
For the first six months of 2001, our ratio of earnings to fixed
charges was 6.03, compared with 10.51 for the same period of
2000. Our ratio of earnings to combined fixed charges and
preferred stock dividend requirements was 5.57, compared with
9.67 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 $45 million in the first six months of 2001,
compared with cash used by continuing operations of $499 million
in the same period of 2000. The improvement over 2000 was centered
in our property-liability underwriting operations and was primarily
due to price increases. Our asset management segment also contributed
to the improvement in operational cash flows in 2001. In our
property-liability operations, underwriting cash flows remained
negative, driven by significant loss payments in certain of our
business segments and premium payments related to our
corporate reinsurance program. We expect our operational
cash flows to continue to improve during the second
half 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 June 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141, "Business Combinations" which establishes
financial accounting and reporting standards for business
combinations. The provisions of this statement reflect a
fundamentally different approach to accounting for business
combinations than previous requirements. It requires all
business combinations to be accounted for under the purchase
method of accounting and no longer allows for the pooling method
to be used. In addition, this statement requires that intangible
assets that can be identified and meet certain criteria be
recognized as assets apart from goodwill. The provisions of this
statement apply to all business combinations initiated after June
30, 2001. We intend to implement SFAS 141 in the periods during
which its provisions become effective.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and
Other Intangible Assets" which establishes financial accounting
and reporting for acquired goodwill and other intangible assets.
It addresses how intangible assets that are acquired individually
or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial
statements upon their acquisition. It also addresses how
goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial
statements. The statement changes current accounting by
requiring intangible items to be tested for impairment on an
annual basis in lieu of the historical approach, which required
goodwill to be amortized over the estimated useful life, not to
exceed 40 years. The statement is effective for fiscal years
beginning after December 15, 2001. We intend to implement SFAS
No. 142 in the period during which its provisions become
effective. We have not determined the impact of adopting this
statement.
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 and other
actions and initiatives 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; worse than anticipated
loss development from business written in prior years; 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.
Not applicable.
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 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.
2) The St. Paul filed a Form 8-K Current Report dated July 16,
2001, relating to the announcement of the expected impact of
catastrophes and Health Care losses on The St. Paul's second-
quarter 2001 operating results.
3) The St. Paul filed a Form 8-K Current Report dated July 19,
2001, relating to the announcement of several changes in
executive management at the company, and the announcement of
second-quarter 2001 operating results.
4) The St. Paul filed a Form 8-K Current Report dated August 3,
2001, related to the announcement of an agreement to purchase
London Guarantee Insurance 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: August 14, 2001 By /s/ Bruce A. Backberg
--------------- ---------------------
Bruce A. Backberg
Senior Vice President
(Authorized Signatory)
Date: August 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*..................................
(3) (i) Articles of incorporation*.................................
(ii) By-laws*..................................................
(4) Instruments defining the rights of security holders,
including indentures*.......................................
(10) Material contracts*............................................
(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.