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, 1999
--------------
or
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- ----------
Commission File Number 0-3021
------
THE ST. PAUL COMPANIES, INC.
----------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0518860
------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
385 Washington St., Saint Paul, MN 55102
------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
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 7, 1999, was 226,288,957.
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, 1999 and 1998 3
Consolidated Balance Sheets, March 31, 1999
(Unaudited) and December 31, 1998 4
Consolidated Statements of Shareholders' Equity,
Three Months Ended March 31, 1999
(Unaudited) and Twelve Months Ended 6
December 31, 1998
Consolidated Statements of Comprehensive Income
(Unaudited), Three Months Ended March 31, 1999
and 1998 7
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 1999 and 1998 8
Notes to Consolidated Financial Statements
(Unaudited) 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 20
PART II. OTHER INFORMATION
Item 1 through Item 6 33
Signatures 34
EXHIBIT INDEX 35
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Unaudited
(In millions, except per share data)
Three Months Ended
March 31
-------------------
1999 1998
------ ------
Revenues:
Premiums earned $1,676 $1,782
Net investment income 396 397
Asset management 81 71
Realized investment gains 65 50
Other 26 24
------ ------
Total revenues 2,244 2,324
------ ------
Expenses:
Insurance losses and loss adjustment expenses 1,225 1,272
Life policy benefits 68 60
Policy acquisition expenses 390 421
Operating and administrative 303 321
------ ------
Total expenses 1,986 2,074
------ ------
Income before income taxes and cumulative
effect of accounting change 258 250
Income tax expense 63 55
------ ------
Income before cumulative effect
of accounting change 195 195
Cumulative effect of accounting
change, net of taxes (30) -
------ ------
Net income $165 $195
====== ======
Basic earnings per common share:
Income before cumulative effect
of accounting change $0.83 $0.82
Cumulative effect of accounting
change, net of taxes (0.13) -
------ ------
Net income $0.70 $0.82
====== ======
Diluted earnings per common share:
Income before cumulative effect
of accounting change $0.79 $0.77
Cumulative effect of accounting
change, net of taxes (0.12) -
------ ------
Net income $0.67 $0.77
====== ======
Dividends declared on common stock $0.26 $0.25
====== ======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
March 31, December 31,
ASSETS 1999 1998
- ------ --------- ------------
(Unaudited)
Investments:
Fixed maturities, at estimated fair value $21,234 $21,056
Equities, at estimated fair value 1,321 1,259
Real estate and mortgage loans 1,519 1,507
Venture capital, at estimated fair value 623 571
Securities lending collateral 1,839 1,368
Other investments 298 373
Short-term investments, at cost 839 982
------- -------
Total investments 27,673 27,116
Cash 148 120
Investment banking inventory securities 44 107
Reinsurance recoverables:
Unpaid losses 4,119 3,978
Paid losses 198 157
Ceded unearned premiums 254 288
Receivables:
Underwriting premiums 2,102 2,152
Interest and dividends 374 361
Other 266 117
Deferred policy acquisition expenses 902 878
Deferred income taxes 1,264 1,193
Office properties and equipment, at cost less
accumulated depreciation of $497 (1998; $405) 524 518
Goodwill 581 592
Other assets 774 746
------- -------
Total assets $39,223 $38,323
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In millions)
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ------------------------------------ --------- ------------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $18,595 $18,458
Future policy benefits 4,323 4,142
Unearned premiums 3,151 3,266
------- -------
Total insurance reserves 26,069 25,866
Debt 1,524 1,260
Payables:
Reinsurance premiums 273 291
Income taxes 298 221
Accrued expenses and other 1,154 1,238
Securities lending 1,839 1,368
Other liabilities 1,139 940
------- -------
Total liabilities 32,296 31,184
------- -------
Company-obligated mandatorily redeemable
preferred capital securities of subsidiaries
or trusts holding solely convertible
subordinated debentures of the Company 503 503
------- -------
Shareholders' equity:
Preferred:
Series B convertible preferred stock;
1.45 shares authorized; 0.9 shares
outstanding in 1999 and 1998 133 134
Guaranteed obligation - PSOP (114) (119)
------- -------
Total preferred shareholders' equity 19 15
------- -------
Common:
Common stock, 480 shares authorized;
227 shares outstanding (234 shares in 1998) 2,080 2,128
Retained earnings 3,422 3,480
Accumulated other comprehensive income:
Unrealized appreciation 919 1,027
Unrealized loss on foreign currency translation (16) (14)
------- -------
Total accumulated other comprehensive income 903 1,013
------- -------
Total common shareholders' equity 6,405 6,621
------- -------
Total shareholders' equity 6,424 6,636
------- -------
Total liabilities, redeemable preferred
securities and shareholders' equity $39,223 $38,323
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In millions)
Three Twelve
Months Ended Months Ended
March 31 December 31
------------- ------------
1999 1998
------- -------
(Unaudited)
Preferred shareholders' equity:
Series B PSOP convertible preferred stock:
Beginning of period $134 $138
Redemptions during period (1) (4)
------- -------
End of period 133 134
------- -------
Guaranteed obligation - PSOP:
Beginning of period (119) (121)
Principal payments 5 2
------- -------
End of period (114) (119)
------- -------
Total preferred shareholders' equity 19 15
------- -------
Common shareholders' equity:
Common stock:
Beginning of period 2,128 2,057
Stock issued under stock incentive plans 15 70
Stock issued for preferred shares redeemed 2 8
Reacquired common shares (65) (35)
Other - 28
------- -------
End of period 2,080 2,128
------- -------
Retained earnings:
Beginning of period 3,480 3,720
Net income 165 89
Dividends declared on common stock (59) (223)
Dividends declared on preferred stock, net of taxes (2) (9)
Reacquired common shares (164) (100)
Tax benefit on employee options and awards 3 7
Premium on preferred shares redeemed (1) (4)
------- -------
End of period 3,422 3,480
------- -------
Unrealized appreciation, net of taxes:
Beginning of period 1,027 846
Change during the period (108) 181
------- -------
End of period 919 1,027
------- -------
Unrealized loss on foreign currency
translation, net of taxes:
Beginning of period (14) (23)
Change during the period (2) 9
------- -------
End of period (16) (14)
------- -------
Guaranteed obligation - ESOP:
Beginning of period - (8)
Principal payments - 8
------- -------
End of period - -
------- -------
Total common shareholders' equity 6,405 6,621
------- -------
Total shareholders' equity $6,424 $6,636
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Unaudited
(In millions)
Three Months Ended
March 31
---------------------
1999 1998
------ ------
Net income $165 $195
------ ------
Other comprehensive income (loss), net of taxes:
Change in unrealized appreciation (108) 48
Change in unrealized loss on foreign
currency translation (2) 5
------ ------
Other comprehensive income (loss) (110) 53
------ ------
Comprehensive income $55 $248
====== ======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In millions)
Three Months Ended
March 31
------------------------
1999 1998
------- -------
OPERATING ACTIVITIES
Net income $165 $195
Adjustments:
Change in property-liability
insurance reserves 39 (180)
Change in reinsurance balances (127) 116
Change in premiums receivable (8) 60
Change in asset management balances 3 (2)
Depreciation and amortization 42 33
Realized investment gains (65) (50)
Other 28 (162)
------ ------
Net Cash Provided by
Operating Activities 77 10
------ ------
INVESTING ACTIVITIES
Purchase of investments (1,644) (837)
Proceeds from sales and
maturities of investments 1,252 1,105
Change in short-term investments 150 (154)
Change in open security transactions 28 7
Net purchases of office properties and equipment (43) (17)
Discontinued operations (4) (13)
Acquisitions - (98)
Other 4 64
------ ------
Net Cash Provided (Used) by
Investing Activities (257) 57
------ ------
FINANCING ACTIVITIES
Deposits on universal life and
investment contracts 268 94
Withdrawals on universal life
and investment contracts (30) (63)
Dividends paid on common and preferred stock (61) (50)
Proceeds from issuance of debt 275 -
Repayment of debt (21) (91)
Repurchase of common shares (229) -
Stock options exercised and other 6 61
------ ------
Net Cash Provided (Used) by
Financing Activities 208 (49)
------ ------
Increase in cash 28 18
Cash at beginning of period 120 113
------ ------
Cash at end of period $148 $131
====== ======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
March 31, 1999
Note 1 - Basis of Presentation
- ------------------------------
The financial statements include The St. Paul Companies, Inc. and
subsidiaries (The St. Paul), and have been prepared in conformity
with generally accepted accounting principles. The St. Paul
completed its merger with USF&G Corporation (USF&G) in April
1998. The financial statements for all current and prior periods
in this report reflect the combined accounts and results of
operations of The St. Paul and USF&G.
