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 September 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
incorporation or organization) No.)
385 Washington St., Saint Paul, MN 55102
---------------------------------- ---------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (651) 310-7911
-------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
------ ------
The number of shares of the Registrant's Common Stock, without par
value, outstanding at October 31, 2001, was 207,405,759.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION -------
Consolidated Statements of Operations (Unaudited),
(Unaudited), Three Months and Nine Months
Ended September 30, 2001 and 2000 3
Consolidated Balance Sheets, September 30, 2001
(Unaudited) and December 31, 2000 4
Consolidated Statements of Shareholders' Equity,
Nine Months Ended September 30, 2001
(Unaudited) and Twelve Months Ended
December 31, 2000 6
Consolidated Statements of Comprehensive Income
(Unaudited), Nine Months Ended September 30, 2001
and 2000 7
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 2001 and 2000 8
Notes to Consolidated Financial Statements
(Unaudited) 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 25
PART II. OTHER INFORMATION
Item 1 through Item 6 42
Signatures 43
EXHIBIT INDEX 44
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
(In millions, September 30 September 30
(except per share data) ------------------ -----------------
data)
2001 2000 2001 2000
Revenues: ----- ----- ----- -----
Premiums earned $1,860 1,325 5,231 4,102
Net investment income 289 318 924 954
Asset management 95 88 265 265
Realized investment gains (losses) (81) 106 2 551
Other 67 24 133 99
----- ----- ----- -----
Total revenues 2,230 1,861 6,555 5,971
----- ----- ----- -----
Expenses:
Insurance losses and loss
adjustment expenses 2,455 813 4,984 2,867
Policy acquisition expenses 397 324 1,133 981
Operating and administrative 255 408 884 986
----- ----- ----- -----
Total expenses 3,107 1,545 7,001 4,834
----- ----- ----- -----
Income (loss) from
continuing operations
before income taxes (877) 316 (446) 1,137
Income tax expense (benefit) (282) 97 (156) 352
----- ----- ----- -----
Income (loss) from
continuing operations (595) 219 (290) 785
Discontinued operations:
Operating gain (loss),
net of taxes - 10 (1) 29
Gain (loss) on disposal,
net of taxes (64) 2 (61) (14)
----- ----- ----- -----
Income (loss) from
discontinued operations,
net of taxes (64) 12 (62) 15
----- ----- ----- -----
Net income (loss) $(659) 231 (352) 800
===== ===== ===== =====
Basic earnings (loss) per
common share:
Income (loss) from
continuing operations $(2.86) 0.98 (1.42) 3.56
Discontinued operations,
net of taxes (0.30) 0.06 (0.29) 0.07
----- ----- ----- -----
Net income (loss) $(3.16) 1.04 (1.71) 3.63
===== ===== ===== =====
Diluted earnings (loss) per
common share:
Income (loss) from
continuing operations $(2.86) 0.93 (1.42) 3.35
Discontinued operations,
net of taxes (0.30) 0.05 (0.29) 0.07
----- ----- ----- -----
Net income (loss) $(3.16) 0.98 (1.71) 3.42
===== ===== ===== =====
Dividends declared on
common stock $ 0.28 0.27 0.84 0.81
===== ===== ===== =====
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
Restated
September 30, December 31,
ASSETS 2001 2000
------ ------------- -----------
(Unaudited)
Investments:
Fixed maturities, at estimated fair value $14,962 $14,730
Equities, at estimated fair value 1,393 1,466
Real estate and mortgage loans 997 1,025
Venture capital, at estimated fair value 935 1,064
Securities lending collateral 1,053 1,207
Other investments 101 229
Short-term investments, at cost 2,438 2,331
------- -------
Total investments 21,879 22,052
Cash 168 52
Reinsurance recoverables:
Unpaid losses 6,505 4,651
Paid losses 338 324
Ceded unearned premiums 681 814
Receivables:
Underwriting premiums 3,236 2,937
Interest and dividends 273 277
Other 202 181
Deferred policy acquisition expenses 671 576
Deferred income taxes 1,136 930
Office properties and equipment, at cost less
accumulated depreciation of $473 (2000; $452) 488 492
Goodwill 585 510
Other assets 1,488 1,706
------- -------
Total assets $37,650 $35,502
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In millions)
Restated
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
------------------------------------ ------------ -----------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $20,874 $18,196
Unearned premiums 4,010 3,648
------- -------
Total insurance reserves 24,884 21,844
Debt 2,145 1,647
Payables:
Reinsurance premiums 944 1,060
Income taxes 58 170
Accrued expenses and other 918 1,031
Securities lending 1,099 1,231
Other liabilities 1,273 955
------- -------
Total liabilities 31,321 27,938
------- -------
Company-obligated mandatorily redeemable
preferred capital securities of trusts
holding solely subordinated
debentures of the Company 318 337
------- -------
Shareholders' equity:
Preferred:
SOP convertible preferred stock;
1.45 shares authorized; 0.8 shares
outstanding (0.8 shares in 2000) 113 117
Guaranteed obligation - SOP (53) (68)
------- -------
Total preferred shareholders' equity 60 49
------- -------
Common:
Common stock, 480 shares authorized;
207 shares outstanding (218 shares in 2000) 2,170 2,238
Retained earnings 3,285 4,243
Accumulated other comprehensive income:
Unrealized appreciation 570 765
Unrealized loss on foreign currency translation (69) (68)
Unrealized loss on derivatives (5) -
------- -------
Total accumulated other comprehensive income 496 697
------- -------
Total common shareholders' equity 5,951 7,178
------- -------
Total shareholders' equity 6,011 7,227
------- -------
Total liabilities, redeemable preferred
securities and shareholders' equity $37,650 $35,502
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In millions)
Nine Twelve
Months Ended Months Ended
September 30 December 31
------------ ------------
2001 2000
------- -------
(Unaudited)
Preferred shareholders' equity:
Series B SOP convertible preferred stock:
Beginning of period $117 $129
Redemptions during period (4) (12)
------ ------
End of period 113 117
------ ------
Guaranteed obligation - SOP:
Beginning of period (68) (105)
Principal payments 15 37
------ ------
End of period (53) (68)
------ ------
Total preferred shareholders' equity 60 49
------ ------
Common shareholders' equity:
Common stock:
Beginning of period 2,238 2,079
Stock issued under stock incentive plans 47 95
Stock issued for preferred shares redeemed 11 23
Conversion of company-obligated preferred securities - 207
Reacquired common shares (134) (170)
Other 8 4
------ ------
End of period 2,170 2,238
------ ------
Retained earnings:
Beginning of period 4,243 3,827
Net income (loss) (352) 993
Dividends declared on common stock (177) (232)
Dividends declared on preferred stock, net of taxes (6) (8)
Reacquired common shares (454) (366)
Tax benefit on employee stock
options, and other changes 37 40
Premium on preferred shares redeemed (6) (11)
------ ------
End of period 3,285 4,243
------ ------
Unrealized appreciation, net of taxes:
Beginning of period 765 568
Change during the period (195) 197
------ ------
End of period 570 765
------ ------
Unrealized loss on foreign currency
translation, net of taxes:
Beginning of period (68) (26)
Change during the period (1) (42)
------ ------
End of period (69) (68)
------ ------
Unrealized loss on derivatives, net of taxes:
Beginning of period - -
Change during the period (5) -
------ ------
End of period (5) -
------ ------
Total common shareholders' equity 5,951 7,178
------ ------
Total shareholders' equity $6,011 $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 Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
------ ------ ------ ------
Net income (loss) $(659) $231 $(352) $800
------ ------ ------ ------
Other comprehensive income (loss),
net of taxes:
Change in unrealized appreciation 48 70 (195) 167
Change in unrealized loss on
foreign currency translation (7) (21) (1) (42)
Change in unrealized loss on
derivatives (4) - (5) -
------ ------ ------ ------
Other comprehensive income (loss) 37 49 (201) 125
------ ------ ------ ------
Comprehensive income (loss) $(622) $280 $(553) $925
====== ====== ====== ======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In millions)
Nine Months Ended
September 30
-------------------------
2001 2000
OPERATING ACTIVITIES ------- -------
Net income (loss) $(352) $800
Adjustments:
Loss (gain) from
discontinued operations 62 (15)
Change in insurance reserves 3,047 289
Change in reinsurance balances (1,792) (876)
Realized investment gains (2) (551)
Change in deferred acquisition costs (95) (68)
Change in accounts payable
and accrued expenses (105) (91)
Change in insurance premiums receivable (300) (418)
Change in income taxes
payable/refundable (82) 68
Provision for federal deferred
tax expense (benefit) (3) 161
Depreciation and amortization 75 74
Change in other assets and liabilities (121) 27
------ ------
Net Cash Provided (Used)
by Continuing Operations 332 (600)
Net Cash Provided by
Discontinued Operations 217 138
------ ------
Net Cash Provided (Used)
by Operating Activities 549 (462)
------ ------
INVESTING ACTIVITIES
Purchase of investments (4,334) (3,970)
Proceeds from sales and
maturities of investments 4,599 4,854
Net sales (purchases)
of short-term investments (232) 263
Change in open security transactions 43 6
Purchases of office properties and equipment (52) (72)
Sales of office properties and equipment 4 8
Acquisitions, net of cash acquired (203) (202)
Proceeds from sale of subsidiaries 358 201
Other 9 (40)
------ ------
Net Cash Provided by Continuing Operations 192 1,048
Net Cash Used by Discontinued Operations (591) (440)
------ ------
Net Cash Provided (Used) by
Investing Activities (399) 608
------ ------
FINANCING ACTIVITIES
Dividends paid on common and preferred stock (185) (180)
Proceeds from issuance of debt 637 498
Repayment of debt and capital securities (196) (372)
Repurchase of common shares (588) (512)
Stock options exercised and other (44) 50
------ ------
Net Cash Used by Continuing Operations (376) (516)
Net Cash Provided by Discontinued Operations 343 315
------ ------
Net Cash Used by Financing Activities (33) (201)
------ ------
Effect of exchange rate changes on cash (1) -
------ ------
Increase (decrease) in cash 116 (55)
Cash at beginning of period 52 105
------ ------
Cash at end of period $ 168 $50
====== ======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
September 30, 2001
Note 1 - Basis of Presentation
------------------------------
The financial statements include The St. Paul Companies, Inc. and
its 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 September 28, 2001, our subsidiary, St. Paul Fire and Marine
Insurance Company, closed on the sale of 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 sheet as of Dec. 31, 2000, F&G Life's
net assets were included in "Other Assets," classified as net
assets of discontinued operations. See Note 13 on page 22 of this
report for further information on the sale of F&G Life.
