<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 June 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 August 10, 1998, was 236,102,543.
<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 Six Months Ended June 30, 1998 and 1997 3
Consolidated Balance Sheets (Unaudited),
June 30, 1998 and December 31, 1997 4
Consolidated Statements of Shareholders' Equity
(Unaudited), Six Months Ended June 30, 1998 and
Twelve Months Ended December 31, 1997 6
Consolidated Statements of Comprehensive Income
(Unaudited), Six Months Ended June 30, 1998
and 1997 7
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 1998 and 1997 8
Notes to Consolidated Financial Statements (Unaudited) 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
PART II. OTHER INFORMATION
Item 1 through Item 6 30
Signatures 31
EXHIBIT INDEX 32
<PAGE>
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Unaudited
(In thousands)
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
------- ------- ------ ------
Revenues:
Premiums earned $1,752,167 1,856,347 3,533,724 3,696,972
Net investment income 397,656 390,331 794,547 780,411
Realized investment gains 132,667 171,384 182,508 267,473
Asset management-
investment banking 74,919 59,755 146,321 118,360
Other 19,407 15,285 43,908 32,137
--------- --------- --------- ---------
Total revenues 2,376,816 2,493,102 4,701,008 4,895,353
--------- --------- --------- ---------
Expenses:
Insurance losses and loss
adjustment expenses 1,662,018 1,321,084 2,933,872 2,647,041
Life policy benefits 61,994 62,348 121,631 121,636
Policy acquisition expenses 416,998 443,241 850,116 869,870
Operating and administrative 682,454 275,509 991,710 556,643
--------- --------- --------- ---------
Total expenses 2,823,464 2,102,182 4,897,329 4,195,190
--------- --------- --------- ---------
Income (loss) from
continuing operations
before income taxes (446,648) 390,920 (196,321) 700,163
Income tax expense (benefit) (149,367) 101,978 (93,718) 174,053
--------- --------- --------- ---------
Income (loss) from
continuing operations (297,281) 288,942 (102,603) 526,110
Loss on disposal of
discontinued operations,
net of taxes - - - (67,750)
--------- --------- --------- ---------
Net income (loss) ($297,281) 288,942 (102,603) 458,360
========= ========= ========= =========
Basic earnings (loss) per
common share:
Income (loss) from
continuing operations ($1.28) 1.25 (0.46) 2.26
Loss from discontinued
operations - - - (0.30)
--------- --------- --------- ---------
Net income (loss) ($1.28) 1.25 (0.46) 1.96
========= ========= ========= =========
Diluted earnings (loss) per
common share:
Income (loss) from
continuing operations ($1.28) 1.15 (0.46) 2.09
Loss from discontinued
operations - - - (0.27)
--------- --------- --------- ---------
Net income (loss) ($1.28) 1.15 (0.46) 1.82
========= ========= ========= =========
Dividends declared on
common stock $ 0.25 0.235 0.50 0.47
========= ========= ========= =========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Unaudited
(In thousands)
June 30, December 31,
ASSETS 1998 1997
- ------ ---------- ----------
Investments:
Fixed maturities, at estimated market value $20,843,281 20,945,219
Equities, at estimated market value 1,146,784 1,052,370
Real estate, at cost less accumulated
depreciation of $100,985 (1997; $93,015) 915,659 985,317
Mortgage loans, at cost 702,035 640,734
Venture capital, at estimated market value 491,817 461,892
Other investments 932,599 923,933
Short-term investments, at cost 974,492 970,568
---------- ----------
Total investments 26,006,667 25,980,033
Cash 129,107 113,175
Investment banking inventory securities 43,602 130,203
Reinsurance recoverables:
Unpaid losses 4,043,507 3,839,051
Paid losses 126,515 128,422
Ceded unearned premiums 343,115 376,343
Receivables:
Underwriting premiums 2,276,459 2,213,926
Interest and dividends 345,512 355,970
Other 137,761 104,727
Deferred policy acquisition expenses 837,490 872,460
Deferred income taxes 1,216,008 1,213,790
Office properties and equipment, at cost
less accumulated depreciation
of $397,536 (1997; $369,414) 532,890 602,381
Goodwill 599,428 618,528
Other assets 810,131 809,819
---------- ----------
Total assets $37,448,192 37,358,828
========== ==========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
Unaudited
(In thousands)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- ------------------------------------ ----------- -----------
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $18,646,485 18,153,080
Future policy benefits 3,876,671 3,816,050
Unearned premiums 3,392,302 3,528,234
---------- ----------
Total insurance reserves 25,915,458 25,497,364
Debt 1,075,895 1,304,008
Payables:
Income taxes 224,717 303,549
Reinsurance premiums 305,611 258,495
Accrued expenses and other 1,481,548 1,327,549
Other liabilities 1,453,391 1,556,995
---------- ----------
Total liabilities 30,456,620 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; 945 shares
outstanding (956 shares in 1997) 136,320 137,892
Guaranteed obligation - PSOP (121,167) (121,167)
---------- ----------
Total preferred shareholders' equity 15,153 16,725
---------- ----------
Common:
Common stock, 480,000 shares authorized;
235,848 shares outstanding
(233,130 shares in 1997) 2,120,746 2,057,108
Retained earnings 3,509,146 3,720,140
Guaranteed obligation - ESOP - (8,453)
Accumulated other comprehensive income:
Unrealized appreciation 866,335 845,811
Unrealized loss on foreign currency translation (22,508) (23,163)
---------- ----------
Total accumulated other comprehensive income 843,827 822,648
---------- ----------
Total common shareholders' equity 6,473,719 6,591,443
---------- ----------
Total shareholders' equity 6,488,872 6,608,168
---------- ----------
Total liabilities, redeemable preferred
securities and shareholders' equity $37,448,192 37,358,828
========== ==========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Unaudited
(In thousands)
Six Twelve
Months Ended Months Ended
June 30, December 31,
1998 1997
------------ ------------
Preferred shareholders' equity:
Series B convertible preferred stock:
Beginning of period $137,892 142,131
Redemptions during period (1,572) (4,239)
---------- ----------
End of period 136,320 137,892
---------- ----------
Guaranteed obligation - PSOP:
Beginning of period (121,167) (126,068)
Principal payments - 4,901
---------- ----------
End of period (121,167) (121,167)
---------- ----------
Total preferred shareholders' equity 15,153 16,725
---------- ----------
Common shareholders' equity:
Common stock:
Beginning of period 2,057,108 1,895,608
Stock issued under stock incentive plans 44,110 32,421
