<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
----- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- ----------
Commission File Number 0-3021
------
THE ST. PAUL COMPANIES, INC.
-------------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0518860
----------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
385 Washington St., Saint Paul, MN 55102
---------------------------------- --------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (651) 310-7911
-------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
The number of shares of the Registrant's Common Stock, without par
value, outstanding at November 10, 1999, was 227,254,539.
<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, 1999 and 1998 3
Consolidated Balance Sheets, September 30, 1999
(Unaudited) and December 31, 1998 4
Consolidated Statements of Shareholders' Equity,
Nine Months Ended September 30, 1999
(Unaudited) and Twelve Months Ended December 31, 1998 6
Consolidated Statements of Comprehensive Income
(Unaudited), Three Months and Nine Months Ended
September 30, 1999 and 1998 7
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 1999 and 1998 8
Notes to Consolidated Financial Statements
(Unaudited) 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
PART II. OTHER INFORMATION
Item 1 through Item 6 38
Signatures 38
EXHIBIT INDEX 39
<PAGE>
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
(In millions, September 30 September 30
except per share) ------------------- ------------------
1999 1998 1999 1998
Revenues: ----- ----- ----- -----
Premiums earned $1,309 1,409 4,124 4,375
Net investment income 391 391 1,188 1,185
Asset management 85 76 251 223
Realized investment gains 41 25 173 210
Other 30 24 92 76
----- ----- ----- -----
Total revenues 1,856 1,925 5,828 6,069
----- ----- ----- -----
Expenses:
Insurance losses and loss
adjustment expenses 890 1,132 2,938 3,541
Life policy benefits 101 66 253 188
Policy acquisition expenses 358 350 1,057 1,110
Operating and administrative 327 286 845 1,162
----- ----- ----- -----
Total expenses 1,676 1,834 5,093 6,001
----- ----- ----- -----
Income from continuing
operations before income
taxes and cumulative effect
of accounting change 180 91 735 68
Income tax expense (benefit) 39 (12) 173 (46)
----- ----- ----- -----
Income from continuing
operations before cumulative
cumulative effect of
accounting change 141 103 562 114
Cumulative effect of accounting
change, net of taxes - - (30) -
----- ----- ----- -----
Income from continuing operations 141 103 532 114
Discontinued operations:
Operating loss, net of taxes - (35) (22) (125)
Gain on disposal, net of taxes 186 - 186 -
----- ----- ----- -----
Income (loss) from discontinued
operations, net of taxes 186 (35) 164 (125)
----- ----- ----- -----
Net income (loss) $327 68 696 (11)
===== ===== ===== =====
Basic earnings (loss) per
common share:
Income from continuing
operations before cumulative
effect of accounting change $0.61 0.42 2.42 0.45
Cumulative effect of
accounting change, net of taxes - - (0.13) -
----- ----- ----- -----
Income from continuing
operations $0.61 0.42 2.29 0.45
Discontinued operations,
net of taxes 0.82 (0.15) 0.72 (0.54)
----- ----- ----- -----
Net income (loss) $1.43 0.27 3.01 (0.09)
===== ===== ===== =====
Diluted earnings (loss) per
common share:
Income from continuing
operations before cumulative
effect of accounting change $0.58 0.41 2.29 0.44
Cumulative effect of
accounting change, net of taxes - - (0.12) -
----- ----- ----- -----
Income from continuing
operations 0.58 0.41 2.17 0.44
Discontinued operations,
net of taxes 0.76 (0.14) 0.67 (0.53)
----- ----- ----- -----
Net income (loss) $1.34 0.27 2.84 (0.09)
===== ===== ===== =====
Dividends declared
on common stock $0.26 0.25 0.78 0.75
===== ===== ===== =====
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
September 30, December 31,
ASSETS 1999 1998
- ------ ------------- ------------
(Unaudited)
Investments:
Fixed maturities, at estimated fair value $19,875 $20,456
Equities, at estimated fair value 1,359 1,259
Real estate and mortgage loans 1,534 1,507