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 Note 12
on page 21 and Note 7 on page 15 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
(loss) per common share for the three months and nine months
ended September 30, 2001 and 2000.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
------ ------ ------ ------
(In millions, except per share data)
EARNINGS
Basic:
Net income (loss), as reported $(659) $231 $(352) $800
Dividends on preferred stock,
net of taxes (2) (2) (6) (6)
Premium on preferred shares redeemed (1) (3) (6) (9)
------ ------ ------ ------
Net income (loss) available
to common shareholders $(662) $226 $(364) $785
====== ====== ====== ======
Diluted:
Net income (loss) available
to common shareholders $(662) $226 $(364) $785
Effect of dilutive securities:
Convertible preferred stock - 2 - 5
Zero coupon convertible notes - 1 - 5
Convertible monthly income
preferred securities - 1 - 2
------ ------ ------ ------
Net income (loss) available to
common shareholders, as adjusted $(662) $230 $(364) $797
====== ====== ====== ======
COMMON SHARES
Basic:
Weighted average common
shares outstanding 209 217 213 216
====== ====== ====== ======
Diluted:
Weighted average common
shares outstanding 209 217 213 216
Effect of dilutive securities:
Stock options - 4 - 2
Convertible preferred stock - 6 - 7
Zero coupon convertible notes - 2 - 2
Convertible monthly income
preferred securities - 3 - 6
------ ------ ------ ------
Total 209 232 213 233
====== ====== ====== ======
EARNINGS (LOSS) PER SHARE
Basic $(3.16) $1.04 $(1.71) $3.63
====== ====== ====== ======
Diluted $(3.16) $0.98 $(1.71) $3.42
====== ====== ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 2 - Earnings Per Share (continued)
--------------------------------------
Diluted EPS is the same as Basic EPS for both periods of 2001
because Diluted EPS calculated in accordance with Statement of
Financial Standards (SFAS) No. 128, "Earnings Per Share," for The
St. Paul's loss from continuing operations, results in a lesser
loss per share than the Basic EPS calculation does. The
provisions of SFAS No. 128 prohibit this "anti-dilution" of
earnings per share, and require that the larger Basic loss per
share also be reported as the Diluted loss per share amount.
Note 3 - September 11th Terrorist Attack
----------------------------------------
On September 11, 2001 a terrorist attack was made on the two
World Trade Center towers in New York, NY, the Pentagon in
Washington D.C. and on a passenger jet airplane that subsequently
crashed in Pennsylvania. This attack resulted in unprecedented
losses for the property-liability insurance industry. Our
estimated gross pretax losses and loss adjustment expenses
incurred as a result of the terrorist attack totaled $2.16
billion. The estimated net pretax operating loss of $866 million
from that event includes an estimated benefit of $1.2 billion
from cessions made under various reinsurance agreements, a $40
million provision for uncollectible reinsurance, a net $44
million benefit from additional and reinstated insurance and
reinsurance premiums, and a $90 million reduction in contingent
commission expenses in our Reinsurance segment. The estimated
net pretax operating loss of $866 million represented an increase
over the estimated operating loss of $700 million we announced on
September 19, 2001, primarily due to our intention, which we
announced on October 23, 2001, to not cede losses from the attack
to our corporate aggregate excess-of-loss reinsurance program.
The after-tax operating loss of $606 million attributable to the
attack included a write-off of $43 million in foreign tax
credits.
Our estimated losses are based on a variety of actuarial
techniques, coverage interpretation and claims estimation
methodologies, and include an estimate of losses incurred but not
reported, as well as estimated costs related to the settlement of
claims.
Our estimate of losses is also based on our belief that property-
liability insurance losses from the terrorist attack will total
between $30 billion and $35 billion for the insurance industry.
Our estimate of industry losses is subject to significant
uncertainties and may change over time as additional information
becomes available. A material increase in our estimate of
industry losses would likely cause us to make a corresponding
material increase to our provision for losses related to the
attack.
The estimated net pretax operating loss of $866 million was
distributed among our property-liability business segments as
follows:
Net Pretax
(In millions) Operating Loss
----------- --------------
International $164
Commercial Lines Group 147
Other Specialty 49
Global Health Care 6
Global Surety -
------
Total Primary Insurance 366
Reinsurance 500
------
Total Property-
Liability Insurance $866
======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 4 - Investments
--------------------
Investment Activity. The following is a summary of our
investment purchases, sales and maturities for continuing
operations.
Nine Months Ended September 30
------------------------------
2001 2000
-------- --------
(In millions)
Purchases:
Fixed maturities $2,754 $1,918
Equities 1,279 1,662
Real estate and mortgage loans 51 5
Venture capital 235 372
Other investments 15 13
------- -------
Total purchases 4,334 3,970
------- -------
Proceeds from sales and maturities:
Fixed maturities 3,057 2,352
Equities 1,274 1,666
Real estate and mortgage loans 94 209
Venture capital 13 613
Other investments 161 14
------- -------
Total sales and maturities 4,599 4,854
------- -------
Net sales $(265) $(884)
======= =======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 4 - Investments (continued)
-------------------------------
Change in Unrealized Appreciation. The increase (decrease) in
unrealized appreciation of investments recorded in common
shareholders' equity was as follows:
Restated
Nine Months Ended Twelve Months Ended
September 30, 2001 December 31, 2000
------------------- --------------------
(In millions)
Fixed maturities $ 342 $425
Equities (357) (199)
Venture capital (298) (61)
Securities lending collateral 18 43
Other (52) 47
-------- --------
Total change in pretax unrealized
appreciation on continuing operations (347) 255
Change in deferred taxes on
continuing operations 152 (92)
-------- --------
Total change in unrealized
appreciation on continuing
operations, net of taxes $ (195) $163
Change in pretax unrealized
appreciation on
discontinued operations - 52
Change in deferred taxes on
discontinued operations - (18)
-------- --------
Total change in pretax
appreciation on discontinued
operations, net of taxes - 34
-------- --------
Total change in unrealized
appreciation, net of taxes $(195) $197
======== ========
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 5 - Income Taxes
---------------------
The components of income tax expense (benefit) on income (loss) from
continuing operations were as follows :
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
------ ------ ------ ------
(In millions)
Federal current tax
expense (benefit) $ (71) $ 48 $ (96) $ 177
Federal deferred tax
expense (benefit) (152) 44 (3) 161
------ ------ ------ ------
Total federal income
tax expense (benefit) (223) 92 (99) 338
Foreign income tax
expense (benefit) (62) - (64) 1
State income tax expense 3 5 7 13
------ ------ ------ ------
Total income tax
expense (benefit) $ (282) $ 97 $(156) $352
====== ====== ====== ======
Note 6 - Contingent Liabilities
-------------------------------
On Sept. 28, 2001, we closed on the sale of F&G Life (see Note
13). Under the terms of the agreement, we received Old Mutual plc
common shares valued at $300 million, which we are required to
hold for one year following the closing. The proceeds from the
sale of F&G Life are subject to possible adjustment based on the
movement of the market price of Old Mutual's stock at the end of
the one-year period. If the market value of the Old Mutual stock
exceeds $330 million at the end of the one-year period, we are
required to remit to Old Mutual either cash or Old Mutual shares
in the amount representing the excess over $330 million. If the
market value of the Old Mutual shares is less than $300 million
at the end of the one-year period, we will receive either cash or
Old Mutual shares in the amount representing the deficit below
$300 million, up to $40 million.