Stock issued for preferred shares redeemed 3,777 8,708
Stock issued for acquisitions - 113,264
Reacquired common shares - (13,892)
Other 15,751 20,999
---------- ----------
End of period 2,120,746 2,057,108
---------- ----------
Retained earnings:
Beginning of period 3,720,140 3,097,261
Net income (loss) (102,603) 929,292
Dividends declared on common stock (108,972) (186,036)
Dividends declared on preferred stock,
net of taxes (4,269) (10,304)
Reacquired common shares - (114,232)
Premium on preferred shares
converted or redeemed (2,205) (4,052)
Other changes during period 7,055 8,211
---------- ----------
End of period 3,509,146 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 20,524 166,430
---------- ----------
End of period 866,335 845,811
---------- ----------
Unrealized loss on foreign currency
translation, net of taxes:
Beginning of period (23,163) (20,500)
Currency translation adjustments 655 (2,663)
---------- ----------
End of period (22,508) (23,163)
---------- ----------
Total common shareholders' equity 6,473,719 6,591,443
---------- ----------
Total shareholders' equity $6,488,872 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 Six Months Ended
June 30 June 30
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
(In thousands)
Net income (loss), $(297,281) 288,942 (102,603) 458,360
------- ------- ------- -------
Other comprehensive income,
net of taxes:
Change in unrealized appreciation (27,881) 198,086 20,524 (113,420)
Change in unrealized loss on
foreign currency translation (4,197) (1,037) 655 5,299
------- ------- ------- -------
Other comprehensive income (32,078) 197,049 21,179 (108,121)
------- ------- ------- -------
Comprehensive income (loss) $(329,359) 485,991 (81,424) 350,239
======= ======= ======= =======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Six Months Ended
June 30
---------------------
1998 1997
---- ----
OPERATING ACTIVITIES
Net income (loss) ($102,603) 458,360
Adjustments:
Change in net property-liability
insurance reserves 219,047 (60,548)
Change in insurance premiums receivable (58,182) (62,697)
Change in asset management balances (3,122) 63,063
Realized investment gains (182,508) (267,473)
Provision for loss on disposal
of discontinued operations - 67,750
Other 108,651 61,049
--------- ---------
Net Cash Provided by
(Used in) Operating Activities (18,717) 259,504
--------- ---------
Cash outflow resulting from
sale of discontinued operations (13,772) (20,284)
--------- ---------
INVESTING ACTIVITIES
Purchase of investments (2,288,072) (2,887,202)
Proceeds from sales and
maturities of investments 2,433,067 2,757,640
Change in short-term investments 16,274 (31,580)
Change in open security transactions 100,849 76,430
Net purchases of office
properties and equipment (51,553) (70,691)
Other 22,175 (12,878)
--------- ----------
Net Cash Provided by
(Used in) Investing Activities 232,740 (168,281)
--------- ----------
FINANCING ACTIVITIES
Net deposits for universal life
and investment contracts 49,805 156,007
Dividends paid on common and preferred stock (102,887) (102,734)
Proceeds from issuance of debt 36,190 182,186
Repayment of debt (193,827) (103,155)
Redemption of preferred shares - (199,981)
Repurchase of common shares - (102,004)
Proceeds from issuance of company-obligated
mandatorily redeemable preferred
securities of subsidiaries - 98,871
Stock options exercised and other 26,400 18,471
--------- ---------
Net Cash Used in Financing Activities (184,319) (52,339)
--------- ---------
Effect of exchange rate changes on cash - 44
--------- ---------
Increase in cash 15,932 18,644
Cash at beginning of period 113,175 109,855
--------- ---------
Cash at end of period $129,107 128,499
========= =========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
June 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 unaudited 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. The accounting policies employed by The
St. Paul and USF&G prior to the merger were consistent in all
respects except for the method of accounting for certain workers'
compensation loss reserves. See Note 8 on pages 16 and 17 of
this report for further information about the adjustment recorded
to conform the accounting policies of The St. Paul and USF&G with
regard to these reserves.
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).
In the third quarter of 1998, The St. Paul intends to file with
the Securities and Exchange Commission audited financial
statements reflecting the combined accounts and results of
operations of The St. Paul and USF&G as of Dec. 31, 1997 and
1996, and for the years ended Dec. 31, 1997, 1996 and 1995.
<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 Six Months Ended
June 30 June 30
------------------- ----------------
1998 1997 1998 1997
------ ------ ----- ------
(In thousands)
BASIC
Net income (loss), as reported ($297,281) 288,942 (102,603) 458,360
Dividends on preferred stock,
net of taxes (2,120) (2,168) (4,269) (6,012)
Premium on preferred
shares redeemed (1,361) (651) (2,205) (911)
-------- -------- -------- --------
Net income (loss)
available to common shares ($300,762) 286,123 (109,077) 451,437
======== ======== ======== ========
DILUTED
Net income (loss), as reported ($297,281) 288,942 (102,603) 458,360
Dividends on preferred stock,
net of taxes (2,120) - (4,269) (1,659)
Premium on preferred
shares redeemed (1,361) (651) (2,205) (911)
Dividends on convertible monthly
income preferred securities,
net of taxes - 2,019 - 4,037
Additional PSOP expense due
to assumed conversion of
preferred stock, net of taxes - (666) - (1,336)
Interest expense on zero
coupon bonds,net of taxes - 779 - 1,542
-------- -------- -------- --------
Net income (loss), as adjusted ($300,762) 290,423 (109,077) 460,033
======== ======== ======== ========
AVERAGE COMMON
SHARES OUTSTANDING
Basic 235,160 229,611 234,670 230,211
======== ======== ======== ========
Diluted 235,160 252,362 234,670 252,701
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE
Basic ($1.28) 1.25 (0.46) 1.96
======== ======== ======== ========
Diluted ($1.28) 1.15 (0.46) 1.82
======== ======== ======== ========
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Diluted EPS is the same as Basic EPS for both periods of 1998
because Diluted EPS calculated in accordance with Statement of
Financial Standards (SFAS) No. 128, "Earnings Per Share," for The
St. Paul's loss from continuing operations, results in a lesser
loss per share than the Basic EPS calculation does. The
provisions of SFAS No. 128 prohibit this "anti-dilution" of
earnings per share, and require that the larger Basic loss per
share also be reported as the Diluted loss per share figure.
