<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
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
incorporation or organization) Identification 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 on November 10, 1998, was 235,733,012.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Consolidated Statements of Operations (Unaudited), Three
Months and Nine Months Ended September 30, 1998 and 1997 3
Consolidated Balance Sheets, September 30, 1998
(Unaudited) and December 31, 1997 4
Consolidated Statements of Shareholders' Equity,
Nine Months Ended September 30, 1998 (Unaudited) and
Twelve Months Ended December 31, 1997 6
Consolidated Statements of Comprehensive Income
(Unaudited), Three Months and Nine Months Ended
September 30, 1998 and 1997 7
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 1998 and 1997 8
Notes to Consolidated Financial Statements (Unaudited) 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
PART II. OTHER INFORMATION
Item 1 through Item 6 33
Signatures 34
EXHIBIT INDEX 35
<PAGE>
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Unaudited
(In thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------- ------------------
1998 1997 1998 1997
----- ----- ----- -----
Revenues:
Premiums earned $1,698,787 1,810,402 5,232,511 5,507,374
Net investment income 390,601 392,082 1,185,148 1,172,493
Realized investment gains 24,835 47,478 207,343 314,951
Asset management-
investment banking 76,470 61,939 222,791 180,299
Other 20,564 12,389 64,472 44,526
--------- --------- --------- ---------
Total revenues 2,211,257 2,324,290 6,912,265 7,219,643
--------- --------- --------- ---------
Expenses:
Insurance losses and loss
adjustment expenses 1,386,905 1,261,322 4,320,777 3,908,363
Life policy benefits 66,080 57,873 187,711 179,509
Policy acquisition expenses 393,812 427,362 1,243,928 1,297,232
Operating and
administrative 332,447 303,182 1,324,157 859,825
--------- --------- --------- ---------
Total expenses 2,179,244 2,049,739 7,076,573 6,244,929
--------- --------- --------- ---------
Income (loss) from
continuing operations
before income taxes 32,013 274,551 (164,308) 974,714
Income tax expense (benefit) (31,789) 59,379 (125,507) 233,432
--------- --------- --------- ---------
Income (loss) from
continuing operations 63,802 215,172 (38,801) 741,282
Loss on disposal of
discontinued operations,
operations, net of taxes - - - (67,750)
--------- --------- --------- ---------
Net income (loss) $63,802 215,172 (38,801) 673,532
========= ========= ========= =========
Basic earnings (loss) per
common share:
Income (loss) from
continuing operations $0.26 0.92 (0.21) 3.18
Loss from discontinued
operations - - - (0.30)
--------- --------- --------- ---------
Net income (loss) $0.26 0.92 (0.21) 2.88
========= ========= ========= =========
Diluted earnings (loss) per
common share:
Income (loss) from
continuing operations $0.25 0.85 (0.21) 2.95
Loss from discontinued
operations - - - (0.27)
--------- --------- --------- ---------
Net income (loss) $0.25 0.85 (0.21) 2.68
========= ========= ========= =========
Dividends declared on
common stock $0.25 0.235 0.75 0.71
========= ========= ========= =========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
September 30, December 31,
ASSETS 1998 1997
- ------ ------------ ------------
(Unaudited)
Investments:
Fixed maturities, at estimated market value $21,149,340 20,945,219
Equities, at estimated market value 1,064,029 1,052,370
Real estate, at cost less accumulated
depreciation of $105,196 (1997; $93,015) 933,467 985,317
Mortgage loans, at cost 674,125 640,734
Venture capital, at estimated market value 506,968 461,892
Other investments 1,033,193 923,933
Short-term investments, at cost 863,961 970,568
---------- ----------
Total investments 26,225,083 25,980,033
Cash 129,391 113,175
Investment banking inventory securities 52,009 130,203
Reinsurance recoverables:
Unpaid losses 4,000,161 3,839,051
Paid losses 127,804 128,422
Ceded unearned premiums 318,423 376,343
Receivables:
Underwriting premiums 2,250,015 2,213,926
Interest and dividends 376,874 355,970
Other 94,127 104,727
Deferred policy acquisition expenses 876,151 872,460
Deferred income taxes 1,162,775 1,213,790
Office properties and equipment, at cost
less accumulated depreciation
of $408,403 (1997; $369,414) 518,084 602,381
Goodwill 602,075 618,528
Other assets 771,391 809,819
---------- ----------
Total assets $37,504,363 37,358,828
========== ==========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In thousands)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- ------------------------------------ ----------- ------------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $18,653,723 18,153,080
Future policy benefits 3,959,164 3,816,050
Unearned premiums 3,411,620 3,528,234
---------- ----------
Total insurance reserves 26,024,507 25,497,364
Debt 1,097,742 1,304,008
Payables:
Income taxes 176,299 303,549
Reinsurance premiums 314,837 258,495
Accrued expenses and other 1,251,254 1,327,549
Other liabilities 1,527,909 1,556,995
---------- ----------
Total liabilities 30,392,548 30,247,960
---------- ----------
Company-obligated mandatorily redeemable
preferred securities of subsidiaries 502,700 502,700
---------- ----------
Shareholders' equity:
Preferred:
Series B convertible preferred stock;
1,450 shares authorized; 937 shares
outstanding (956 shares in 1997) 135,522 137,892
Guaranteed obligation - PSOP (118,605) (121,167)
---------- ----------
Total preferred shareholders' equity 16,917 16,725
---------- ----------
Common:
Common stock, 480,000 shares authorized;
236,872 shares outstanding
(233,130 shares in 1997) 2,142,667 2,057,108
Retained earnings 3,512,636 3,720,140
Guaranteed obligation - ESOP - (8,453)
Accumulated other comprehensive income:
Unrealized appreciation 969,904 845,811
Unrealized loss on foreign
currency translation (33,009) (23,163)
---------- ----------
Total accumulated other comprehensive income 936,895 822,648
---------- ----------
Total common shareholders' equity 6,592,198 6,591,443
---------- ----------
Total shareholders' equity 6,609,115 6,608,168
---------- ----------
Total liabilities, redeemable preferred
securities and shareholders' equity $37,504,363 37,358,828
========== ==========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands)
Nine Twelve
Months Ended Months Ended
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
Preferred shareholders' equity:
Series B convertible preferred stock:
Beginning of period $137,892 142,131
Redemptions during period (2,370) (4,239)
--------- ---------
End of period 135,522 137,892
--------- ---------
Guaranteed obligation - PSOP:
Beginning of period (121,167) (126,068)
Principal payments 2,562 4,901
--------- ---------
End of period (118,605) (121,167)
--------- ---------
Total preferred shareholders' equity 16,917 16,725
--------- ---------
Common shareholders' equity:
Common stock:
Beginning of period 2,057,108 1,895,608
Stock issued under stock incentive plans 66,889 32,421
Stock issued for preferred shares redeemed 5,394 8,708
Stock issued for acquisitions - 113,264
Reacquired common shares - (13,892)
Other 13,276 20,999
--------- ---------
End of period 2,142,667 2,057,108
--------- ---------
Retained earnings:
Beginning of period 3,720,140 3,097,261
Net income (loss) (38,801) 929,292
Dividends declared on common stock (167,793) (186,036)
Dividends declared on preferred