Venture capital, at estimated fair value 790 571
Securities lending collateral 1,764 1,368
Other investments 245 372
Short-term investments, at cost 1,216 965
-------- -------
Total investments 26,783 26,498
Cash 175 146
Investment banking inventory securities 52 107
Reinsurance recoverables:
Unpaid losses 4,267 3,974
Paid losses 162 157
Ceded unearned premiums 305 288
Receivables:
Underwriting premiums 2,289 2,085
Interest and dividends 370 354
Other 168 52
Deferred policy acquisition expenses 939 878
Deferred income taxes 1,421 1,193
Office properties and equipment, at cost less
accumulated depreciation of $472 (1998; $390) 521 510
Goodwill 513 592
Other assets 1,238 1,030
-------- --------
Total assets $39,203 $37,864
======== ========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In millions)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ------------------------------------ ------------- ------------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $18,122 $18,186
Future policy benefits 4,681 4,142
Unearned premiums 3,222 3,092
-------- --------
Total insurance reserves 26,025 25,420
Debt 1,316 1,260
Payables:
Reinsurance premiums 508 291
Income taxes 439 221
Accrued expenses and other 1,293 1,225
Securities lending 1,764 1,368
Other liabilities 958 940
-------- --------
Total liabilities 32,303 30,725
-------- --------
Company-obligated mandatorily redeemable
preferred capital securities of subsidiaries
or trusts holding solely convertible
subordinated debentures of the Company 477 503
-------- --------
Shareholders' equity:
Preferred:
Series B convertible preferred stock;
1.45 shares authorized; 0.9 shares
outstanding in 1999 and 1998 131 134
Guaranteed obligation - PSOP (105) (119)
-------- --------
Total preferred shareholders' equity 26 15
-------- --------
Common:
Common stock, 480.0 shares authorized;
226.8 shares outstanding (233.7 shares in 1998) 2,085 2,128
Retained earnings 3,809 3,480
Accumulated other comprehensive income:
Unrealized appreciation 527 1,027
Unrealized loss on foreign currency translation (24) (14)
-------- --------
Total accumulated other comprehensive income 503 1,013
-------- --------
Total common shareholders' equity 6,397 6,621
-------- --------
Total shareholders' equity 6,423 6,636
-------- --------
Total liabilities, redeemable preferred
securities and shareholders' equity $39,203 $37,864
======== ========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In millions)
Nine Twelve
Months Ended Months Ended
September 30 December 31
------------ ------------
1999 1998
------- -------
(Unaudited)
Preferred shareholders' equity:
Series B PSOP convertible preferred stock:
Beginning of period $134 $138
Redemptions during period (3) (4)
------ ------
End of period 131 134
------ ------
Guaranteed obligation - PSOP:
Beginning of period (119) (121)
Principal payments 14 2
------ ------
End of period (105) (119)
------ ------
Total preferred shareholders' equity 26 15
------ ------
Common shareholders' equity:
Common stock:
Beginning of period 2,128 2,057
Stock issued under stock incentive plans 26 70
Stock issued for preferred shares redeemed 6 8
Reacquired common shares (75) (35)
Other - 28
------ ------
End of period 2,085 2,128
------ ------
Retained earnings:
Beginning of period 3,480 3,720
Net income 696 89
Dividends declared on common stock (176) (223)
Dividends declared on preferred stock, net of taxes (8) (9)
Reacquired common shares (190) (100)
Tax benefit on employee options and awards 10 7
Premium on preferred shares redeemed (3) (4)
------ ------
End of period 3,809 3,480
------ ------
Unrealized appreciation, net of taxes:
Beginning of period 1,027 846
Change during the period (500) 181
------ ------
End of period 527 1,027
------ ------
Unrealized gain (loss)loss on foreign currency
translation, net of taxes:
Beginning of period (14) (23)
Change during the period (10) 9
------ ------
End of period (24) (14)
------ ------
Guaranteed obligation - ESOP:
Beginning of period - (8)
Principal payments - 8
------ ------
End of period - -
------ ------
