UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
--------------
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 May 9, 2002, was 208,319,416.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Consolidated Statements of Income (Unaudited),
Three Months Ended March 31, 2002 and 2001 3
Consolidated Balance Sheets, March 31, 2002
(Unaudited) and December 31, 2001 4
Consolidated Statements of Shareholders' Equity,
Three Months Ended March 31, 2002
(Unaudited) and Twelve Months Ended 6
December 31, 2001
Consolidated Statements of Comprehensive Income
(Unaudited), Three Months Ended March 31, 2002
and 2001 7
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 2002 and 2001 8
Notes to Consolidated Financial Statements
(Unaudited) 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 23
PART II. OTHER INFORMATION
Item 1 through Item 6 40
Signatures 41
EXHIBIT INDEX 42
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
For the three months ended March 31, 2002 and 2001
(In millions, except per share data)
2002 2001
------ ------
Revenues
Premiums earned $ 1,935 $ 1,627
Net investment income 293 335
Asset management 91 85
Realized investment gains (losses) (38) 77
Other 36 38
------ ------
Total revenues 2,317 2,162
------ ------
Expenses
Insurance losses and loss
adjustment expenses 1,393 1,183
Policy acquisition expenses 410 380
Operating and administrative
expenses 318 301
------ ------
Total expenses 2,121 1,864
------ ------
Income from continuing operations
before income taxes 196 298
Income tax expense 48 89
------ ------
Income from continuing operations 148 209
------ ------
Discontinued operations:
Operating loss, net of taxes - (1)
Loss on disposal, net of taxes (9) (6)
------ ------
Loss from discontinued
operations, net of taxes (9) (7)
------ ------
Net income $ 139 $ 202
====== ======
Basic earnings per share:
Income from continuing operations $ 0.69 $ 0.95
Discontinued operations, net of taxes (0.04) (0.04)
------ ------
Net income $ 0.65 $ 0.91
====== ======
Diluted earnings per share:
Income from continuing operations $ 0.67 $ 0.90
Discontinued operations, net of taxes (0.04) (0.03)
------ ------
Net income $ 0.63 $ 0.87
====== ======
Dividends declared on common stock $ 0.29 $ 0.28
====== ======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2002 (unaudited) and December 31, 2001
(In millions)
2002 2001
------- -------
Assets
Investments:
Fixed maturities, at estimated
fair value $ 16,511 $ 15,911
Equities, at estimated fair value 1,365 1,410
Real estate and mortgage loans 945 972
Venture capital, at estimated
fair value 826 859
Securities on loan 741 775
Short-term investments 1,638 2,153
Other investments 100 98
------- -------
Total investments 22,126 22,178
Cash 185 151
Reinsurance recoverables:
Unpaid losses 6,852 6,848
Paid losses 356 351
Ceded unearned premiums 725 667
Receivables:
Insurance premiums 3,252 3,123
Interest and dividends 270 260
Other 239 247
Deferred policy acquisition costs 662 628
Deferred income taxes 1,276 1,248
Office properties and equipment 485 486
Goodwill and intangible assets 783 690
Other assets 1,367 1,444
------- -------
Total Assets $ 38,578 $ 38,321
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
March 31, 2002 (unaudited) and December 31, 2001
(In millions)
2002 2001
------- -------
Liabilities:
Insurance reserves:
Loss and loss adjustment expenses $ 22,076 $ 22,101
Unearned premiums 4,216 3,957
------- -------
Total insurance reserves 26,292 26,058
Debt 2,260 2,130
Payables:
Reinsurance premiums 948 943
Accrued expenses and other 940 1,036
Securities lending collateral 756 790
Other liabilities 1,381 1,357
------- -------
Total Liabilities 32,577 32,314
------- -------
Company-obligated mandatorily
redeemable preferred securities of
trusts holding soley subordinated
debentures of the company 893 893
------- -------
Shareholders' Equity:
Preferred:
SOP convertible preferred stock 110 111
Guaranteed obligation - SOP (49) (53)
------- -------
Total Preferred
Shareholders' Equity 61 58
------- -------
Common:
Common stock 2,207 2,192
Retained earnings 2,590 2,500
Accumulated other comprehensive
income, net of taxes:
Unrealized appreciation
of investments 324 442
Unrealized loss on foreign
currency translation (72) (76)
Unrealized loss on derivatives (2) (2)
------- -------
Total accumulated other
comprehensive income 250 364
------- -------
Total Common
Shareholders' Equity 5,047 5,056
------- -------
Total Shareholders' Equity 5,108 5,114
------- -------
Total Liabilities, Redeemable
Preferred Securities And
Shareholders' Equity $ 38,578 $ 38,321
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months Ended March 31, 2002 (unaudited) and
Twelve Months Ended December 31, 2001
(In millions)
2002 2001
------- -------
Preferred Shareholders' Equity:
SOP convertible preferred stock:
Beginning of period $ 111 $ 117
Redemptions (1) (6)
------- -------
End of period 110 111
------- -------
Guaranteed obligation - SOP:
Beginning of period (53) (68)
Principal payments 4 15
------- -------
End of period (49) (53)
------- -------
Total preferred
shareholders' equity 61 58
------- -------
Common Shareholders' Equity:
Common stock:
Beginning of period 2,192 2,238
Stock issued:
Stock incentive plans 11 67
Preferred shares redeemed 4 13
Reacquired common shares - (135)
Other - 9
------- -------
End of period 2,207 2,192
------- -------
Retained earnings:
Beginning of period 2,500 4,243
Net income (loss) 139 (1,088)
Dividends declared on
common stock (60) (235)
Dividends declared on
preferred stock, net of taxes (2) (9)
Reacquired common shares - (454)
Other changes 13 43
------- -------
End of period 2,590 2,500
------- -------
Unrealized appreciation on
investments, net of taxes:
Beginning of period 442 765
Change during the period (118) (323)
------- -------
End of period 324 442
------- -------
Unrealized loss on foreign
currency translation, net of taxes:
Beginning of period (76) (68)
Change during the period (4) (8)
------- -------
End of period (72) (76)
------- -------
Unrealized loss on
derivatives, net of taxes:
Beginning of period (2) -
Change during the period - (2)
------- -------
End of period (2) (2)
------- -------
Total common
shareholders' equity 5,047 5,056
------- -------
Total shareholders' equity $ 5,108 $ 5,114
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, 2002 and 2001
(Unaudited)
(In millions)
2002 2001
------- -------
Net income $ 139 $ 202
Other comprehensive income
(loss), net of taxes:
Change in unrealized
appreciation on investments (118) (113)
Change in unrealized loss on
foreign currency translation 4 19
Change in unrealized loss on
derivatives - (2)
------- -------
Other comprehensive loss (114) (96)
------- -------
Comprehensive income $ 25 $ 106
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2002 and 2001
(Unaudited)
(In millions)
2002 2001
------- -------
Operating Activities
Net income $ 139 $ 202
Adjustments:
Loss from discontinued operations 9 7
Change in insurance reserves 97 205
Change in reinsurance balances (26) (453)
Realized investment losses (gains) 38 (77)
Change in deferred acquisition costs (30) (31)
Change in insurance premiums receivable (122) 14
Change in accounts payable and
accrued expenses (96) (80)
Change in income taxes payable/refundable 46 19
Provision for federal deferred tax expense 3 98
Depreciation and amortization 21 26
Other 17 (124)
------- -------
Net cash provided (used)
by continuing operations 96 (194)
Net cash provided by
discontinued operations - 39
------- -------
Net cash provided (used)
by operating activities 96 (155)
------- -------
Investing Activities
Purchases of investments (2,419) (1,532)
Proceeds from sales and
maturities of investments 1,790 1,634
Net sales of short-term investments 504 181
Change in open security transactions (29) 37
Purchase of office property and equipment (16) (17)
Sales of office property and equipment 1 -
Acquisitions, net of cash acquired (59) -
Other 95 (15)
------- -------
Net cash provided (used)
by continuing operations (133) 288
Net cash used by
discontinued operations (4) (264)
------- -------
Net cash provided (used)
by investing activities (137) 24
------- -------
Financing Activities
Dividends paid on common and
preferred stock (60) (61)
Proceeds from issuance of debt 498 164
Repayment of debt (368) (11)
Repurchase of common shares - (188)
Subsidiary's repurchase of common shares (57) (42)
Stock options exercised and other 64 26
------- -------
Net cash provided (used)
by continuing operations 77 (112)
Net cash provided by
discontinued operations - 244
------- -------
Net cash provided by
financing activities 77 132
Effect of exchange rate changes on cash (2) -
------- -------
Increase in cash 34 1
Cash at beginning of period 151 52
------- -------
Cash at end of period $ 185 $ 53
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
March 31, 2002
Note 1 - Basis of Presentation
------------------------------
The financial statements include The St. Paul Companies, Inc. and
subsidiaries ("The St. Paul" or "the company"), and have been
prepared in conformity with United States generally accepted
accounting principles.
These consolidated financial statements rely, in part, on
estimates. Our most significant estimates are those relating to
our reserves for losses and loss adjustment expenses. We
continually review our estimates and make adjustments as
necessary, but actual results could turn out to be significantly
different from what we expected when we made these estimates.
With respect to those underwriting lines of business that we have
decided to exit (see Note 3 to our annual report to shareholders
for the year ended Dec. 31, 2001), we believe the process of
estimating required reserves for losses and loss adjustment
expenses has an increased level of risk and uncertainty due to
regulatory and other business considerations. 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.
Reference should be made to the "Notes to Consolidated Financial
Statements" in our annual report to shareholders for the year
ended Dec. 31, 2001. 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 2001 consolidated financial statements have
been reclassified to conform to the 2002 presentation. These
reclassifications had no effect on net income, comprehensive
income or shareholders' equity, as previously reported.
New Accounting Policy - Goodwill and Intangible Assets
------------------------------------------------------
Effective with the first-quarter 2002 adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets," as described in Note 10,
our accounting for goodwill and intangible assets has changed.
In an acquisition of another entity, the excess of the amount we
paid over the fair value of the company's tangible net assets is
recorded as either an intangible asset, if it meets certain
criteria, or goodwill. Intangible assets with a finite useful
life (generally over five to 20 years) are amortized to expense
over their estimated life, on a basis expected to be consistent
with their estimated future cash flows. Intangible assets with
an indefinite useful life and goodwill are no longer amortized,
effective January 1, 2002.