stock, net of taxes (6,395) (10,304)
Reacquired common shares (153) (114,232)
Premium on preferred shares
converted or redeemed (3,025) (4,052)
Other changes during period 8,663 8,211
--------- ---------
End of period 3,512,636 3,720,140
--------- ---------
Guaranteed obligation - ESOP:
Beginning of period (8,453) (20,353)
Principal payments 8,453 11,900
--------- ---------
End of period - (8,453)
--------- ---------
Unrealized appreciation, net of taxes:
Beginning of period 845,811 679,381
Change during the period 124,093 166,430
--------- ---------
End of period 969,904 845,811
--------- ---------
Unrealized loss on foreign currency
translation, net of taxes:
Beginning of period (23,163) (20,500)
Currency translation adjustments (9,846) (2,663)
--------- ---------
End of period (33,009) (23,163)
--------- ---------
Total common shareholders' equity 6,592,198 6,591,443
--------- ---------
Total shareholders' equity $6,609,115 6,608,168
========= =========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Unaudited
(In thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -----------------
1998 1997 1998 1997
----- ----- ----- -----
Net income (loss), as reported $63,802 215,172 (38,801) 673,532
------- ------- ------- -------
Other comprehensive income,
net of taxes:
Change in unrealized appreciation 103,569 212,046 124,093 98,626
Change in unrealized gain (loss)
on foreign currency translation (10,501) 533 (9,846) 5,832
------- ------- ------- -------
Other comprehensive income 93,068 212,579 114,247 104,458
------- ------- ------- -------
Comprehensive income $156,870 427,751 75,446 777,990
======= ======= ======= =======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Nine Months Ended
September 30
---------------------
1998 1997
------ -----
OPERATING ACTIVITIES
Net income (loss) $ (38,801) 673,532
Adjustments:
Change in net property-liability
insurance reserves 256,881 (59,818)
Change in insurance premiums receivable (36,371) (69,231)
Change in asset management balances (19,834) 148,549
Realized investment gains (207,343) (314,951)
Provision for loss on disposal
of discontinued operations - 67,750
Other 168,014 225,903
--------- ---------
Net cash provided by operating activities 122,546 671,734
--------- ---------
Cash outflow resulting from
sale of discontinued operations (20,218) (44,776)
--------- ---------
INVESTING ACTIVITIES
Purchase of investments (4,002,198) (4,288,064)
Proceeds from sales and maturities of investments 3,982,566 3,897,736
Change in short-term investments 151,298 (99,363)
Change in open security transactions (7,598) 60,249
Net purchases of office properties and equipment (61,275) (106,680)
Other (5,209) (149,757)
--------- ---------
Net cash provided by
(used in) investing activities 57,584 (685,879)
--------- ---------
FINANCING ACTIVITIES
Net deposits for universal life
and investment contracts 153,714 214,586
Dividends paid on common and preferred stock (164,504) (148,637)
Proceeds from issuance of debt 61,022 196,682
Repayment of debt (205,444) (100,000)
Redemption of preferred shares - (199,484)
Repurchase of common shares (153) (128,030)
Proceeds from issuance of company-obligated
mandatorily redeemable preferred securities
of subsidiaries - 197,845
Stock options exercised and other 11,669 20,400
--------- ---------
Net cash provided by (used in)
financing activities (143,696) 53,362
--------- ---------
Effect of exchange rate changes on cash - (23)
--------- ---------
Increase (decrease) in cash 16,216 (5,582)
Cash at beginning of period 113,175 109,855
--------- ---------
Cash at end of period $129,391 104,273
========= =========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
September 30, 1998
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.
On April 24, 1998, 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 consolidated financial statements
for all current year and prior year periods in this report
reflect the combined accounts and results of operations of The
St. Paul and USF&G. See Note 8 on page 16 of this report for
further information about the merger.
These consolidated financial statements rely, in part, on
estimates. In the opinion of management, all necessary
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.
Some figures in the 1997 consolidated financial statements have
been reclassified to conform with the 1998 presentation. These
reclassifications had no effect on net income or shareholders'
equity, as previously reported.
All references in the consolidated financial statements and
related footnotes to per share amounts and to the number of
common shares for both 1998 and 1997 reflect the effect of the 2-
for-1 stock split which occurred on May 6, 1998 (See Note 9).
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 2 Earnings (Loss) per Share
- ---------------------------------
Earnings (loss) per common share (EPS) amounts were calculated by
dividing net income (loss), as adjusted, by the adjusted average
common shares outstanding.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
(In thousands)
BASIC
Net income (loss), as reported $63,802 215,172 (38,801) 673,532
Dividends on preferred stock,
net of taxes (2,126) (2,163) (6,395) (8,175)
Premium on preferred shares redeemed (820) (1,523) (3,025) (2,434)
------- ------- ------- -------
Net income (loss) available
to common shares $60,856 211,486 (48,221) 662,923
======= ======= ======= =======
DILUTED
Net income (loss), as reported $63,802 215,172 (38,801) 673,532
Dividends on preferred stock,
net of taxes - - (6,395) (1,659)
Premium on preferred shares redeemed (820) (1,523) (3,025) (2,434)
Dividends on convertible monthly
income preferred securities,
net of taxes 2,018 2,018 - 6,055
Additional PSOP expense due to
assumed conversion of preferred
stock, net of taxes (564) (659) - (1,995)
Interest expense on zero
coupon bonds, net of taxes 826 796 - 2,338
------- ------- ------- -------
Net income (loss), as adjusted $65,262 215,804 (48,221) 675,837
======= ======= ======= =======
AVERAGE COMMON
SHARES OUTSTANDING
Basic 236,244 229,885 235,214 230,101
======= ======= ======= =======
Diluted 256,527 252,423 235,214 252,486
======= ======= ======= =======
EARNINGS (LOSS) PER SHARE
Basic $0.26 0.92 (0.21) 2.88
======= ======= ======= =======
Diluted $0.25 0.85 (0.21) 2.68
======= ======= ======= =======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Diluted EPS is the same as Basic EPS for the nine months ended
Sept. 30, 1998 because Diluted EPS calculated in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," for The St. Paul's loss from continuing
operations, results in a lesser loss per share than the Basic EPS
calculation does. The provisions of SFAS No. 128 prohibit this
"anti-dilution" of earnings per share, and require that the
larger Basic loss per share also be reported as the Diluted loss
per share figure.
Average common shares outstanding for Diluted EPS for the three
months ended Sept. 30, 1998 and both periods of 1997 includes the
common and common equivalent shares outstanding for the period
and common shares that would be issuable upon conversion of
preferred stock, the company-obligated mandatorily redeemable
preferred securities of St. Paul Capital L.L.C. (monthly income
preferred securities) and the zero coupon convertible notes.
Note 3 Investments
- -------------------
Investment Activity. A summary of investment transactions
is presented below.