Total common shareholders' equity 6,397 6,621
------ ------
Total shareholders' equity $6,423 $6,636
====== ======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Unaudited
(In millions)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ----------------
1999 1998 1999 1998
----- ----- ----- -----
Net income (loss) $327 $68 $696 $(11)
------ ------ ------ ------
Other comprehensive income (loss),
net of taxes:
Change in unrealized appreciation (143) 104 (500) 124
Change in unrealized loss on
foreign currency translation (5) (11) (10) (10)
------ ------ ------ ------
Other comprehensive income (loss) (148) 93 (510) 114
------ ------ ------ ------
Comprehensive income $179 $161 $186 $103
====== ====== ====== ======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In millions)
Nine Months Ended
September 30
-------------------------
1999 1998
-------- -------
OPERATING ACTIVITIES
Net income (loss) $696 $(11)
Adjustments:
Change in property-liability
insurance reserves 144 378
Change in reinsurance balances (487) (78)
Change in premiums receivable (254) (36)
Change in income taxes payable 291 56
Change in asset management balances (2) (20)
Depreciation and amortization 100 98
Net gain on disposal of standard
personal insurance operations (186) -
Realized investment gains (173) (210)
Other 32 44
----- -----
Net Cash Provided by
Operating Activities 161 221
----- -----
INVESTING ACTIVITIES
Purchase of investments (4,641) (3,976)
Proceeds from sales and
maturities of investments 4,378 3,888
Change in short-term investments (354) 127
Net proceeds from sale of
standard personal insurance operations 252 -
Change in open security transactions 61 (3)
Net purchases of office properties and equipment (98) (61)
Acquisitions - (98)
Other 44 74
----- -----
Net Cash Used by Investing Activities (358) (49)
----- -----
FINANCING ACTIVITIES
Deposits on universal life
and investment contracts 727 311
Withdrawals on universal life
and investment contracts (96) (158)
Dividends paid on common and preferred stock (184) (165)
Proceeds from issuance of debt 110 61
Repayment of debt and capital securities (81) (205)
Repurchase of common shares (265) -
Stock options exercised and other 15 12
----- -----
Net Cash Provided
(Used) by Financing Activities 226 (144)
----- -----
Increase in cash 29 28
Cash at beginning of period 146 136
----- -----
Cash at end of period $175 $164
===== =====
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
September 30, 1999
Note 1 - Basis of Presentation
- ------------------------------
The financial statements include The St. Paul Companies, Inc. and
subsidiaries (The St. Paul), and have been prepared in conformity
with generally accepted accounting principles. The St. Paul
completed its merger with USF&G Corporation (USF&G) in April
1998. The financial statements for all current and prior periods
in this report reflect the combined accounts and results of
operations of The St. Paul and USF&G.
On September 30, 1999, The St. Paul completed the sale of its
standard personal insurance business to Metropolitan Property and
Casualty Insurance Company. The results of the operations sold
have been accounted for as discontinued operations for all
current and prior year periods presented in this report. See
Note 9 on page 17 for further information regarding the sale.
These consolidated financial statements rely, in part, on
estimates. In the opinion of management, all necessary
adjustments, consisting of normal recurring adjustments, have
been reflected for a fair presentation of the results of
operations, financial position and cash flows in the accompanying
unaudited consolidated financial statements. The results for the
period are not necessarily indicative of the results to be
expected for the entire year.
Reference should be made to the "Notes to Consolidated Financial
Statements" in The St. Paul's annual report to shareholders for
the year ended December 31, 1998. The amounts in those notes
have not changed materially except as a result of transactions in
the ordinary course of business or as otherwise disclosed in
these notes.