Average common shares outstanding for diluted EPS in 1997 include
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.
Six Months Ended June 30
--------------------------
1998 1997
------ ------
(In thousands)
Purchases:
Fixed maturities $1,145,945 1,878,844
Equities 820,247 721,728
Real estate 36,124 75,187
Mortgage loans 112,454 94,747
Venture capital 85,702 57,222
Other investments 87,600 59,474
--------- ---------
Total purchases 2,288,072 2,887,202
--------- ---------
Proceeds from sales and maturities:
Fixed maturities:
Sales 241,138 1,083,017
Maturities and redemptions 988,904 592,785
Equities 915,194 683,907
Venture capital 42,825 180,973
Real estate 120,306 154,995
Mortgage loans 52,832 12,191
Other investments 71,868 49,772
--------- ---------
Total sales and maturities 2,433,067 2,757,640
--------- ---------
Net purchases (sales) ($144,995) 129,562
========= =========
<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:
Six Months Ended Twelve Months Ended
June 30, 1998 December 31, 1997
----------------- ------------------
(In thousands)
Fixed maturities $33,231 399,832
Equities 12,039 61,969
Venture capital 11,541 (154,826)
Life deferred policy acquisition
costs and policy benefits (27,798) (50,692)
-------- --------
Total change in pretax
unrealized appreciation 29,013 256,283
Change in deferred taxes (8,489) (89,853)
-------- --------
Total change in unrealized
appreciation, net of taxes $20,524 166,430
======== ========
Note 4 Income Taxes
- --------------------
The components of income tax expense (benefit) on continuing
operations are as follows:
Three Months Ended Six Months Ended
June 30 June 30
----------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------
(In thousands)
Federal current tax
expense (benefit) $(7,025) 102,451 44,468 186,285
Federal deferred tax benefit (147,313) (6,690) (152,588) (24,578)
------- ------- ------- -------
Total federal income tax
expense (benefit) (154,338) 95,761 (108,120) 161,707
Foreign income taxes 3,484 4,723 10,382 9,329
State income taxes 1,487 1,494 4,020 3,017
------- ------- ------- -------
Total income tax expense
(benefit) on continuing
operations $(149,367) 101,978 (93,718) 174,053
======= ======= ======= =======
<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:
June 30, December 31,
1998 1997
------------------- -------------------
Book Fair Book Fair
Value Value Value Value
------ ------ ------- -------
(In thousands)
Medium-term notes $511,917 531,400 511,920 529,000
Commercial paper 203,963 203,963 168,429 168,429
8 3/8% senior notes 149,650 159,000 149,592 159,060
Zero coupon
convertible notes 108,645 126,500 106,838 122,307
7 1/8% senior notes 79,836 83,700 79,824 82,680
Real estate mortgages 19,884 20,100 19,900 20,491
Nuveen debt 2,000 2,000 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 $1,075,895 1,126,663 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 Six Months Ended
June 30 June 30
----------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
Revenues from Continuing
Operations (In thousands)
Property-Liability
Insurance:
Worldwide Insurance
Operations $1,463,105 1,490,811 2,919,826 2,987,091
Reinsurance 263,071 339,336 563,657 656,574
--------- --------- --------- ---------
Total premiums earned 1,726,176 1,830,147 3,483,483 3,643,665
Net investment income 331,130 326,827 662,893 657,334
Realized investment gains 129,621 168,980 177,111 262,943
Other 15,726 11,523 34,452 25,241
--------- --------- --------- ---------
Total property-
liability insurance 2,202,653 2,337,477 4,357,939 4,589,183
--------- --------- --------- ---------
Life insurance 94,094 86,247 183,959 170,865
--------- --------- --------- ---------
Asset management-
investment banking 76,344 60,279 148,813 121,401
--------- --------- --------- ---------
Total reportable
segments 2,373,091 2,484,003 4,690,711 4,881,449
Parent company and
eliminations 3,725 9,099 10,297 13,904
--------- --------- --------- ---------
Total revenues $2,376,816 2,493,102 4,701,008 4,895,353
========= ========= ========= =========
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Three Months Ended Six Months Ended
June 30 June 30
-------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
Income (Loss) from Continuing
Operations Before Income Taxes (In thousands)
Property-Liability
Insurance:
Worldwide Insurance
Operations ($503,682) (64,398) (611,895) (149,463)
Reinsurance 1,867 (1,053) 16,079 1,944
--------- --------- --------- ---------
Total GAAP
underwriting result (501,815) (65,451) (595,816) (147,519)
Net investment income 331,130 326,827 662,893 657,334
Realized investment gains 129,621 168,980 177,111 262,943
Other (223,276) (23,226) (252,051) (44,763)
--------- --------- --------- ---------
Total property-
liability insurance (264,340) 407,130 (7,863) 727,995
--------- --------- --------- ---------
Life insurance (33,964) 12,333 (14,946) 25,288
--------- --------- --------- ---------
Asset management-
investment banking:
Pretax income before
minority interest 33,077 28,866 64,527 58,060
Minority interest (7,984) (7,436) (15,817) (13,926)
--------- --------- --------- ---------
Total asset
management-investment
banking 25,093 21,430 48,710 44,134
--------- --------- --------- ---------
Total reportable
segments (273,211) 440,893 25,901 797,417
Parent company and
eliminations (173,437) (49,973) (222,222) (97,254)
--------- --------- --------- ---------
Total income (loss)
from continuing
operations before
income taxes $(446,648) 390,920 (196,321) 700,163
========= ========= ======== =========
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
above table: $250 million in the property-liability GAAP
underwriting result; $199 million in property-liability "other;"
$23 million in property-liability realized gains; $57 million in
the life segment; and $127 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. There were no
material intercompany transactions between The St. Paul and USF&G
prior to the merger.