Nine Months Ended September 30
------------------------------
1998 1997
------ ------
(In thousands)
Purchases:
Fixed maturities $2,536,629 2,717,288
Equities 1,071,175 1,082,038
Real estate 63,152 117,138
Mortgage loans 112,598 197,572
Venture capital 118,727 98,360
Other investments 99,917 75,668
--------- ---------
Total purchases 4,002,198 4,288,064
--------- ---------
Proceeds from sales and maturities:
Fixed maturities:
Sales 1,013,762 1,337,993
Maturities and redemptions 1,471,002 956,025
Equities 1,169,491 1,058,804
Real estate 112,275 228,263
Mortgage loans 83,275 21,550
Venture capital 51,812 241,854
Other investments 80,949 53,247
--------- ---------
Total sales and maturities 3,982,566 3,897,736
--------- ---------
Net purchases $19,632 390,328
========= =========
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Change in Unrealized Appreciation. The increase (decrease) in
unrealized appreciation recorded in common shareholders' equity
was as follows:
Nine Months Ended Twelve Months Ended
September 30, 1998 December 31, 1997
------------------ ------------------
(In thousands)
Fixed maturities $328,176 399,696
Equities (113,318) 61,969
Venture capital 4,798 (154,826)
Life deferred policy acquisition
costs and policy benefits (5,903) (21,171)
Single premium immediate
annuity reserves (9,880) (27,411)
Other (14,143) (1,974)
-------- --------
Total change in pretax
unrealized appreciation 189,730 256,283
Change in deferred taxes (65,637) (89,853)
-------- --------
Total change in unrealized
appreciation, net of taxes $124,093 166,430
======== ========
Note 4 Income Taxes
- --------------------
The components of income tax expense (benefit) on continuing
operations are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
(In thousands)
Federal current tax
expense (benefit) $(94,590) 63,289 (50,122) 249,574
Federal deferred tax
expense (benefit) 58,664 (11,795) (93,924) (36,373)
------- ------- ------- -------
Total federal income tax
expense (benefit) (35,926) 51,494 (144,046) 213,201
Foreign income taxes 2,820 6,383 13,202 15,712
State income taxes 1,317 1,502 5,337 4,519
------- ------- ------- -------
Total income tax expense
(benefit) on continiung
operations $(31,789) 59,379 (125,507) 233,432
======= ======= ======= =======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 5 Contingent Liabilities
- ------------------------------
In the ordinary course of conducting business, the company 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 St. Paul's operations in
certain ways. Although it is possible that the settlement of a
contingency may be material to the company'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.
Note 6 Debt
- ------------
Debt consists of the following:
September 30, December 31,
1998 1997
---------------- -----------------
Book Fair Book Fair
Value Value Value Value
------ ------ ------ ------
(In thousands)
Medium-term notes $ 501,915 566,600 511,920 529,000
Commercial paper 229,373 229,373 168,429 168,429
8 3/8% senior notes 149,679 162,100 149,592 159,060
Zero coupon convertible notes 110,091 113,200 106,838 122,307
7 1/8% senior notes 79,842 87,500 79,824 82,680
Real estate mortgages 19,842 20,500 19,900 20,491
Nuveen debt 7,000 7,000 84,500 84,600
7 % senior notes - - 145,225 145,744
Credit facility - - 35,000 35,000
Guaranteed ESOP debt - - 2,780 2,800
--------- --------- --------- ---------
Total debt $1,097,742 1,186,273 1,304,008 1,350,111
========= ========= ========= =========
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 Segment Information
- ---------------------------
In connection with the merger with USF&G, The St. Paul performed
a reassessment of its reportable segments in accordance with SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Based on the merged organizational structure and
related operating segment manager responsibilities, The St. Paul
has redefined its reportable segments as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
Revenues from Continuing (In thousands)
Operations
Property-liability
insurance:
Primary insurance
operations $1,445,090 1,491,355 4,364,916 4,478,446
Reinsurance operations 222,937 293,934 786,594 950,508
--------- --------- --------- ---------
Total premiums earned 1,668,027 1,785,289 5,151,510 5,428,954
Net investment income 322,094 328,360 984,987 985,694
Realized investment gains 6,573 39,163 183,684 302,106
Other 17,042 8,565 51,494 33,806
--------- --------- --------- ---------
Total property-
liability insurance 2,013,736 2,161,377 6,371,675 6,750,560
--------- --------- --------- ---------
Life insurance 99,763 91,916 283,722 262,781
--------- --------- --------- ---------
Asset management-
investment banking 76,739 66,062 225,552 187,463
--------- --------- --------- ---------
Total reportable
segments 2,190,238 2,319,355 6,880,949 7,200,804
Parent company and
eliminations 21,019 4,935 31,316 18,839
--------- --------- --------- ---------
Total revenues $2,211,257 2,324,290 6,912,265 7,219,643
========= ========= ========= =========
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
Income (Loss) from Continuing
Operations Before Income Taxes (In thousands)
Property-liability
insurance:
Primary insurance
operations $(265,940) (52,540) (877,835) (202,003)
Reinsurance operations (21,199) 5,183 (5,120) 7,127
-------- -------- -------- --------
Total GAAP
underwriting result (287,139) (47,357) (882,955) (194,876)
Net investment income 322,094 328,360 984,987 985,694
Realized investment gains 6,573 39,163 183,684 302,106
Other (17,870) (35,661) (269,921) (80,424)
-------- -------- -------- --------
Total property-
liability insurance 23,658 284,505 15,795 1,012,500
-------- -------- -------- --------
Life insurance 22,430 20,041 7,484 45,329
-------- -------- -------- --------
Asset management-
investment banking:
Pretax income before
minority interest 33,889 30,605 98,416 88,665
Minority interest (8,017) (7,456) (23,834) (21,382)
-------- -------- -------- --------
Total asset
management-
investment banking 25,872 23,149 74,582 67,283
-------- -------- -------- --------
Total reportable
segments 71,960 327,695 97,861 1,125,112
Parent company and
eliminations (39,947) (53,144) (262,169) (150,398)
-------- -------- -------- --------
Total income (loss)
from continuing
operations before
income taxes $ 32,013 274,551 (164,308) 974,714
======== ======== ======== ========
The St. Paul recorded a $656 million pretax one-time charge in
the second quarter of 1998 resulting from its merger with USF&G
(See Note 8). The charge was recorded in the following captions
of the year-to-date information in the above table: $250 million
in the property-liability GAAP underwriting result; $196 million
in property-liability "other;" $23 million in property-liability
realized gains; $57 million in the life insurance segment; and
$130 million in "parent company and eliminations."
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 8 Merger with USF&G Corporation
- -------------------------------------
On April 24, 1998, The St. Paul issued 66,468,572 of its common
shares (as adjusted for the May 6, 1998 two-for-one stock split)
in exchange for all of the outstanding common stock of USF&G
Corporation, a holding company for property-liability and life
insurance operations. The transaction was valued at
approximately $3.7 billion, which included the assumption of
USF&G's debt and capital securities. This business combination
has been accounted for as a pooling-of-interests; accordingly,
the consolidated unaudited financial statements for periods prior
to the combination have been restated to include the accounts and
results of operations of USF&G Corporation.
Prior to the merger, USF&G discounted all of its workers'
compensation reserves to present value, whereas The St. Paul did
not discount any of its loss reserves. Subsequent to the merger,
The St. Paul and USF&G, on a combined basis, discount only
tabular workers' compensation reserves using an interest rate of
up to 3.5%. Since these reserves have an ultimate cost and
payment pattern that is fixed and determinable in accordance with
Staff Accounting Bulletin No. 62, "Discounting by Property-
Casualty Insurance Companies," The St. Paul has determined that
the discounting of such reserves is the preferable accounting
treatment.
The St. Paul recorded a one-time, pretax charge of $656 million
($458 million after-tax) in the second quarter of 1998, which
consisted of expenses resulting from the merger and other
nonrecurring charges. Through Sept. 30, 1998, The St. Paul had
made cash payments of $88 million related to the one-time charge.
Note 9 2-for-1 Common Stock Split
- ----------------------------------
The St. Paul's Restated Articles of Incorporation were amended
after the vote of shareholders at the 1998 Annual Meeting of
Shareholders on May 5, 1998, to increase the authorized common
shares of the company from 240 million to 480 million.