Some amounts in the 1998 consolidated financial statements have
been reclassified to conform with the 1999 presentation. These
reclassifications had no effect on net income or shareholders'
equity, as previously reported.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 2 - Earnings Per Share
- ---------------------------
Earnings per common share (EPS) amounts were calculated by
dividing operating earningsnet income, as adjusted, by the
average common shares outstanding.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
(In millions, except per share data)
EARNINGS
Basic:
Net income (loss), as reported $327 $68 $696 $(11)
Dividends on preferred
stock, net of taxes (2) (2) (6) (7)
Premium on preferred shares redeemed (1) (1) (3) (3)
------ ------ ------ ------
Net income (loss) available
to common shareholders $324 $65 $687 $(21)
====== ====== ====== ======
Diluted:
Net income (loss) available
to common shareholders $324 $65 $687 $(21)
Effect of dilutive securities:
Convertible preferred stock 2 1 5 -
Convertible monthly income
preferred securities 2 2 6 -
Zero coupon convertible notes 1 1 2 -
------ ------ ------ ------
Net income (loss) available
to common shareholders $329 $69 $700 $(21)
====== ====== ====== ======
COMMON SHARES
Basic:
Weighted average common
shares outstanding 227 236 228 235
====== ====== ====== ======
Diluted:
Weighted average common
shares outstanding 227 236 228 235
Effect of dilutive securities:
Stock options 2 3 2 4
Convertible preferred stock 7 8 7 -
Convertible monthly income
preferred securities 7 7 7 -
Zero coupon convertible notes 2 3 2 -
------ ------ ------ ------
Total 245 257 246 239
====== ====== ====== ======
EARNINGS (LOSS) PER SHARE
Basic $1.43 $0.27 $3.01 $(0.09)
====== ====== ====== ======
Diluted $1.34 $0.27 $2.84 $(0.09)
====== ====== ====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 3 - Investments
- --------------------
Investment Activity. A summary of investment transactions is presented
below.
Nine Months Ended September 30
------------------------------
1999 1998
-------- --------
(In millions)
Purchases:
Fixed maturities $3,213 $2,511
Equities 1,063 1,071
Real estate and mortgage loans 123 176
Venture capital 170 119
Other investments 72 99
------ ------
Total purchases 4,641 3,976
------ ------
Proceeds from sales and maturities:
Fixed maturities 2,971 2,391
Equities 1,085 1,169
Real estate and mortgage loans 93 196
Venture capital 156 52
Other investments 73 80
------ ------
Total sales and maturities 4,378 3,888
------ ------
Net purchases $ 263 $ 88
====== ======
Change in Unrealized Appreciation. The increase (decrease) in
unrealized appreciation of investments recorded in common
shareholders' equity was as follows:
Nine Months Ended Twelve Months Ended
September 30, 1999 December 31, 1998
------------------ -------------------
(In millions)
Fixed maturities $(1,063) $203
Equities (2) 69
Venture capital 139 45
Life deferred policy acquisition
costs and policy benefits 85 (1)
Single premium immediate
annuity reserves 45 (17)
Other - (16)
------ ------
Total change in pretax
unrealized appreciation (796) 283
Change in deferred taxes 296 (102)
------ ------
Total change in unrealized
appreciation, net of taxes $(500) $181
====== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 4 - Income Taxes
- ---------------------
The components of income tax expense on income from continuing
operations before the cumulative effect of accounting change is
as follows :
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
(In millions)
Federal current tax
expense (benefit) $27 $ (95) $ 41 $(50)
Federal deferred t
expense (benefit) 3 79 106 (14)
----- ----- ----- -----
Total federal income
tax expense (benefit) 30 (16) 147 (64)
Foreign income taxes 7 3 20 13
State income taxes 2 1 6 5
----- ----- ----- -----
Total income tax expense
(benefit) on continuing
operations $39 $(12) $173 $(46)
===== ===== ===== =====
Note 5 - Contingent Liabilities
- -------------------------------
In the ordinary course of conducting business, The St. Paul and
some of its subsidiaries have been named as defendants in various
lawsuits. Some of these lawsuits attempt to establish liability
under insurance contracts issued by those companies. Plaintiffs
in these lawsuits are asking for money damages or to have the
court direct the activities of the company's operations in
certain ways. Although it is possible that the settlement of a
contingency may be material to The St. Paul's results of
operations and liquidity in the period in which the settlement
occurs, The St. Paul 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.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 6 - Debt
- -------------
Debt consists of the following:
September 30, December 31,
1999 1998
------------ ------------
Book Fair Book Fair
Value Value Value Value
------ ------ ------ ------
(In millions)
Medium-term notes $617 $610 $637 $675
Commercial paper 244 244 257 257
8 3/8% senior notes 150 154 150 160
Zero coupon convertible notes 93 88 111 118
7 1/8% senior notes 80 80 80 86
Variable rate borrowings 64 64 - -
Floating rate notes 46 46 - -
Real estate mortgages 15 15 15 16
Nuveen short-term borrowings 7 7 10 10
----- ----- ----- -----
Total debt $1,316 $1,308 $1,260 $1,322
===== ===== ===== =====
A number of The St. Paul's real estate entities are parties to
variable rate loan agreements aggregating $63.8 million at Sept.