In the ordinary course of conducting business, we and some of our
subsidiaries have been named as defendants in numerous lawsuits,
some of which have been brought on behalf of various alleged
classes of complainants. Some of these lawsuits attempt to
establish liability under insurance contracts issued or allegedly
issued by our underwriting operations and seek damages of
unspecified amounts. 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 7 - Debt
-------------
Debt consists of the following:
September 30, December 31,
2001 2000
------------ -----------
Book Fair Book Fair
Value Value Value Value
----- ----- ----- -----
(In millions)
Medium-term notes $ 591 $ 616 $ 617 $ 619
Commercial paper 575 575 138 138
7-7/8% senior notes 249 273 249 261
8-1/8% senior notes 249 281 249 267
Short-term borrowings 173 173 - -
Zero coupon convertible notes 102 121 98 95
7-1/8% senior notes 80 85 80 82
Variable rate borrowings 64 64 64 64
Real estate debt 30 31 2 2
8-3/8% senior notes - - 150 151
----- ----- ----- -----
Total debt obligations 2,113 2,219 $1,647 $1,679
Fair value of interest ===== =====
rate swap agreements 32 32
----- -----
Total debt reported
on balance sheet $2,145 $2,251
===== =====
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.
In the third quarter of 2001, our asset management subsidiary,
The John Nuveen Company, issued $173 million of short-term debt
to finance a portion of its acquisition of Symphony Asset
Management LLC, an institutional money management firm.
At September 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 $230
million, and their aggregate fair value at September 30, 2001 was
an asset of $32 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 8 - 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.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 8 - Segment Information (continued)
---------------------------------------
As discussed in Note 13 on page 22 of this report, on September
28, 2001, we closed on the sale of F&G Life, which comprised our
life insurance segment. As a result, F&G Life's results of
operations were included in discontinued operations on our
statements of operations included in this report for all periods.
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, risk
control 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 nine months ended September 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 Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
------ ------ ------ ------
(In millions)
REVENUES
Property-liability insurance:
Commercial Lines Group $418 $394 $1,276 $1,173
Global Surety 107 96 320 316
Global Health Care 221 139 584 451
Other Specialty 456 304 1,317 965
International 183 103 610 350
------ ------ ------ ------
Total primary
insurance operations 1,385 1,036 4,107 3,255
Reinsurance 475 289 1,124 847
------ ------ ------ ------
Total property-liability
premiums earned 1,860 1,325 5,231 4,102
------ ------ ------ ------
Investment operations:
Net investment income 285 312 910 943
Realized investment
gains (losses) (77) 104 (20) 542
------ ------ ------ ------
Total investment
operations 208 416 890 1,485
Other 63 19 123 80
------ ------ ------ ------
Total property-
liability insurance 2,131 1,760 6,244 5,667
------ ------ ------ ------
Asset management 99 92 273 280
------ ------ ------ ------
Total reportable
segments 2,230 1,852 6,517 5,947
Parent company, other
operations and
consolidating eliminations - 9 38 24
------ ------ ------ ------
Total revenues $2,230 $1,861 $6,555 $5,971
====== ====== ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 8 - Segment Information (continued)
---------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
------ ------ ------ ------
(In millions)
INCOME (LOSS) BEFORE
INCOME TAXES
Property-liability insurance:
Commercial Lines Group $(165) $ 15 $(56) $ 48
Global Surety 3 (2) 35 29
Global Health Care (70) (70) (324) (135)
Other Specialty (69) 14 (18) (3)
International (260) (8) (349) (79)
------ ------ ------ ------
Total primary
insurance operations (561) (51) (712) (140)
Reinsurance (510) 4 (559) (74)
------ ------ ------ ------
Total GAAP
underwriting result (1,071) (47) (1,271) (214)
------ ------ ------ ------
Investment operations:
Net investment income 285 312 910 943
Realized investment
gains (losses) (77) 104 (20) 542
------ ------ ------ ------
Total investment
operations 208 416 890 1,485
Other (7) (24) (52) (88)
------ ------ ------ ------
Total property-
liability insurance (870) 345 (433) 1,183
------ ------ ------ ------
Asset management:
Pretax income before
minority interest 47 43 137 130
Minority interest (11) (10) (32) (30)
------ ------ ------ ------
Total asset management 36 33 105 100
------ ------ ------ ------
Total reportable
segments (834) 378 (328) 1,283
Parent company, other
operations and
consolidating eliminations (43) (62) (118) (146)
------ ------ ------ ------
Total income (loss)
before income taxes $(877) $316 $(446) $1,137
====== ====== ====== ======
See Note 15 for a discussion of our comprehensive strategic and
financial review of all of our business segments. It is likely
that the strategic review will result in a change to our segment
reporting structure.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, C1ontinued
Note 9 - 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.
As a result of the losses incurred in the September 11 terrorist
attack, we have ceded $1.2 billion in losses under various
reinsurance agreements, and have recognized a $40 million
provision for uncollectible reinsurance. We have determined that
95 percent of our total reinsurance recoverables are from
companies with ratings of A- or better or from state-sponsored
reinsurance programs or collateralized reinsurance programs.
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 nine
months ended September 30, 2001, we did not cede any losses under
the corporate program; but we ceded $9 million and $7 million of
written and earned premiums, respectively, representing the
initial premium paid to our reinsurer. Our estimate of our net
losses related to the September 11 attack was determined based on
our intention to not cede losses attributable to the attack to
our corporate treaty. Under the separate Reinsurance segment
treaty, we ceded $118 and $120 million of written and earned
premiums, respectively, and $273 million of insurance losses and
loss adjustment expenses, for a net benefit of $153 million, in
the first nine months of 2001.
It is our intention to commute all or a portion of the 2001
corporate treaty in the fourth quarter of 2001. Also included in
the comprehensive strategic review, as discussed in Note 15, is
an evaluation of the use of corporate aggregate excess-of-loss
reinsurance treaties.
In the nine months ended September 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 and earned premiums of $263 million,
and insurance losses and loss adjustment expenses of $449
million, resulting in a net benefit of $186 million to our pretax
income from continuing operations. Under the separate
Reinsurance segment treaty, we ceded written and earned premiums
of $64 million, and insurance losses and loss adjustment expenses
of $128 million, resulting in a net pretax benefit of $64 million
in the nine months ended September 30, 2000.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 9 - Reinsurance (continued)
-------------------------------
The effect of assumed and ceded reinsurance on premiums written,
premiums earned and insurance losses and loss adjustment expenses
(including the effect of the September 11 attack) are as follows:
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
--------------- --------------
(In millions) 2001 2000 2001 2000
----------- ----- ----- ----- -----
Written premiums:
Direct $1,798 $1,578 $5,016 $3,987
Assumed 755 453 2,103 1,569
Ceded (526) (539) (1,393) (1,173)
----- ----- ----- -----
Net premiums written 2,027 1,492 5,726 4,383
===== ===== ===== =====
Earned premiums:
Direct 1,659 1,307 4,687 3,755
Assumed 738 523 1,976 1,441
Ceded (537) (505) (1,432) (1,094)
----- ----- ----- -----
Total premiums earned 1,860 1,325 5,231 4,102
===== ===== ===== =====
Insurance losses and loss
adjustment expenses:
Direct 2,171 1,059 4,597 2,894
Assumed 1,941 212 2,938 1,248
Ceded (1,657) (458) (2,551) (1,275)
----- ----- ----- -----
Total net insurance
losses and loss
adjustment expenses $2,455 $813 $4,984 $2,867
===== ===== ===== =====
Note 10 - 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 10 - Restructuring Charges (continued)
------------------------------------------
In connection with our merger with USF&G, in the second quarter
of 1998 we recorded a pretax charge to net income 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 Sept. 30,
----------- Charge 2000 Payments Adjustment 2001
-------- ---------- -------- ---------- -----------
Lease
commitments
previously
charged to
earnings: $75 $43 $(9) $(1) $33
=== === === === ===
Note 11 - 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 approximately 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 September 30, 2001, 119 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 11 - 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 Sept 30,
earnings: Charge 2000 Payments Adjustment 2001
---------- -------- ---------- -------- ---------- ----------
Employee-
related $ 4 $ 1 $(1) $ - $ -
Occupancy-
related 24 23 (8) (7) 8
----- ----- ----- ----- -----
Total $28 $24 $(9) $(7) $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. This adjustment
was offset by a $1 million adjustment in the 3rd quarter related
to sublease recoveries.