The following summarizes the results of operations previously
reported by The St. Paul and USF&G, and the combined amounts
included in the accompanying consolidated financial statements.
Three Months Three Months Six Months
Ended Ended Ended
March 31, 1998 June 30, 1997 June 30, 1997
--------------- ------------- -------------
(In thousands)
Total Revenues:
The St. Paul Companies, Inc. $1,467,157 1,620,711 3,177,914
USF&G Corporation 857,035 872,391 1,717,439
--------- --------- ---------
Combined $2,324,192 2,493,102 4,895,353
========= ========= =========
Net Income:
The St. Paul Companies, Inc. $154,000 230,524 355,073
USF&G Corporation 38,113 47,416 92,403
--------- --------- ---------
Combined 192,113 277,940 447,476
Conforming accounting
adjustment, net of taxes 2,565 11,002 10,884
--------- --------- ---------
Net income included
accompanying financial
statements $194,678 288,942 458,360
========= ========= =========
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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%, a rate which is allowed by all of the states in which The
St. Paul is domiciled. These reserves have an ultimate cost and
payment pattern that are fixed and determinable, and accordingly,
may be discounted 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 in the circumstances
because discounting these reserves more closely matches revenue
and expense and more reasonably portrays the economic impact of
the time value of money related to these reserves. The
conforming accounting adjustment in the preceding table
represents the net reduction in insurance losses and loss
adjustment expenses to conform the discounting policies of the
two companies with regard to these reserves. The conforming
accounting adjustment resulted in a net decrease of $94 million
and $95 million in the net assets of the combined organization as
of June 30, 1998 and Dec. 31, 1997, respectively.
The St. Paul recorded a one-time, pretax charge of $656 million
($458 million after-tax) in the second quarter, which consisted
of expenses resulting from the merger and other nonrecurring
charges. The pretax charge was composed of the following
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; $67 million writedown of certain USF&G
investments and other assets; $41 million writedown of deferred
policy acquisition costs of the life insurance operation acquired
in the merger; and $52 million of other costs, primarily
transaction fees and other expenses related to the merger.
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
June 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, Minn. The following discussion is
based on the combined results of The St. Paul and USF&G for all
periods presented.
The St. Paul incurred a pretax loss from continuing operations of
$447 million in the second quarter of 1998, driven by 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, The
St. Paul's second quarter pretax earnings totaled $209 million in
1998, down from comparable pretax earnings from continuing
operations of $391 million in the same 1997 period. The decline
from 1997 primarily resulted from a significant increase in
catastrophe losses and deteriorating loss experience in several
segments of The St. Paul's property-liability insurance
operations.
The following table summarizes The St. Paul's results for the
second quarter and year-to-date.
Three Months Six Months
Ended June 30 Ended June 30
(in millions) ------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Pretax income (loss):
Property-liability
insurance:
GAAP underwriting result $(502) (65) (596) (148)
Net investment income 331 327 663 657
Realized investment gains 130 169 177 263
Other (223) (24) (252) (44)
--- --- --- ---
Total property-
liability insurance (264) 407 (8) 728
Life insurance (34) 12 (15) 25
Asset management-
investment banking 25 21 49 44
Parent and other (174) (49) (222) (97)
--- --- --- ---
Income (loss) from
continuing operations
before income taxes (447) 391 (196) 700
Income tax expense (benefit) (150) 102 (93) 174
--- --- --- ---
Income (loss) from
continuing operations (297) 289 (103) 526
Loss from discontinued
operations, net of taxes - - - (68)
--- --- --- ---
Net income (loss) $(297) 289 (103) 458
=== === === ===
Diluted net income (loss)
per common share $(1.28) 1.15 (0.46) 1.82
==== ==== ==== ====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Results
--------------------
Revenues
- -------- Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
(in millions) 1998 1997 1998 1997
---- ---- ---- ----
Earned premiums $1,752 1,856 3,533 3,697
Net investment income 398 390 795 780
Realized investment gains 133 171 183 267
Asset management-
investment banking 75 60 146 118
Other 19 16 44 33
------- ------ ------- -------
Total revenues $2,377 2,493 4,701 4,895
======= ====== ======= =======
Premiums earned in The St. Paul's insurance operations for the
second quarter and first half of 1998 declined 6% and 4%,
respectively, compared with same periods of 1997. The reduction
was centered in the General Commercial segment of The St. Paul's
property-liability operations, where intensely competitive market
conditions over the last 12 months have negatively impacted
business volume and pricing. Life insurance premiums earned were
level with the second quarter of 1997 and down $3 million for the
first half of the year. Realized investment gains for the second
quarter and first half of 1998 declined from gains in the same
periods of last year; however, the 1997 totals were unusually
large due to the sale of one venture capital investment in the
second quarter which generated a $129 million gain.
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;
- $52 million of other costs, primarily composed of
transaction fees and other expenses resulting from the
merger.