30, 1999. The borrowings mature in the year 2030, with principal
paydowns starting in the year 2006. The interest rate is set
weekly by a third party, and was 3.75% at Sept. 30, 1999.
Note 7 - Segment Information
- ----------------------------
As of Sept. 30, 1999, The St. Paul had seven reportable business
segments in its property-liability insurance operation,
consisting of the Commercial Lines Group, Specialty Commercial,
Surety, Specialty Auto, International, Reinsurance and Investment
Operations. (In July 1999, The St. Paul sold its standard
personal insurance business to Metropolitan Property and Casualty
Insurance Company in a transaction that closed on September 30,
1999. The results of the operations sold have been accounted for
as discontinued operations for all current and prior year periods
presented in this report and are not included in The St. Paul's
segment data). The St. Paul also has a life insurance segment
(Fidelity and Guaranty Life) and an asset management segment (The
John Nuveen Company). The St. Paul evaluates the performance of
its property-liability underwriting segments based on GAAP
underwriting results. The property-liability investment
operation is disclosed as a separate reportable segment because
that operation is managed at the corporate level and the invested
assets, net investment income and realized gains are not
allocated to individual underwriting segments. The life
insurance and asset management segments are evaluated based on
their respective pretax operating results, which include
investment income. The St. Paul does not aggregate its segments
for purposes of reporting segment information.
The reportable underwriting business segments in The St. Paul's
property-liability operation are each managed separately because
each offers insurance products to unique customer classes and
utilizes different underwriting criteria and marketing
strategies. For example, the Commercial Lines Group provides
"commodity-type" insurance products to the extensive, small and
medium-sized commercial markets. It also targets certain large
industry groups, such as the construction industry. By contrast,
the Specialty Commercial segment markets specialized insurance
products and services tailored to meet the individual needs of
specific commercial customer groups, such as doctors, lawyers,
officers and directors, as well as technology firms and
government entities. Customers in the Specialty Commercial
segment generally require specialized underwriting expertise and
claim settlement services.
The tabular information on the following pages provides revenue
and income data for each of The St. Paul's business segments for
the three months and nine months ended September 30, 1999 and
1998. In 1999, The St. Paul revised its segment reporting
structure to separately disclose its Surety underwriting
operation as a business
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
- ---------------------------------------
segment, which differs from its prior classification as a
component of the Commercial Lines Group. This revision reflects
the distinct nature of this operation, which provides surety bond
coverages (primarily for construction contractors). The Surety
operation is managed and evaluated separately from other
components of the Commercial Lines Group, and is also the largest
underwriter of surety bonds in North America, based on 1998
annual written premium volume. Segment information for 1998 has
been restated to be consistent with the 1999 presentation.
On October 1, 1999, The St. Paul announced a realignment of its
primary property-liability insurance underwriting operations.