During the latter part of 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
performed a comprehensive review of our entire Global Health Care
segment. Based on the results of this review, completed during
the second quarter of 2001, 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 determined
that the excess of purchase price over net tangible assets
acquired we recorded as part of the MMI purchase had not been
impaired.
In October 2001, following the change in executive management
discussed in Note 15, as well as an ongoing assessment of the
severity of Global Health Care claims, this business has become
the subject of further strategic review. That review, expected to
be completed in the fourth quarter of 2001, may impact our
analysis of the recoverability of the MMI goodwill.
Note 12 - Adoption of Accounting Pronouncement
-----------------------------------------------
Effective Jan. 1, 2001, we adopted the provisions of SFAS No.
133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. According to the statement, hedging
instruments may be specifically designated into one of three
categories based on their intended use. The applicable category
dictates the accounting for each derivative. The following
categories and the related impacts and disclosures required by
SFAS No. 133 are applicable to The St. Paul:
Fair Value Hedges: We have several pay-floating, receive-fixed
interest rate swaps that are designated as fair value hedges of
selected portions of our fixed rate debt. The terms of the swaps
match those of the debt instruments, and the swaps are therefore
considered 100% effective. The transitional impact of adopting
SFAS No. 133 for the fair value of the hedges was $15 million,
which is recorded in "Other Assets" on the balance sheet with an
equivalent liability 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 nine months ended
September 30, 2001 movement in interest rates was a $17 million
increase in the fair value of the swaps and the related debt on
the balance sheet, with the income statement impacts again
offsetting.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 12 - 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 nine months
ended September 30, 2001, we recognized a $6.6 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 nine
months ended September 30, 2001 we recognized a loss in the
income statement of less than $1.1 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, including our investment in Old Mutual common stock.
There was no transition adjustment related to the adoption of
SFAS No. 133, and we recorded less than $2 million of operating
and administrative expense in the nine months ended September 30,
2001 relating to the change in the market value of these
derivatives during the period.
Note 13 - Discontinued Operations
----------------------------------
Life Insurance Segment
----------------------
On September 28, 2001, our subsidiary, St. Paul Fire and Marine
Insurance Company ("Fire and Marine"), closed on the sale of its
life insurance company, Fidelity and Guaranty Life Insurance
Company ("F&G Life") to Old Mutual plc ("Old Mutual") for $335
million in cash and $300 million in shares of Old Mutual stock.
In accordance with the sale agreement, the sale proceeds were
reduced by $11.7 million, on a pretax basis, related to a
decrease in the market value of certain securities within F&G
Life's investment portfolio between March 31, 2001 and the
closing date.
Pursuant to the sale agreement, we are required to hold the Old
Mutual stock received for one year after the closing of the
transaction. The consideration received is 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 Note 6.
When the sale was announced in April 2001, we expected to realize
a modest gain on the sale of F&G Life, when proceeds were
combined with F&G Life's operating results through the disposal
date. However, a decline in the market value of certain of F&G
Life's investments since April, coupled with a change in our
estimate of tax expense related to the sale, resulted in an after-
tax loss of $74 million on the sale proceeds. That loss is
combined with F&G Life's results of operations for a year-to-date
after-tax loss of $55 million and is included in the reported
loss from discontinued operations for the three months and nine
months ended September 30, 2001.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 13 - 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 September 30, 2001, our
preliminary analysis indicated that neither a deficiency nor a
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 nine months of 2001, we recorded a pretax
loss of $7 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 14 - 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 $314 million.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 15 - Subsequent Event - Executive Management and Expected
Strategic Initiatives
--------------------------------------------------------------
On October 11, 2001, our Board of Directors appointed Jay S.
Fishman as Chairman, President and Chief Executive Officer of
The St. Paul. Mr. Fishman has initiated a comprehensive
strategic and financial review of all of our business segments,
as well as our use of aggregate excess-of-loss reinsurance
treaties. It is likely that the review will result in our
announcement of significant strategic initiatives during the fourth
quarter of this year, including potential strategic initiatives
affecting our Global Health Care, International and Reinsurance
segments. These segments, which accounted for 35% of our consolidated
revenues in the first nine months of 2001 and 28% of our
consolidated revenues in 2000, have produced losses and/or have
increased the volatility of our earnings profile in recent times.
The strategic initiatives are likely to result in material
restructuring or related charges in the fourth quarter of 2001,
but are expected to result in an emphasis on businesses that have
the potential to more consistently produce acceptable returns.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 2001
Forward-looking Statement Disclosure
------------------------------------
This discussion contains certain forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995.
Forward-looking statements are statements other than historical
information or statements of current condition. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks"
or "estimates," or variations of such words, and similar
expressions are also intended to identify forward-looking
statements. Examples of these forward-looking statements include
statements concerning: market and other conditions and their
effect on future premiums, revenues, earnings, cash flow and
investment income; price increases, improved loss experience, and
expense savings resulting from the restructuring 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; changes in
our estimate of insurance industry losses resulting from the
September 11, 2001 terrorist attack; the potential impact of
the global war on terrorism and Federal solutions
to make available insurance coverage for acts
of terrorism; judicial decisions and rulings; and various other
matters. We undertake no obligation to release publicly the
results of any future revisions we may make to forward-looking
statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Consolidated Results
--------------------
The following table summarizes The St. Paul's results for the
third quarter and first nine months of 2001 and 2000.
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(In millions, except per share data) 2001 2000 2001 2000
---------------------------------- ------ ------ ------ -----
Pretax income (loss):
Property-liability insurance:
GAAP underwriting result $(1,071) $ (47) $(1,271) $(214)
Net investment income 285 312 910 943
Realized investment gains (losses) (77) 104 (20) 542
Other (7) (24) (52) (88)
----- ----- ----- -----
Total property-
liability insurane (870) 345 (433) 1,183
Asset management 36 33 105 100
Parent and other (43) (62) (118) (146)
----- ----- ----- -----
Pretax income (loss) from
continuing operations (877) 316 (446) 1,137
Income tax expense (benefit) (282) 97 (156) 352
----- ----- ----- -----
Income (loss) from
continuing operations (595) 219 (290) 785
Discontinued operations,
net of taxes (64) 12 (62) 15
----- ----- ----- -----
Net income (loss) $(659) $231 $(352) $800
===== ===== ===== =====
Diluted net income (loss)
per share ($3.16) $0.98 ($1.71) $3.42
===== ===== ===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Results (continued)
Our pretax loss from continuing operations of $877 million in the
third quarter of 2001 was primarily driven by significant losses
incurred in our property-liability insurance operations as a
result of the terrorist attack in the United States on September 11,
2001. Our currently estimated net pretax operating loss from
that event is $866 million. On an after-tax basis, including the
write-off of $43 million in foreign tax credits, estimated net
operating losses from the terrorist attack totaled $606 million,
or $2.90 per common share for the third quarter. The impact of
the terrorist attack on our results is discussed in further
detail in the following section of this report. In addition to
the terrorist attack, our property-liability results in the third
quarter and first nine months of 2001 were adversely impacted by
poor underwriting results in our Global Health Care,
International and Reinsurance business segments and significant
net realized investment losses.
September 11, 2001 Terrorist Attack
-----------------------------------
Our estimated gross pretax losses and loss adjustment expenses
incurred as a result of the terrorist attack totaled $2.16
billion. The estimated net pretax operating loss of $866 million
includes an estimated benefit of $1.20 billion from cessions made
under various reinsurance agreements, a $40 million provision for
uncollectible reinsurance, a net $44 million benefit from
additional and reinstated insurance and reinsurance premiums, and
a $90 million reduction in contingent commission expenses in our
Reinsurance segment. The estimated net pretax operating loss of
$866 million represented an increase over the estimated operating
loss of $700 million we announced on September 19, 2001,
primarily due to our intention, announced on October 23, 2001, to
not cede losses from the attack to our corporate aggregate excess-
of-loss reinsurance program.
We have determined that 95% of our total reinsurance recoverables
are from companies with ratings of A- or better or from state-
sponsored reinsurance programs or collateralized reinsurance
programs.
Our estimated losses are based on a variety of actuarial
techniques, coverage interpretation and claims estimation
methodologies, and include an estimate of losses incurred but not
reported, as well as estimated costs related to the settlement of
claims.
Our estimate of losses is also based on our belief that property-
liability insurance losses from the terrorist attack will total
between $30 billion and $35 billion for the insurance industry.
Our estimate of industry losses is subject to significant
uncertainties and may change over time as additional information
becomes available. A material increase in our estimate of
industry losses would likely cause us to make a corresponding
material increase to our provision for losses related to the
attack.