As part of the adoption, goodwill and intangible assets will be
evaluated for possible impairment under the provisions of SFAS
No. 142 for goodwill and intangible assets not subject to
amortization, and under SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," for intangible
assets subject to amortization. We expect to complete this
evaluation during the second quarter of 2002. Any impairment
recognized resulting from the adoption of SFAS No. 142 will be
recorded as a cumulative effect of accounting change as of
January 1, 2002 and will require restatement of our first-quarter
2002 results. Until that review is completed, we cannot
determine whether we will recognize any impairment.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 2 - Earnings Per Common Share
----------------------------------
The following table provides the calculation of our earnings per
common share for the three months ended March 31, 2002 and 2001:
Three Months
Ended March 31
-----------------
(in millions) 2002 2001
----------- ----- -----
Earnings
Basic:
Net income, as reported $ 139 $ 202
Preferred stock dividends, net of taxes (2) (2)
Premium on preferred shares redeemed (3) (2)
----- -----
Net income available
to common shareholders $ 134 $ 198
===== =====
Diluted:
Net income available
to common shareholders $ 134 $ 198
Effect of dilutive securities:
Convertible preferred stock 2 2
Zero coupon convertible notes 1 1
----- -----
Net income, as adjusted $ 137 $ 201
===== =====
Common Shares
Basic:
Weighted average common
shares outstanding 208 217
===== =====
Diluted:
Weighted average common
shares outstanding 208 217
Effect of dilutive securities:
Stock options 3 4
Convertible preferred stock 6 6
Zero coupon convertible notes 3 3
----- -----
Total 220 230
===== =====
Earnings per Common Share
Basic $ 0.65 $ 0.91
===== =====
Diluted $ 0.63 $ 0.87
===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 3 - Investments
--------------------
Investment Activity. Following is a summary of our investment
purchases, sales and maturities for continuing operations.
Three Months
Ended March 31
-----------------
(in millions) 2002 2001
----------- ----- -----
Purchases:
Fixed maturities $ 1,987 $ 931
Equities 385 495
Real estate and mortgage loans 3 41
Venture capital 37 63
Other investments 7 2
----- -----
Total purchases 2,419 1,532
----- -----
Proceeds from sales and
maturities:
Fixed maturities 1,263 933
Equities 500 498
Real estate and mortgage loans 13 51
Venture capital 12 7
Other investments 2 145
----- -----
Total sales and maturities 1,790 1,634
----- -----
Net purchases (sales) $ 629 $ (102)
===== =====
Change in Unrealized Appreciation. The increase (decrease) in
unrealized appreciation of investments recorded in common
shareholders' equity was as follows:
Three Twelve
Months Ended Months Ended
March 31 December 31
------------ ------------
(in millions) 2002 2001
----------- ------ ------
Fixed maturities $ (170) $ 187
Equities 31 (347)
Venture capital,
net of minority interest (7) (314)
Other (12) (80)
------ ------
Total change in pretax
unrealized appreciation -
continuing operations (158) (554)
Change in deferred taxes 40 214
------ ------
Total change in unrealized
appreciation, net of taxes (118) (340)
Change in pretax unrealized
appreciation - discontinued operations - 26
Change in deferred taxes - (9)
------ ------
Total change in unrealized
appreciation - discontinued operations
net of taxes - 17
------ ------
Total change in unrealized
appreciation, net of taxes $ (118) $ (323)
====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 4 - Income Taxes
---------------------
The components of income tax expense (benefit) on income from
continuing operations were as follows:
Three Months
Ended March 31
-----------------
(in millions) 2002 2001
----------- ----- -----
Income tax expense (benefit):
Federal current $ 38 $ (12)
Federal deferred 3 98
----- -----
Total federal 41 86
Foreign 4 -
State 3 3
----- -----
Total income tax expense $ 48 $ 89
===== =====
Note 5 - Contingent Liabilities
-------------------------------
In the ordinary course of conducting business, we, and some of
our subsidiaries, have been named as defendants in various
lawsuits. Some of these lawsuits attempt to establish liability
under insurance contracts issued by our underwriting operations,
including liability under environmental protection laws and for
injury caused by exposure to asbestos products. Information
about these contingent liabilities is set forth under "Environmental
and Asbestos Claims" in Management's Discussion and Analysis and is
incorporated herein by reference. Plaintiffs in these lawsuits
are seeking money damages that in some cases are substantial or
extra contractual in nature or are seeking to have the court
direct the activities of our operations in certain ways.
We are a defendant in one such matter arising out of an insuring
relationship which existed for a number of years prior to 1961
with one insured, Western Asbestos Company ("Western Asbestos"),
a distributor and installer of asbestos products. Western
MacArthur Company ("Western MacArthur"), which acquired certain
assets of Western Asbestos in 1967, has asserted rights to
coverage for claims for asbestos-related injuries arising out
of the products distributed and installed by Western Asbestos.
Presently, there are significant default judgments against
Western MacArthur taken by asbestos claimants. Significant
issues exist as to the scope of coverage, including with
respect to the defaults, under policies USF&G Company, one
of our insurance underwriting subsidiaries, wrote for Western
Asbestos and the availability of that coverage to Western
MacArthur. We believe Western Asbestos is our largest known
asbestos exposure.
Although the ultimate outcome of these matters is not presently
determinable, it is possible that the resolution of one or more
matters may be material to our results of operations; however,
we do not believe that the total amounts that we and our
subsidiaries will ultimately have to pay in all of these lawsuits
will have a material effect on our liquidity or overall financial
position.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 6 - Debt
-------------
Debt consisted of the following at March 31, 2002
and December 31, 2001:
March 31, 2002 December 31, 2001
--------------- -----------------
(in millions) Book Fair Book Fair
----------- Value Value Value Value
----- ----- ----- -----
Medium-term notes $ 571 $ 583 $ 571 $ 596
5.75% senior notes 498 494 - -
7.875% senior notes 249 268 249 269
8.125% senior notes 249 270 249 275
Commercial paper 240 240 606 606
Nuveen line of credit
borrowings 183 183 183 183
Zero coupon convertible notes 104 105 103 106
7.125% senior notes 80 84 80 84
Variable rate borrowings 64 64 64 64
Real estate debt - - 2 2
----- ----- ----- -----
Total obligations 2,238 2,291 2,107 2,185
Fair value of interest
rate swap agreements 22 22 23 23
----- ----- ----- -----
Total debt reported
on balance sheet $2,260 $2,313 $2,130 $2,208
===== ===== ===== =====
In March 2002, we issued $500 million of 5.75% senior notes due
in 2007. Proceeds from the issuance were primarily used to repay
a portion of our commercial paper outstanding.
At March 31, 2002, 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, which qualified
for hedge accounting, totaled $480 million, and their aggregate
fair value at March 31, 2002 was an asset of $22 million with a
corresponding increase to debt on our balance sheet.
Note 7 - Segment Information
----------------------------
We have seven reportable business segments in our property-
liability insurance operations, consisting of Specialty
Commercial, Commercial Lines Group, Surety and Construction,
Health Care, Lloyd's and Other, Reinsurance, and Investment
Operations. We also have an asset management segment, consisting
of our majority ownership in 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 7 - Segment Information (continued)
---------------------------------------
The tabular information that follows provides revenue and income
data from continuing operations for each of our business segments
for the first quarters of 2002 and 2001. In the fourth quarter
of 2001, we implemented a new segment reporting structure for our
property-liability underwriting operations. Data for 2001 in the
tables have been reclassified to be consistent with the new
segment reporting structure.
Three Months
Ended March 31
-----------------
(in millions) 2002 2001
----------- ----- -----
Revenues from continuing operations:
Property-liability insurance:
Specialty Commercial $ 554 $ 433
Commercial Lines Group 432 364
Surety and Construction 278 235
Health Care 184 182
Lloyd's and Other 110 111
----- -----
Total primary insurance operations 1,558 1,325
Reinsurance 377 302
----- -----
Total insurance premiums earned 1,935 1,627
----- -----
Investment operations:
Net investment income 290 330
Realized investment gains (losses) (39) 52
----- -----
Total investment operations 251 382
----- -----
Other 34 36
----- -----
Total property-liability insurance 2,220 2,045
----- -----
Asset management 94 87
----- -----
Total reportable segments 2,314 2,132
Parent company, other operations and
consolidating eliminations 3 30
----- -----
Total revenues $2,317 $2,162
===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
---------------------------------------
Three Months
Ended March 31
-----------------
(in millions) 2002 2001
----------- ----- -----
Income (loss) from continuing operations:
Property-liability insurance:
Specialty Commercial $ 4 $ (9)
Commercial Lines Group 2 77
Surety and Construction 4 20
Health Care 3 (130)
Lloyd's and Other (39) (24)
----- -----
Total primary insurance operations (26) (66)
Reinsurance 15 (21)
----- -----
Total underwriting result (11) (87)
----- -----
Investment operations:
Net investment income 290 330
Realized investment gains (losses) (39) 52
----- -----
Total investment operations 251 382
----- -----
Other (26) (4)
----- -----
Total property-liability insurance 214 291
----- -----
Asset management:
Pretax income before minority interest 49 45
Minority interest (11) (10)
----- -----
Total asset management 38 35
----- -----
Total reportable segments 252 326
Parent company, other operations and
consolidating eliminations (56) (28)
----- -----
Total income from continuing operations
before income taxes $ 196 $ 298
===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 8 - Reinsurance
--------------------
Our consolidated financial statements reflect the effects of
assumed and ceded reinsurance transactions. Assumed reinsurance
refers to our acceptance of certain insurance risks that other
insurance companies have underwritten. Ceded reinsurance
involves transferring certain insurance risks (along with the
related written and earned premiums) we have underwritten to
other insurance companies who agree to share these risks. The
primary purpose of ceded reinsurance is to protect us against
earnings volatility and from potential losses in excess of the
amount we are prepared to accept.
We expect those with whom we have ceded reinsurance to honor
their obligations. In the event these companies are unable to
honor their obligations, we will pay these amounts. We have
established allowances for possible nonpayment of amounts due to
us.
In the first quarter of 2002, we were not party to an all-lines,
corporate excess-of-loss reinsurance treaty. In the preceding
three years, cessions made under similar treaties had a
significant impact on our reported financial results for certain
periods. In 2001, we were party to such a treaty that we entered
into effective Jan. 1 of that year, but coverage under that
treaty was not triggered in the first quarter of the year.