These charges were recorded pursuant to management's plan to
integrate the operations of The St. Paul and USF&G.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance
----------------------------
The following summarizes key financial results by property-
liability underwriting operation:
% of Three Months Six Months
1998 Ended June 30 Ended June 30
Written ------------- -------------
($ in Millions) Premiums 1998 1997 1998 1997
-------- ---- ---- ---- ----
Specialized Commercial:
Written Premiums 34% 589 587 1,157 1,146
Underwriting Result ($145) 19 (169) 26
Combined Ratio 127.2 98.7 117.3 99.8
General Commercial
Written Premiums 22% $358 459 746 923
Underwriting Result ($228) (49) (275) (97)
Combined Ratio 161.9 110.6 136.9 112.0
Personal Insurance:
Written Premiums 20% $358 293 692 603
Underwriting Result ($121) (19) (138) (56)
Combined Ratio 135.2 104.3 120.0 107.9
----- ----- ----- ----- -----
Total U.S. Underwriting:
Written Premiums 76% $1,305 1,339 2,595 2,672
Underwriting Result ($494) (49) (582) (127)
Combined Ratio 139.0 104.1 123.7 105.8
International Underwriting:
Written Premiums 7% $122 95 211 148
Underwriting Result ($10) (15) (30) (22)
Combined Ratio 107.6 117.6 114.0 116.0
----- ----- ----- ----- -----
Total Worldwide Insurance
Operations:
Written Premiums 83% $1,427 1,434 2,806 2,820
Underwriting Result ($504) (64) (612) (149)
Combined Ratio 136.9 104.7 123.0 106.3
Reinsurance:
Written Premiums 17% $318 393 594 680
Underwriting Result $2 (1) 16 1
Combined Ratio 95.5 96.7 95.9 97.6
----- ----- ----- ----- -----
Total Property-Liability
Underwriting:
Written Premiums 100% $1,745 1,827 3,400 3,500
GAAP Underwriting Result ($502) (65) (596) (148)
Statutory Combined Ratio:
Loss and Loss Expense Ratio 96.3 72.2 84.2 72.6
Underwriting Expense Ratio 34.2 30.8 34.4 32.0
----- ----- ----- -----
Combined Ratio 130.5 103.0 118.6 104.6
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance
----------------------------
Overview
- --------
The table on the preceding page reflects the impact of the $250
million pretax provision for losses and loss adjustment expenses
recorded in the second quarter to apply The St. Paul's reserving
policies to USF&G's loss reserves subsequent to the consummation
of the merger. The following table summarizes The St. Paul's
consolidated "core" GAAP underwriting results excluding that one-
time charge, and the impact of catastrophe losses on core
underwriting results.
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
($ in millions) 1998 1997 1998 1997
---- ---- ---- ----
Core GAAP underwriting result ($252) (65) (346) (148)
Core statutory combined ratio 116.0 103.0 111.4 104.6
Pretax catastrophe losses $157 70 208 84
Impact on combined ratio 9.1 3.8 6.0 2.3
----- ----- ----- -----
Core results excluding
catastrophes:
GAAP underwriting result ($95) 5 (138) (64)
Statutory combined ratio 106.9 99.2 105.4 102.3
===== ===== ===== =====
Pretax catastrophe losses of $157 million in the second quarter
resulted from severe storms in the Midwest and Southeast.
Several of these storms occurred in Minnesota, where The St.
Paul has a heavy concentration of business, and in Tennessee,
which was one of USF&G's largest markets. The deterioration in
underwriting results excluding catastrophes was largely due to
intensely competitive conditions in several market sectors,
particularly the small to midsized commercial segment.
The consolidated expense ratio of 34.2 for the second quarter
was negatively impacted by 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 Segment
- -------------------------------
The following discussion focuses on core segment results
excluding the impact of the $250 million one-time charge to
increase USF&G's loss and loss adjustment expense reserves.
Specialized Commercial
- ----------------------
Written premiums in this segment totaled $589 million in the
second quarter, virtually level with comparable 1997 premiums of
$587 million. The St. Paul's Medical Services operation, which
is now included in this segment, recorded premiums of $85
million for the quarter, down 5% from last year's second quarter
total of $89 million. Medical Services posted a second quarter
underwriting loss of $26 million, compared with a profit of $5
million in the same period of 1997. On a year-to-date basis,
Medical Services' premium volume of $181 million was down 3%,
and underwriting results were $62 million worse than 1997.
Accelerating loss costs and a continuing competitive market
environment which has negatively impacted pricing accounted for
the deterioration in Medical Services' results. During the
second quarter, The St. Paul began implementing price increases
of 3% to 5% on selected physicians and surgeons' policy
renewals.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance
----------------------------
The remainder of the Specialized Commercial segment posted
slight premium growth over the second quarter and first six
months of 1997. Core underwriting results, however,
deteriorated by almost $40 million for both the second quarter
and year-to-date in comparison to 1997, primarily due to
increased catastrophe losses and adverse loss development on
prior years' business. The St. Paul's Surety underwriting
operation, which is now the largest in the United States as a
result of the USF&G merger, posted strong growth in net premium
volume and a $19 million underwriting profit for the quarter.
General Commercial
- ------------------
Premium volume in this segment declined 22% for the quarter and
19% for the first half of the year. Prices continue to decline
in this market, reflecting the continuing intense competition
for small to midsized commercial business. The St. Paul does
not anticipate that the pricing environment will improve during
the remainder of 1998. The second quarter core underwriting
loss of $108 million was severely impacted by catastrophe losses
of $48 million, and a general deterioration in noncatastrophe
prior year loss development across the book of business. The
expense ratio for the quarter of 39.6 was over four points worse
than last year's second quarter, due to the sharp decline in
premium volume, initial merger-related expenses and higher
commission expenses. The expense ratio is expected to improve
going forward as integration efficiencies are realized. On a
year-to-date basis, the core underwriting loss of $155 million
was $58 million worse than 1997, with catastrophe losses of $64
million playing a large role in the deterioration. Catastrophe
losses in the first half of 1997 totaled $19 million.
Personal Insurance
- ------------------
Second quarter and year-to-date written premium volume grew 22%
and 15%, respectively, over the same periods of 1997. The
majority of the increase in 1998 was 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. The Personal Insurance segment's core
underwriting loss of $86 million for the second quarter was
severely impacted by catastrophe losses of $78 million. For the
first half of 1998, catastrophe losses accounted for $86 million
of the core underwriting loss of $103 million. Two May storms
in Minnesota resulted in over 11,000 claims, accounting for
nearly $50 million of this segment's catastrophe total.