Subsequent to this action, The St. Paul's board of directors
approved a 2-for-1 common stock split. One additional share of
common stock for each outstanding share was issued on May 11,
1998, to shareholders of record on May 6, 1998.
Note 10 Discontinued Operations
- --------------------------------
In May 1997, The St. Paul completed the sale of its brokerage
operation, Minet, to Aon Corporation. The St. Paul's gross
proceeds from the sale were approximately equal to its remaining
carrying value of Minet. In connection with the transaction, The
St. Paul agreed to indemnify Aon against most preclosing
liabilities of the Minet businesses. The company recorded a net
after-tax loss on disposal of $67.8 million in the first quarter
of 1997, which resulted primarily from The St. Paul's agreement
to be responsible for certain severance, employee benefits,
future lease commitments and other costs relating to Minet.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 1998
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 St. Paul's pretax income from continuing operations of $32
million in the third quarter of 1998 fell significantly below
income of $275 million in the corresponding 1997 period. The St.
Paul's pretax loss from continuing operations of $164 million in
the first nine months of 1998 included a one-time, pretax charge
of $656 million ($458 million after-tax), which consisted of
expenses resulting from its merger with USF&G and other
nonrecurring charges. Excluding the one-time charge, nine-month
pretax earnings of $492 million were nearly $500 million behind
comparable 1997 earnings of $975 million. Earnings for the third
quarter and nine months of 1998 were negatively impacted by
severe catastrophe losses and deterioration in the core results
of several property-liability underwriting business centers.
The following table summarizes The St. Paul's results for the
third quarter and year-to-date.
Three Months Nine Months
Ended September 30 Ended September 30
(in millions) ------------------ ------------------
1998 1997 1998 1997
Pretax income (loss): ----- ----- ----- -----
Property-liability
insurance:
GAAP underwriting result $(287) (47) (883) (195)
Net investment income 322 328 985 986
Realized investment gains 7 39 184 302
Other (18) (35) (270) (80)
---- ---- ---- ----
Total property-
liability insurance 24 285 16 1,013
Life insurance 22 20 7 45
Asset management-
investment banking 26 23 75 67
Parent and other (40) (53) (262) (150)
---- ---- ---- ----
Income (loss) from
continuing operations
before income taxes 32 275 (164) 975
Income tax expense (benefit) (32) 60 (125) 234
---- ---- ---- ----
Income (loss) from
continuing operations 64 215 (39) 741
Loss from discontinued
operations, net of taxes - - - (67)
---- ---- ---- ----
Net income (loss) $64 215 (39) 674
==== ==== ==== ====
Diluted net income (loss)
per common share $0.25 0.85 (0.21) 2.68
==== ==== ==== ====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Revenues
- --------
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(in millions) 1998 1997 1998 1997
----- ----- ----- -----
Earned premiums $1,699 1,810 5,233 5,507
Net investment income 391 392 1,185 1,172
Realized investment gains 25 47 207 315
Asset management-
investment banking 76 62 223 181
Other 20 13 64 45
----- ----- ----- -----
Total revenues $2,211 2,324 6,912 7,220
===== ===== ===== =====
Premiums earned in The St. Paul's insurance operations for the
third quarter and first nine months of 1998 declined 6% and 5%,
respectively, compared with the same periods of 1997. The St.
Paul's General Commercial and Reinsurance operations, where
intensely competitive market conditions have negatively impacted
business volume and pricing, accounted for virtually all of the
third quarter and nine-month declines from 1997. Life insurance
premiums earned were $6 million ahead of the third quarter of
1997 and $3 million higher for the first nine months of the year.
Realized investment gains for the first nine months of 1998
declined from 1997; however, the 1997 total was unusually large
due to the sale of one venture capital investment which generated
a $129 million pretax gain. The increase in asset management-
investment banking revenues in 1998 reflects the impact of an
acquisition in September 1997.
One-time Charges
- ----------------
The $656 million one-time, pre-tax charge recorded in the second
quarter was composed of the following merger-related and other
nonrecurring components:
- $250 million of loss and loss adjustment expenses, to
reflect the application of The St. Paul's reserving
policies to USF&G's property-liability loss reserves;
- $176 million of severance and other employee-related
costs;
- $70 million of facilities exit costs, primarily relating
to lease buy-outs resulting from the anticipated
consolidation of branch office locations;
- $67 million writedown of certain USF&G investments and
other assets, including a writedown in the carrying value
of a portion of the former USF&G headquarters complex in
Baltimore, MD;
- $41 million writedown of deferred policy acquisition costs
of the life insurance operation (F&G Life) acquired in the
merger;
- $52 million of other costs, primarily composed of
transaction fees and other expenses resulting from the
merger.
These charges were recorded pursuant to management's plan to
integrate the operations of The St. Paul and USF&G. Through
Sept. 30, 1998, The St. Paul had made cash payments of $59
million for severance and other employee-related costs, and $29
million for other costs, primarily transaction fees.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance
----------------------------
The following summarizes key financial results by property-
liability underwriting operation. (Underwriting results are
presented on a GAAP basis; combined ratios are presented on a
statutory basis).
% of Three Months Nine Months
1998 Ended Sept. 30 Ended Sept. 30
Written -------------- ---------------
($ in millions) Premiums 1998 1997 1998 1997
-------- ----- ----- ----- -----
Specialized Commercial:
Written Premiums 35% $660 682 1,817 1,829
Underwriting Result ($80) 40 (249) 66
Combined Ratio 112.0 93.0 115.5 97.4
General Commercial
Written Premiums 22% $364 434 1,111 1,357
Underwriting Result ($109) (61) (384) (158)
Combined Ratio 128.4 114.4 134.1 112.7
Personal Insurance:
Written Premiums 21% $386 341 1,077 943
Underwriting Result ($55) (18) (193) (74)
Combined Ratio 116.1 104.8 118.7 106.8
----- ----- ----- ----- -----
Total U.S. Underwriting:
Written Premiums 78% $1,410 1,457 4,005 4,129
Underwriting Result ($244) (39) (826) (166)
Combined Ratio 117.5 102.4 121.5 104.7
International Underwriting:
Written Premiums 6% $78 81 289 229
Underwriting Result ($22) (14) (52) (36)
Combined Ratio 127.0 114.1 117.6 115.3
----- ----- ----- ----- -----
Total Primary Insurance
Operations:
Written Premiums 84% $1,488 1,538 4,294 4,358
Underwriting Result ($266) (53) (878) (202)
Combined Ratio 118.0 103.0 121.4 105.2
Reinsurance Operations:
Written Premiums 16% $239 288 833 968
Underwriting Result ($21) 6 (5) 7
Combined Ratio 108.1 97.8 99.4 97.6
---- ----- ----- ----- -----
Total Property-Liability
Underwriting:
Written Premiums 100% $1,727 1,826 5,127 5,326
Underwriting Result ($287) (47) (883) (195)
Combined Ratio:
Loss and Loss Expense Ratio 83.1 70.7 83.9 72.0
Underwriting Expense Ratio 33.6 31.5 34.1 31.8
----- ----- ----- -----
Combined Ratio 116.7 102.2 118.0 103.8
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Overview
- --------
The year-to-date data in the table on the preceding page
reflects the impact of the $250 million pretax provision for
losses and loss adjustment expenses recorded in the second
quarter to apply The St. Paul's reserving policies to USF&G's
loss reserves subsequent to the consummation of the merger. The
following table summarizes The St. Paul's consolidated "core"
GAAP underwriting results (excluding that one-time charge), and
the impact of catastrophe losses on core underwriting results.