However, we ceded $9 million and $3 million of written and earned
premiums, respectively, related to the treaty in the first
quarter of 2001, representing the initial premium paid to our
reinsurer. Our Reinsurance segment was party to a separate
aggregate excess-of-loss reinsurance treaty, unrelated to the
corporate treaty, in both 2002 and 2001. Coverage was not
triggered under that treaty in the first quarter of 2002, however
we did record ceded written and earned premiums of $4 million in
that quarter, representing the initial premium for this treaty.
In the first quarter of 2001, we ceded $3 million of written and
earned premiums and $26 million of insurance losses and loss
adjustment expenses, for a net benefit of $23 million as a result
of the Reinsurance segment treaty.
The effect of assumed and ceded reinsurance on premiums written,
premiums earned and insurance losses and loss adjustment expenses
was as follows:
Three Months
Ended March 31
-----------------
(in millions) 2002 2001
----------- ----- -----
Premiums written
Direct $1,973 $1,613
Assumed 643 570
Ceded (509) (337)
----- -----
Net premiums written $2,107 $1,846
===== =====
Premiums earned
Direct $1,815 $1,482
Assumed 562 522
Ceded (442) (377)
----- -----
Net premiums earned $1,935 $1,627
===== =====
Insurance losses and loss
adjustment expenses
Direct $1,512 $1,220
Assumed 348 411
Ceded (467) (448)
----- -----
Net insurance losses and
loss adjustment expenses $1,393 $1,183
===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 9 - Restructuring Charges
------------------------------
Fourth Quarter 2001 Strategic Review - In December 2001, we
announced the results of a strategic review of all of our
operations, which included a decision to exit a number of
businesses and countries. Note 3 in our 2001 Annual Report to
Shareholders provides more detailed information on this strategic
review. Related to this review, we recorded a pretax charge of
$62 million, including $46 million of employee-related costs
(related to the expected elimination of 800 positions during
2002), $9 million of occupancy-related costs, $4 million of
equipment charges and $3 million of legal costs. Note 16 in our
2001 Annual Report to Shareholders provides more information on
this charge. During the first quarter of 2002, we recorded an
additional $6 million of employee-related charges related to this
strategic review, as we met the criteria for accrual. As of
March 31, 2002, 414 positions had been eliminated.
The following presents a rollforward of activity related to
this accrual:
(In millions)
----------- Original Reserve Reserve
Charges to Pre-tax at Dec. 31, at March 31,
earnings: Charge 2001 Payments Adjustments 2002
---------- -------- ---------- -------- ----------- ----------
Employee-related $ 46 $ 46 $(20) $ 6 $ 32
Occupancy-rrelated 9 9 - - 9
Equipment charges 4 N/A N/A N/A N/A
Legal costs 3 3 - - 3
---- ---- ---- ---- -----
Total $ 62 $ 58 $(20) $ 6 $ 44
==== ==== ==== ==== =====
Other Restructuring Charges - Since 1997, we have recorded
several restructuring and other charges related to actions taken
to improve our operations. Note 16 in our 2001 Annual Report to
Shareholders provides more detailed information regarding these
charges.
In connection with our April 2000 acquisition of MMI, we recorded
a pretax charge of $28 million, including $4 million of employee-
related costs (related to the elimination of approximately 120
positions) and $24 million of occupancy-related costs.
In connection with a cost reduction program announced in August
1999, we recorded a pretax charge of $60 million, including $25
million of employee-related costs (related to the elimination of
approximately 590 positions), $33 million in occupancy-related
charges and $2 million in equipment charges.
In connection with a cost reduction program primarily involving
our commercial insurance operations in the fourth quarter of
1998, we recorded a pretax charge of $34 million, including $26
million of employee-related costs (related to the elimination of
approximately 500 positions) and $8 million of occupancy-related
costs.
In connection with our merger with USF&G, in the second quarter
of 1998 we recorded a pretax charge to earnings of $292 million,
primarily consisting of severance and other employee-related
costs (related to the elimination of approximately 2,200
positions), facilities exit costs, asset impairments and
transaction costs.
All actions have been taken and all obligations had been met
regarding these other restructuring charges, with the exception
of certain remaining lease commitments. The lease commitment
charges related to excess space created by the elimination of
positions. During the first quarter of 2002, we reduced the
lease commitment reserve by $1 million related to sublease
activity. We expect to be obligated under certain lease
commitments for approximately seven years.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 9 - Restructuring Charges (continued)
-----------------------------------------
The following presents a rollforward of activity related to these
lease commitments:
(In millions)
----------- Original Reserve Reserve
Charges to Pre-tax at Dec. 31, at March 31,
earnings: Charge 2001 Payments Adjustments 2002
---------- -------- ---------- -------- ----------- ----------
Lease
commitments
charged to
earnings: $99 $39 $(4) $(1) $34
==== ==== ==== ==== ====
Note 10 - Adoption of Accounting Pronouncement
----------------------------------------------
In the first quarter of 2002, we began implementing the
provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting for
acquired goodwill and other intangible assets. The statement
changes prior accounting practice in the way intangible assets
with indefinite useful lives, including goodwill, are tested for
impairment on an annual basis. Generally, it also requires that
those assets meeting the criteria for classification as
intangible with estimable useful lives be amortized to expense
over those lives, while intangible assets with indefinite useful
lives and goodwill are not to be amortized. As a result of
implementing the provisions of this statement, we did not record
any goodwill amortization expense in the first quarter of 2002.
In the first quarter of 2001, goodwill amortization expense
totaled $9 million. Amortization expense associated with
intangible assets totaled $3 million in the first quarter of
2002, compared with $1 million in the same 2001 period. We are
in the process of evaluating our recorded goodwill and intangible
assets for impairment. As part of this impairment evaluation, we
will adopt the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," with respect to our
review of intangible assets subject to amortization. We expect
to conclude our impairment evaluation in the second quarter of
2002. Any impairment recognized resulting from the adoption of
SFAS No. 142 will be reflected as a cumulative effect of
accounting change as of Jan. 1, 2002 and will require restatement
of our first-quarter 2002 results. Until our evaluation is
completed, we cannot determine if we will recognize any
impairment.
Related to our adoption of SFAS No. 142, we also reviewed the
amortization method and useful lives of existing intangible
assets, and adjusted as appropriate. Generally speaking,
amortization was accelerated and useful lives shortened.
The following presents a summary of our acquired intangible
assets.
As of March 31, 2002
-------------------------------------
(In millions) Gross
----------- Carrying Accumulated Net
Amortizable intangible assets: Amount Amortization Amount
----------------------------- -------- ------------ ------
Present value future profits $ 70.8 $ (7.2) $ 63.6
Customer relationships 43.8 (1.6) 42.2
Renewal rights 16.2 (2.6) 13.6
Internal use software 1.6 (0.2) 1.4
Favorable leases 0.4 (0.1) 0.3
------ ------ ------
Total $132.8 $(11.7) $121.1
====== ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 10 - Adoption of Accounting Pronouncement (continued)
---------------------------------------------------------
At March 31, 2002, our estimated amortization expense for the
next five years was as follows.
(In millions)
-----------
Estimated amortization expense
for the year ended Dec. 31:
----------------------------------------
2003 $20
2004 18
2005 15
2006 10
2007 8
The changes in the carrying value of goodwill on our balance
sheet were as follows. The increase in goodwill in our Asset
Management segment results from Nuveen's purchase of shares from
minority shareholders. See Note 11 for a discussion of the
increase to the Specialty Commercial and Surety and Construction
segments.
(In millions)
----------- Balance Balance
at Dec. 31, Goodwill Impairment at March 31,
Goodwill by Segment 2001 Acquired Losses 2002
----------------------- ------ -------- ---------- -----------
Specialty Commercial $ 36 $ 6 $ - $ 42
Commercial Lines Group 33 - - 33
Surety and Construction 14 12 - 26
Lloyd's and Other 7 4 - 11
Asset Management 519 31 - 550
----- ----- ----- -----
Total $ 609 $ 53 $ - $ 662
===== ===== ===== =====
The following presents the impact of ceasing amortization of
goodwill for the quarter ended March 31, 2001.
For the Quarter Ended
March 31,
---------------------
(In millions) 2002 2001
----------- ----- -----
Reported net income $ 139 $ 202
Add back goodwill amoritization - 9
----- -----
Adjusted net income $ 139 $ 211
===== =====
Basic earnings per share:
Reported net income $0.65 $0.91
Goodwill amortization - 0.04
----- -----
Adjusted net income $0.65 $0.95
===== =====
Diluted earnings per share:
Reported net income $0.63 $0.87
Goodwill amortization - 0.04
----- -----
Adjusted net income $0.63 $0.91
===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 11 - Acquisition of London Guarantee
-----------------------------------------
In late March 2002, we completed our acquisition of London
Guarantee Insurance Company ("London Guarantee"), a specialty
property-liability insurance company focused on providing surety
products, and management liability, bond, and professional
indemnity products, for a total cost of approximately $80
million. The acquisition was funded through internally-generated
funds. For the year ended Dec. 31, 2001, London Guarantee,
headquartered in Toronto, generated approximately $35 million in
surety net written premiums (which we will report in our Surety
and Construction segment going forward) and approximately $18
million in management liability, bond, and professional indemnity
product written premiums (which we will report in Financial and
Professional Services in the Specialty Commercial segment going
forward). London Guarantee's assets and liabilities were
included in our consolidated balance sheet as of March 31, 2002,
but the results of their operations since the acquisition date
were not material and were not included in our statement of
income for the three months ended March 31, 2002.
Related to the purchase, we have recorded, on a preliminary
basis, an intangible asset of approximately $38 million and
goodwill of approximately $18 million. The intangible asset
represents the present value of future business and will be
amortized, on a basis consistent with the expected cash flows,
over an expected useful life of eight years. Of the preliminary
goodwill amount, we expect to allocate $12 million to our Surety
and Construction segment, and $6 million to our Specialty
Commercial segment.
Note 12 - Discontinued Operations
---------------------------------
Life Insurance
--------------
On September 28, 2001, we completed the sale of our life
insurance company, Fidelity and Guaranty Life Insurance Company,
and its subsidiary, Thomas Jefferson Life, (together, "F&G Life")
to Old Mutual plc ("Old Mutual") for $335 million in cash and
$300 million in shares of Old Mutual stock. Pursuant to the sale
agreement, we must hold the Old Mutual stock received for one
year after the closing of the transaction. 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. The amount of possible adjustment will be
determined by a derivative "collar" agreement included in the
sale agreement. If the market value of the Old Mutual stock
exceeds $330 million on Sept. 28, 2002, 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 on that date,
we will receive either cash or Old Mutual shares in the amount
representing the deficit below $300 million, up to $40 million.