The nonstandard auto business center, a market in which The St.
Paul had virtually no presence prior to the merger with USF&G,
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 $61 million in the second quarter of 1998,
compared with $20 million in the same period of 1997. The core
underwriting profit for the quarter was $1 million, compared
with a loss of $1 million in 1997's second quarter.
International
- -------------
The International segment posted premium growth of 29% for the
second quarter and 42% for the first half of 1998, when compared
to the same periods of 1997. New business in Europe, including
business generated through The St. Paul's involvement with
Lloyd's of London, was the primary factor contributing to
premium growth 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 second quarter improved $5 million over the same
1997 period, but year-to-date results lag $8 million behind the
first half of 1997 due to the impact of severe ice storms in
Canada during the first quarter.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance
----------------------------
Reinsurance
- -----------
St. Paul Re was augmented by the addition of F&G Re and Discover
Re as a result of the merger with USF&G. 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.
The Reinsurance segment's written premiums of $318 million in
the second quarter were down 19% from the same period of 1997.
Premium volume of $594 million through the first half of 1998
declined 13% from the first six months of 1997. These sizable
declines in 1998 reflect soft global market conditions for this
segment, resulting from excess capacity in primary reinsurance
markets which has reduced the demand for reinsurance products
worldwide.
Despite the premium shortfall from 1997, the Reinsurance segment
posted a year-to-date underwriting profit of $16 million,
compared with a profit of $1 million in the first half of 1997.
The lack of catastrophe losses and favorable loss development
for prior underwriting years accounted for 1998's strong
performance. Year-to-date catastrophe losses totaled $5 million
in 1998, compared with $7 million in 1997.
Investment Operations
- ---------------------
Pretax investment income in The St. Paul's property-liability
operations for the second quarter and first six months of 1998
was virtually level with the same periods of 1997. The lack of
written premium growth and an increase in insurance losses paid
in recent quarters have resulted in a decline in new funds
available for investment. In addition, market yields on new
investments have continued to decline during the first half of
1998. As a result, investment income growth has been negligible
for the last several quarters.
The merger with USF&G added fixed maturities investments of $5.3
billion (at cost) to The St. Paul's property-liability
operations. The combined fixed maturities portfolio on June 30,
1998 of $17.1 billion had a market value on that date of $17.9
billion. 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 June 30,
1998. The USF&G merger also added lesser amounts of equities,
real estate and other investments to The St. Paul's property-
liability operations.
Pretax realized investment gains totaled $130 million in the
second quarter, compared with gains of $169 million in last
year's second quarter. Year-to-date pretax gains in 1998 of
$177 million were down from last year's six-month gains of $263
million. Sales of equity security investments in favorable
market conditions accounted for the majority of 1998's gains.
The sale of a single venture capital investment generated pretax
gains of $129 million in the second quarter of 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 company 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 company'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 six months
ended June 30, 1998, and the years ended Dec. 31, 1997 and 1996.
Amounts in the "net" column are reduced by reinsurance
recoverables.
Environmental 1998
- ------------- (six 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 13 15 44 58 87 92
Paid losses (34) (34) (66) (57) (56) (54)
---- ---- ---- ---- ---- ----
Ending reserves $846 658 867 677 889 676
==== ==== ==== ==== ==== ====
Many significant environmental claims currently being brought
against insurance companies arise out of contamination that
occurred 20 to 30 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
Environmental and Asbestos Claims
---------------------------------
The following table represents a reconciliation of total gross
and net reserve development for asbestos claims for the six
months ended June 30, 1998, and the years ended Dec. 31, 1997
and 1996:
Asbestos 1998
- -------- (six 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 5 3 22 (5) 18 25
Paid losses (12) (7) (38) (20) (32) (21)
---- ---- ---- ---- ---- ----
Ending reserves $390 275 397 279 413 304
==== ==== ==== ==== ==== ====
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
June 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 company 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 June 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, 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
Life Insurance
--------------
Highlights of F&G Life's financial performance for the second
quarter and six months of 1998 and 1997 were as follows (core
earnings exclude the impact of the $57 million one-time charge):
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
(in millions) 1998 1997 1998 1997
---- ---- ---- ----
Sales (annualized premiums) $71 121 151 235
Premiums earned $26 26 50 53
Policy surrenders $62 42 114 81
Net investment income $67 63 132 121
Core pretax earnings
(including realized gains) $23 12 42 25
The decline in sales for the second quarter and first half of
1998 was primarily due to the significantly lower level of
interest rates and its negative impact on fixed interest rate
annuities. The demand for annuity products is affected by
fluctuating interest rates and the relative attractiveness of
alternative investment, annuity or insurance products. In an
effort to balance its portfolio of fixed interest rate annuity
products, F&G Life introduced an equity-indexed annuity in June
1998.
The decline in premiums earned for the first six months of 1998
was largely due to a reduction in sales of structured settlement
annuities, which are sold primarily to property-liability
insurers to settle insurance claims. Sales of these annuities
in the second quarter were adversely impacted by disruptions
caused by the merger with The St. Paul; however, sales are
expected to grow in the second half of 1998 as F&G Life expands
these products into The St. Paul's claim organization.
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. Despite the decline
in premiums earned, core pretax earnings for the second quarter
and six 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 June 30, 1998 was $10.74
billion, compared with $10.49 billion at June 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 second
quarter 1998 pretax earnings was $25 million, $4 million higher
than the same period of 1997. For the first half of 1998, the
company's portion of such earnings was $49 million, compared
with $44 million for the first half of 1997. The company
currently owns 77% of Nuveen.
Nuveen's asset management fee revenue of $67 million for the
second quarter was $16 million, or 32% 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 $132 million in 1998, compared with $102
million through the first six months of 1997.
Nuveen's assets under management grew to $52.2 billion at June
30, 1998, an increase of 5% since year-end 1997.