These consolidated financial statements rely, in part, on
estimates. In the opinion of management, all necessary
adjustments, consisting of normal recurring adjustments, have
been reflected for a fair presentation of the results of
operations, financial position and cash flows in the accompanying
unaudited consolidated financial statements. The results for the
period are not necessarily indicative of the results to be
expected for the entire year.
Reference should be made to the "Notes to Consolidated Financial
Statements" in The St. Paul's annual report to shareholders for
the year ended December 31, 1998. 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 1998 consolidated financial statements have
been reclassified to conform with the 1999 presentation. These
reclassifications had no effect on net income or shareholders'
equity, as previously reported.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 2 - Earnings Per Share
- ---------------------------
Earnings per common share (EPS) amounts were calculated by
dividing operating earningsnet income, as adjusted, by the
average common shares outstanding.
Three Months Ended
March 31
------------------
1999 1998
------ ------
(In millions, except per share data)
EARNINGS
Basic:
Net income, as reported $165 $195
Dividends on preferred stock, net of taxes (2) (2)
Premium on preferred shares redeemed (1) (1)
------ ------
Net income available to common shareholders $162 $192
====== ======
Diluted:
Net income available to common shareholders $162 $192
Effect of dilutive securities:
Convertible preferred stock 2 2
Convertible monthly income preferred securities 2 1
Zero coupon convertible notes 1 1
------ ------
Net income available to common shareholders $167 $196
====== ======
COMMON SHARES
Basic:
Weighted average common shares outstanding 230 234
====== ======
Diluted:
Weighted average common shares outstanding 230 234
Effect of dilutive securities:
Stock options 2 4
Convertible preferred stock 7 8
Convertible monthly income preferred securities 7 7
Zero coupon convertible notes 3 3
------ ------
Total 249 256
====== ======
EARNINGS PER SHARE
Basic $0.70 $0.82
====== ======
Diluted $0.67 $0.77
====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 3 - Investments
- --------------------
Investment Activity. A summary of investment transactions is presented
below.
Three Months Ended March 31
---------------------------
1999 1998
-------- --------
(In millions)
Purchases:
Fixed maturities $1,189 $439
Equities 316 260
Real estate and mortgage loans 39 71
Venture capital 33 39
Other investments 67 28
------ ------
Total purchases 1,644 837
------ ------
Proceeds from sales and maturities:
Fixed maturities 853 613
Equities 323 351
Real estate and mortgage loans 23 88
Venture capital 37 19
Other investments 16 34
------ ------
Total sales and maturities 1,252 1,105
------ ------
Net purchases (sales) $392 $(268)
====== ======
Change in Unrealized Appreciation. The increase (decrease) in
unrealized appreciation of investments recorded in common
shareholders' equity was as follows:
Three Months Ended Twelve Months Ended
March 31, 1999 December 31, 1998
------------------ -------------------
(In millions)
Fixed maturities $(276) $203
Equities 18 69
Venture capital 25 45
Life deferred policy acquisition
costs and policy benefits 20 (1)
Single premium immediate
annuity reserves 39 (17)
Other - (16)
------ ------
Total change in pretax
unrealized appreciation (174) 283
Change in deferred taxes 66 (102)
------ ------
Total change in unrealized
appreciation, net of taxes $(108) $181
====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 4 - Income Taxes
- ---------------------
The components of income tax expense on income before the
cumulative effect of accounting change is as follows :
Three Months Ended
March 31
------------------
1999 1998
------- -------
(In millions)
Federal current tax expense $12 $51
Federal deferred tax expense (benefit) 42 (5)
------ ------
Total federal income tax expense 54 46
Foreign income taxes 7 7
State income taxes 2 2
------ ------
Total income tax expense $63 $55
====== ======
Note 5 - Contingent Liabilities
- -------------------------------
In the ordinary course of conducting business, The St. Paul and
some of its subsidiaries have been named as defendants in various
lawsuits. Some of these lawsuits attempt to establish liability
under insurance contracts issued by those companies. Plaintiffs
in these lawsuits are asking for money damages or to have the
court direct the activities of the company's operations in
certain ways. Although it is possible that the settlement of a
contingency may be material to The St. Paul's results of
operations and liquidity in the period in which the settlement
occurs, the company believes that the total amounts that it or
its subsidiaries will ultimately have to pay in all of these
lawsuits will have no material effect on its overall financial
position.
In some cases, plaintiffs seek to establish coverage for their
liability under environmental protection laws. See
"Environmental and Asbestos Claims" in Management's Discussion
and Analysis for information on these claims.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 6 - Debt
- -------------
Debt consists of the following:
March 31, December 31,
1999 1998
--------------- ---------------
Book Fair Book Fair
Value Value Value Value
------ ------ ------ ------
(In millions)
Medium-term notes $637 $655 $637 $675
Commercial paper 487 487 257 257
8 3/8% senior notes 150 158 150 160
Zero coupon convertible notes 91 96 111 118
7 1/8% senior notes 80 84 80 86
Floating rate notes 46 46 - -
Nuveen short-term borrowings 18 18 10 10
Real estate mortgages 15 16 15 16
------ ------ ------ ------
Total debt $1,524 $1,560 $1,260 $1,322
====== ====== ====== ======
Note 7 - Segment Information
- ----------------------------
The St. Paul has seven reportable business segments in its
property-liability insurance operation, consisting of the
Commercial Lines Group, Specialty Commercial, Personal Insurance,
Surety, International, Reinsurance and Investment Operations.
The St. Paul also has a life insurance segment (Fidelity and
Guaranty Life) and an asset management segment (The John Nuveen
Company). The St. Paul evaluates the performance of its 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 life insurance and asset
management segments are evaluated based on their respective
pretax operating results, which include investment income.
The St. Paul does not aggregate its segments for purposes
of reporting segment information.
The reportable underwriting business segments in The St. Paul's
property-liability operation are each managed separately because
each offers insurance products to unique customer classes and utilizes
different underwriting criteria and marketing strategies. For
example, the Commercial Lines Group provides "commodity-type"
insurance products to the extensive, small and medium-sized
commercial markets. It also targets certain large industry
groups, such as the construction industry. By contrast, the
Specialty Commercial segment markets specialized insurance
products and services tailored to meet the individual needs of
specific commercial customer groups, such as doctors, lawyers,
officers and directors, as well as technology firms and
government entities. Customers in the Specialty Commercial
segment generally require specialized underwriting expertise and
claim settlement services.
The tabular information on the following pages provide revenue
and income data for each of The St. Paul's business segments for
the first quarters of 1999 and 1998. In the first quarter of
1999, The St. Paul revised its segment reporting structure to
separately disclose its Surety underwriting operation as a
business segment, which differs from its prior classification as
a component of the Commercial Lines Group. This revision
reflects the distinct nature of this operation, which provides
surety bond coverages (primarily for construction contractors).