At March 31, 2002, the market value of the Old Mutual shares was
$276 million, compared with $242 million at Dec. 31, 2001. The
$34 million increase in market value since Dec. 31, 2001 was
recorded as a component of unrealized appreciation of
investments, net of taxes, in shareholders' equity. The
estimated fair value of the collar was $12 million at March 31,
2002, down from $17 million at Dec. 31, 2001. The collar
qualifies for derivative accounting treatment under provisions of
SFAS No. 133; consequently, the fair value of the collar
agreement is recorded as an asset on our balance sheet. The $5
million decline in value was recorded as a component of
discontinued operations, net of taxes, on our statement of income
for the three months ended March 31, 2002.
Standard Personal Insurance Business
------------------------------------
In 1999, we sold our standard personal insurance operations to
Metropolitan Property and Casualty Insurance Company
(Metropolitan). Metropolitan purchased Economy Fire & Casualty
Company and its subsidiaries (Economy), as well as the rights and
interests in those non-Economy policies constituting our
remaining standard personal insurance operations. Those rights
and interests were transferred to Metropolitan by way of a
reinsurance and facility agreement (Reinsurance Agreement).
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 12 - Discontinued Operations (continued)
--------------------------------------------
The Reinsurance Agreement relates solely to the non-Economy
standard personal insurance policies, and was entered into solely
as a means of accommodating Metropolitan through a transition
period. The Reinsurance Agreement allows Metropolitan to write
non-Economy business on our policy forms while Metropolitan
obtains the regulatory license, form and rate approvals necessary
to write non-Economy business through their own insurance
subsidiaries. Any business written on our policy forms during
this transition period is then fully ceded to Metropolitan under
the Reinsurance Agreement. We recognized no gain or loss on the
inception of the Reinsurance Agreement and will not incur any net
revenues or expenses related to the Reinsurance Agreement. All
economic risk of post-sale activities related to the Reinsurance
Agreement has been transferred to Metropolitan. We anticipate
that Metropolitan will pay all claims incurred related to this
Reinsurance Agreement. In the event Metropolitan is unable to
honor their obligations to us, we will pay these amounts.
As part of the sale to Metropolitan, we guaranteed the adequacy
of Economy's loss and loss expense reserves. Under that
guarantee, we will pay for any deficiencies in those reserves and
will share in any redundancies that develop by Sept. 30, 2002. We
remain liable for claims on non-Economy policies that result from
losses occurring prior to closing. By agreement, Metropolitan
will adjust those claims and share in redundancies in related
reserves that may develop. As of Mar. 31, 2002, we have
estimated that we will owe Metropolitan $7 million on these
guarantees, and have recorded that obligation. Any losses
incurred by us under these agreements will be reflected in
discontinued operations in the period they are incurred. For the
first three months of 2002 and 2001, we recorded pretax losses of
$2 million and $12 million, respectively, in discontinued
operations. We have no other contingent liabilities related to
the sale.
Note 13 - Derivative Financial Instruments
------------------------------------------
We have the following derivative instruments, which have been
designated into one of three categories based on their intended
use:
Fair Value Hedges: We have several pay-floating, receive-fixed
interest rate swaps, totaling $480 million notional amount, that
are designated as fair value hedges of a portion of our medium-
term and senior notes, that we have entered into for the purpose
of managing the effect of interest rate fluctuations on this
debt. The terms of the swaps match those of the debt
instruments, and the swaps are therefore considered 100%
effective. The impact related to the three months ended March
31, 2002 and March 31, 2001 movement in interest rates was a $1
million decrease and a $7 million increase, respectively, in the
fair value of the swaps and the related debt on the balance
sheet, with the income statement impacts again offsetting.
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. In the three months ended March 31, 2002, we
recognized less than a $1 million loss on the cash flow hedges,
which is included in "Other Comprehensive Income." The
comparable amount for the three months ended March 31, 2001 was
$3 million. The amounts included in other comprehensive income
will be reclassified into earnings concurrent with the timing of
the hedged cash flows. We anticipate that less than $1 million
will be reclassified into earnings within the next twelve months.
In both the three months ended March 31, 2002 and March 31, 2001
we recognized a loss in the income statement of less than $1
million representing the portions of the forward contracts deemed
ineffective.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 13 - Derivative Financial Instruments (continued)
-----------------------------------------------------
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. These include our investment in an embedded collar
on Old Mutual common stock received as partial consideration from
the sale of our life insurance business, foreign currency put
options on British Pounds Sterling to hedge currency risk
associated with our position in Old Mutual stock and stock
warrants in our venture capital business. We recorded less than
$1 million of income in continuing operations for both the three
months ended March 31, 2002 and March 31, 2001 relating to the
change in the market value of these derivatives during the
period. We also recorded $7 million of losses in discontinued
operations for the three months ended March 31, 2002 relating to
non-hedge derivatives associated with the sale of our life
business.
Note 14 - Subsequent Event
--------------------------
On April 25, 2002, we announced that we plan to transfer our
ongoing reinsurance operations to a newly formed Bermuda-based
reinsurer, Platinum Underwriters Holdings, Ltd. ("Platinum").
Platinum intends to offer to the public 75.1% of its common
shares. We will transfer to Platinum certain renewal
opportunities and tangible and intangible assets of our
reinsurance operation, St. Paul Re, and enter into various
agreements with Platinum and its subsidiaries, in exchange for a
24.9% interest in the common shares of Platinum, which will have
9.9% of the voting rights. A registration statement for the
offering was filed with the U.S. Securities and Exchange
Commission on April 25, 2002. Platinum's offering is expected to
close early in the third quarter of 2002, subject to the receipt
of regulatory approvals, and market and other conditions. We
expect this transaction to result in a net realized capital gain,
the amount of which will depend on the results of the offering.
At the time of the closing of the offering, operating
subsidiaries of Platinum are expected to reinsure St. Paul Fire
and Marine Insurance Company and St. Paul Reinsurance Company
Limited for certain reinsurance contracts incepting in 2002.
Platinum will not reinsure the reinsurance liabilities of St.
Paul Fire and Marine Insurance Company and St. Paul Reinsurance
Company Limited relating to reinsurance contracts incepting prior
to January 1, 2002. We will retain the reserves related to those
liabilities.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
March 31, 2002
Forward-looking Statement Disclosure
------------------------------------
This report contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are statements other than
historical information or statements of current condition. Words
such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks" or "estimates," or variations of such words, and similar
expressions are also intended to identify forward-looking
statements. Examples of these forward-looking statements include
statements concerning: market and other conditions and their
effect on future premiums, revenues, earnings, cash flow and
investment income; price increases, improved loss experience and
expense savings resulting from the restructuring actions
announced in recent years; and statements concerning the
anticipated public offering of Platinum Underwriters Holdings,
Ltd.
In light of the risks and uncertainties inherent in 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; risks relating to the ability of Platinum Underwriters
Holdings, Ltd. to receive required regulatory approvals and
undertake a successful public offering of its common shares in
the time frame we anticipate, and of the proposed transfer of our
going forward reinsurance operations to Platinum; loss of
significant customers; the possibility of worse-than anticipated
loss development from business written in prior years; changes in
our estimate of insurance industry losses resulting from the
Sept. 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; adverse developments in
pending litigation; judicial decisions and rulings; anticipated
increases in premiums; our implementation of new strategies as a
result of the strategic review completed in late 2001; 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 Highlights
-----------------------
The following table summarizes our results for the three
months ended March 31, 2002 and 2001.
(In millions, except per share data) 2002 2001
---------------------------------- ------ ------
Pretax income (loss):
Property-liability insurance:
Underwriting result $ (11) $ (87)
Net investment income 290 330
Realized investment gains (losses) (39) 52
Other (26) (4)
------ ------
Total property-liability insurance 214 291
Asset management 38 35
Parent and other (56) (28)
------ ------
Pretax income from
continuing operations 196 298
Income tax expense 48 89
------ ------
Income from continuing operations 148 209
Discontinued operations, net of taxes (9) (7)
------ ------
Net income $ 139 $ 202
====== ======
Diluted net income per share $0.63 $0.87
====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
Consolidated Results
--------------------
Our pretax income from continuing operations of $196 million in
the first quarter of 2002 was more than $100 million less than
comparable 2001 pretax income of $298 million. The decline
resulted from significant reductions in realized investment gains
and investment income in our property-liability insurance
operations, which more than offset a $76 million improvement in
underwriting results. Our asset management subsidiary, The John
Nuveen Company achieved an increase in earnings, driven by strong
investment product sales and growth in assets under management.
Pretax losses in "Parent and other" exceeded comparable first-
quarter 2001 losses due to a decline in realized investment
gains.
Acquisition
-----------
In late March 2002, we completed our acquisition of London
Guarantee Insurance Company ("London Guarantee"), a specialty
property-liability insurance company focused on providing surety
products and management liability, bond, and professional
indemnity products, for a total cost of approximately $80
million. The acquisition was funded through internally-generated
funds. London Guarantee, headquartered in Toronto, generated
approximately $35 million in surety net written premiums for the
year ended Dec. 31, 2001, and approximately $18 million in net
written premiums from the remaining lines of business we
acquired. London Guarantee's assets and liabilities were
included in our consolidated balance sheet as of March 31, 2002,
but the results of their operations since the acquisition date
were not material and are not included in our statement of income
for the three months ended March 31, 2002.
Withdrawal from Certain Lines of Business
-----------------------------------------
In the fourth quarter of 2001, we announced our intention to
withdraw from several lines of business in our property-liability
insurance operations. Beginning in January 2002, the operations
listed below were placed in "runoff," meaning that we have ceased
or plan to cease underwriting new business in these operations as
soon as possible. We are pursuing the sale of certain operations
placed in runoff.
- All coverages in our Health Care segment;
- All underwriting operations in Germany, France, the
Netherlands, Argentina, Mexico (excluding surety business,
which continues), Spain, Australia, New Zealand, Botswana, and
South Africa;
- In the United Kingdom, all coverages offered to the
construction industry. (Unionamerica, a United Kingdom
medical liability underwriting entity that we acquired in
2000, was placed in runoff in late 2000, except for business
we are contractually committed to underwrite through certain
syndicates at Lloyd's through 2004);
- At Lloyd's, casualty insurance and reinsurance, U.S.
surplus lines business, non-marine reinsurance and, when our
contractual commitment expires at the end of 2003, our
participation in the insuring of the Lloyd's Central Fund;
- In our reinsurance operations, most North American
reinsurance business underwritten in the United Kingdom, all
but traditional finite reinsurance business underwritten by
St. Paul Re's Financial Solutions business center, bond and
credit reinsurance, and aviation reinsurance.