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- ---------------
($ in millions) 1998 1997 1998 1997
----- ----- ----- -----
Core GAAP underwriting result ($287) (47) (633) (195)
Core statutory combined ratio 116.7 102.2 113.1 103.8
Pretax catastrophe losses $173 36 381 120
Impact on combined ratio 10.4 2.0 7.4 2.2
----- ----- ----- -----
Core results excluding
catastrophes:
GAAP underwriting result ($114) (11) (252) (75)
Statutory combined ratio 106.3 100.2 105.7 101.6
===== ===== ===== =====
Hurricane Georges, which struck the Caribbean region and the
Gulf Coast of the United States in September, accounted for $102
million of catastrophe losses in 1998's third quarter. The
remainder of third quarter losses primarily resulted from
several summer storms throughout the United States. Numerous
storms in several of The St. Paul's largest markets in the first
half of 1998 contributed to the nine-month catastrophe total of
$381 million. The deterioration in underwriting results
excluding catastrophes was largely due to intensely competitive
conditions in several market sectors, particularly the midsized
commercial segment, and accelerating loss costs in the Medical
Services business center.
The consolidated expense ratio of 33.6 for the third quarter
reflects the impact of declining written premium volume and an
increase in commission expenses resulting from efforts to retain
USF&G business during the integration of The St. Paul and USF&G
into one organization.
Underwriting Results by Operation
- ---------------------------------
All references to year-to-date results in the following
discussion focus on core segment results excluding the impact of
the $250 million one-time charge recorded in the second quarter
to increase USF&G's loss and loss adjustment expense reserves.
SPECIALIZED COMMERCIAL
This category includes The St. Paul's business centers which
serve specific commercial customer segments and provide
specialized products and services for targeted industry groups.
Written premiums totaled $660 million in the third quarter, down
3% from comparable 1997 premiums of $682 million. The St.
Paul's Medical Services operation recorded premiums of $174
million for the quarter, down 10% from last year's third quarter
total of $192 million. Competitive conditions in the medical
liability insurance market have negatively impacted pricing
levels and
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
new business opportunities in 1998. Medical Services' third
quarter and year-to-date underwriting losses of $38 million and
$91 million, respectively, reflect the impact of accelerating
loss costs and the poor pricing environment. However, The St.
Paul began implementing price increases on selected physicians
and surgeons' policy renewals in 1998, and intends to pursue
additional pricing actions in 1999.
For the remainder of Specialized Commercial, premium volume in
the third quarter and first nine months of 1998 was virtually
level with the same periods of 1997. Core underwriting results
for both periods, however, were significantly worse than 1997,
primarily due to deteriorating loss experience in several
operations, particularly the Construction business center.
Catastrophe losses were also a factor in Specialized
Commercial's results for the third quarter and nine months of
1998. The St. Paul's Surety underwriting operation, now the
largest in the United States as a result of the USF&G merger,
recorded a 21% increase in net premium volume and a $53 million
underwriting profit through the first nine months of 1998,
representing a 23% increase over the same 1997 period.
GENERAL COMMERCIAL
The St. Paul's General Commercial operation provides insurance
products and services for a broad range of small to midsized
commercial enterprises. Premium volume declined 16% for the
quarter and 18% for the first nine months of the year. Prices
continue to decline in this segment, particularly in the
commercial middle-market sector, reflecting the continuing
intense competition for business. In response to these
difficult conditions, The St. Paul intends to adhere to strict
underwriting standards with regard to new and renewal business
going forward, which may result in a reduction of up to $200
million in annual premium volume in this segment. The third
quarter core underwriting loss of $109 million, which included
$31 million of catastrophe losses, primarily resulted from a
general deterioration in noncatastrophe prior year loss
development across the book of business. On a year-to-date
basis, the core underwriting loss of $264 million was over $100
million worse than 1997, with catastrophe losses of $112 million
playing a large role in the deterioration. Catastrophe losses
in the first nine months of 1997 totaled $46 million.
PERSONAL INSURANCE
Personal Insurance provides property-liability insurance
products and services to individuals. Third quarter and year-to-
date written premium volume grew 13% and 14%, respectively, over
the same periods of 1997, primarily due to The St. Paul's
acquisition in December 1997 of Titan Holdings, Inc., a property-
liability company which has a substantial book of nonstandard
automobile business. Core underwriting results in the Personal
Insurance segment were severely impacted by catastrophe losses
of $60 million in the third quarter and $147 million for the
nine months. Numerous storms throughout the United States,
including two May storms in Minnesota which generated over
11,000 claims and nearly $50 million of losses, were the primary
contributors to this segment's catastrophe total through the
first nine months of 1998.
The nonstandard auto business center provides automobile
coverage for individuals who are unable to obtain standard
coverage due to their inability to meet certain underwriting
criteria. Premiums generated by this business center totaled
$191 million in the first nine months of 1998, compared with $57
million in the same period of 1997. The increase was primarily
the result of the acquisition of Titan Holdings, Inc.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
INTERNATIONAL
This operation provides commercial and personal property-
liability insurance products and services in selected
international markets. Premium volume for the third quarter of
1998 declined 4% compared to the same period of 1998, but year-
to-date premiums were 26% higher than the first nine months of
1997. New commercial business in Europe, and growth in business
generated through The St. Paul's involvement with Lloyd's of
London, were the primary factors contributing to the year-to-
date premium increase in 1998. The Emerging Markets sector of
the International segment also provided premium growth over
1997, due to new business in Botswana and South Africa.
Underwriting results for the third quarter and first nine months
of 1998 deteriorated from comparable 1997 results, primarily due
to severe ice storms in Canada during the first quarter and
adverse prior year development on Canadian loss reserves.
REINSURANCE
The St. Paul's Reinsurance segment consists of St. Paul Re, F&G
Re and Discover Re. St. Paul Re and F&G Re underwrite both
treaty and facultative reinsurance for property, liability,
ocean marine, surety and certain specialty classes of business.
Discover Re provides products and services to the alternative
risk transfer market, and provides products for self-insured
companies and insurance pools, as well as ceding to and
reinsuring captive insurers.
Written premiums of $239 million in the third quarter were down
17% from the same period of 1997. Premium volume of $833
million through the first nine months of 1998 declined 14% from
the first nine months of 1997. The significant declines in 1998
reflect soft global market conditions for this segment,
resulting from excess capacity in primary reinsurance markets.
The Reinsurance segment recorded a $21 million underwriting loss
in the third quarter, compared with a profit of $6 million in
1997's third quarter. Third quarter catastrophe losses in this
segment totaled $53 million, virtually all of which resulted
from Hurricane Georges. Catastrophe losses in last year's third
quarter were negligible. The year-to-date underwriting loss of
$5 million in 1998 includes a catastrophe impact of $58 million.
Investment Operations
- ---------------------
Third quarter pretax investment income of $322 million in The
St. Paul's property-liability operations declined 2% from the
same period of 1997. Year-to-date income of $985 million was
virtually level with 1997. A 4% decline in written premiums and
4% increase in insurance losses paid through the first nine
months of 1998 have resulted in a significant decline in new
funds available for investment. In addition, market yields on
new investments have continued to decline in 1998. As a result,
The St. Paul does not anticipate investment income growth for
the remainder of 1998.
The fixed maturities portfolio on Sept. 30, 1998 of $18.0
billion included $1.1 billion of pretax unrealized appreciation.
Approximately 95% of those investments were rated at investment
grade (BBB or above). The weighted average pretax yield on the
fixed maturities portfolio was 6.8% at September 30, 1998.