The Surety operation is managed and evaluated separately from
other components of the Commercial Lines Group, and is also the
largest underwriter of surety bonds in North America, based on
1997 written premium volume. Segment information for the first
quarter of 1998 has been restated to be consistent with the 1999
presentation.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
- ----------------------------------------
Three Months Ended
March 31
--------------------
1999 1998
----- ------
Revenues (In millions)
Property-liability insurance:
U.S. underwriting:
Commercial Lines Group $503 $591
Specialty Commercial 361 336
Personal Insurance 331 341
Surety 91 74
------ ------
Total U.S. underwriting 1,286 1,342
International 121 115
------ ------
Total primary insurance operations 1,407 1,457
Reinsurance 242 300
------ ------
Total property-liability premiums earned 1,649 1,757
------ ------
Investment operations:
Net investment income 322 332
Realized investment gains 61 47
------ ------
Total investment operations 383 379
Other 21 19
------ ------
Total property-liability insurance 2,053 2,155
------ ------
Life insurance 99 90
------ ------
Asset management 83 72
------ ------
Total reportable segments 2,235 2,317
Parent company, other operations and
consolidating eliminations 9 7
------ ------
Total revenues $2,244 $2,324
====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
- ----------------------------------------
Three Months Ended
March 31
-------------------
1999 1998
------- ------
(In millions)
Income (Loss) Before Income Taxes and Cumulative
Effect of Accounting Change
Property-liability insurance:
U.S. underwriting:
Commercial Lines Group $(95) $(79)
Specialty Commercial (18) (5)
Personal Insurance (3) (14)
Surety 15 15
------ ------
Total U.S. underwriting (101) (83)
International (35) (25)
------ ------
Total primary insurance operations (136) (108)
Reinsurance 23 14
------ ------
Total GAAP underwriting result (113) (94)
------ ------
Investment operations:
Net investment income 322 332
Realized investment gains 61 47
------ ------
Total investment operations 383 379
------ ------
Other (25) (29)
------ ------
Total property-liability insurance 245 256
------ ------
Life insurance 19 19
------ ------
Asset management:
Pretax income before minority interest 38 31
Minority interest (9) (7)
------ ------
Total asset management 29 24
------ ------
Total reportable segments 293 299
Parent company, other operations and
consolidating eliminations (35) (49)
------ ------
Total income before income taxes and cumulative
effect of accounting change $258 $250
====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 8 - Cumulative Effect of Accounting Change
- -----------------------------------------------
Effective Jan. 1, 1999, The St. Paul adopted the provisions of
the American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) No. 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments." The
SOP provides guidance for recognizing and measuring liabilities
for guaranty fund and other insurance-related assessments. The
St. Paul recorded a pretax expense of $46 million ($30 million
after-tax) in the first quarter of 1999 representing the
cumulative effect of adopting the provisions of the SOP. The
majority of the cumulative effect related to assessments for
workers' compensation second-injury funds, with a lesser amount
related to insurance guaranty funds. Second-injury funds provide
reimbursement to insurance carriers or employers for workers'
compensation claims when the cost of a workers' second injury
combined with a prior accident or disability is greater than what
the second injury alone would have produced. Second-injury funds
are established to help ensure that employers are not made to
suffer a greater monetary loss or increased insurance costs
because of hiring previously injured or handicapped employees.
The St. Paul's total accrued expense related to insurance
assessments was $74 million at March 31, 1999, which consisted of
the $46 million first quarter cumulative effect of adopting SOP
97-3 and $28 million of previously recorded liabilities. The
accrual is recorded as follows: $53 million in other liabilities,
$16 million in insurance reserves, and $5 million in other assets
as an offset to deferred premium tax recoverable. The accrued
amounts are expected to be disbursed as assessed during a period
of up to 30 years.
Note 9 - Merger with USF&G Corporation
- --------------------------------------
On April 24, 1998, The St. Paul issued 66.5 million of its
common shares in exchange for all of the outstanding common
stock of USF&G Corporation, a holding company for property-
liability and life insurance operations.
The St. Paul recorded a pretax charge to earnings of $292 million
in the second quarter of 1998 related to the merger, primarily
consisting of severance and other employee-related costs,
facilities exit costs, asset impairments and transaction costs.
The St. Paul estimated that approximately 2,000 positions would
be eliminated due to the combination of the two organizations,
resulting from efficiencies to be realized by the larger
organization and the elimination of redundant functions. All
levels of employees, from technical staff to senior management,
are being affected by the reductions. The number of positions
expected to be reduced by function include approximately 950 in
The St. Paul's property-liability underwriting operation, 350 in
claims and 700 in finance and other administrative positions.
The reductions are occurring throughout the United States.
Through March 31, 1999, 1,883 positions had been eliminated, and
the cost of termination benefits paid was $118 million. The St.
Paul expects to realize annualized pretax expense savings of
approximately $210 million as a result of the merger (as measured
against the combined 1997 pre-merger expenses of The St. Paul and
USF&G), primarily due to the reduction in employee salaries and
benefits.
The merger-related charge was determined in accordance with
Emerging Issues Task Force (EITF) Issue No 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity," Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," SFAS
No. 5, "Accounting for Contingencies," and Accounting Principles
Board Opinion No. 16, "Business Combinations."
The following table provides information about the components of
the 1998 charge, payments made and the balance of accrued amounts
remaining at March 31, 1999.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 9 - Merger with USF&G Corporation (continued)
- --------------------------------------------------
Pre-tax
Charges to earnings: Charge
-------------------- ------
(in millions)
USF&G corporate headquarters $36
Long-lived assets 23
Software depreciation acceleration 10
Computer leases and equipment 9
Other equipment and furniture 8
-----
Subtotal 86
Accrued charges subject
to rollforward:
----------------------- Reserve
Pre-tax at Mar. 31,
Charge Payments 1999
------- -------- ----------
Executive severance 89 $(82) $7
Other severance 53 (36) 17
Branch lease exit costs 34 (3) 31
Transaction costs 30 (30) -
----- ----- -----
Accruals subject to rollforward 206 $(151) $55
----- ===== =====
Total $292
=====
The following discussion provides more information regarding the
rationale for and calculation of certain components of the merger-
related charge:
USF&G Corporate Headquarters
- ----------------------------
After consummating the merger in April 1998, The St. Paul vacated
a significant portion of a building in Baltimore, MD that had
been the site of USF&G's corporate headquarters. Having
developed a plan to lease the space to outside parties, The St.
Paul categorized the building as an "asset to be held or used" as
defined by SFAS No. 121 for purposes of evaluating the potential
impairment of its $64 million carrying value. Based on an
independent appraisal, The St. Paul recorded a $36 million
writedown in its carrying value.
Computer leases and equipment
- -----------------------------
The St. Paul conducted an extensive technology study upon
consummation of the merger which identified redundant computer
hardware. As a result, The St. Paul recorded a $9 million
expense for lease buy-out transactions and disposals of computer
equipment. The expense represented the lease termination fee
obligation (lease buy-outs), calculated as the discounted value
of the remaining computer lease obligations; and the net book
value of redundant computer equipment.
Executive severance
- -------------------
Represents the obligations The St. Paul is required to pay in
accordance with the USF&G Senior Executive Severance Plan in
place at the time of the merger. The merger with USF&G qualified
as a change in control under the Severance Plan, which obligated
The St. Paul to make payments to covered employees on the
occurrence of certain triggering events within two years of the
closing of the merger. Such triggering events, which have
occurred, included the employee's involuntary termination without
cause by the company or the employee's termination for "good
reason" which included such factors as diminution of
responsibilities, change in job title, or being required to
relocate beyond a certain distance. In addition, The St. Paul
had an obligation to certain employees who, although not
terminated, had "good reason" to take action which would trigger
payment under the Severance Plan.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 9 - Merger with USF&G Corporation (continued)
- --------------------------------------------------
Other severance
- ---------------
Represents severance and related benefits such as out-placement
counseling, vacation buy-out and medical coverage to be paid to
terminated employees not covered under the USF&G Senior Executive
Severance Plan.
Branch lease exit costs
- -----------------------
As a result of the merger, excess space was created in several
locations due to staff reductions in the combined organization.
The charge for branch lease exit costs was calculated by
determining the percentage of anticipated excess space at each
site and the current lease costs over the remaining lease period.
In certain locations, the lease is expected to be terminated.
For leases not expected to be terminated, the amount of expense
included in the charge was calculated as the percentage of excess
space (20% to 100%) times the net of: remaining rental payments
plus capitalized leasehold improvements less actual sub-lease
income. No amounts were discounted to present value in the
calculation.
Transaction costs
- -----------------
This amount consists of registration fees, costs of furnishing
information to stockholders, consultant fees, investment banker
fees, and legal and accounting fees.
Long-lived assets
- -----------------
Upon consummation of the merger, The St. Paul determined that
several of USF&G's real estate investments were not consistent
with The St. Paul's real estate investment strategy. A plan was
developed to sell a number of apartment buildings and various
other miscellaneous holdings, with an expected disposal date by
year-end 1999. In applying the provisions of SFAS No. 121, it
was determined that four of these miscellaneous investments
should be written down to fair value, based on The St. Paul's
plan to sell them. Fair value was determined based on a
discounted cash flow analysis, or based on market prices for
similar assets. The four investments were as follows:
1) Description of Percentage rents retained after sale
investment: of a portfolio of stores to a third
party
Carrying $21.6 million prior to writedown of
amount: $16.6 million, for current amount of
$5.0 million, with $4.3 million held
in the property-liability segment
and $0.7 million held in the life
segment
2) Description of 138-acre land parcel in New Jersey,
investment: with farm buildings being rented out
Carrying $4.9 million prior to writedown of
amount: $2.1 million, for current amount of
$2.8 million, held in the property-
liability segment
3) Description of Receivable representing cash flow
investment: guarantee payments related to real
estate partnerships.