These operations do not qualify as "discontinued operations" for
accounting purposes; therefore, results from these operations are
included in their respective property-liability segment results
discussed on pages 30 to 36 of this report. For the three months
ended March 31, 2002, these runoff operations collectively
accounted for $367 million, or 19%, of our reported net earned
premiums, and generated negative underwriting results totaling
$18 million (an amount that does not include investment income
from the assets maintained to support these operations). Runoff
premium volume in 2002 was centered in our Health Care segment,
where we are required to offer continuing
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
coverage to certain policyholders in the form of extended
reporting endorsements, and in our Lloyd's and Other segment,
where we are contractually committed to underwrite business in
certain Lloyd's syndicates through 2003 and 2004. For the three
months ended March 31, 2001, these runoff operations collectively
accounted for $377 million, or 23%, of our net earned premiums,
and generated negative underwriting results totaling $146
million.
Restructuring Charge
--------------------
In December 2001, in connection with the withdrawal from the
foregoing lines of business and as part of our overall plan to
reduce company-wide expenses, we recorded a $62 million pretax
restructuring charge. The majority of the charge - $46 million -
pertained to employee-related costs associated with our plan to
terminate an estimated total of 800 employees by the end of 2002.
As of March 31, 2002, we had terminated 414 employees and made
payments of $20 million related to the $46 million charge. The
remainder of the $62 million charge consisted of legal, equipment
and occupancy-related costs, for which no payments had been made
as of March 31, 2002.
In the first quarter of 2002, we recorded an additional pretax
restructuring charge of $6 million, related to additional
employee-related expenses that did not meet the criteria for
accrual at Dec. 31, 2001. This charge was partially offset by a
$1 million reduction in occupancy-related restructuring charges
recorded in prior years.
Adoption of SFAS No. 142
------------------------
In the first quarter of 2002, we began implementing the
provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting for
acquired goodwill and other intangible assets. The statement
changes prior accounting practice in the way intangible assets
with indefinite useful lives, including goodwill, are tested for
impairment on an annual basis. Generally, it also requires that
those assets meeting the criteria for classification as
intangible with finite useful lives be amortized to expense over
those lives, while intangible assets with indefinite useful lives
and goodwill are not to be amortized. As a result of
implementing the provisions of this statement, we did not record
any goodwill amortization expense in the first quarter of 2002.
In the first quarter of 2001, goodwill amortization expense
totaled $9 million. Amortization expense associated with
intangible assets totaled $3 million in the first quarter of
2002, compared with $1 million in the same 2001 period. We are
in the process of evaluating our recorded goodwill and intangible
assets for impairment. We expect to conclude that evaluation in
the second quarter of 2002. Any impairment recognized as a
result of adopting SFAS No. 142 will be recorded as a cumulative
effect of accounting change as of Jan. 1, 2002, and will require
the restatement of our first-quarter 2002 results. Until our
evaluation is completed, we cannot determine whether we will
recognize any impairment.
September 11, 2001 Terrorist Attack
-----------------------------------
In 2001, we recorded estimated net pretax losses totaling $941
million related to the September 11, 2001 terrorist attack in the
United States. We are continually evaluating the adequacy of the
net loss provision recorded, based on claim experience,
collections from our reinsurers, and other factors. In the first
quarter of 2002, we did not record any additions or reductions to
our original estimated loss provision recorded in 2001. Through
March 31, 2002, we have made net loss payments totaling $147
million related to the attack since it occurred, of which $85
million were made in the first quarter of 2002. For further
information regarding the impact of the terrorist attack on our
operations, refer to Note 2 on page 50 of our 2001 Annual Report
to Shareholders.
Discontinued Operations
-----------------------
F&G Life - On September 28, 2001, we completed the sale of our
life insurance company, Fidelity and Guaranty Life Insurance
Company, and its subsidiary, Thomas Jefferson Life, (together,
"F&G Life") to Old Mutual plc ("Old Mutual") for $335 million in
cash and $300 million in shares of Old Mutual stock. Pursuant to
the sale
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
agreement, we must hold the Old Mutual stock received for one
year after the closing of the transaction. 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. The amount of possible adjustment will be
determined by a derivative "collar" agreement included in the
sale agreement. If the market value of the Old Mutual stock
exceeds $330 million on Sept. 28, 2002, 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 on that date,
we will receive either cash or Old Mutual shares in the amount
representing the deficit below $300 million, up to $40 million.
At March 31, 2002, the market value of the Old Mutual shares was
$276 million, compared with $242 million at Dec. 31, 2001. The
$34 million increase in market value since Dec. 31, 2001 was
recorded as a component of unrealized appreciation of
investments, net of taxes, in shareholders' equity. The collar's
estimated fair value was $12 million at March 31, 2002, down from
$17 million at Dec. 31, 2002. The collar qualifies for
derivative accounting treatment under provisions of SFAS No. 133;
consequently, the fair value of the collar agreement is recorded
as an asset on our balance sheet. The $5 million decline in
value was recorded as a component of discontinued operations, net
of taxes, on our statement of income for the three months ended
March 31, 2002.
Standard 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. Any losses incurred by us under
these agreements are reflected in discontinued operations in the
period during which they are incurred. As of March 31, 2002, our
analysis indicated that we will owe Metropolitan approximately $7
million related to the reserve guarantee, an estimate that was
unchanged from our estimate at Dec. 31, 2001. (We recorded a
pretax expense equal to that amount in discontinued operations in
2001 related to the reserve guarantee). In the first quarters of
2002 and 2001, we recorded pretax losses of $2 million and $12
million, respectively, in discontinued operations, related to pre-
sale claims.
Subsequent Event - Announcement of Intention to Transfer Ongoing
Reinsurance Operations to Bermuda-Based Reinsurer
----------------------------------------------------------------
On April 25, 2002, we announced that we plan to transfer our
ongoing reinsurance operations to a newly formed Bermuda-based
reinsurer, Platinum Underwriters Holdings, Ltd. ("Platinum").
Platinum intends to offer to the public 75.1% of its common
shares. We will transfer to Platinum certain renewal
opportunities and tangible and intangible assets of our
reinsurance operation, St. Paul Re, and enter into various
agreements with Platinum and its subsidiaries, in exchange for a
24.9% interest in the common shares of Platinum, which will have
9.9% of the voting rights. A registration statement for the
offering was filed with the U.S. Securities and Exchange
Commission on April 25, 2002. Platinum's offering is expected to
close early in the third quarter of 2002, subject to regulatory
approvals and market conditions. We expect the transaction,
which is subject to market and other conditions, to result in a
net realized capital gain, the amount of which will depend on the
results of the offering.
At the time of the closing of the offering, Platinum will
reinsure St. Paul Fire and Marine Insurance Company and St. Paul
Reinsurance Company Limited for certain reinsurance contracts
incepting in 2002. Platinum will not reinsure the reinsurance
liabilities of St. Paul Fire and Marine Insurance Company and St.
Paul Reinsurance Company Limited relating to reinsurance
contracts incepting prior to January 1, 2002. We will retain the
reserves related to those liabilities.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
Critical Accounting Policies
----------------------------
Overview - The St. Paul Companies, Inc. is a holding company with
subsidiaries operating in the property-liability insurance
industry and the asset management industry. We combine our
financial statements with those of our subsidiaries and present
them on a consolidated basis in accordance with U.S. generally
accepted accounting principles.
We make estimates and assumptions that can have a significant
effect on the amounts that we report in our financial statements.
The most significant estimates relate to our reserves for
property-liability insurance losses and loss adjustment expenses.
We continually review and analyze our estimates, but actual
results may turn out to be significantly different than we
expected when the estimates were made. We believe the process of
estimating loss and loss adjustment expense reserves for those
lines of business we have placed in runoff involves an increased
level of risk and uncertainty due to regulatory and other
business considerations.
As described on page 25 of this report, in the first quarter of
2002, we adopted a new standard relating to accounting for
goodwill and intangible assets.
In our investment portfolio, we continually monitor the
difference between our cost and the estimated fair value of
investments. If any experience a decline in value that we
believe is other than temporary, we write down the investment for
the decline and record a realized loss on our statement of
operations.
Property-Liability Operations - Premiums on insurance policies we
sell are our largest source of revenue, and we recognize the
premiums as revenue evenly over the term of the policy. Our
insurance reserves are our largest liability, and reflect our
estimate of claims reported but not yet paid, and claims incurred
but not yet reported to us. The costs related to writing a
policy are amortized over the same period the related premiums
are recognized as revenue. Reinsurance accounting is followed
when risk transfer requirements have been met. These
requirements involve significant assumptions being made related
to the amount and timing of expected cash flows, as well as the
interpretation of underlying contract terms.
Asset Management Operations - We are the 77% owner of The John
Nuveen Company, which comprises our asset management segment. We
consolidate 100% of Nuveen's revenues, expenses, assets and
liabilities, with reductions on the statement of operations and
balance sheet for minority shareholders' proportionate interest
in Nuveen's earnings and equity.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance
----------------------------
Overview
--------
Our first-quarter 2002 consolidated written premiums of $2.11
billion were 14% higher than comparable 2001 premiums of $1.85
billion. Strong growth in our Specialty Commercial, Commercial
Lines Group, and Surety and Construction segments was partially
offset by premium declines in our Health Care and Lloyd's and
Other segments, where our runoff operations are concentrated. In
our U.S. commercial insurance operations, price increases
averaged 25% in the first three months of 2002, while business
retention levels remained strong. We expect the favorable
pricing environment to continue throughout the remainder of 2002.
In the first quarter of 2002, we were not party to an all-lines,
corporate aggregate excess-of-loss reinsurance treaty. In the
preceding three years, cessions made under such treaties had a
significant impact on our reported financial results for certain
periods. In 2001, we were party to such a treaty that we entered
into effective January 1 of that year, but coverage under that
treaty was not triggered in the first quarter and the impact of
the treaty on our first quarter results was limited to cessions
of a modest amount of deposit premiums to our reinsurer. Our
Reinsurance segment, St. Paul Re, was party to a separate
aggregate excess-of-loss treaty, unrelated to the corporate
treaty, in both 2002 and 2001. In the first quarter of 2002,
coverage was not triggered under that treaty, but St. Paul Re
ceded $4 million of net written and earned deposit premiums to
its reinsurer. In the first quarter of 2001, St. Paul Re ceded
$3 million of written and earned premiums and $26 million of
insurance losses and loss adjustment expenses under that treaty,
for a net pretax benefit of $23 million.