The St. Paul is currently assessing the impact of the
reorganization on its external segment reporting format. Any
changes to The St. Paul's segment reporting structure will be
reflected in the company's financial statements for the year
ended Dec. 31, 1999.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1999 1998 1999 1998
------ ------ ----- -----
(In millions)
Revenues from Continuing Operations
Property-liability
insurance:
U.S. Underwriting:
Commercial Lines Group $435 $558 $1,464 $1,713
Specialty Commercial 329 334 1,009 1,006
Surety 100 90 284 255
Specialty Auto 63 62 176 181
------ ------ ------ ------
Total U.S. Underwriting 927 1,044 2,933 3,155
International 107 111 368 352
------ ------ ------ ------
Total primary
insurance operations 1,034 1,155 3,301 3,507
Reinsurance 213 223 696 787
------ ------ ------ ------
Total property-liability
premiums earned 1,247 1,378 3,997 4,294
------ ------ ------ -----
Investment operations:
Net investment income 321 322 964 985
Realized investment gains 38 7 170 187
------ ------ ------ ------
Total investment operations 359 329 1,134 1,172
Other 17 21 70 62
------ ------ ------ ------
Total property-
liability insurance 1,623 1,728 5,201 5,528
------ ------ ------ ------
Life insurance 131 100 341 284
------ ------ ------ ------
Asset management 87 77 256 226
------ ------ ------ ------
Total reportable segments 1,841 1,905 5,798 6,038
Parent company, other
operations and consolidating
eliminations 15 20 30 31
------ ------ ------ ------
Total revenues from
continuing operations $1,856 $1,925 $5,828 $6,069
====== ====== ====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
- ---------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
(In millions)
Income (Loss) from Continuing Operations
Before Income Taxes and Cumulative Effect
of Accounting Change
Property-liability
insurance:
U.S. Underwriting:
Commercial Lines Group ($69) ($157) ($241) ($584)
Specialty Commercial (43) (53) (86) (99)
Surety 5 20 33 53
Specialty Auto 4 (2) 4 (3)
------ ------ ------ ------
Total U.S. Underwriting (103) (192) (290) (633)
International (23) (25) (76) (66)
------ ------ ------ ------
Total primary insurance (126) (217) (366) (699)
Reinsurance 15 (21) 44 (5)
------ ------ ------ ------
Totla GAAP
underwriting result (111) (238) (322) (704)
------ ------ ------ ------
Investment operations:
Net investment income 321 322 964 985
Realized investment gains 38 7 170 187
------ ------ ------ ------
Total investment operations 359 329 1,134 1,172
Other (77) (7) (97) (224)
------ ------ ------ ------
Total property-
liability insurance 171 84 715 244
------ ------ ------ ------
Life insurance 21 22 48 9
------ ------ ------ ------
Asset management:
Prestax income before
minority interest 40 34 117 98
Minority interest (10) (8) (28) (23)
------ ------ ------ ------
Total asset management 30 26 89 75
------ ------ ------ ------
Total reportable segments 222 132 852 328
Parent company, other
operations and consolidating
eliminations (42) (41) (117) (260)
------ ------ ------ ------
Total income from
continuing operations before
income taxes and cumulative
effect of accounting
change $180 $91 $735 $68
====== ====== ====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 8 - Reinsurance
- --------------------
The St. Paul's consolidated financial statements reflect the
effects of assumed and ceded reinsurance transactions. Assumed
reinsurance refers to The St. Paul's acceptance of certain
insurance risks that other insurance companies have underwritten.
Ceded reinsurance involves transferring certain insurance risks
The St. Paul has underwritten to other insurance companies who
agree to share these risks. The primary purpose of ceded
reinsurance is to protect The St. Paul from potential losses in
excess of the amount it is prepared to accept.