As a result of the terrorist attack on September 11, certain of
the major independent rating organizations revised their
financial ratings of a number of companies in the insurance
industry. Our financial ratings were revised as follows:
Standard & Poor's Ratings Group placed us on CreditWatch
Negative; Moody's Investor Services, Inc. announced that our
ratings were under review for a possible downgrade; and A. M.
Best announced that our ratings were under review with developing
implications.
The impact of the estimated net pretax operating loss of $866
million in the third quarter was distributed among our property-
liability business segments as follows:
Net Pretax
GAAP Operating GAAP
Underwriting Loss from Underwriting
(Dollars in millions) Loss as Terrorist Loss as
------------------- Reported Attack Adjusted
-------- --------- ------------
International $ (260) $(164) $ (96)
Commercial Lines Group (165) (147) (18)
Other Specialty (69) (49) (20)
Global Health Care (70) (6) (64)
Global Surety 3 - 3
----- ----- -----
Total Primary Insurance (561) (366) (195)
Reinsurance (510) (500) (10)
----- ----- -----
Total Property-
Liability Insurance $(1,071) $(866) $(205)
===== ===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Results (continued)
-------------------------------
Estimated losses in our International segment were centered in
our operations at Lloyd's, where we are a participant in an
aviation syndicate that provided property coverage on the four
planes involved in the terrorist attack. Our International
losses also included losses resulting from our participation in
the insuring of the Lloyd's Central Fund, which would be utilized
if an individual member of Lloyd's is unable to pay its share of
a syndicate's losses. In the Commercial Lines Group segment,
losses were centered in our small and middle market operations,
as well as our Catastrophe Risk business center. In the Other
Specialty segment, the Financial and Professional Services and
Technology business centers accounted for the majority of losses
associated with the terrorist attack.
Sale of F&G Life Insurance Company
----------------------------------
On September 28, 2001, The St. Paul's subsidiary, St. Paul Fire
and Marine Insurance Company ("Fire and Marine") completed the
sale of Fidelity and Guaranty Life Insurance Company ("F&G Life")
to Old Mutual plc, a London-based international financial
services company. Under terms of the agreement, Fire and Marine
received $335 million in cash and 190,356,631 ordinary shares of
Old Mutual valued at $300 million based on the average closing
price of Old Mutual shares on the London Stock Exchange for the
ten consecutive trading days prior to September 27, 2001.
Pursuant to the purchase agreement, Fire and Marine must hold the
Old Mutual shares received for one year after the closing of the
transaction. The consideration is subject to possible adjustment
based on the market price of Old Mutual's shares at the end of
that one-year period. When the sale agreement with Old Mutual
was announced in April 2001, we expected to realize a modest
pretax gain on the sale of F&G Life, when proceeds were combined
with F&G Life's operating results through the disposal date.
However, a decline in the market value of certain of F&G Life's
investments since April, coupled with a change in our estimate of
tax expense related to the sale, resulted in a net after-tax loss
of $74 million on the sale proceeds. That loss is combined with
F&G Life's results of operations for a year-to-date after-tax
loss of $55 million and is included in the reported loss from
discontinued operations for the three months and nine months
ended September 30, 2001.
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 Sept. 30, 2001, our preliminary analysis
indicated that neither a deficiency nor a 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 nine
months of 2001 and 2000, we recorded pretax losses of $7 million
and $5 million, respectively, in discontinued operations related
to these agreements.
Common Share Repurchases
------------------------
In the third quarter of 2001, we repurchased and retired 4.6
million of our common shares for a total cost of $200 million,
bringing our year-to-date repurchase total to 13.0 million shares
at a total cost of $589 million, or $45.36 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 nine months of 2001 represented
approximately 6% 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,
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Results (continued)
-------------------------------
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 - Change in Executive Management and Expected
Strategic Initiatives
--------------------------------------------------------------
On October 11, 2001, our Board of Directors appointed Jay S.
Fishman as Chairman, President and Chief Executive Officer of The
St. Paul. Mr. Fishman has initiated a comprehensive strategic
and financial review of all of our business segments, as well as
our use of corporate aggregate excess-of-loss reinsurance
treaties. It is likely that the review will result in our
announcement of significant strategic initiatives during the fourth
quarter of this year, including potential strategic initiatives
affecting our Global Health Care, International and Reinsurance
segments. These segments, which accounted for 35% of our consolidated
revenues in the first nine months of 2001 and 28% of our
consolidated revenues in 2000, have produced losses and/or have
increased the volatility of our earnings profile in recent times.
The strategic initiatives are likely to result in material
restructuring or related charges in the fourth quarter of 2001,
but are expected to result in an emphasis on businesses that have
the potential to more consistently produce acceptable returns.
It is also likely that the strategic initiatives will result in a
change in our segment reporting structure.
Property-Liability Insurance
----------------------------
Overview
--------
Our consolidated reported written premiums totaled $2.03 billion
in the third quarter of 2001, 36% higher than reported premium
volume of $1.49 billion in the same period of 2000. Through the
first nine months of 2001, our reported premium volume of $5.73
billion grew $1.35 billion, or 31%, over comparable reported 2000
written premiums of $4.38 billion. Several factors impacted the
comparability of our 2001 and 2000 third quarter and year-to-date
premium volume, as follows:
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(In millions) 2001 2000 2001 2000
----------- ------ ------ ------ ------
Reported net written premiums $2,027 $1,492 $5,726 $4,383
Adjustments:
Excess-of-loss reinsurance cessions 73 191 127 327
Net reinstated and additional
premiums (49) - (49) -
Incremental impact of MMI
acquisition - - (97) -
Elimination of quarter-reporting lag - - - (40)
----- ----- ----- -----
Net written premiums,
as adjusted $2,051 $1,683 $5,707 $4,670
===== ===== ===== =====
Percentage increase over 2000 22% 22%
===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
The aggregate excess-of-loss reinsurance cessions are described
below. The net reinstated and additional premiums were
concentrated in our Reinsurance segment and resulted from the
magnitude of losses associated with the terrorist attack. We
acquired MMI Companies, Inc. ("MMI"), an international health
care risk services company, in April 2000, which accounted for
$97 million of incremental written premiums in the first nine
months of 2001. In 2000, we eliminated the one-quarter reporting
lag for our reinsurance operations based in the United Kingdom
("St. Paul Re - UK"), which added $40 million to our year-to-date
premium volume in 2000. The adjusted third-quarter and year-to-
date premium growth rates of 22% were primarily the result of
significant price increases and strong renewal retention rates
throughout nearly all of our business segments, as well as new
business in several of those segments. Through the first nine
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 16% in the first
nine months of the year. We expect to achieve additional price
increases in the final three months of 2001.
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 can be 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.
We do not intend to cede losses arising from the September 11,
2001 terrorist attack to the corporate reinsurance program. The
written and earned premiums ceded in the three months and nine
months ended September 30, 2001 represented the initial premium
paid to our reinsurer. Our primary purpose in entering into the
corporate reinsurance treaty was to reduce the volatility in our
reported quarterly earnings over time. Because of the magnitude
of losses associated with the terrorist attack, that purpose
could not be fulfilled had the treaty been invoked to its full
capacity in the third quarter. Accordingly, it is our intention
to commute all or a portion of the 2001 corporate treaty in the
fourth quarter. In addition, as part of the strategic review of
our business operations, we are reviewing our use of aggregate
excess-of-loss reinsurance treaties.
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(In millions) 2001 2000 2001 2000
----------- ------ ------ ------ ------
Corporate program:
Ceded written premiums $ - $183 $ 9 $263
Ceded earned premiums 2 193 7 263
Ceded losses and loss
adjustment expenses - 338 - 449
------ ------ ------ ------
Net pretax benefit (detriment) (2) 145 (7) 186
------ ------ ------ ------
Reinsurance segment treaty:
Ceded written premiums 73 8 118 64
Ceded earned premiums 77 8 120 64
Ceded losses and loss
adjustment expenses 171 8 273 128
------ ------ ------ ------
Net pretax benefit 94 - 153 64
------ ------ ------ ------
Combined total:
Ceded written premiums 73 191 127 327
Ceded earned premiums 79 201 127 327
Ceded losses and loss
adjustment expenses 171 346 273 577
------ ------ ------ ------
Net pretax benefit $ 92 $145 $146 $250
====== ====== ====== ======
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 Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(In millions) 2001 2000 2001 2000
----------- ------ ------ ------ ------
Commercial Lines Group $ (1) $ (5) $ (2) $ (5)
Global Health Care - 43 (1) 43
Global Surety - 6 - 6
Other Specialty (1) 40 (2) 40
International - 57 (1) 70
----- ----- ----- -----
Total Primary Insurance (2) 141 (6) 154
Reinsurance 94 4 152 96
----- ----- ----- -----
Total Property-
Liability Insurance $ 92 $145 $146 $250
===== ===== ===== =====
Our reported consolidated loss ratio, which measures insurance
losses and loss adjustment expenses as a percentage of earned
premiums, was 132.0 in the third quarter of 2001, over 70 points
worse than the reported third-quarter 2000 loss ratio of 61.3.