Carrying $4.8 million prior to writedown of
amount: $1.7 million, sold with no further
gain or loss.
4) Description of Limited partnership interests in
investment: three citrus groves
Carrying $4.5 million prior to writedown of
amount: $2.4 million, less subsequent
partnership distribution of $0.1
million for current amount of $2.0
million, held in "parent company and
other" operations
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 10 - Fourth Quarter 1998 Restructuring Charge
- --------------------------------------------------
In the fourth quarter of 1998, The St. Paul recorded a pretax
restructuring charge of $34 million. The majority of the charge,
$26 million, related to the anticipated termination of
approximately 520 employees in the following operations: Claims,
Commercial Lines Group, Information Systems, Medical Services and
Professional Markets. The remaining charge of $8 million related
to costs to be incurred to exit lease contracts.
As of March 31, 1999, 98 employees had been terminated under the
restructuring plan, and the cost of termination benefits paid was
$5 million. Less than $1 million had been paid related to branch
leases as of March 31, 1999. Actions to take place under this
restructuring plan are expected to be completed by the end of
1999. The St. Paul anticipates realizing annualized pretax
expense savings of approximately $50 million in 1999, primarily
as the result of the reduction in employee salaries and benefits.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
March 31, 1999
Consolidated Results
--------------------
On April 24, 1998, The St. Paul Companies, Inc. (The St. Paul)
completed its merger with USF&G Corporation (USF&G) in a tax-free
exchange of stock accounted for as a pooling-of-interests. The
combined organization operates under The St. Paul name and is
headquartered in St. Paul, MN. The following discussion is based
on the combined results of The St. Paul and USF&G for all periods
presented.
The following table summarizes The St. Paul's results for the
first quarters of 1999 and 1998.
Three Months Ended March 31
---------------------------
(in millions, except per share data) 1999 1998
------ ------
Pretax income (loss):
Property-liability insurance:
GAAP underwriting result $(113) (94)
Net investment income 322 332
Realized investment gains 61 47
Other (25) (29)
------ ------
Total property-liability insurance 245 256
Life insurance 19 19
Asset management 29 24
Parent and other (35) (49)
------ ------
Income before income taxes and
cumulative effect of accounting change 258 250
Income tax expense 63 55
------ ------
Income before cumulative effect
of accounting change 195 195
Cumulative effect of accounting change,
net of taxes (30) -
------ ------
Net income $165 195
====== ======
Diluted net income per common share $0.67 $0.77
====== ======
The St. Paul's pretax income of $258 million in the first quarter
of 1999 was $8 million, or 3%, higher than pretax income of $250
million in the same period of 1998, primarily due to a decline in
expenses in the "parent company and other" category resulting
from merger-related efficiencies, and earnings growth in the
asset management segment. These improvements more than offset an
$11 million decline in property-liability pretax earnings, which
primarily resulted from deterioration in underwriting results
compared with the first quarter of 1998.
The St. Paul's net income of $165 million, or $0.67 per share, in
the first quarter of 1999 included a pretax expense of $46
million ($30 million after-tax), representing the cumulative
effect of adopting the AICPA's Statement of Position (SOP) 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-
Related Assessments." The SOP provides guidance for recognizing
and measuring liabilities for guaranty fund and other insurance-
related assessments.
The merger-related efficiencies realized in the first quarter
primarily resulted from the elimination of duplicate functions
throughout the combined organization, including the consolidation
of corporate headquarters' functions, and the elimination of
1,981 employees since the consummation of the merger. By the end
of 1999, The St. Paul expects to realize pretax annualized
expense savings of approximately $260 million (as measured
against the combined 1997 pre-merger expenses of The St. Paul and
USF&G) as a result of the merger and the restructuring of its
Commercial Lines Group and Specialty Commercial underwriting
business segments.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance
----------------------------
The following summarizes key financial results by property-
liability underwriting business segment (Underwriting results
are presented on a GAAP basis; combined ratios are presented on
a statutory accounting basis):
Three Months
% of 1999 Ended March 31
Written ---------------
($ in millions) Premiums 1999 1998
- -------------- -------- ----- -----
Commercial Lines Group:
Written Premiums 32% $500 551
Underwriting Result $(95) (79)
Combined Ratio 117.8 114.4
Specialty Commercial:
Written Premiums 20% $314 281
Underwriting Result $(18) (5)
Combined Ratio 108.4 106.7
Personal Insurance:
Written Premiums 20% $312 333
Underwriting Result $(3) (14)
Combined Ratio 100.5 103.7
Surety:
Written Premiums 6% $103 91
Underwriting Result $15 15
Combined Ratio 79.1 78.8
---- ----- -----
Total U.S. Underwriting:
Written Premiums 78% $1,229 1,256
Underwriting Result $(101) (83)
Combined Ratio 108.3 108.2
International:
Written Premiums 7% $108 122
Underwriting Result $(35) (25)
Combined Ratio 130.6 119.9
---- ------ ------
Total Primary Insurance
Operations:
Written Premiums 85% $1,337 1,378
Underwriting Result $(136) (108)
Combined Ratio 110.2 109.0
Reinsurance:
Written Premiums 15% $229 277
Underwriting Result $23 14
Combined Ratio 94.1 97.0
---- ----- -----
Total Property-Liability
Insurance:
Written Premiums 100% $1,566 1,655
Underwriting Result $(113) (94)
Combined Ratio:
Loss and Loss Expense Ratio 74.3 72.4
Underwriting Expense Ratio 33.5 34.6
----- -----
Combined Ratio 107.8 107.0
===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Overview
- --------
First quarter consolidated written premiums of $1.57 billion were
5% below comparable 1998 premiums of $1.65 billion. The decline
was concentrated in The St. Paul's Commercial Lines Group,
reflecting the impact of management's initiatives to reduce the
amount of unprofitable business in this segment, and in the
Reinsurance segment, where soft market conditions continue to
negatively impact pricing levels and opportunities for new
business.
The consolidated loss ratio, measuring insurance losses and loss
adjustment expenses as a percentage of earned premiums, was 74.3
for the first quarter, almost two points worse than the comparable
1998 loss ratio of 72.4. Adverse loss experience in the Commercial
Lines Group and International segments was the primary source of
the deterioration from 1998. Catastrophe losses of $30 million in
1999's first quarter accounted for 1.8 points of the loss ratio,
compared with similar losses of $51 million (2.8 loss ratio points)
in the same period of 1998. Winter storms and flooding accounted
for the majority of catastrophe experience in both years.
The consolidated expense ratio, measuring underwriting expenses as
a percentage of written premiums, was 33.5 for the 1999 first
quarter, an improvement of over one point from the 1998 first
quarter ratio of 34.6. The expense ratio reduction reflects cost
savings realized as a result of the merger with USF&G, and
efficiencies resulting from the restructuring of the Commercial
Lines Group and Specialty Commercial segments in late 1998. That
restructuring resulted in the elimination of 98 positions from
these segments during the first quarter of 1999. These positions
are separate from those positions eliminated as a result of the
merger with USF&G.
Underwriting Results by Segment
- -------------------------------
COMMERCIAL LINES GROUP
The Commercial Lines Group segment includes The St. Paul's Middle
Market and Small Commercial business centers, and several business
centers providing specialized products and services for targeted
industry groups. Premium volume of $500 million in the first
quarter of 1999 declined 9% from comparable 1998 volume of $551
million. The reduction was centered in the Middle Market business
center, reflecting the impact of corrective underwriting
initiatives implemented in the second half of 1998 aimed at
improving the pricing and quality of the Middle Market book of
business. The commercial middle market has for several years been
characterized by intense price competition among insurance
carriers, resulting in a sustained period of inadequate pricing
levels relative to the risks assumed. Written premiums of $107
million in the Construction business center in the first quarter of
1999 were 6% higher than the same period of 1998, largely due to
price increases on renewal business. The St. Paul anticipates
annualized premium reductions in the range of $250 million by the
end of 1999 in the Commercial Lines Group as the result of the
corrective actions underway.