Our reported consolidated loss ratio, which measures insurance
losses and loss adjustment expenses as a percentage of earned
premiums, was 72.0 for the first quarter of 2002, compared with a
reported loss ratio of 72.7 in the same 2001 period. Excluding
the benefit of the Reinsurance segment treaty in 2001, the first-
quarter 2001 loss ratio was 74.1. The improvement in 2002 was
concentrated in our Health Care and Reinsurance segments and
reflected the initial impact of our strategic initiative to exit
unprofitable market sectors. Our results in the first quarter of
both years benefited from the absence of significant catastrophe
losses.
Our reported consolidated expense ratio, measuring underwriting
expenses as a percentage of written premiums, was 27.9 for the
first quarter of 2002, compared with the 2001 first-quarter ratio
of 31.1. The significant improvement reflected the effects of
strong written premium growth and our aggressive expense
reduction efforts in recent years, including the strategic
initiatives implemented near the end of 2001.
The table on the following page summarizes key financial results
(from continuing operations) by property-liability underwriting
business segment (underwriting results are presented on a GAAP
basis; combined ratios are presented on a statutory accounting
basis). In the fourth quarter of 2001, we implemented a new
segment reporting structure for our property-liability
underwriting operations. Data for first-quarter 2001 in the
table have been reclassified to be consistent with the new
segment reporting structure.
Following the table is a detailed discussion of the results for
each segment. In those discussions, we sometimes use the term
"prior accident year loss development" (or similar terms) which
refers to an increase or decrease in losses recorded in the
current year that relate to business underwritten prior to 2002.
Similarly, we sometimes refer to "current accident year loss
development" (or similar terms), which refers to losses recorded
on business written in 2002.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Three Months
Ended March 31
--------------
(Dollars in millions) 2002 2001
------------------- ---- ----
Specialty Commercial
Written premiums 27%* $576 $456
Underwriting result $4 $(9)
Combined ratio 99.3 102.2
Commercial Lines Group
Written premiums 24%* $505 $430
Underwriting result $2 $77
Combined ratio 97.8 75.4
Surety and Construction
Written premiums 17%* $348 $264
Underwriting result $4 $20
Combined ratio 94.5 90.2
Health Care
Written premiums 7%* $147 $177
Underwriting result $3 $(130)
Combined ratio 105.6 170.8
Lloyd's and Other
Written premiums 3%* $68 $98
Underwriting result $(39) $(24)
Combined ratio 143.0 124.1
---- ------ ------
Total Primary Insurance
Written premiums 78%* $1,644 $1,425
Underwriting result $(26) $(66)
Combined ratio 101.8 104.0
Reinsurance
Written premiums 22%* $463 $421
Underwriting result $15 $(21)
Combined ratio 92.2 101.6
---- ------ ------
Total Insurance
Written premiums 100% $2,107 $1,846
==== ====== ======
Underwriting result $(11) $(87)
====== ======
Statutory combined ratio:
Loss and loss adjustment expense ratio 72.0 72.7
Underwriting expense ratio 27.9 31.1
------ ------
Combined ratio 99.9 103.8
====== ======
* Percentage of total.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Underwriting Results by Segment
-------------------------------
Specialty Commercial
--------------------
The Specialty Commercial segment includes the following 11
business centers: Technology, Financial and Professional Services,
Ocean Marine, Catastrophe Risk, Public Sector Services, Discover
Re, Umbrella/Excess & Surplus Lines, Oil and Gas, Transportation,
National Programs and International Specialty. These business
centers are considered specialty operations because each provides
products and services requiring specialty expertise and focuses on
the respective customer group served. The following table
summarizes results for this segment for the first quarters of 2002
and 2001.
Three Months
Ended March 31
--------------
(Dollars in millions) 2002 2001
------------------- ---- ----
Net written premiums $576 $456
Percentage increase over 2001 26%
Underwriting result $4 $(9)
Statutory combined ratio:
Loss and loss adjustment expense ratio 73.8 75.6
Underwriting expense ratio 25.5 26.6
----- -----
Combined ratio 99.3 102.2
===== =====
The strong premium growth in 2002 was driven by price increases
that averaged 24% across the entire segment. The following
discussion summarizes results from several of the largest
business centers in this segment.
- Financial & Professional Services - Written premiums of
$116 million in the first quarter of 2002 grew 23% over the
same 2001 period, driven by price increases averaging 28%.
The loss ratio of 79.0 in 2002 improved slightly over the
comparable 2001 ratio of 79.6.
- Technology - Premium volume of $99 million grew 6% over
the first quarter of 2001. Price increases averaged 18% in
the first quarter. The loss ratio was 68.5 in 2002, compared
with the 2001 first-quarter ratio of 53.7. Deterioration in
prior accident year loss experience was the primary factor
driving the increase in the loss ratio.
- Public Sector - Written premiums totaled $65 million in
2002, up 30% from the same period of 2001 due to a combination
of new business and price increases that averaged 19% in the
first three months of 2002. The loss ratio rose from 71.1 in
2001 to 74.2 in 2002, primarily due to deterioration in prior
accident year loss experience.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
- International Specialty - Premium volume of $64 million
in 2002 grew 15% over the 2001 first-quarter total, with the
increase entirely due to price increases that averaged in
excess of 40% in the international markets where we operate.
As part of the strategic initiatives announced at the end of
2001, we are now limiting our ongoing international business
to Canada, the United Kingdom and Ireland. The first-quarter
loss ratio in this business center improved by over 17 points
to 80.1, reflecting the initial impact of our decision to exit
those international markets where we lacked the scale to
produce profitable results.
- Umbrella/Excess & Surplus Lines - Price increases
averaging 45% and new business combined to produce first-
quarter 2002 written premiums of $61 million, an increase of
$42 million over the same period of 2001. The first-quarter
loss ratio of 71.4 was slightly worse than the comparable 2001
ratio of 70.5.
Commercial Lines Group
----------------------
The Commercial Lines Group ("CLG") segment includes our Small
Commercial, Middle Market Commercial and Large Accounts business
centers, as well as the results of our limited involvement in
insurance pools. The Small Commercial business center serves
small businesses such as retailers, wholesalers, service
companies, professional offices, manufacturers and contractors.
The Middle Market Commercial business center offers comprehensive
insurance coverages for a wide variety of commercial enterprises
where annual insurance costs range from $75,000 to $1 million.
The Large Accounts business center offers insurance programs to
larger commercial businesses that are willing to share insurance
risk through significant deductibles and self-insured retentions.
The following table summarizes results for this segment for the
first quarters of 2002 and 2001.
Three Months
Ended March 31
--------------
(Dollars in millions) 2002 2001
------------------- ---- ----
Net written premiums $505 $430
Percentage increase over 2001 18%
Underwriting result $2 $77
Statutory combined ratio:
Loss and loss adjustment expense ratio 68.7 44.3
Underwriting expense ratio 29.1 31.1
----- -----
Combined ratio 97.8 75.4
===== =====
The strong growth in written premium volume over 2001 was
primarily driven by price increases, which averaged 22% in the
first quarter, and to a lesser extent, new business. Premiums of
$172 million in the Small Commercial business center grew 18%
over the first quarter of 2001. We have identified the small
commercial marketplace as one providing significant potential for
profitable growth, and we are in the process of building a field
organization
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
throughout the United States to better serve these customers. In
the Middle Market Commercial business center, premium volume of
$296 million in the first quarter was 16% higher than the same
period of 2001. Large Accounts' written premiums of $19 million
in the first quarter of 2002 grew 4% over comparable premium
volume in the same period of 2001.
The reported loss ratio and underwriting profit in the CLG
segment in last year's first quarter were unusually favorable due
to the impact of a $100 million reduction in previously
established reserves. Those reserves pertained to certain
business written in years prior to 1989, and were reduced based
on actuarial analyses, which indicated that ultimate losses on
that business would fall short of the established reserves.
Excluding the reserve reduction, the CLG loss ratio in last
year's first quarter was 71.8 and the underwriting loss was $23
million, both significantly worse than 2002 first-quarter
results. Current accident year results in 2002 for both the
Small and Middle Market Commercial business centers improved over
comparable results in 2001, reflecting the impact of price
increases and an improvement in the quality of our book of
business. The two-point improvement in the expense ratio
compared with last year's first quarter reflected the impact of
our cost-saving initiatives in recent years, as well as the
significant growth in written premium volume. The first-quarter
2002 expense ratio was 1.6 points better than the fourth-quarter
2001 ratio (as adjusted to exclude the effects of aggregate
excess-of-loss reinsurance in the 2001 quarter).
Surety and Construction
-----------------------
Our Surety business center underwrites predominantly contract
surety bonds, which guarantee that third parties will be
indemnified against the nonperformance of contractual
obligations. Our Construction business center provides insurance
products and services to a broad range of contractors and owners
of construction projects. The following table summarizes key
financial data for this segment for the first three months of
2002 and 2001.
Three Months
Ended March 31
--------------
(Dollars in millions) 2002 2001
------------------- ---- ----
Net written premiums $348 $264
Percentage increase over 2001 32%
Underwriting result $4 $20
Statutory combined ratio:
Loss and loss adjustment expense ratio 63.3 54.0
Underwriting expense ratio 31.2 36.2
----- -----
Combined ratio 94.5 90.2
===== =====
The strong increase in premium volume over 2001 was centered in
the Construction business center, where premiums of $238 million
grew 50% over comparable 2001 volume of $159 million. Price
increases averaged 28% for Construction business in the first
quarter of 2002, and business retention levels and new business
volume were strong. Surety premium volume of $110 million in
2002 increased 5% over the first quarter of 2001, with the growth
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
primarily due to new business resulting from our acquisition in
late 2001 of the right to seek to renew surety bond business
previously underwritten by Fireman's Fund Insurance Company. Our
Surety operation, the largest in the world based on premium
volume, has maintained a conservative risk profile over the last
two years in anticipation of, and the subsequent occurrence of,
an economic slowdown in both the United States and Mexico. We
anticipate the acquisition of London Guarantee in March 2002 to
contribute to further growth in our Surety operation during the
remainder of 2002.