Pretax realized investment gains totaled $7 million in the third
quarter, compared with gains of $39 million in last year's third
quarter. Year-to-date pretax gains in 1998 of $184 million were
down from last year's nine-month gains of $302 million. Sales
of equity security investments accounted for the majority of
1998's gains. The sale of a single venture capital investment
generated a pretax gain of $129 million in 1997.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Environmental and Asbestos Claims
---------------------------------
The St. Paul's property-liability underwriting operations
continue to receive claims alleging injuries from environmental
pollution or alleging covered property damages for the cost to
clean up polluted sites. The St. Paul also receives asbestos
injury claims arising out of product liability coverages under
general liability policies. The vast majority of these claims
arise from policies written many years ago. 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 the original policies.
The St. Paul's ultimate liability for environmental claims is
difficult to estimate because of these issues. Insured parties
have submitted claims for losses not covered in the insurance
policy, 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.
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
claims experience, both of which are still developing.
The following table represents a reconciliation of total gross
and net environmental reserve development for the nine months
ended September 30, 1998 (unaudited), and the years ended Dec.
31, 1997 and 1996. Amounts in the "net" column are reduced by
reinsurance recoverables.
Environmental 1998
- ------------- (nine months) 1997 1996
----------- ------ ------
(in millions) Gross Net Gross Net Gross Net
----- ---- ----- --- ----- ---
Beginning reserves $867 677 889 676 840 631
Reserves acquired - - - - 18 7
Incurred losses 23 25 44 58 87 92
Paid losses (53) (45) (66) (57) (56) (54)
--- --- --- --- --- ---
Ending reserves $837 657 867 677 889 676
=== === === === === ===
Many significant environmental claims currently being brought
against insurance companies arise out of contamination that
occurred 25 to 35 years ago. Since 1970, The St. Paul's
commercial general liability policy form has included a specific
pollution exclusion, and, since 1986, an industry standard
absolute pollution exclusion for policies underwritten in the
United States.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
The following table represents a reconciliation of total gross
and net reserve development for asbestos claims for the nine
months ended September 30, 1998 (unaudited), and the years ended
Dec. 31, 1997 and 1996:
Asbestos 1998
- -------- (nine months) 1997 1996
----------- ------ ------
(in millions) Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Beginning reserves $397 279 413 304 421 294
Reserves acquired - - - - 6 6
Incurred losses 29 10 22 (5) 18 25
Paid losses (27) (8) (38) (20) (32) (21)
--- --- --- --- --- ---
Ending reserves $399 281 397 279 413 304
=== === === === === ===
Most of the asbestos claims the company has received pertain to
policies written prior to 1986. Since 1986, for policies
underwritten in the United States, The St. Paul's commercial
general liability policy has included the industry standard
absolute pollution exclusion, which the company believes applies
to asbestos claims.
The St. Paul's reserves for environmental and asbestos losses at
September 30, 1998 represent its best estimate of its ultimate
liability for such losses, based on all information currently
available. Because of the difficulty inherent in estimating
such losses, however, the company 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 its results of
operations, liquidity or financial position.
Total gross environmental and asbestos reserves at September 30,
1998 of $1.24 billion represented approximately 7% of gross
consolidated property-liability reserves of $18.65 billion.
Life Insurance
--------------
The St. Paul's life insurance segment is comprised of Fidelity
and Guaranty Life Insurance Company and subsidiaries ("F&G
Life"), acquired in the USF&G merger. F&G Life underwrites
traditional life insurance and annuities, which are sold
throughout the United States through independent agents,
managing general agents and specialty brokerage firms.
F&G Life recorded a nonrecurring $41 million pretax charge in
the second quarter of 1998, representing a writedown of deferred
policy acquisition costs. The current low interest rate
environment prompted a reassessment of assumptions related to
future net investment spreads, premium persistency and
annuitization rates, primarily related to single premium
deferred annuities and tax sheltered annuities. In addition,
F&G Life recorded a pretax one-time charge of $16 million as a
result of the merger in the second quarter, primarily relating
to severance, investment writedowns and facilities exit costs.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Highlights of F&G Life's financial performance for the third
quarter and nine months of 1998 and 1997 were as follows (year-
to-date core earnings exclude the impact of the $57 million one-
time charges):
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
(in millions) 1998 1997 1998 1997
---- ---- ---- ----
Sales (annualized premiums) $131 109 282 344
Premiums earned $31 25 81 78
Policy surrenders $48 44 162 125
Net investment income $66 64 198 185
Core pretax earnings
(including realized gains) $22 20 64 45
The increase in sales for the third quarter was driven by sales
of a new equity indexed annuity product introduced in June 1998.
Credited interest rates on this product are tied to the
performance of the S&P 500 index. The overall decline in sales
through the first nine months of 1998 was primarily due to the
significantly lower level of interest rates and its negative
impact on fixed interest rate annuities. Fluctuating interest
rates and the relative attractiveness of alternative investment,
annuity or insurance products affect the demand for annuity
products.
The increase in premiums earned in the third quarter of 1998 was
largely due to an increase in sales of structured settlement
annuities, which are sold primarily to property-liability
insurers to settle insurance claims. Expansion of the
structured settlement program into The St. Paul's claim
organization is expected to result in a continued increase in
sales.
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 increased
in 1998 due to an increase in the size and maturity of the
annuity book of business and from competition from alternative
investments, primarily equity-based products.
Net investment income grew in 1998 as a result of an increasing
asset base generated by positive cash flow. Core pretax earnings
for the third quarter and first nine months of 1998 were higher
than the same periods of 1997 due to improved investment spread
management on annuity and universal life products and strong
expense controls.
Total life insurance in force at September 30, 1998 was $10.69
billion, compared with $10.62 billion at September 30, 1997.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Asset Management-Investment Banking
-----------------------------------
The St. Paul's portion of The John Nuveen Company's third
quarter 1998 pretax earnings was $26 million, $3 million higher
than the same period of 1997. For the first nine months of
1998, the company's portion of such earnings was $75 million,
compared with $67 million for the first nine months of 1997. At
September 30, 1998, The St. Paul owned 78% of Nuveen.
Nuveen's asset management fee revenue of $69 million for the
third quarter was $13 million, or 22%, higher than in the same
period of 1997. The increase was primarily due to Nuveen's
acquisition of Rittenhouse Financial Services, Inc., which
manages individual equity and balanced accounts for affluent
investors, in September 1997. Year-to-date management fee
revenues totaled $201 million in 1998, compared with $158
million through the first nine months of 1997.
Nuveen's assets under management grew to $52.5 billion at Sept.
30, 1998, an increase of 6% since year-end 1997.
Capital Resources
-----------------
The St. Paul's capitalization (debt, redeemable preferred
securities and equity) stood at $8.21 billion at Sept. 30, 1998,
down 2% from the year-end 1997 total of $8.41 billion. Common
shareholders' equity at the end of the third quarter was
virtually level with year-end 1997.
Total debt outstanding at the end of September was $1.10
billion, a decline of $206 million, or 16%, from the Dec. 31,
1997 total of $1.30 billion. The reduction was driven by the
maturity of $145 million of 7% senior notes in May 1998, which
was funded with a combination of internal funds and the issuance
of commercial paper. In addition, Nuveen's short-term debt
outstanding declined by $78 million from year-end 1997. Medium-
term notes with varying maturities accounted for 46% of The St.