The 2001 ratio included the impact of catastrophe losses incurred
totaling $1.09 billion, of which $956 million resulted from the
terrorist attack, and $50 million resulted from the explosion of
a chemical manufacturing plant in Toulouse, France. Catastrophe
losses totaled $17 million in the third quarter of 2000. Last
year's reported third-quarter loss ratio included a $56 million
benefit from a reduction in our estimate of ultimate losses on
certain nontraditional reinsurance contracts. Excluding the
impact of the reinsurance treaties and catastrophes in both
years, as well as the reduction in reinsurance losses in 2000,
the adjusted 2001 third-quarter loss ratio of 82.0 was 3.5 points
worse than the adjusted third-quarter 2000 loss ratio of 78.5.
The deterioration was centered in our Global Health Care,
International and Reinsurance segments, as discussed in more
detail in the following pages.
Our reported consolidated expense ratio, measuring underwriting
expenses as a percentage of premiums written, was 25.6 for the
third quarter of 2001, compared with a reported ratio of 39.0 for
the same 2000 period. The 2000 third-quarter ratio included the
impact of a $66 million increase in our estimate of contingent
commission expense for certain nontraditional reinsurance
business. Excluding that provision last year, and excluding the
impact of the reinsurance treaties and catastrophe losses in both
years, the adjusted third-quarter 2001 expense ratio was 29.7,
compared with an adjusted third-quarter 2000 ratio of 30.6. 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 Nine Months
2001 Ended September 30 Ended September 30
(Dollars in millions) Written ------------------ ------------------
------------------- Premiums 2001 2000 2001 2000
-------- ------ ------ ------ ------
Commercial Lines Group:
Written Premiums 24% $465 457 1,400 1,252
Underwriting Result $(165) 15 (56) 48
Combined Ratio 137.9 94.6 102.9 95.7
Global Health Care:
Written Premiums 10% $259 179 583 419
Underwriting Result $(70) (70) (324) (135)
Combined Ratio 131.3 146.1 157.0 131.2
Global Surety:
Written Premiums 6% $106 102 319 342
Underwriting Result $3 (2) 35 29
Combined Ratio 99.0 98.5 89.6 88.2
Other Specialty:
Written Premiums 25% $479 364 1,418 1,043
Underwriting Result $(69) 14 (18) (3)
Combined Ratio 115.7 92.0 101.3 98.9
International:
Written Premiums 12% $195 114 717 426
Underwriting Result $(260) (8) (349) (79)
Combined Ratio ___ 239.4 99.7 155.7 117.7
----- ----- ----- -----
Total Primary Insurance:
Written Premiums 77% $1,504 1,216 4,437 3,482
Underwriting Result $(561) (51) (712) (140)
Combined Ratio 139.7 101.2 116.8 103.3
----- ----- ----- -----
Reinsurance:
Written Premiums 23% $523 276 1,289 901
Underwriting Result $(510) 4 (559) (74)
Combined Ratio ___ 209.9 100.3 149.7 109.0
----- ----- ----- -----
Total Property-Liability
Insurance:
Written Premiums 100% $2,027 1,492 5,726 4,383
GAAP Underwriting Result $(1,071) (47) (1,271) (214)
Statutory Combined Ratio:
Loss and Loss Expense Ratio 132.0 61.3 95.3 69.9
Underwriting Expense Ratio 25.6 39.0 28.6 34.6
------ ------ ------ ------
Combined Ratio 157.6 100.3 123.9 104.5
====== ====== ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Underwriting Results by Segment
-------------------------------
To provide a more meaningful analysis of the underlying
performance of our business segments, the following discussion
excludes the impact of the terrorist attack in 2001 and the
reinsurance treaties in both 2001 and 2000. The impact of the
terrorist attack on segment results was discussed on pages 26 and
27 of this report, and the impact of the reinsurance treaties on
segment results was discussed on pages 29 and 30 of this report.
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 terrorist
attack in 2001 and the reinsurance treaties in both years.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Dollars in millions) 2001 2000 2001 2000
------------------- ------ ------ ------ ------
Net written premiums $492 $463 $1,430 1,258
Percentage change from 2000 6% 14%
GAAP underwriting profit (loss) $(17) $21 $92 $53
Statutory combined ratio:
Loss and loss adjustment
expense ratio 74.3 62.8 62.2 62.7
Underwriting expense ratio 28.3 30.6 29.3 32.6
------ ----- ----- -----
Combined ratio 102.6 93.4 91.5 95.3
====== ===== ===== =====
Premium growth in the third quarter and first nine months of 2001
was driven by price increases, strong renewal retention rates and
new business in our standard and nonstandard commercial
operations. In the first nine months of the year, price
increases averaged 13.0% in those operations, with third-quarter
price increases averaging 14.6%. Premium growth in the standard
and nonstandard operations in the third quarter was partially
offset by a significant decline in catastrophe risk net written
premiums due to an increase in premiums ceded for reinsurance.
The deterioration in the third-quarter loss ratio compared with
the same 2000 period was primarily the result of adverse prior
year loss development in our standard commercial insurance
operations. 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 nine-month 2001 loss ratio of 69.8 was
slightly worse than the adjusted 2000 ratio of 68.6. The
significant improvement in the third-quarter and year-to-date
expense ratios in 2001 reflected the combined impact of our
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 terrorist attack in 2001 and the
reinsurance treaties in both years.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Dollars in millions) 2001 2000 2001 2000
------------------- ------ ------ ------ ------
Net written premiums $263 $234 $588 $474
Percentage change from 2000 12% 24%
GAAP underwriting loss $(64) $(113) $(317) $(178)
Statutory combined ratio:
Loss and loss adjustment
expense ratio 106.2 135.2 131.8 110.1
Underwriting expense ratio 21.8 21.2 23.6 26.0
------ ------ ------ ------
Combined ratio 128.0 156.4 155.4 136.1
====== ====== ====== ======
Premium growth in the third quarter and first nine months of 2001
was driven by significant price increases, which averaged 25.4%
across this segment in the first nine months of the year. In
addition, our acquisition of MMI in April 2000 accounted for
approximately $48 million of incremental year-to-date premium
volume in 2001. We have severely curtailed the amount of new
business in the Global Health Care segment in 2001 due to an
unfavorable pricing environment and unacceptable loss experience
in many of the lines of business and geographical locations in
which we offer our products. This has resulted in a significant
decline in policy counts since the end of 2000. 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 27 states, with price increases averaging 21%.
The improvement in the third-quarter loss ratio compared with the
same 2000 period was due to a reduction in the level of adverse
prior-year loss development. Through the first nine months of
2001, however, the loss ratio was significantly worse than in the
same period of 2000, primarily due to a $107 million provision
recorded in the second quarter of this year 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 negative impact on our
results in 2001.
In addition, we have implemented a Health Care claims 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 year that would have otherwise likely been included in
future periods, and has contributed to the increase in severity
which prompted the second-quarter reserve strengthening.
Business written in accident years 2000 and 2001 has 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. However, we will continue to
consider the impact of the Health Care claims initiative on our
actuarial analysis of loss reserves in this segment.
In the second quarter of 2001, we completed a comprehensive
review of our entire Health Care segment. Based on the results
of that review, as well as our evaluation of the strategic value
of the Unionamerica entity (MMI's United Kingdom-based
subsidiary), we determined that the excess purchase price over
net tangible assets acquired that we recorded as part of the MMI
acquisition had not been impaired. In October 2001, our new
Chairman, President and Chief Executive Officer, Jay S. Fishman,
commenced a comprehensive review of all of our business
operations which is expected to be completed in the fourth
quarter of 2001, at which time significant strategic initiatives,
possibly affecting our Global Health Care segment, are expected
to be announced. That review may impact our analysis of the
recoverability of goodwill associated with the MMI acquisition.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Global Surety
-------------
Our Global Surety segment underwrites surety bonds, which
guarantee that third parties will be indemnified against the
nonperformance of contractual obligations. The following table
summarizes key financial data for this segment for the third
quarter and first nine months of 2001 and 2000 excluding the
impact of the reinsurance treaties in both years. (The Global
Surety segment was not impacted by the terrorist attack in 2001).
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Dollars in millions) 2001 2000 2001 2000
------------------- ------ ------ ------ ------
Net written premiums $106 $113 $320 $353
Percentage change from 2000 (6)% (9)%
GAAP underwriting profit (loss) $3 $(8) $35 $23
Statutory combined ratio:
Loss and loss adjustment
expense ratio 48.3 54.0 38.4 41.6
Underwriting expense ratio 50.6 50.7 51.1 49.0
------ ------ ------ ------
Combined ratio 98.9 104.7 89.5 90.6
====== ====== ====== ======
The decline in written premium volume compared with 2000 reflects
the impact of tightened underwriting standards implemented in
2001 in anticipation of an economic slowdown in both the United
States and Mexico. The current economic slowdown could
negatively impact the construction industry, and, in turn, our
contract surety operations. The enhanced underwriting standards
in effect over the last several quarters have reduced the risk
profile of this segment's book of business. 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 nine months of
2001.