The first quarter GAAP underwriting loss of $95 million in the
Commercial Lines Group was $16 million worse than the same period
of 1998, primarily due to adverse loss development in the Middle
Market business center. Underwriting results in the Small
Commercial and Construction business centers, however, improved
over the first quarter of 1998. The Commercial Lines Group expense
ratio improved by 1.4 points compared with the first quarter of
1998, reflecting efficiencies resulting from the merger with USF&G
and the favorable impact of restructuring initiatives undertaken in
the fourth quarter of 1998.
SPECIALTY COMMERCIAL
The Specialty Commercial segment includes the Medical Services,
Custom Markets and Professional Markets business centers, all of
which provide specialized insurance products and services tailored
to meet the needs of specific commercial customer groups. Medical
Services' written premiums of $129 million in the first quarter,
which were 34% higher than comparable 1998 volume of $96 million,
were distorted by a reporting endorsement on an existing
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
account which generated a premium of $37 million. Excluding that
account, Medical Services' premium volume was down 4% from the
first quarter of 1998, reflecting competitive conditions in the
medical liability market. In Custom Markets, written premiums of
$84 million in the first quarter grew 10% over the same period of
1998, driven by new business in the Technology and Oil & Gas
underwriting operations. Professional Markets' written premiums of
$101 million in the first quarter were down 8% compared with the
same 1998 period, primarily due to a reduction of business volume
in the Public Sector Services underwriting operation.
The first quarter underwriting loss of $18 million in the Specialty
Commercial segment deteriorated from a loss of $5 million in the
same 1998 period, due to a decline in profitability in the
Professional Markets business center. Catastrophe losses of $6
million in the Public Sector Services operation were the primary
contributor to the deterioration from 1998. The growing Technology
operation in Custom Markets posted an underwriting profit of $7
million, virtually level with the same period of 1998. Medical
Services' first quarter underwriting loss of $24 million was a
slight improvement over the comparable 1998 loss of $27 million.
PERSONAL INSURANCE
The Personal Insurance segment provides property-liability
insurance products and services to individuals. In standard
personal lines, premium volume of $245 million in the first quarter
of 1999 fell 6% below the first quarter 1998 total of $261 million,
primarily due to the negative impact on new and renewal business
volume of price increases implemented in the personal auto line of
business. In the Specialty Auto business center, which provides
nonstandard auto coverages for individuals who are unable to obtain
standard coverage due to their inability to meet certain
underwriting criteria, premium volume of $67 million was 8% below
the comparable 1998 total of $72 million, reflecting the impact of
intense rate competition in this market.
The Personal Insurance segment's underwriting loss totaled $3
million in the first quarter of 1999, compared with the 1998 first
quarter loss of $14 million. Favorable loss development on
business written in prior years and a $12 million decline in
catastrophe losses accounted for the improvement in 1999.
SURETY
The St. Paul is the largest underwriter of surety bonds in the
United States as a result of the merger with USF&G. Premium volume
of $103 million in the first quarter of 1999 grew 14% over
comparable 1998 premiums of $91 million, fueled by the strong
domestic economy which has heightened the demand for surety-related
products. The expanding economy in Mexico also contributed to the
strong premium growth in the first quarter of 1999. The Surety
segment continued to produce strong results, posting an
underwriting profit of $15 million in the first quarter, level with
the same period of 1998.
INTERNATIONAL
The St. Paul's International segment provides commercial and
personal property-liability insurance products and services in
selected international markets. Written premiums of $108 million
in the first quarter of 1999 fell 11% short of 1998's first quarter
volume of $122 million. Premiums generated by the Global Marine
business center in 1999 were $9 million below 1998 levels,
primarily due to corrective underwriting and pricing actions
initiated during the first quarter which adversely impacted policy
renewals and new business volume. The St. Paul's operations in
Canada also experienced a decline in written premiums compared with
the first quarter of 1998, primarily due to the timing of certain
account renewals. The International segment's underwriting loss of
$35 million for the first quarter of 1999 was $10 million worse
than the same period of 1998, reflecting the impact of reserve
strengthening in the Global Marine business center and an increase
in losses in Canada.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
REINSURANCE
The St. Paul's Reinsurance segment underwrites treaty and
facultative reinsurance for property, liability, ocean marine,
surety and certain specialty classes of business, and provides
products and services to the alternative risk transfer market.
First quarter 1999 premium volume of $229 million declined 17% from
the same period of 1998, primarily due to the continued soft
pricing environment for reinsurance products. Excess capacity in
primary insurance markets has reduced demand for reinsurance
coverages worldwide. The St. Paul does not anticipate an
improvement in reinsurance market conditions during the remainder
of 1999. Despite the decline in premiums, the underwriting profit
in this segment of $23 million was $9 million higher than 1998's
first quarter, reflecting favorable loss development on prior
years' business and the absence of significant catastrophe losses.
Investment Operations
- ---------------------
First quarter 1999 pretax investment income in The St. Paul's
property-liability insurance operations totaled $322 million, 3%
below the comparable 1998 total of $332 million. Declining premium
levels over the last several quarters, coupled with cash outflows
associated with the USF&G merger (primarily severance and other
employee-related expenses), have resulted in a significant
reduction in new funds available for investment compared with prior
years. In addition, recent investment maturities have generally
been reinvested at lower current market yields. These factors have
contributed to the trend of declining investment income in recent
quarters. The St. Paul does not anticipate substantial improvement
in its cash flow situation during the remainder of 1999, and
expects investment income for the year to fall short of 1998
levels.
Pretax realized investment gains in The St. Paul's property-
liability insurance operations of $61 million were $14 million, or
30%, higher than gains of $47 million in the same period of 1998.
The increase was primarily due to the sale of venture capital
investments during the quarter, which generated $40 million of
realized gains, compared with $13 million in 1998's first quarter.
Sales of equity securities accounted for realized gains of $28
million and $42 million in the first quarters of 1999 and 1998,
respectively.
The $17.7 billion carrying value of the fixed maturities portfolio
on March 31, 1999 included $802 million of pretax unrealized
appreciation in market value. A slight upward movement in market
interest rates during the first quarter of 1999 resulted in a $214
million pretax decline in the unrealized appreciation of the bond
portfolio. Approximately 96% of that portfolio is rated at
investment grade (BBB or above). The weighted average pretax yield
on those investments was 6.8% at March 31, 1999, compared with 6.9%
at the same time a year ago.
Environmental and Asbestos Claims
---------------------------------
The St. Paul continues to receive claims alleging injuries from
environmental pollution or alleging covered property damages for
the cost to clean up polluted sites. The company also receives
asbestos injury and property damage claims arising out of product
liability coverages under general liability policies. The vast
majority of these claims arise from policies written many years
ago. The St. Paul's alleged liability for both environmental and
asbestos claims is complicated by significant legal issues,
primarily pertaining to the scope of coverage. In the company's
opinion, court decisions in certain jurisdictions have tended to
broaden insurance coverage beyond the intent of original insurance
policies.
The company's ultimate liability for environmental claims is
difficult to estimate because of these legal issues. Insured
parties have submitted claims for losses not covered in their
respective insurance policies, and the ultimate resolution of these
claims may be subject to lengthy litigation, making it difficult to
estimate The St. Paul's 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 equally
difficult. The primary factors influencing the estimate of the
total cost of these claims are case law and a history of prior
claim development.
The following table represents a reconciliation of total gross and
net environmental reserve development for the three months ended
March 31, 1999, and the years ended Dec. 31, 1998 and 1997.
Amounts in the "net" column are reduced by reinsurance
recoverables.
1999
Environmental (three months) 1998 1997
- ------------- ------------- ------------ ------------
(in millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Beginning reserves $783 $645 $867 $677 $889 $676
Incurred losses 27 26 (16) 26 44 58
Paid losses (15) (13) (68) (58) (66) (57)
---- ---- ---- ---- ---- ----
Ending reserves $795 $658 $783 $645 $867 $677
==== ==== ==== ==== ==== ====
The following table represents a reconciliation of total gross and
net reserve development for asbestos claims for the three months
ended March 31, 1999, and the years ended Dec. 31, 1998 and 1997.