Capital Resources
-----------------
The St. Paul's capitalization (debt, redeemable preferred
securities and equity) stood at $8.07 billion at June 30, 1998,
down 4% from the year-end 1997 total of $8.41 billion. Common
shareholders' equity declined by $118 million in the first half
of 1998 as a result of the net loss incurred during that period.
The merger with USF&G Corporation consummated in April 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.
Total debt outstanding at the end of June was $1.08 billion, a
decline of $228 million, or 17%, 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 commercial paper issuances.
In addition, Nuveen's short-term debt outstanding declined by
$83 million from year-end 1997. Approximately 48% of The St.
Paul's debt outstanding at June 30, 1998 consisted of medium-
term notes bearing a weighted average rate of 7.1%. Commercial
paper comprised 19% of The St. Paul's total debt at the mid-
point of 1998. Debt as a percentage of total capitalization at
June 30, 1998, was 13%, down from 15% at year-end 1997.
The St. Paul has no plans for major capital expenditures during
the remainder of 1998.
The company's year-to-date pretax loss from continuing
operations was inadequate to cover "fixed charges" by $196
million and "combined fixed charges and preferred stock
dividends" by $224 million. For the first six months of 1997,
the company's ratio of earnings to fixed charges was 12.05, and
the ratio of earnings to combined fixed charges and preferred
stock dividends was 8.81. 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.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Liquidity
---------
Liquidity refers to the company's ability to generate sufficient
funds to meet the cash requirements of its business operations.
Net cash used in operations was $19 million in the first six
months of 1998, compared with cash provided by operations of
$260 million in 1997. The significant decline in operational
cash flows compared with 1997 was the result of 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 negative operational cash flows in the first half of
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 afforded by the merger
with USF&G.
Year 2000 Issues
----------------
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. For several
years, The St. Paul has been evaluating its financial and
operational computer systems to determine the impact of the
"Year 2000" issue on those systems. With the completion of the
merger with USF&G Corporation, The St. Paul has further
evaluated USF&G's activities to become "Year 2000" compliant.
The St. Paul has developed and implemented plans to address the
required system modifications, and does not expect the financial
impact of making these modifications to be material to its
results of operations, cash flows or consolidated financial
position.
The St. Paul is coordinating with financial institutions,
vendors and other entities with which it does business to
identify and resolve any year 2000 issues.
The St. Paul also faces potential "Year 2000" claims stemming
from coverages offered in insurance policies it has sold to
customers. In some instances, coverage is not provided under
the insurance policies, while in other instances, coverage may
be provided under certain circumstances. The company continues
to assess its exposure to insurance claims arising from those
coverages, and it is taking a number of actions to address that
exposure, including individual risk evaluation and
classification of high hazard exposures. Currently, The St.
Paul believes that, although payments of such claims could
possibly have an adverse effect on its results of
operations and/or cash flows, they would not have 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 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
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Impact of Accounting Pronouncements to be Adopted in the Future
- ---------------------------------------------------------------
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.
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. 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 the 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. 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 April 24, 1998, relating to the
consummation of its merger with USF&G
Corporation.
2) The St. Paul filed a Form 8-K Current
Report dated April 27, 1998, relating to the
announcement of its financial results for
the quarter ended March 31, 1998.
3) The St. Paul filed a Form 8-K Current
Report dated May 5, 1998, relating to the
election of three former directors of USF&G
Corporation to The St. Paul's board of
directors, and the approval of a two-for-one
common stock split to shareholders of record
on May 6, 1998.
4) The St. Paul filed a Form 8-K Current
Report dated May 14, 1998, relating to the
anticipated cost savings to be realized from
the USF&G merger, and the anticipated second-
quarter charge to earnings resulting from
the merger.
5) The St. Paul filed a Form 8-K Current
Report dated May 22, 1998, relating to the
expected pretax catastrophe losses of
between $35 million and $40 million
resulting from a May 15, 1998 storm in
Minnesota.
<PAGE>
6) The St. Paul filed a Form 8-K Current
Report dated June 8, 1998, relating to the
expected pretax catastrophe losses of
between $25 million and $30 million
resulting from a May 30, 1998 storm in
Minnesota and the Midwest.
7) 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.
8) 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE ST. PAUL COMPANIES, INC.
(Registrant)
Date: August 14, 1998 By /s/ Bruce A. Backberg
---------------------
Bruce A. Backberg
Senior Vice President
and Chief Legal Counsel
(Authorized Signatory)
Date: August 14, 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**..................(1)
(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 Six Months Ended
June 30 June 30
------------------- ----------------
1998 1997 1998 1997
----- ----- ----- -----
EARNINGS:
Basic:
Net income (loss), as reported $(297,281) 288,942 (102,603) 458,360
Dividends on preferred stock,
net of taxes (2,120) (2,168) (4,269) (6,012)
Premium on preferred
shares redeemed (1,361) (651) (2,205) (911)
-------- -------- -------- --------
Net income (loss) available
to common shares $(300,762) 286,123 (109,077) 451,437
======== ======== ======== ========
Diluted:
Net income (loss), as reported $(297,281) 288,942 (102,603) 458,360
Dividends on preferred stock,
net of taxes (2,120) - (4,269) (1,659)
Premium on preferred
shares redeemed (1,361) (651) (2,205) (911)
Dividends on convertible
monthly income preferred
securities, net of taxes - 2,019 - 4,037
Additional PSOP expense due to