Other Specialty
---------------
The Other Specialty segment includes the following business
centers: Construction, Technology, Ocean 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 terrorist attack in 2001
and the reinsurance treaties in both years.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Dollars in millions) 2001 2000 2001 2000
------ ------ ------ ------
Net written premiums $488 $424 $1,429 $1,104
Percentage change from 2000 15% 29%
GAAP underwriting profit (loss) $(19) $(26) $33 $(43)
Statutory combined ratio:
Loss and loss adjustment
expense ratio 76.8 76.1 69.7 73.3
Underwriting expense ratio 27.9 29.1 27.8 29.8
------ ------ ------ ------
Combined ratio 104.7 105.2 97.5 103.1
====== ====== ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Price increases, strong renewal retention rates and new business
in nearly all of the business centers comprising this segment
accounted for the growth in third-quarter and year-to-date
premium volume over the equivalent periods of 2000. In our
Construction operation, premium volume of $122 million in the
third quarter was 4% ahead of the same period last year, and year-
to-date premiums of $430 million grew 30% over 2000. Price
increases in this operation averaged 17.2% for the first nine
months of 2001. Our Technology business center recorded premiums
of $288 million through the first nine months of 2001, 25% higher
than the same period of 2000. Year-to-date price increases in
Technology averaged 11.9%. In our Financial and Professional
Services operation, year-to-date written premiums of $282 million
were 23% ahead of 2000, driven by price increases averaging 10.9%
and new business in both domestic and international markets.
Year-to-date premium growth of 79% in Oil and Gas and 36% in
Excess & Surplus Lines also contributed to the Other Specialty
segment's strong increase in written premiums over the first nine
months of 2000.
Year-to-date results last year in the Other Specialty segment
included a $33 million benefit from a reduction in previously
established workers' compensation reserves. Excluding that
benefit last year, the loss ratio of 69.7 for the first nine
months of 2001 was nearly seven points better than the adjusted
nine-month 2000 ratio of 76.5. Financial & Professional
Services, Technology, and Ocean Marine were all major
contributors to the significant improvement in year-to-date
results in 2001, reflecting the favorable impact of significant
price increases in recent quarters 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,
our participation in the insuring of the Lloyd's Central Fund,
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 third quarter and first
nine months of 2001 and 2000 excluding the impact of the
terrorist attack in 2001 and the reinsurance treaties in both
years.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Dollars in millions) 2001 2000 2001 2000
------------------- ------ ------ ------ ------
Net written premiums $196 $177 $718 $512
Percentage change from 2000 11% 40%
GAAP underwriting loss $(96) $(65) $(184) $(149)
Statutory combined ratio:
Loss and loss adjustment
expense ratio 119.1 107.2 102.2 102.6
Underwriting expense ratio 30.5 28.0 26.5 28.6
------ ------ ------ ------
Combined ratio 149.6 135.2 128.7 131.2
====== ====== ====== ======
The 11% increase in third-quarter 2001 premium volume over the
same 2000 period was primarily the result of new business and
price increases at Lloyd's, which accounted for $108 million of
the International segment's premium volume for the quarter,
compared with $53 million in the same 2000 period. The growth in
Lloyd's written premiums in the third quarter was partially
offset by a $41 million decline in premiums generated through
Unionamerica Insurance Company, which was acquired in the MMI
transaction in April 2000. Although we ceased writing new
business through Unionamerica in 2001, we are contractually
obligated to underwrite business in certain of Unionamerica's
syndicates at Lloyd's. Through the first nine months of 2001,
premium volume generated at Lloyd's totaled $429 million, an
increase of 72% over comparable 2000 premiums of $250 million.
Year-to-date premiums in the International segment included $49
million of incremental premiums generated by Unionamerica.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
The deterioration in the International segment's third-quarter
2001 loss ratio compared to the same period of 2000 was the
result of adverse prior-year loss development 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. In
addition, our new Chairman, President and Chief Executive
Officer, Jay S. Fishman, has commenced a comprehensive review of
all of our business operations which is expected to be completed
in the fourth quarter of 2001, at which time significant
strategic initiatives, which may affect our International
segment, are expected to be announced.
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 terrorist attack
in 2001 and the reinsurance treaties in both years.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Dollars in millions) 2001 2000 2001 2000
------------------- ------ ------ ------ ------
Net written premiums $507 $265 $1,320 $946
Percentage change from 2000 91% 40%
GAAP underwriting loss $(104) $- $(210) $(106)
Statutory combined ratio:
Loss and loss adjustment
expense ratio 91.4 42.7 85.8 76.8
Underwriting expense ratio 32.1 60.6 31.6 35.5
------ ------ ------ ------
Combined ratio 123.5 103.3 117.4 112.3
====== ====== ====== ======
Premium growth in 2001 was driven by new business and significant
price increases across virtually all lines of traditional
reinsurance coverages, as well as new business opportunities in
the nontraditional insurance market. Year-to-date premium volume
last year included $40 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 46% higher than the adjusted 2000
total. Following the terrorist attack on September 11, all
property and liability reinsurance business quoted by St. Paul Re
includes terrorism exclusions.
The components of St. Paul Re's third-quarter combined ratio last
year were distorted by a reduction in the estimate of ultimate
losses on certain nontraditional reinsurance by $56 million and a
corresponding increase in our estimate of reserves for contingent
commissions by $66 million. Excluding those changes, the third-
quarter 2000 loss ratio would have been 62.4, and the expense
ratio would have been 35.6. The deterioration in the third-
quarter loss ratio in 2001 compared to the adjusted 2000 ratio
was primarily due to an increase in catastrophe losses. St. Paul
Re incurred a $50 million loss representing our estimate of
losses related to the explosion of a chemical plant in Toulouse,
France in the third quarter, and an additional $13 million in
loss development from Tropical Storm Allison, which occurred
earlier this year. In addition, several large losses in North
American casualty coverages and global marine coverages also
contributed to the poor result in the third quarter of 2001. Our
new Chairman, President and Chief Executive Officer, Jay S.
Fishman, has commenced a comprehensive review of all of our
business operations which is expected to be completed in the
fourth quarter of 2001, at which time significant strategic
initiatives, which may affect our Reinsurance segment, are
expected to be announced.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Investment Operations
---------------------
The St. Paul's property-liability insurance operations produced
pretax investment income of $285 million in the third quarter of
2001, down 9% from income of $312 million in the same period of
2000. Our year-to-date pretax investment income of $910 million
was 4% below comparable 2000 income of $943 million. The decline
in investment income in 2001 reflected the impact of net sales of
fixed maturities in recent quarters to fund a portion of our
negative underwriting cash flow, and a lower interest rate
environment. In addition, we have made cumulative premium
payments totaling $639 million since the fourth quarter of 1999
related to our corporate reinsurance program, which has reduced
funds available for investment.
Our underwriting cash flows, while still negative, have improved
through the first nine months of 2001 compared to the same period
of 2000, primarily due to significant price increases throughout
our operations. Underwriting cash flows continue to be
negatively impacted by an increase in insurance loss and loss
adjustment expense payments, particularly in our Health Care and
International segments. In addition, in January 2001 we
undertook an initiative to hasten the settlement of potentially
high-severity pending claims throughout our property-liability
operations, which has resulted in an acceleration of claim
payments in the first nine months of the year. We expect to
achieve further price increases during the remainder of 2001;
however, we expect our underwriting cash flows to significantly
deteriorate in the fourth quarter of 2001 and into the first
quarter of 2002 due to the magnitude of insurance losses and loss
adjustment expenses that will be paid related to the September
11th terrorist attack in the United States.
Pretax realized investment losses in our property-liability
insurance operations totaled $77 million in the third quarter,
compared with realized gains of $104 million in the same period
of 2000. The third-quarter 2001 losses were driven by losses on
the sale of equity securities and negative returns on several of
our venture capital investments. Through the first nine months
of 2001, realized losses were $20 million, compared with year-to-
date 2000 realized gains of $542 million. An uncertain economic
outlook contributed to a decline in equity values and a lack of
venture capital activity during the first nine months 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
nine-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 nine-
month 2000 realized gain total.