1999
Asbestos (three months) 1998 1997
- -------- -------------- ------------ ------------
(in millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Beginning reserves $402 $277 $397 $279 $413 $304
Incurred losses (5) 2 44 13 22 (5)
Paid losses (7) (7) (39) (15) (38) (20)
---- ---- ---- ---- ---- ----
Ending reserves $390 $272 $402 $277 $397 $279
==== ==== ==== ==== ==== ====
The St. Paul's reserves for environmental and asbestos losses at
March 31, 1999 represent its best estimate of its ultimate
liability for such losses, based on all information currently
available. Because of the inherent difficulty in estimating such
losses, however, The St. Paul cannot give assurances that its
ultimate liability for environmental and asbestos losses will, in
fact, match current reserves. The St. Paul continues to evaluate
new information and developing loss patterns, but it believes any
future additional loss provisions for environmental and asbestos
claims will not materially impact The St. Paul's results of
operations, liquidity or financial position.
Total gross environmental and asbestos reserves at March 31, 1999,
of $1.19 billion represented approximately 6% of gross consolidated
reserves of $18.59 billion.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Life Insurance
--------------
The St. Paul's life insurance segment consists of Fidelity and
Guaranty Life Insurance Company and subsidiaries ("F&G Life"). F&G
Life's primary products are deferred annuities (including tax-
sheltered annuities and equity indexed annuities), structured
settlement annuities and immediate annuities. F&G Life also
underwrites traditional life insurance products.
Highlights of F&G Life's financial performance for the first
quarters of 1999 and 1998 were as follows:
Three Months
Ended March 31
---------------
(in millions) 1999 1998
----- -----
Sales (annualized premiums) $304 $79
Premiums and policy charges $27 $24
Policy surrenders $48 $51
Net investment income $72 $65
Pretax earnings $19 $19
Life insurance in force $10,818 $10,731
F&G Life's results in the first quarter of 1999 benefited from
growing spreads on increased assets under management, strong
product sales, life insurance product initiatives and disciplined
expense management.
The significant increase in sales compared with the first quarter
of 1998 was driven by the continued success of the new equity-
indexed annuity product introduced in June 1998. That product
accounted for $250 million, or 82%, of total sales for the quarter.
Credited interest rates on this product are tied to the performance
of the S&P 500 equity index. Sales of fixed interest rate
annuities in the first quarter of 1999 declined due to the negative
impact of continued low levels of market interest rates on F&G
Life's fixed rate products. The demand for annuity products is
affected by fluctuating interest rates and the relative
attractiveness of alternative investments, particularly equity-
based products.
The $3 million increase in premiums and policy charges in the first
quarter of 1999 resulted from an increase in sales of structured
settlement annuities and life-contingent single premium immediate
annuities ("SPIA"). Structured settlement annuities are sold
primarily to property-liability insurers to settle insurance
claims. Sales of structured settlement annuities, annuities with
life contingencies and term life insurance are recognized as
premiums earned under GAAP. However, sales of investment-type
contracts, such as equity-indexed, deferred and tax sheltered
annuities and universal life-type contracts are recorded directly
on the balance sheet and are not recognized as premium revenue
under GAAP. The expansion of the structured settlement program
into The St. Paul's property-liability claim organization led to
the increase in structured settlement sales. The growth in SPIA
sales resulted from an increased emphasis on this product in the
first quarter of 1999.
Deferred annuities and universal life products are subject to
surrender by policyholders. Nearly all of F&G Life's surrenderable
annuity policies allow a refund of the cash value balance less a
surrender charge. Surrender activity decreased $3 million in the
first quarter of 1999. Policy surrenders in last year's first
quarter reflected surrenders on a block of single premium deferred
annuities ("SPDA") policies sold through a distributor that ceased
doing business with F&G Life in 1997. The decrease in SPDA
surrenders in 1999 was offset by an increase in tax-sheltered
annuity surrenders.
Net investment income grew 11% in 1999 as a result of an increasing
asset base generated by positive cash flow.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Asset Management
----------------
The St. Paul's portion of pretax earnings from The John Nuveen
Company (Nuveen) was $29 million in the first quarter of 1999,
compared with $24 million in 1998's first quarter. The company
holds a 78% interest in Nuveen.
Nuveen's asset management fee revenue of $73 million in the first
quarter were $9 million, or 13%, higher than in the same period of
1998. Total managed assets grew to $57.3 billion at March 31,
1999, an increase of $2.0 billion over year-end 1998 and over $6
billion higher than a year ago. Gross new product sales during the
first quarter of 1999 totaled $3.2 billion, compared with gross
sales of $1.7 billion in the same period of 1998. Nuveen's results
continued to benefit from the acquisition of Rittenhouse Financial
Services, Inc., an equity and balanced account management firm, in
September 1997. Rittenhouse generated managed account sales of
$1.8 billion in the first quarter of 1999, compared with $970
million in the same period of 1998.
Capital Resources
-----------------
Common shareholders' equity of $6.41 billion at March 31, 1999 was
down $216 million from the year-end 1998 total of $6.62 billion,
reflecting significant common share repurchases and a $181 million
decline in the after-tax unrealized appreciation of the company's
fixed maturity investment portfolio. The St. Paul repurchased 7.2
million of its common shares for a total cost of $229 million
during the first quarter of 1999, for an average cost of $32.06 per
share. A slight increase in market interest rates during the first
three months of 1999 led to a decline in the unrealized
appreciation of The St. Paul's bond holdings compared with year-end
1998.
Total debt outstanding at March 31, 1999 of $1.52 billion increased
by $263 million over the year-end 1998 total of $1.26 billion,
largely due to the issuance of commercial paper during the quarter
to finance the company's common share repurchases. Total debt also
reflects the February 1999 issuance of $46 million of floating rate
notes by a special purpose offshore entity that is providing
reinsurance to a subsidiary of The St. Paul. During the first
quarter, The St. Paul purchased 33.5 million of its $1,000
principal amount zero coupon convertible notes from note holders
for a total cash consideration of $21 million, which represented
the original issue price plus the original issue discount accrued
to the date of purchase. The St. Paul purchased the notes at the
option of the note holders.
Approximately 42% of The St. Paul's consolidated debt outstanding
at March 31, 1999 consisted of medium-term notes bearing a weighted-
average interest rate of 6.9%. The ratio of total debt to total
capitalization of 18% increased from the year-end 1998 ratio of
15%.
The company anticipates that any major capital expenditures during
the remainder of 1999 would involve further repurchases of its
common stock. At March 31, 1999, The St. Paul had approximately
$135 million of capacity to repurchase additional common shares
under the $500 million repurchase program authorized by the
company's board of directors in November 1998. There are no major
capital improvements planned for the remainder of the year.
The company's ratio of earnings to fixed charges was 7.90 for the
first three months of 1999, compared with 7.47 for the same period
of 1998. The company's ratio of earnings to combined fixed charges
and preferred stock dividend requirements was 7.11 for the first
three months of 1999, compared with 6.72 for the same period of
1998. Fixed charges consist of interest expense, distributions on
capital securities and that portion of rental expense deemed to be
representative of an interest factor.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Liquidity
---------
Liquidity is a measure of The St. Paul's ability to generate
sufficient cash flows to meet the short- and long-term cash
requirements of its business operations. Net cash flows provided
by operations totaled $77 million in the first quarter of 1999,
compared with $10 million in the same period of 1998. The
improvement was due primarily to a reduction in expenses in The St.
Paul's property-liability operations. The St. Paul does not
anticipate significant increases in operational cash flows during
the remainder of 1999 due to the expected decline in premium volume
and the anticipated lack of investment income growth. On a long-
term basis, The St. Paul believes its operational cash flows will
benefit from the corrective pricing and underwriting actions under
way in its property-liability operations. The St. Paul's financial
strength and conservative level of debt provide it 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.
Year 2000 Readiness Disclosure
------------------------------
Many computer systems in the world have the potential of being
disrupted at the turn of the century due to programming limitations
that may cause the two-digit year code of "00" to be recognized as
the year 1900, instead of 2000. The St. Paul is heavily dependent
on its many computer systems, and those of its independent agents
and brokers (The St. Paul "distribution network") and its vendors,
for virtually every aspect of its operations, including
underwriting, claims, investments and financial reporting. Thus,
the "Year 2000" issue involves potentially serious operational
risks for the Company.
For several years, The St. Paul has been evaluating its computer
systems to determine the impact of the Year 2000 issue on their
operation. With the completion of the merger with USF&G
Corporation on April 24, 1998, The St. Paul has also been
evaluating USF&G's activities to become "Year 2000" compliant. As
compliance evaluation of the St. Paul and USF&G systems has
progressed to an advanced stage, a shift of emphasis from
evaluation to correction and compliance testing has taken place.