assumed conversion of preferred
stock, net of taxes - (666) - (1,336)
Interest expense on zero
coupon bonds, net of taxes - 779 - 1,542
-------- -------- -------- --------
Net income (loss) available
to common shares $(300,762) 290,423 (109,077) 460,033
======== ======== ======== ========
SHARES:
Basic:
Weighted average common
shares outstanding 235,160 229,611 234,670 230,211
======== ======== ======== ========
Diluted:
Weighted average common
shares outstanding 235,160 229,611 234,670 230,211
Additional dilutive effect of:
Assumed conversion of
preferred stock - 8,025 - 7,848
Assumed conversion of
monthly income
preferred securities - 7,017 - 7,017
Assumed exercise of
stock options outstanding - 4,786 - 4,702
Assumed conversion of
zero coupon bonds - 2,923 - 2,923
-------- -------- -------- --------
Weighted average, as adjusted 235,160 252,362 234,670 252,701
======== ======== ======== ========
EARNINGS (LOSS) PER
COMMON SHARE:
Basic $(1.28) 1.25 (0.46) 1.96
Diluted $(1.28) 1.15 (0.46) 1.82
Diluted earnings per share is the same as Basic earnings per
share for both periods of 1998 because Diluted earnings per share
calculated in accordance with SFAS No. 128 for The St. Paul's
loss from continuing operations for those periods results in anti-
dilution.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Exhibit 12
Computation of Ratios
(In thousands, except ratios)
Three Months Ended Six Months Ended
June 30 June 30
------------------- -----------------
1998 1997 1998 1997
------ ------ ----- -----
EARNINGS:
Income (loss) before
income taxes (446,648) 390,920 (196,321) 700,163
Add: fixed charges 28,833 31,561 60,269 63,382
-------- -------- -------- --------
Income (loss), as adjusted $(417,815) 422,481 (136,052) 763,545
======== ======== ======== ========
FIXED CHARGES:
Interest costs $20,841 24,566 44,318 47,811
Rental expense (1) 7,992 6,995 15,951 15,571
-------- -------- -------- --------
Total fixed charges $28,833 31,561 60,269 63,382
======== ======== ======== ========
FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS:
Fixed charges $28,833 31,561 60,269 63,382
PSOP preferred stock dividends 4,255 4,391 8,546 8,815
Dividends on redeemable
preferred securities 9,425 7,381 18,851 14,486
-------- -------- -------- --------
Total fixed charges and
preferred stock dividends $42,513 43,333 87,666 86,683
======== ======== ======== ========
Ratio of earnings
to fixed charges (2) - 13.39 - 12.05
======== ======== ======== ========
Ratio of earnings to
combined fixed charges and
preferred stock dividends (2) - 9.75 - 8.81
======== ======== ======== ========
(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 second quarter 1998 loss is inadequate to cover "fixed
charges" by $446.6 million and "combined fixed charges and preferred
stock dividends" by $460.3 million. The year to date 1998 loss is
inadequate to cover "fixed charges" by $196.3 million and "combined
fixed charges and preferred stock dividends" by $223.7 million.
<PAGE>
Exhibit 18
August 14, 1998
The St. Paul Companies, Inc.
385 Washington St.
St. Paul, Minnesota 55102
Ladies and Gentlemen:
We have been furnished with a copy of Form 10-Q of The St. Paul
Companies, Inc. for the three months ended June 30, 1998, and
have read the Company's statements contained in Note 8 to the
consolidated financial statements included therein. As stated in
Note 8, the Company changed its method of accounting for certain
workers' compensation reserves from an undiscounted to a
discounted basis and states that the newly adopted accounting
principle is preferable in the circumstances because discounting
these reserves more closely matches revenue and expense and more
reasonably portrays the economic impact of the time value of
money related to these reserves. These reserves have an ultimate
cost and payment pattern that are fixed and determinable and,
accordingly, may be discounted in accordance with Staff
Accounting Bulletin No. 62, "Discounting by Property-Casualty
Insurance Companies." Prior to the merger of USF&G Corporation
and The St. Paul Companies, Inc. in April of 1998, these
companies had different accounting policies relating to these
types of workers' compensation reserves. Therefore, in the
merged entity consolidated financial statements, prior years have
been retroactively restated to apply the preferable accounting
method for all periods presented. In accordance with your
request, we have reviewed and discussed with Company officials
the circumstances and business judgment and planning upon which
the decision to make this change in method of accounting was
based.
We have not audited any consolidated financial statements of The
St. Paul Companies, Inc. as of any date or for any period
subsequent to December 31, 1997, nor have we audited the
information set forth in the aforementioned Note 8 to the
consolidated financial statements; accordingly, we do not express
an opinion concerning the factual information contained therein.
With regard to the aforementioned accounting change,
authoritative criteria have not been established for evaluating
the preferability of one acceptable method of accounting over
another acceptable method. However, for purposes of The St. Paul
Companies, Inc.'s compliance with the requirements of the
Securities and Exchange Commission, we are furnishing this
letter.
Based on our review and discussion, with reliance on management's
business judgment and planning, we concur that the newly adopted
method of accounting is preferable in the Company's
circumstances.
Very truly yours,
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<DEBT-HELD-FOR-SALE> 20,843,281 20,265,282
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 1,146,784 999,326
<MORTGAGE> 702,035 489,197
<REAL-ESTATE> 915,659 1,141,487
<TOTAL-INVEST> 26,006,667 24,578,469
<CASH> 129,107 128,499
<RECOVER-REINSURE> 126,515 114,804
<DEFERRED-ACQUISITION> 837,490 869,585
<TOTAL-ASSETS> 37,448,192 35,489,254
<POLICY-LOSSES> 22,523,156 21,684,485
<UNEARNED-PREMIUMS> 3,392,302 3,578,692
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 1,075,895 1,249,496
502,700 407,000
15,153 17,998
<COMMON> 2,120,746 1,915,485
<OTHER-SE> 4,352,973 3,911,569
<TOTAL-LIABILITY-AND-EQUITY> 37,448,192 35,489,254
3,533,724 3,696,972
<INVESTMENT-INCOME> 794,547 780,411
<INVESTMENT-GAINS> 182,508 267,473
<OTHER-INCOME> 190,229 150,497
<BENEFITS> 3,055,503 2,768,677
<UNDERWRITING-AMORTIZATION> 850,116 869,870
<UNDERWRITING-OTHER> 991,710 556,643
<INCOME-PRETAX> (196,321) 700,163
<INCOME-TAX> (93,718) 174,053
<INCOME-CONTINUING> (102,603) 526,110
<DISCONTINUED> 0 (67,750)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (102,603) 458,360
<EPS-PRIMARY> (0.46) 1.96
<EPS-DILUTED> (0.46) 1.82
<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>