The quality of our investment portfolio remains high, and we have
not recorded any significant permanent impairments in the
carrying value of our investment holdings. The $14.8 billion
carrying value of our fixed maturities portfolio included over
$700 million of pretax unrealized appreciation on September 30,
2001. Approximately 94% of our portfolio is rated at investment
grade (BBB or above), and its weighted average pretax yield at
September 30, 2001 was 6.8%, unchanged from a year ago. The
combined carrying value of our equity and venture capital
investments at September 30, 2001 included pretax unrealized
appreciation of $81 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.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Environmental and Asbestos Claims (continued)
--------------------------------------------
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 nine months
ended September 30, 2001, and the years ended Dec. 31, 2000 and
1999. Amounts in the "net" column are reduced by reinsurance
recoverables.
2001
Environmental (nine months) 2000 1999
------------- ----------- ------------ ------------
(In millions) Gross Net Gross Net Gross Net
----------- ----- ----- ----- ----- ----- -----
Beginning reserves $665 $563 $698 $599 $783 $645
Incurred losses 55 53 25 14 (33) 1
Paid losses (52) (46) (58) (50) (52) (47)
----- ----- ----- ----- ----- -----
Ending reserves $668 $570 $665 $563 $698 $599
===== ===== ===== ===== ===== =====
The following table represents a reconciliation of total gross
and net reserve development for asbestos claims for the nine
months ended September 30, 2001, and the years ended Dec. 31,
2000 and 1999.
2001
Asbestos (nine months) 2000 1999
-------- ------------ ------------ -------------
(In millions) Gross Net Gross Net Gross Net
----------- ----- ----- ----- ----- ----- -----
Beginning reserves $397 $299 $398 $298 $402 $277
Incurred losses 52 52 41 33 28 51
Paid losses (39) (29) (42) (32) (32) (30)
----- ----- ----- ----- ----- -----
Ending reserves $410 $322 $397 $299 $398 $298
===== ===== ===== ===== ===== =====
Our reserves for environmental and asbestos losses at September
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. We believe any future additional loss
provisions for, or settlement of, environmental and asbestos
claims will not materially impact our financial position, but may
materially impact our results of operations or liquidity in the
period in which such provisions or settlements occur.
Total gross environmental and asbestos reserves at September 30,
2001 of $1.08 billion represented approximately 5% of gross
consolidated reserves of $20.87 billion.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Asset Management
----------------
Our asset management segment consists of our 78% 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 third quarter and first nine months
of 2001 and 2000 were as follows:
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(In millions) 2001 2000 2001 2000
----------- ------ ------ ------ ------
Revenues $99 $92 $273 $280
Expenses 52 49 136 150
----- ----- ----- -----
Pretax earnings 47 43 137 130
Minority interest (11) (10) (32) (30)
----- ----- ----- -----
The St. Paul's share
of pretax earnings $36 $33 $105 $100
===== ===== ===== =====
Assets under management $66,477 $61,003
====== ======
The increase in Nuveen's third-quarter 2001 revenues over the
same 2000 period was primarily due to growth in asset management
fees resulting from the acquisition of Symphony Asset Management,
LLC ("Symphony") during the quarter. Symphony is an
institutional money manager specializing in alternative
investment strategies. Nuveen's gross product sales of $3.2
billion in the third quarter were 36% higher than the same 2000
quarter, driven by the popularity of equity and fixed-income
retail managed accounts and exchange-traded common stock fund
products. The success of Nuveen's diverse selection of products
for affluent investors continued 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 $1.5 billion in the third quarter of 2001, 39%
higher than net flows in the same 2000 period.
Managed assets at September 30, 2001 consisted of $31.4 billion
of exchange-traded funds, $23.3 billion of managed accounts and
$11.8 billion of mutual funds. Total assets under management of
$66.48 billion grew over $5 billion over the year-end 2000
managed asset total, due to the acquisition of Symphony, which
added $4.1 billion of managed assets, and the strong positive net
asset flows through the first nine months of the year.
Capital Resources
-----------------
Common shareholders' equity totaled $5.95 billion at September
30, 2001, down $1.23 billion from the year-end 2000 total of
$7.18 billion. The decline reflected the impact of our net loss
of $352 million in the first nine months of the year, significant
share repurchases and a reduction in the unrealized appreciation
of our equity and venture capital investment portfolio. Through
the first nine months of 2001, we repurchased 13.0 million of our
common shares for a total cost of $589 million, and an average
cost of $45.36 per share. The repurchases were financed through
a combination of internally-generated funds and commercial paper
borrowings. From November 1998 through September 2001, we
repurchased and retired 45.8 million of our common shares for a
total cost of $1.62 billion, or an average cost of $35.27 per
share.
Total debt outstanding at September 30, 2001 of $2.14 billion was
$497 million higher than the year-end 2000 total of $1.65
billion. The increase was driven by the issuance of an
additional $437 million of commercial paper in 2001 to finance
the maturity of our $150 million, 8.375% senior notes in June and
to finance a portion of our common share repurchases. In
addition, The John Nuveen Company issued $173 million of short
term debt to finance a portion of their acquisition of Symphony
Asset Management. The St. Paul's ratio of total debt obligations
to total capitalization was 25% at September 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.
We have not repurchased any common shares during the period from
October 1, 2001 to November 2, 2001. As of November 5, 2001, we
had approximately $89 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 nine months of 2001, our loss from continuing
operations was inadequate to cover "fixed charges" by $446
million and "combined fixed charges and preferred stock
dividends" by $456 million. For the first nine months of 2000,
the ratio of earnings to fixed charges was 7.83, and the ratio of
earnings to combined fixed charges and preferred stock dividend
requirements was 7.25. 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 provided by continuing
operations totaled $332 million in the first nine months of 2001,
compared with cash used by continuing operations of $600 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, year-to-
date underwriting cash flows (premium collections less payments
for losses and loss adjustment expenses and underwriting
expenses) remained negative, driven by significant loss payments
in certain of our business segments. Underwriting cash flows in
2001, however, improved significantly compared with the same
period of 2000. We expect our operational cash flows to
deteriorate in the last quarter of 2001 and into the first
quarter of 2002 due to the magnitude of insurance losses and loss
adjustment expenses payable as a result of the September 11th
terrorist attack. On a long-term basis, however, 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.
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
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Impact of Accounting Pronouncements to be Adopted in the Future (continued)
--------------------------------------------------------------------------
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 expect our adoption of this statement to result in
a material reduction in the amount of our goodwill amortization
in 2002.
Also in June 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" which establishes financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
retirement costs. It requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are to be
capitalized as part of the carrying amount of the long-lived
asset. This statement is effective for fiscal years beginning
after June 15, 2002. We do not expect the adoption of SFAS No.
143 to have a material impact on our financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which addresses
financial accounting and reporting for the impairment or disposal
of long-lived assets. This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of," and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
or Infrequently Occurring Events and Transactions," for the
disposal of a segment of a business. SFAS No. 144 establishes a
single accounting model, based on the framework established in
SFAS No. 121, for long-lived assets to be disposed of by sale.
It also resolves significant implementation issues related to
SFAS No. 121. This statement is effective for fiscal years
beginning after December 15, 2001. We have not yet determined
the impact of adopting this statement.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note 6 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 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.
2) 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.
3) 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.
4) The St. Paul filed a Form 8-K Current Report dated September
19, 2001, related to the announcement of the anticipated impact
of the September 11, 2001 terrorist attack on The St. Paul's
third-quarter 2001 operating results.
5) The St. Paul filed a Form 8-K Current Report dated September
28, 2001 (as amended by Form 8-K/A filed on October 29, 2001),
related to the announcement of the completion of The St. Paul's
sale of Fidelity and Guaranty Life Insurance Company to Old
Mutual plc, and the appointment of Jay S. Fishman as chairman
and chief executive officer of The St. Paul.
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: November 5, 2001 By /s/ Bruce A. Backberg
---------------------
Bruce A. Backberg
Senior Vice President
(Authorized Signatory)
Date: November 5, 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 ....
(a) Employment Agreement between The St. Paul Companies, Inc.
and Mr. Jay S. Fishman dated October 10, 2001**...............(1)
(b) Employment Agreement between The St. Paul Companies, Inc.
and Mr. Douglas W. Leatherdale dated September 18, 2001**.....(1)
(11) Statement re computation of per share earnings**.....................(1)
(12) Statement re computation of ratios**.................................(1)
(15) Letter re unaudited interim financial information*...................
(18) Letter re change in accounting principles*...........................
(19) Report furnished to security holders*................................
(22) Published report regarding matters submitted to
vote of security holders*.........................................
(23) Consents of experts and counsel*.....................................
(24) Power of attorney*...................................................
(27) Financial data schedule*.............................................
(99) Additional exhibits*.................................................
* These items are not applicable.
** This exhibit is included only with the copies of this
report that are filed with the Securities and Exchange
Commission. However, a copy of the exhibit may be obtained
from the Registrant for a reasonable fee by writing to The St.
Paul Companies, Inc., 385 Washington Street, Saint Paul, MN
55102, Attention: Corporate Secretary.
(1) Filed herewith.