The St. Paul has also been working with vendors and members of its
distribution network in an effort to address Year 2000 issues that
such relationships involve. Finally, The St. Paul has been
reviewing and taking action to address non-systems related issues
that may arise as a result of the Year 2000 problem, including
insurance and reinsurance coverage issues, and have been seeking to
reduce the Company's Year 2000 related exposures through the
development of contingency plans.
The following discussion describes The St. Paul's efforts to date
and future plans to deal with the Year 2000 issue. These plans
have been and continue to be updated and revised as additional
information becomes available.
State of Readiness
- ------------------
Since the late 1980s, The St. Paul has required that all of the
internal computer systems supported by its Information Systems
Division ("ISD") use a four-digit date field. Early implementation
of this design standard has limited the number of systems requiring
remediation.
The St. Paul established a Review Board in the third quarter of
1997 to review and certify the remediation of the hundreds of
internally developed and externally sourced systems it uses through
rigorous testing. To coordinate the Year 2000 remediation efforts,
The St. Paul created the Year 2000 Project Office, which is
responsible for the oversight, coordination and monitoring of Year
2000 efforts including, among other things, reviewing the
compliance status of information systems in all operating units and
subsidiaries, both foreign and domestic, directing the Year 2000
coordinators assigned to operating units, and formulating company-
wide contingency plans.
Prior to the merger with USF&G, a separate "Y2K Action Committee"
was maintained by USF&G, and a comprehensive program to address
each of three identified aspects to the Year 2000 issue (readying
USF&G's systems, coordinating with agents and other third parties
with whom USF&G interacts, and managing the risk of claims from
insured parties) had been established. The Year 2000 program
developed by USF&G's Y2K Action Committee has now been integrated
into The St. Paul's overall Year 2000 response.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Year 2000 Readiness Disclosure (continued)
-----------------------------------------
Information Technology Systems
- ------------------------------
All of The St. Paul's systems, whether internally developed or
externally sourced, are subject to the company-wide comprehensive
testing and compliance standards promulgated by ISD, the oversight
and monitoring of which is the responsibility of the Year 2000
Project Office. Insofar as internal systems are concerned, Year
2000 compliance was achieved by December 31, 1998. Initial
compliance validation of all such systems was completed by March
31, 1999. All subsidiaries not headquartered in Saint Paul, MN or
Baltimore, MD are scheduled to complete initial validation testing
of their operating systems on or before June 30, 1999.
The Year 2000 Project Office's plan for remediation and validation
of externally sourced systems provides for the Company to work with
the vendors of those systems to ensure that those systems become
Year 2000 compliant at the earliest practicable date. Compliance
testing in accordance with ISD standards takes place as and when
compliant versions and/or affirmations of compliance from vendors
are received. The St. Paul has identified what it believes to be
all of its third-party supplied mission critical systems, and
expect to receive Year 2000 compliant versions and/or affirmations
of compliance for each of them, and to complete the validation
process, before September 30, 1999.
Third-Party Service Providers and Distribution Network
- ------------------------------------------------------
The St. Paul relies indirectly on the information technology
systems of its service providers and those of its distribution
network. The Year 2000 Project Office is communicating with the
Company's service providers, including financial institutions
providing custody and other services, its independent agents and
brokers, and other entities with which it does business, to
identify and resolve Year 2000 issues and to determine the
potential impact, where relevant, of the possible failure of
certain of such persons to achieve Year 2000 compliance on a timely
basis. Results of this process are expected to be used in The St.
Paul's contingency planning efforts discussed below.
Nuveen Systems
- --------------
Having started the development and implementation of internal four-
digit date code software and system standards in the early 1980s,
Nuveen's Year 2000 program consists primarily of Year 2000
compliance examination and testing of the software packages and
hardware provided by third parties and of the systems and software
of its service providers. Certification of Year 2000 compliance
and testing of critical third-party hardware and software systems
used in processing at Nuveen was completed by the end of the first
quarter of 1999. The remaining certification and testing is
expected to be completed in the second quarter of 1999. Nuveen is
in the process of developing contingency plans based upon its
examination of the Year 2000 readiness of its third-party supplied
systems and its service providers. Nuveen believes that the costs
associated with its Year 2000 efforts will not be material to its
operations and financial position.
Embedded Chip Issues
- --------------------
Given the nature of its business, and that of its vendors and the
members of its distribution network, The St. Paul believes that its
exposure to embedded chip Year 2000 issues is minimal (other than
its exposure to possible disruptions in electricity,
telecommunications and other essential services provided by public
utilities that are subject to embedded chip-related disruption).
The St. Paul is, where deemed appropriate, coordinating with
vendors to obtain certificates of Year 2000 compliance for the
embedded computer technology equipment that it uses.
Year 2000 Compliance Program Costs
- ----------------------------------
The St. Paul has developed and implemented plans to address the
system modifications required to prepare for the Year 2000, and
does not expect the planning and implementation costs associated
with Year 2000 efforts to be material to its results of operations,
cash flows or consolidated financial position. Through December
31, 1997, the costs of Year 2000 remediation measures incurred,
including costs incurred by USF&G prior to the merger, totaled
approximately $6 million. The St. Paul incurred costs of
approximately $12 million in 1998, and it anticipates additional
costs of approximately $5 million in 1999.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Year 2000 Readiness Disclosure (continued)
-----------------------------------------
Contingency Planning
- --------------------
The St. Paul's Year 2000 Project Office's contingency planning team
created a contingency planning model and template that focuses on
maintaining/restoring infrastructure and resuming critical business
functions in the event of Year 2000-related disruptions.
Infrastructure, business and staff units, field offices and
subsidiary location teams are creating plans to address these
areas. During the first quarter of 1999, infrastructure teams
created plans to maintain/restore critical operations at corporate
headquarters. Likewise, during the first quarter of 1999, most
business or staff unit teams created plans to provide responsive
actions for several potential disruption duration scenarios, and
for resuming critical business processes, products and services.
For each disruption duration scenario, the business and staff unit
plans identify alternative procedures designed to permit continued
operations and to minimize risk exposure. The contingency planning
model and template have been distributed to subsidiary and field
office locations to facilitate their creation of contingency plans.
All plans will be analyzed and rolled up to an enterprise level
following completion and will be modified as needed during 1999.
The St. Paul believes that its most significant Year 2000 exposure
is the potential business disruptions that would be caused by
widespread failure of public utility systems, particularly in the
power generation/distribution and the telecommunication industries.
While the contingency plans The St. Paul is developing will provide
alternative procedures to lessen the impact of short duration
disruptions, prolonged failure of power and telecommunications
systems could have a material adverse effect on the Company's
results of operations, cash flows and consolidated financial
position.
As noted above, The St. Paul indirectly relies on the information
systems of the many components of its distribution network, which
includes thousands of independent agents and brokers. The St. Paul
is aware that some of its independent agents and brokers are
currently Year 2000 non-compliant and expect that a much lesser
number, unknown at this time and expected to consist primarily of
smaller agents, will be non-compliant on January 1, 2000. The St.
Paul believes that Year 2000 related difficulties experienced by
members of its distribution network have the potential to
materially disrupt its business and that such potential disruptions
constitute its second greatest area of potential exposure to the
Year 2000 problem. As part of its contingency planning effort, The
St. Paul has been providing information to members of its
distribution network intended to sensitize them to the Year 2000
issue and to encourage them to take appropriate steps to become
Year 2000 compliant. Although the Company's distribution network
consists of thousands of agents and brokers, the number of
different systems used by the constituent members is far less. For
example, the Company believes that fewer than 20 different types of
agency management systems are used by its property-liability
insurance agents in the United States. Contingency arrangements
are being discussed with distribution network members pursuant to
which the Company may, among other provisional steps, provide data
in alternative formats and institute temporary direct billing
services in the event of a disruption in their individual systems.
The Company notes that the Year 2000 issue by its nature carries
the risk of unforeseen and potentially very serious problems of
internal or external origin. Some commentators believe that the
Year 2000 issue has the potential of destabilizing the global
economy or causing a global recession, either of which could
adversely affect the Company. While The St. Paul believes it is
taking appropriate action with respect to third parties on whose
systems and services it relies to a significant extent, there can
be no assurance that the systems of such third parties will be Year
2000 compliant or that any third party's failure to have Year 2000
compliant systems would not have a material adverse effect on The
St. Paul's earnings, cash flows or financial condition.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Year 2000 Readiness Disclosure (continued)
-----------------------------------------
Insurance Coverage
- ------------------
The St. Paul also faces potential Year 2000 claims under coverages
provided by insurance and reinsurance policies sold to insured
parties who may incur losses as a result of the failure of such
parties, or the customers or vendors of such parties, to be Year
2000 compliant. Because coverage determinations depend on unique
factual situations, specific policy language and other variables,
it is not possible to determine in advance whether and to what
extent insured parties will incur losses, the amount of the losses
or whether any such losses would be covered under The St. Paul's
insurance policies. In some instances, coverage is not provided
under the insurance policies or reinsurance contracts, while in
other instances, coverage may be provided under certain
circumstances.