The Surety business center accounted for the decline in
underwriting profits in this segment compared with the first
quarter of 2001. Surety's loss ratio of 43.4 was over twelve
points worse than the 2001 first-quarter ratio of 31.3, primarily
due to deterioration in current-year loss experience. Despite
that deterioration, however, Surety's operations remained
profitable, posting a $3 million underwriting profit in 2002,
compared with a profit of $17 million in the same 2001 period.
Construction's first-quarter loss ratio of 74.2 was worse than
the comparable 2001 ratio of 72.0, due to a slight deterioration
in prior-year loss experience. The five-point improvement in
expense ratios quarter-over-quarter reflected the combined impact
of strong written premium growth and the continued success of
expense reduction initiatives.
Health Care
-----------
Our Health Care segment historically has provided property-
liability insurance throughout the entire health care delivery
system. In late 2001, we announced our intention to exit the
medical liability insurance market, subject to applicable
regulatory requirements. As a result, we consider the entire
segment to be in runoff in 2002. The following table summarizes
key financial data for the Health Care segment for the first
quarters of 2002 and 2001.
Three Months
Ended March 31
--------------
(Dollars in millions) 2002 2001
---- ----
Net written premiums $147 $177
Percentage decline from 2001 (17%)
Underwriting result $3 $(130)
Statutory combined ratio:
Loss and loss adjustment expense ratio 82.0 146.7
Underwriting expense ratio 23.6 24.1
----- -----
Combined ratio 105.6 170.8
===== =====
Written premiums in the first quarter of 2002 primarily
consisted of premiums generated by extended reporting
endorsements, which we are required to offer to physicians and
surgeons at the time their policies are nonrenewed. These
endorsements cover losses incurred in prior periods that have
not yet been reported. Unlike typical policies, premiums on
these endorsements are fully earned, and the expected losses are
recorded, at the time the endorsement is written. Our exit of
the medical liability market is proceeding as planned when we
announced the action at the end of 2001. As of March 31, 2002,
we had obtained regulatory approval to cease underwriting new
business in all
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
but two states, and had begun the process of nonrenewing policies
where such approval had been obtained. The two states where
regulatory approval is pending accounted for approximately 6% of
net written premium volume in the Health Care segment for the
year ended Dec. 31, 2001. We anticipate net written premium
volume of approximately $400 million in the Health Care segment
for the full year of 2002, with reporting endorsement premiums
expected to account for the majority of that total.
The improvement in underwriting results in the first quarter of
2002 compared with the same 2001 period reflected the impact of
our decision to exit this market and the absence of significant
adverse prior-year loss development. In the year ended Dec. 31,
2001, we recorded cumulative pretax provisions of $735 million to
strengthen prior accident year loss reserves in this segment, of
which $91 million was recorded in the first quarter of 2001. In
addition, 2002 results included a cumulative $20 million pretax
benefit resulting from the commutation of a reinsurance contract
and the reduction of premium deficiency reserves.
Lloyd's and Other
-----------------
Our Lloyd's and Other segment consists of the following
components: our operations at Lloyd's, where we provide capital
to five underwriting syndicates and own a managing agency; our
participation in the insuring of the Lloyd's Central Fund, which
would be utilized if an individual member of Lloyd's were to be
unable to pay its share of a syndicate's losses; and results from
Unionamerica, a London-based insurance operation we acquired in
April 2000 as part of our purchase of MMI Companies, Inc. In
late 2001, we announced that we would cease underwriting certain
business through Lloyd's beginning in 2002, and would, when
current contractual commitments expire in 2003, end our
involvement in the insuring of the Lloyd's Central Fund. At
Unionamerica, we ceased underwriting new business in late 2000
except for that business we are contractually obligated to
underwrite through 2004. The following table summarizes this
segment's results for the first quarters of 2002 and 2001.
Three Months
Ended March 31
--------------
(Dollars in millions) 2002 2001
------------------- ---- ----
Net written premiums $68 $98
Percentage decline from 2001 (31%)
Underwriting result $(39) $(24)
Statutory combined ratio:
Loss and loss adjustment expense ratio 103.9 86.1
Underwriting expense ratio 39.1 38.0
----- -----
Combined ratio 143.0 124.1
===== =====
Our ongoing business in the Lloyd's and Other segment in the
first quarter of 2002 consisted of the following coverages
offered through our involvement at Lloyd's: aviation, marine,
financial and professional services, property insurance, kidnap
and ransom, accident and health, creditor and other personal
specialty products. The 31% decline in premium volume in 2002
reflected the impact of our reduced involvement at Lloyd's and a
decrease in premiums generated by Unionamerica. On the business
we continued to underwrite through Lloyd's in the first quarter
of 2002, price increases averaged 55%.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Our operations at Lloyd's accounted for the majority of the
deterioration in underwriting results compared with the first
quarter of 2001, with Unionamerica also contributing to a lesser
extent. Provisions to strengthen prior-year reserves were the
primary factor in underwriting losses in this segment in the
first quarter of both years. We are continuing to review the
role of our operations at Lloyd's in our long-term corporate
strategy. In April 2002, we announced that in addition to the
steps undertaken near the end of 2001, we would further narrow
the focus of our operations at Lloyd's to four key product lines:
marine, personal lines, property and aviation.
Reinsurance
-----------
Our Reinsurance segment ("St. Paul Re") underwrites treaty and
facultative reinsurance for property, liability, ocean marine,
surety and certain specialty classes of coverage, and also
underwrites "nontraditional" reinsurance, which provides limited
traditional underwriting risk combined with financial risk
protection. In late 2001, we announced our intention to cease
underwriting certain types of reinsurance coverages in 2002, as
described in more detail on page 24 of this report. The
following table summarizes key financial data for the Reinsurance
segment for the first quarters of 2002 and 2001, excluding the
impact of the aggregate excess-of-loss reinsurance treaty
exclusive to this segment that is described on page 28 of this
report.
Three Months
Ended March 31
--------------
(Dollars in millions) 2002 2001
------------------- ---- ----
Net written premiums $467 $424
Percentage increase over 2001 10%
Underwriting result $19 $(44)
Statutory combined ratio:
Loss and loss adjustment expense ratio 64.7 75.4
Underwriting expense ratio 26.7 33.8
----- -----
Combined ratio 91.4 109.2
===== =====
Premium growth resulted from price increases that averaged
approximately 30% on business renewed on January 1 of this year.
In the first three months of 2002, terms and conditions for
reinsurance coverages continued to tighten, and rate increases
continued to accelerate, amid heightened demand for reinsurance
coverages from primary insurers. Our total reinsurance exposures
declined significantly compared with the first quarter of 2001
due to our more narrow business profile resulting from the
actions announced in late 2001. Our Reinsurance segment now
focuses almost exclusively on property catastrophe reinsurance,
excess-of-loss casualty reinsurance, marine reinsurance and
traditional finite reinsurance.
St. Paul Re's underwriting result in the first three months of
2002 benefited from the significant price increases and its
emphasis on those lines of business that it believes offer the
greatest potential for profitable results. In addition, we
recorded a net reduction of $9 million in losses related to
catastrophes occurring in prior years. In the first quarter of
2001, the primary sources of St. Paul Re's underwriting loss were
the sinking of the Petrobras oil platform, and a provision to
strengthen insurance reserves for North American casualty
business.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
As discussed in more detail on page 26 of this report, in April
2002, we announced our intention to transfer our ongoing
reinsurance operations to a newly formed Bermuda-based reinsurer,
Platinum Underwriters Holdings, Ltd. Platinum intends to offer
to the public 75.1% of its common shares. We will transfer
certain renewal opportunities and tangible and intangible assets
of St. Paul Re to Platinum and enter into various agreements with
Platinum and its subsidiaries, in exchange for a 24.9% interest
in the common shares of the new company.
Investment Operations
---------------------
First-quarter 2002 pretax net investment income in our property-
liability insurance operations totaled $290 million, $40 million
below the same period of 2001. Last year's first-quarter total
was unusually high due to $22 million of income generated by the
development of certain properties in our real estate investment
portfolio. Our investment income in recent quarters has been
negatively impacted by declining yields on new investments and a
general reduction in the amount of funds available for investment
due to significant cash payments for insurance losses and loss
adjustment expenses, particularly in our Health Care, Reinsurance
and Lloyd's and Other segments. In addition, we made cumulative
premium payments totaling $639 million between the fourth quarter
of 1999 and the first quarter of 2001 related to our corporate
reinsurance program. Since the end of 1999, average new money
rates on taxable and tax-exempt securities have fallen from 7.2%
and 5.4%, respectively, to 6.0% and 3.5%, respectively, at
March 31, 2002.
Pretax realized investment losses in our property-liability
insurance operations totaled $39 million in the first quarter of
2002, compared with realized gains of $52 million in the same
2001 period. Losses in 2002 were concentrated in our venture
capital portfolio. Pretax realized gains in 2001 included a gain
of $77 million on the sale of our investment in RenaissanceRe
Holdings Ltd., a Bermuda-based reinsurer.
The market value of our $16.0 billion fixed maturities portfolio
exceeded its cost by $393 million at March 31, 2002.
Approximately 96% of that portfolio is rated at investment grade
(BBB or above). The weighted average pretax yield on those
investments was 6.5% at March 31, 2002, down from 6.9% a year
ago.
Environmental and Asbestos Claims
---------------------------------
We continue to receive claims, including through lawsuits,
alleging injury or damage from environmental pollution or seeking
payment for the cost to clean up polluted sites. We also receive
asbestos injury claims, including through lawsuits, arising
out of coverages under general liability policies. The vast
majority of these claims arise from policies written many years
ago. Significant legal issues, primarily pertaining to the
scope of coverage, complicate the determination of our alleged
liability for both environmental and asbestos claims.
In our opinion, court decisions in certain jurisdictions have
tended to broaden insurance coverage for both environmental and
asbestos matters beyond the intent of the original insurance
policies.
Our ultimate liability for environmental claims is difficult to
estimate because of these legal issues. Insured parties are
seeking recovery 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.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Environmental and Asbestos Claims (continued)
--------------------------------------------
Estimating the ultimate liability for asbestos claims is more
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 and are
complicated by aggressive litigation against insurers, including
us. Estimating ultimate liability is also complicated by the
difficulty of assessing what rights, if any, we may have to seek
contribution from other insurers of any policyholder.
As a result of developments in the asbestos litigation environment
generally, we have determined that it is desirable to seek
more aggressively early resolutions of certain pending asbestos-
related litigations. As a result, we have decided where possible
to seek to resolve these matters while continuing to vigorously
assert defenses in pending litigations. We intend to take a
similar approach to environmental litigations. The resolution
of one or more of these litigations may require us to make
substantial payments and/or to become responsible for substantial
contingent payments. These payments may be material to our
results of operations, but we do not believe they will have a
material effect on our liquidity or overall financial position.