Paul's debt outstanding at Sept. 30, 1998. These notes bear a
weighted-average interest rate of 7.0%. Commercial paper
comprised 21% of The St. Paul's total debt at the end of the
third quarter. Debt (excluding capital securities) as a
percentage of total capitalization at Sept. 30, 1998, was 13%,
down from 15% at year-end 1997. Including capital securities as
a component of debt, the ratios were 19% at Sept. 30, 1998 and
21% at year-end 1997.
The merger with USF&G Corporation consummated on April 24, 1998
was a tax-free exchange of stock accounted for as a pooling-of-
interests. The St. Paul issued 66.5 million shares of its
common stock in exchange for all of the outstanding common stock
of USF&G. The transaction was valued at approximately $3.7
billion, which included the assumption of USF&G's debt and
capital securities.
On November 3, 1998, The St. Paul's board of directors
authorized the company to repurchase up to $500 million of its
common stock in the open market or through private transactions.
The repurchases will be primarily financed through the issuance
of debt securities. Through November 12, 1998, The St. Paul had
repurchased 1.6 million shares for a total cost of $57 million
under this program.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
The St. Paul's year-to-date pretax loss from continuing
operations was inadequate to cover "fixed charges" by $164
million and "combined fixed charges and preferred stock
dividends" by $205 million. For the first nine months of 1997,
The St. Paul's ratio of earnings to fixed charges was 11.98, and
the ratio of earnings to combined fixed charges and preferred
stock dividends was 8.46. Fixed charges consist of interest
expense before reduction for capitalized interest and one-third
of rental expense, which is considered to be representative of
an interest factor.
Liquidity
---------
Liquidity refers to The St. Paul's ability to generate
sufficient funds to meet the cash requirements of its business
operations. Net cash provided by operations was $123 million in
the first nine months of 1998, compared with $672 million for
the same period of 1997. The significant decline in operational
cash flows compared with 1997 resulted from an increase in
insurance loss payments due to deteriorating loss experience and
severe catastrophes, a decline in property-liability written
premiums, and expenses paid relating to the merger with USF&G.
Despite the decline in operational cash flows in 1998, The St.
Paul's ability to meet its short-term and long-term liquidity
requirements remains intact due to the high level of readily
marketable investment securities in its portfolio which generate
strong levels of investment income, and the prospects for future
profitable growth.
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
potential 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 has 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.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
State of Readiness
- ------------------
Since the late 1980's, The St. Paul has required that all of the
internal computer systems supported by The St. Paul's
Information Systems Division ("ISD") use a four-digit date
field. Early implementation of this design standard has limited
the number of systems requiring remediation.
A Review Board was established by The St. Paul in the third
quarter of 1997 to review and certify the remediation of the
hundreds of internally developed and externally sourced systems
used by the Company through rigorous testing. To coordinate the
Year 2000 remediation efforts, The St. Paul has created the Year
2000 Project Office, which is responsible for the oversight,
coordination and monitoring of the Company's Year 2000 efforts
including, among other things, reviewing the compliance status
of the Company's information systems in all operating units and
subsidiaries, both foreign and domestic, directing the Year 2000
coordinators assigned to the Company's 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.
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 is scheduled to be achieved
by December 31, 1998. Compliance validation of all such systems
is scheduled to be completed by March 31, 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 such systems to ensure that
such 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 expects 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 The St. Paul 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.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Nuveen Systems
- --------------
Having started the development and implementation of internal
four-digit date code software and system standards in the early
1980's, 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 of third-party hardware and software systems used in
processing at Nuveen is expected to be complete by the end of
the first 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 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 by the Company, including USF&G prior to the
merger, totaled approximately $6 million. The St. Paul expects
such costs to be approximately $12 million in 1998, and
approximately $5 million in 1999.
Contingency Planning
- --------------------
The Year 2000 Project Office's contingency planning team is
currently developing a master contingency plan comprised of
seven matrices, each matrix covering one of seven identified
core sectors, setting potential risk exposure against three
possible disruption duration scenarios. For each sector of
activity and duration of disruption, the plan will provide an
alternative work-around designed to permit continued operations
and to minimize risk exposure. The overall plan is scheduled to
be complete by March 31, 1999. The plan template and design
model for each matrix will be distributed to all field office
locations upon completion in order to permit the construction of
plans specific to each office's operations.
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 being
developed by The St. Paul will provide work-arounds 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.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
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
expects 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 Company 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 offer
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 The St. Paul 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.
Insurance Coverage
- ------------------
The St. Paul also faces potential "Year 2000" claims under
coverages provided by its reinsurance and insurance 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 Company 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.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
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 The St. Paul's 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 December 1997, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) No. 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-
Related Assessments." The SOP provides guidance for determining
when a liability should be recognized for guaranty fund and
other insurance-related assessments and on the measurement of
that liability. It also provides guidance on when an asset
should be recognized for a portion or all of the liability or
paid assessment that can be recovered through premium tax
offsets of policy surcharges. The SOP is effective for fiscal
years beginning after December 31, 1998. The St. Paul currently
intends to adopt the provisions of the SOP in the first quarter
of 1999. The cumulative effect of adopting the SOP may be
material to The St. Paul's results of operations in the period
it is adopted; however, The St. Paul cannot at this time
reasonably estimate the amount of that cumulative effect.
In February 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which standardizes the disclosure
requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on
changes in benefits obligations and fair values of plan assets,
and eliminates certain disclosures currently required. SFAS No.
132 is effective for fiscal years beginning after December 15,
1997. The St. Paul will adopt the provisions of SFAS No. 132
for its 1998 annual financial statements. This adoption is not
expected to materially change The St. Paul's current pension and
postretirement disclosures, and will have no impact on net
income in 1998 and succeeding years.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for
Internal Use," which provides guidance for determining when
computer software developed or obtained for internal use should
be capitalized. It also provides guidance on the amortization
of capitalized costs and the recognition of impairment. The SOP
is effective for fiscal years beginning after December 31, 1998.
The St. Paul intends to adopt the provisions of the SOP in the
first quarter of 1999. The St. Paul believes the effect of
adopting this SOP will not be material to its results of
operations or financial position.
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 currently 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
interest rates. The St. Paul cannot at this time reasonably
estimate the potential impact of this adoption on its financial
position or results of operations for future periods.
Forward-looking Statement Disclosure
------------------------------------
This report contains certain forward-looking statements within
the meaning of the Private Litigation Reform Act of 1995.
Forward-looking statements are statements other than historical
information or statements of current condition. Words such as
expects, anticipates, intends, plans, believes, seeks or
estimates, or variations of such words, and similar expressions
are also intended to identify forward-looking statements.
Examples of these forward-looking statements include statements
concerning the effects of competition on premiums and revenues,
expectations regarding 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 reinsurance or insurance; 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 systems faults, the
failure to successfully remediate material systems of The St.
Paul, the time 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 its
reinsurance or the insurance coverage provided by The St. Paul's
policies. The St. Paul undertakes no obligation to release
publicly the results of any future revisions it may make to
forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of
unanticipated events.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note 5 to the consolidated
financial statements is incorporated herein by
reference.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. An Exhibit Index is set forth as the
last page in this document.
(b) Reports on Form 8-K.
1) The St. Paul filed a Form 8-K Current
Report dated July 8, 1998, relating to the
anticipated total of approximately $155
million in pretax catastrophe losses for the
second quarter of 1998.
2) The St. Paul filed a Form 8-K Current
Report dated August 3, 1998, relating to the
announcement of its financial results for
the quarter ended June 30, 1998.