The St. Paul's standard property and inland marine policies
require, among other things, direct physical loss or damage from a
covered cause of loss as a condition of coverage. In addition, it
is a fundamental principle of all insurance that a loss must be
fortuitous to be considered potentially covered. Given the fact
that Year 2000 related losses are not unforeseen, and that The St.
Paul expects that such losses will not, in most if not all cases,
cause direct physical loss or damage, The St. Paul has concluded
that its property and inland marine policies do not generally
provide coverage for losses relating to Year 2000 issues. To
reinforce its view on coverage afforded by such policies, The St.
Paul has developed and is implementing a specific Year 2000
exclusion endorsement.
The St. Paul continues to assess its exposure to insurance claims
arising from its liability coverages, and it is taking a number of
actions to address that exposure, including individual risk
evaluation, communications with insured parties, the use of
exclusions in certain types of policies, and classification of high
hazard exposures that in the Company's view present unacceptable
risk. The Company may also face claims from the beneficiaries of
its surety bonds resulting from Year 2000-related performance
failures by the purchasers of the bonds. The St. Paul is assessing
its exposure to such potential claims.
The St. Paul does not believe that Year 2000-related insurance or
reinsurance coverage claims will have a material adverse effect on
its earnings, cash flows or financial position. However, the
uncertainties of litigation are such that unexpected policy
interpretations could compel claim payments substantially beyond
the Company's coverage intentions, possibly resulting in a material
adverse effect on its results of operations and/or cash flows and a
material adverse effect on its consolidated financial position.
Impact of Accounting Pronouncements to be Adopted in the Future
- ---------------------------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet,
and measure those instruments at fair value. SFAS No. 133 is
effective for all quarters of fiscal years beginning after June 15,
1999, and prohibits retroactive application to financial statements
of prior periods. The St. Paul intends to implement the provisions
of SFAS No. 133 in the first quarter of the year 2000. The St.
Paul currently has limited involvement with derivative instruments,
primarily for purposes of hedging against fluctuations in market
indices, foreign currency exchange rates and interest rates. The company
cannot at this time reasonably estimate the potential impact of this
adoption on its financial position or results of operations for
future periods.
In October 1998, the AICPA issued SOP No. 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That
Do Not Transfer Insurance Risk," which provides guidance for
accounting for such contracts. The SOP specifies that insurance
and reinsurance contracts for which the deposit method of
accounting is appropriate should be classified in one of four
categories, and further specifies the accounting treatment for each
of these categories. The SOP is effective for fiscal years
beginning after June 15, 1999. The St. Paul currently intends to
implement the provisions of the SOP in the first quarter of the
year 2000. The company cannot at this time reasonably estimate the
potential impact of this adoption on its financial position or
results of operations for future periods.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Forward-looking Statement Disclosure
------------------------------------
This report contains certain forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995. Forward-
looking statements are statements other than historical information
or statements of current condition. Words such as expects,
anticipates, intends, plans, believes, seeks or estimates, or
variations of such words, and similar expressions are also intended
to identify forward-looking statements. Examples of these forward-
looking statements include statements about The St. Paul's
expectations concerning: market conditions and their effect on
future premiums, revenues, cash flow and investment income; expense
savings resulting from the USF&G merger and the restructuring
actions announced in 1998; and Year 2000 issues and the company's
efforts to address them.
In light of the risks and uncertainties inherent in future
projections, many of which are beyond The St. Paul's 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: general economic conditions
including changes in interest rates and the performance of
financial markets; changes in domestic and foreign laws,
regulations and taxes; changes in the demand for, pricing of, or
supply of insurance or reinsurance; catastrophic events of
unanticipated frequency or severity; loss of significant customers;
judicial decisions and rulings; and various other matters,
including the effects of the merger with USF&G Corporation. Actual
results and experience relating to Year 2000 issues could differ
materially from anticipated results or other expectations as a
result of a variety of risks and uncertainties, including the
impact of system faults, the failure to successfully remediate
material systems, the time it may take to remediate system failures
once they occur, the failure of third parties (including public
utilities, agents and brokers) to properly remediate material Year
2000 problems, and unanticipated judicial interpretations of the
scope of the insurance or reinsurance coverage provided by The St.
Paul's policies. The St. Paul undertakes no obligation to release
publicly the results of any future revisions we may make to forward-
looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note 5 to the
consolidated financial statements is incorporated
herein by reference.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The St. Paul's annual shareholders' meeting was held
on May 4, 1999.
(1) All fifteen persons nominated for directors by
management were named in proxies for the meeting
which were solicited pursuant to Regulation 14A of
the Securities Exchange Act of 1934. There was no
solicitation in opposition to management's nominees
as listed in the proxy statements. All fifteen
nominees were elected by the following votes:
In favor Withheld
----------- ----------
H. Furlong Baldwin 189,627,599 1,566,239
Michael R. Bonsignore 189,823,972 1,379,866
John H. Dasburg 189,606,519 1,597,319
W. John Driscoll 189,706,853 1,496,985
Kenneth M. Duberstein 189,697,739 1,506,099
Pierson M. Grieve 189,668,703 1,535,135
James E. Gustafson 189,826,574 1,377,264
Thomas R. Hodgson 189,800,399 1,403,439
David G. John 189,790,322 1,413,516
William H. Kling 189,727,875 1,475,963
Douglas W. Leatherdale 189,606,015 1,597,823
Bruce K. MacLaury 189,772,120 1,431,718
Glen D. Nelson 189,767,070 1,436,768
Anita M. Pampusch 189,761,230 1,442,608
Gordon M. Sprenger 189,817,158 1,386,680
(2) By a vote of 190,197,086 in favor, 484,243 against
and 522,509 abstaining, the shareholders ratified
the selection of KPMG Peat Marwick LLP as the
independent auditors for The St. Paul.
(3) By a vote of 174,899,952 in favor, 15,391,092
against and 911,122 abstaining, the shareholders
approved The St. Paul's Amended and Restated 1994
Stock Incentive Plan.
(4) By a vote of 181,885,722 in favor, 8,345,113
against and 971,331 abstaining, the shareholders
approved The St. Paul's Annual Incentive Plan.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. An Exhibit Index is set forth as the
last page in this document.
(b) Reports on Form 8-K.
1) The St. Paul filed a Form 8-K Current
Report dated January 6, 1999, relating to the
election of James E. Gustafson as president and
chief operating officer of The St. Paul.
2) The St. Paul filed a Form 8-K Current
Report dated January 29, 1999, relating to the
announcement of its financial results for the
year ended Dec. 31, 1998.
3) The St. Paul filed a Form 8-K Current
Report dated March 4, 1999, related to the
announcement of its revised financial results
for the year ended Dec. 31, 1998.
4) The St. Paul filed a Form 8-K Current
Report dated April 30, 1999, relating to the
announcement of its financial results for the
quarter ended March 31, 1999.
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 17, 1999 By /s/ Bruce A. Backberg
---------------------
Bruce A. Backberg
Senior Vice President
and Chief Legal Counsel
(Authorized Signatory)
Date: May 17, 1999 By /s/ Thomas A. Bradley
---------------------
Thomas A. Bradley
Senior 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............................................
(i) Amendment to Letter Agreement between The St. Paul
and Mr. Paul J. Liska related to the terms of his
employment**..............................................(1)
(ii) The Special Leveraged Stock Purchase Plan**..............(1)
(11) Statement re computation of per share earnings**..............(1)
(12) Statement re computation of ratios**..........................(1)
(15) Letter re unaudited interim financial information*............
(18) Letter re change in accounting principles*....................
(19) Report furnished to security holders*.........................
(22) Published report regarding matters submitted to
vote of security holders*..................................
(23) Consents of experts and counsel*..............................
(24) Power of attorney*............................................
(27) Financial data schedule**.....................................(1)
(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.