The following table represents a reconciliation of total gross
and net environmental reserve development for the three months
ended March 31, 2002, and the years ended Dec. 31, 2001 and 2000.
Amounts in the "net" column are reduced by reinsurance
recoverables.
2002
Environmental (three months) 2001 2000
------------- ------------ ------------ ------------
(In millions) Gross Net Gross Net Gross Net
----------- ----- ---- ----- ---- ----- ----
Beginning reserves $582 $507 $665 $563 $698 $599
Incurred losses (1) (1) 1 18 25 14
Paid losses (10) (9) (84) (74) (58) (50)
---- ---- ---- ---- ---- ----
Ending reserves $571 $497 $582 $507 $665 $563
==== ==== ==== ==== ==== ====
The following table represents a reconciliation of total gross
and net reserve development for asbestos claims for the three
months ended March 31, 2002, and the years ended Dec. 31, 2001
and 2000.
2002
Asbestos (three months) 2001 2000
-------- ------------ ------------ ------------
(In millions) Gross Net Gross Net Gross Net
----------- ----- ---- ----- ---- ----- ----
Beginning reserves $478 $367 $397 $299 $398 $298
Incurred losses 1 - 133 110 41 33
Paid losses (16) (12) (52) (42) (42) (32)
---- ---- ---- ---- ---- ----
Ending reserves $463 $355 $478 $367 $397 $299
==== ==== ==== ==== ==== ====
Our reserves for environmental and asbestos losses at March 31,
2002 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, as well as the potential impact of
our determination to seek more aggressively early resolutions
of certain pending asbestos and environmental related litigations.
Future changes in our estimates of our ultimate liability
for environmental and asbestos claims may be material to our
results of operations, but we do not believe they will materially
impact our liquidity or overall financial position.
Total gross environmental and asbestos reserves at March 31,
2002, of $1.03 billion represented approximately 5% of gross
consolidated reserves of $22.1 billion.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Asset Management
----------------
Our asset management segment consists of our 77% majority
ownership interest in The John Nuveen Company (Nuveen). Nuveen
provides customized individual accounts, mutual funds, exchange-
traded funds and defined portfolios through financial advisors
serving the affluent, high net worth and institutional market
segments. Highlights of Nuveen's performance for the first
quarters of 2002 and 2001 were as follows:
Three Months
Ended March 31
--------------
(In millions) 2002 2001
----------- ---- ----
Revenues $ 94 $ 87
Expenses 45 42
---- ----
Pretax earnings 49 45
Minority interest (11) (10)
---- ----
The St. Paul's share
of pretax earnings $ 38 $ 35
==== ====
Assets under management $69,538 $61,289
====== ======
Nuveen's total revenues in the first quarter of 2002 grew 8% over
the same period of 2001, primarily due to an increase in
investment advisory fees. Gross sales of $3.4 billion in the
first quarter of 2002 included $1.8 billion of retail and
institutional managed accounts and $1.1 billion of closed-end
exchange-traded funds. Institutional account sales in 2002 grew
significantly over those in the first quarter of 2001, due to
Nuveen's acquisition in July 2001 of Symphony Asset Management
LLC, an institutional investment management firm. Total gross
sales in the first quarter of 2001 totaled $3.8 billion.
Nuveen's specialty focus on risk management and tax-sensitivity
in equity and fixed-income securities contributed to earnings
growth amid persistent market and economic uncertainties.
Nuveen's net flows (equal to the sum of sales, reinvestments and
exchanges, less redemptions) during the first quarter of 2002
totaled $1.9 billion, compared with net flows of $2.6 billion in
the first quarter of 2001.
Managed assets at the end of the first quarter consisted of $33.0
billion of exchange-traded funds, $19.2 billion of retail managed
accounts, $5.6 billion of institutional managed accounts and
$11.7 billion of mutual funds. The significant increase in
managed assets over the same time a year ago was partially due to
Nuveen's acquisition of Symphony, which added approximately $4
billion in managed assets.
Capital Resources
-----------------
Common shareholders' equity of $5.05 billion at March 31, 2002
declined slightly from the year-end 2001 total of $5.06 billion,
as our net income of $139 million in the first quarter was more
than offset by dividends declared on our common stock and a
decline in the unrealized appreciation of our investment
portfolio. We did not repurchase any of our common shares during
the first three months of 2002.
Total debt outstanding at March 31, 2002 of $2.26 billion
increased by $130 million over the year-end 2001 total of $2.13
billion, largely due to the issuance of $500 million of 5.75%
senior notes in March 2002. Proceeds from the notes, which
mature in 2007, were primarily used to repay a portion of our
commercial paper outstanding. Our ratio of total debt to total
capitalization of 27% at the end of the first quarter increased
slightly over the year-end 2001 ratio of 26%. Net interest
expense related to debt totaled $25 million in the first quarter
of 2002, compared with $30 million in the same period of 2001.
Preferred distribution expense related to mandatorily redeemable
preferred securities totaled $18 million in the first quarter of
2002, compared with $7 million in the same 2001 period. The
increase was due to the issuance of $575 million of 7.6%
mandatorily redeemable preferred securities in November 2001.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Capital Resources (continued)
----------------------------
Capital expenditures that we might consider during the remainder
of 2002 include acquisitions of existing businesses consistent
with our commercial insurance focus, and repurchases of our
common stock. As of May 11, 2002 we had the capacity to make up
to approximately $89 million in common stock repurchases under a
repurchase program authorized by our board of directors in
February 2001. We repurchase our shares in the open market and
through private transactions when we deem such repurchases to be
a prudent use of capital.
The company's ratio of earnings to fixed charges was 4.90 the
first three months of 2002, compared with 7.73 for the same
period of 2001. The company's ratio of earnings to combined
fixed charges and preferred stock dividend requirements was 4.58
for the first three months of 2002, compared with 7.15 for the
same period of 2001. 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. In our insurance operations, short-term
cash needs primarily consist of funds to pay insurance losses and
loss adjustment expenses and day-to-day operating expenses.
Those needs are met through cash provided from operations, which
primarily consist of insurance premiums collected and investment
income.
Net cash flows provided by continuing operations totaled $96
million in the first quarter of 2002, compared with cash used by
continuing operations of $194 million in the same period of 2001.
Written premium growth of 14% significantly outpaced the 3%
growth in losses and loss adjustment expenses paid in the first
quarter of 2002, contributing to the improvement in cash flows
over 2001. In addition, we made no premium payments related to
our corporate reinsurance program in the first three months of
2002, whereas such payments totaled $156 million in the same 2001
period. Net loss payments related to the September 11, 2001
terrorist attack totaled $85 million in the first quarter of
2002.
We expect operational cash flows during the remainder of 2002 to
continue to be negatively impacted by insurance losses and loss
adjustment expenses payable related to the September 11, 2001
terrorist attack, as well as losses payable related to our
operations in runoff. Excluding these factors, however, we
expect improvement in operational cash flows as a result of
continuing price increases in our ongoing insurance segments and
expense reductions throughout our operations. We believe our
financial strength provides 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. 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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note 5 to the
consolidated financial statements is incorporated
herein by reference.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The St. Paul's annual shareholders' meeting was held on
May 7, 2002.
(1) All fifteen persons nominated for directors by the
board of directors were named in proxies for the
meeting which were solicited pursuant to Regulation
14A under the Securities Exchange Act of 1934.
There was no solicitation in opposition to the
nominees as listed in the proxy statements. All
fifteen nominees were elected by the following
votes:
In favor Withheld
----------- --------
H. Furlong Baldwin 188,544,771 2,940,916
Carolyn H. Byrd 188,680,642 2,805,045
John H. Dasburg 188,498,918 2,986,769
Janet M. Dolan 189,640,308 1,845,379
Kenneth M. Duberstein 189,438,888 2,046,799
Jay S. Fishman 165,685,874 25,799,813
Lawrence G. Graev 189,566,116 1,919,571
Pierson M. Grieve 189,484,269 2,001,418
Thomas R. Hodgson 188,729,190 2,756,497
David G. John 188,724,682 2,761,005
William H. Kling 189,524,775 1,960,912
John A. MacColl 189,295,119 2,190,568
Bruce K. MacLaury 188,635,354 2,850,333
Glen D. Nelson 189,612,807 1,872,879
Gordon M. Sprenger 189,573,842 1,911,845
(2) By a vote of 187,008,854 in favor, 3,533,145
against and 848,298 abstaining, the shareholders
ratified the selection of KPMG LLP as the
independent auditors for The St. Paul.
(3) By a vote of 156,557,749 in favor, 33,265,420
against and 1,567,128 abstaining, the shareholders
approved The St. Paul's Senior Executive
Performance Plan.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. An Exhibit Index is set forth as the
last page in this document.
(b) Reports on Form 8-K.
1) The St. Paul filed a Form 8-K Current
Report dated March 5, 2002, containing the
following documents for The St. Paul for the
year ended Dec. 31, 2001: Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Six-year Summary of
Selected Financial Data; Statement Regarding
Management's Responsibility for Financial
Statements; Independent Auditor's Report;
Consolidated Financial Statements; Notes to
Consolidated Financial Statements; and Consent
of Independent Auditors.
2) The St. Paul filed a Form 8-K Current
Report dated March 7, 2002 related to the
issuance of $500 million of Senior Notes due in
2007.
3) The St. Paul filed a Form 8-K Current
Report dated April 25, 2002 related to the
announcement of The St. Paul's intent to
transfer its ongoing reinsurance operation to a
newly formed Bermuda-based reinsurer, Platinum
Underwriters Holdings, Ltd.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
THE ST. PAUL COMPANIES, INC.
---------------------------
(Registrant)
Date: May 15, 2002 By Bruce A. Backberg
------------ -----------------
Bruce A. Backberg
Senior Vice President
(Authorized Signatory)
Date: May 15, 2002 By 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) Senior Executive Performance Plan**.............................(1)
(11) Statement re computation of per share earnings**....................(1)
(12) Statement re computation of ratios**................................(1)
(15) Letter re unaudited interim financial information*..................
(18) Letter re change in accounting principles*..........................
(19) Report furnished to security holders*...............................
(22) Published report regarding matters submitted to
vote of security holders*........................................
(23) Consents of experts and counsel*....................................
(24) Power of attorney*..................................................
(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.