3) The St. Paul filed a Form 8-K Current
Report dated August 20, 1998, relating to
the announcement of several changes in its
senior management.
4) The St. Paul filed a Form 8-K Current
Report dated October 6, 1998, containing
audited financial statements and related
notes for The St. Paul and USF&G on a
combined basis as of December 31, 1997 and
1996, and for the years ended December 31,
1997, 1996 and 1995.
5) The St. Paul filed a Form 8-K Current
Report dated October 12, 1998, relating to
the announcement of the anticipated total of
approximately $175 million in pretax
catastrophe losses for the third quarter of
1998, and the anticipated impact of
difficult market conditions on its results
for the third and fourth quarters of 1998.
6) The St. Paul filed a Form 8-K Current
Report dated November 3, 1998, relating to
the announcement of its financial results
for the quarter ended September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE ST. PAUL COMPANIES, INC.
(Registrant)
Date: November 16, 1998 By /s/ Bruce A. Backberg
---------------------
Bruce A. Backberg
Senior Vice President
and Chief Legal Counsel
(Authorized Signatory)
Date: November 16, 1998 By /s/ Thomas A. Bradley
---------------------
Thomas A. Bradley
Senior Vice President
and Corporate Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
-------------
Method of
Exhibit Filing
- ------- ---------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession*.....................................
(3) Articles of incorporation and by-laws*..........................
(4) Instruments defining the rights of security holders,
including indentures*........................................
(10) Material contracts*.............................................
(11) Statement re computation of per share earnings**................ (1)
(12) Statement re computation of ratios**............................ (1)
(15) Letter re unaudited interim financial information*..............
(18) Letter re change in accounting principles*......................
(19) Report furnished to security holders*...........................
(22) Published report regarding matters submitted to
vote of security holders*....................................
(23) Consents of experts and counsel*................................
(24) Power of attorney*..............................................
(27) Financial data schedule**....................................... (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 Legal Services,
The St. Paul Companies, 385 Washington Street, Saint Paul, MN
55102.
(1) Filed electronically herewith.
<PAGE>
Exhibit 11
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Share
(In thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
----- ----- ----- -----
EARNINGS:
Basic:
Net income (loss), as reported $63,802 215,172 (38,801) 673,532
Dividends on preferred
stock, net of taxes (2,126) (2,163) (6,395) (8,175)
Premium on preferred
shares redeemed (820) (1,523) (3,025) (2,434)
------- ------- ------- -------
Net income (loss) available
to common shares $60,856 211,486 (48,221) 662,923
======= ======= ======= =======
Diluted:
Net income (loss), as reported $63,802 215,172 (38,801) 673,532
Dividends on preferred
stock, net of taxes - - (6,395) (1,659)
Premium on preferred
shares redeemed (820) (1,523) (3,025) (2,434)
Dividends on convertible monthly
income preferred securities,
net of taxes 2,018 2,018 - 6,055
Additional PSOP expense due to
assumed conversion of
preferred stock, net of taxes (564) (659) - (1,995)
Interest expense on zero
coupon bonds, net of taxes 826 796 - 2,338
------- ------- ------- -------
Net income (loss) available
to common shares $65,262 215,804 (48,221) 675,837
======= ======= ======= =======
SHARES:
Basic:
Weighted average common
shares outstanding 236,244 229,885 235,214 230,101
======= ======= ======= =======
Diluted:
Weighted average common
shares outstanding 236,244 229,885 235,214 230,101
Additional dilutive effect of:
Assumed conversion of
preferred stock 7,530 7,760 - 7,818
Assumed conversion of
monthly income preferred
securities 7,017 7,017 - 7,017
Assumed conversion of
zero coupon bonds 2,914 2,923 - 2,923
Assumed exercise of stock
options outstanding 2,822 4,838 - 4,627
------- ------- ------- -------
Weighted average, as adjusted 256,527 252,423 235,214 252,486
======= ======= ======= =======
EARNINGS (LOSS) PER COMMON
SHARE:
Basic $0.26 0.92 (0.21) 2.88
Diluted $0.25 0.85 (0.21) 2.68
Diluted earnings per share is the same as Basic earnings per
share for the nine months ended Sept. 30, 1998 because Diluted
earnings per share calculated in accordance with SFAS No. 128 for
The St. Paul's loss from continuing operations results in anti-
dilution.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Exhibit 12
Computation of Ratios
(In thousands, except ratios)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
EARNINGS:
Income (loss) before income taxes $32,013 274,551 (164,308) 974,714
Add: fixed charges 25,061 29,743 80,645 88,783
------- ------- ------- ---------
Income (loss), as adjusted $57,074 304,294 (83,663) 1,063,497
======= ======= ======= =========
FIXED CHARGES:
Interest costs $18,994 22,228 58,627 65,697
Rental expense (1) 6,067 7,515 22,018 23,086
------- ------- ------- -------
Total fixed charges $25,061 29,743 80,645 88,783
======= ======= ======= =======
FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS:
Fixed charges $25,061 29,743 80,645 88,783
PSOP preferred stock dividends 4,225 4,352 12,771 13,168
Dividends on redeemable
preferred securities 9,356 9,332 28,207 23,818
------- ------- ------- -------
Total fixed charges and
preferred stock dividends $38,642 43,427 121,623 125,769
======= ======= ======= =======
Ratio of earnings to
fixed charges (2) 2.28 10.23 - 11.98
======= ======= ======= =======
Ratio of earnings to combined
fixed charges and preferred
stock dividends (2) 1.48 7.01 - 8.46
======= ======= ======= =======
(1) Interest portion deemed implicit in total rent expense. Excludes
one-time charge for future lease buy-outs recorded in the second
quarter of 1998 as a result of The St. Paul's merger with USF&G
Corporation.
(2) The year-to-date 1998 loss is inadequate to cover "fixed charges"
by $164.3 million and "combined fixed charges and preferred stock
dividends" by $205.3 million.
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<DEBT-HELD-FOR-SALE> 21,149,340 20,773,959
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 1,064,029 1,061,405
<MORTGAGE> 674,125 581,980
<REAL-ESTATE> 933,467 1,135,320
<TOTAL-INVEST> 26,225,083 25,220,389
<CASH> 129,391 104,273
<RECOVER-REINSURE> 127,804 53,473
<DEFERRED-ACQUISITION> 876,151 867,594
<TOTAL-ASSETS> 37,504,363 36,240,470
<POLICY-LOSSES> 22,612,887 21,795,267
<UNEARNED-PREMIUMS> 3,411,620 3,613,921
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 1,097,742 1,267,421
502,700 502,700
16,917 18,408
<COMMON> 2,142,667 1,931,238
<OTHER-SE> 4,449,531 4,268,354
<TOTAL-LIABILITY-AND-EQUITY> 37,504,363 36,240,470
5,232,511 5,507,374
<INVESTMENT-INCOME> 1,185,148 1,172,493
<INVESTMENT-GAINS> 207,343 314,951
<OTHER-INCOME> 287,263 224,825
<BENEFITS> 4,508,488 4,087,872
<UNDERWRITING-AMORTIZATION> 1,243,928 1,297,232
<UNDERWRITING-OTHER> 1,324,157 859,825
<INCOME-PRETAX> (164,308) 974,714
<INCOME-TAX> (125,501) 233,432
<INCOME-CONTINUING> (38,801) 741,282
<DISCONTINUED> 0 (67,750)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (38,801) 673,532
<EPS-PRIMARY> (0.21) 2.88
<EPS-DILUTED> (0.21) 2.68
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