In 1999, The St Paul's income from continuing operations
benefited from cessions made under two separate aggregate excess-
of-loss reinsurance treaties. The St. Paul ceded a total of $344
million of loss and loss adjustment expenses, and written and
earned premiums totaling $172 million under these two treaties,
for a combined net benefit to pretax income from continuing
operations of $172 million for the nine months ended Sept. 30,
1999.
The St. Paul expects those with whom it has ceded reinsurance to
honor their obligations. In the event these companies are unable
to honor their obligations, The St. Paul will pay these amounts.
The St. Paul has established allowances for possible nonpayment
of amounts due to it.
The effect of assumed and ceded reinsurance on premiums written,
premiums earned and insurance losses and loss adjustment expenses
is as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
($ in millions) 1999 1998 1999 1998
----- ----- ----- -----
Written premiums:
Direct $1,289 $1,288 $3,663 $3,711
Assumed 336 295 1,236 1,044
Ceded (348) (183) (771) (514)
----- ----- ----- -----
Net premiums written 1,277 1,400 4,128 4,241
===== ===== ===== =====
Earned premiums:
Direct 1,266 1,300 3,771 3,931
Assumed 365 308 1,075 1,003
Ceded (322) (199) (722) (559)
----- ----- ----- -----
Net premiums earned 1,309 1,409 4,124 4,375
===== ===== ===== =====
Insurance losses and loss
adjustment expenses:
Direct 890 1,044 2,899 3,270
Assumed 354 206 850 705
Ceded (354) (118) (811) (434)
----- ----- ----- -----
Net insurance
losses and loss
adjustment expenses $890 $1,132 $2,938 $3,541
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 9 - Discontinued Operations - Sale of Standard Personal Insurance
- ----------------------------------------------------------------------
In June 1999, The St. Paul made a strategic decision to sell its
standard personal insurance business. On July 12, 1999 an
agreement was reached to sell this business to Metropolitan
Property and Casualty Insurance Company (Metropolitan). As a
result, the standard personal insurance operations were accounted
for as a discontinued operation for the second quarter and first
six months of 1999, and prior period results were restated to be
consistent with such presentation. The third quarter results of
the standard personal insurance operations are included in the
gain on sale of discontinued operations. The Specialty Auto line
of business, which was previously aggregated with standard
personal insurance to form The St. Paul's Personal Insurance
segment for reporting purposes, was not included in this sale.
The St. Paul completed its disposition of the standard personal
insurance business through the stock sale of the Economy Fire &
Casualty Company and its wholly-owned subsidiaries (Economy) on
Sept. 30, 1999, and the sale of its rights and interests in those
policies constituting the remaining portion of its standard
personal insurance operations and certain related assets. This
remaining portion was transferred to Metropolitan by way of a
reinsurance and facility agreement effective Oct. 1, 1999,
pursuant to which The St. Paul transferred assets, representing
the unearned premium on the inforce policies, of approximately
$325 million to Metropolitan. During the third quarter, The St.
Paul received gross proceeds on the sale of $577 million, less
the payment of the reinsurance premium of $325 million, for net
proceeds of $252 million. Additional proceeds to be received
approximate $17 million.
As a result of the sale, nearly all 1,700 standard personal
insurance employees of The St. Paul will transfer to
Metropolitan, effective Dec. 31, 1999. For the period from
closing date through Dec. 31, 1999, these employees remain
employees of The St. Paul who are being leased to Metropolitan.
The St. Paul recognized a pretax gain on proceeds of $138
million, net of a $27 million pension and postretirement
curtailment gain and disposition costs of $32 million. The gain
on proceeds combined with a $136 million pretax gain on third
quarter discontinued operations to result in a total pretax gain
of $269 million. The third quarter discontinued operations
included a reserve takedown of $145 million, as provided for in
the sale agreement. Redundancies or deficiencies which develop
on these reserves will be settled at a specified point in the
future.
The curtailment gain represents the current estimate of the
impact of a reduced number of employees in the pension and post-
retirement plans due to the sale of personal insurance. The
calculation of the actual curtailment gain will be made in the
fourth quarter of 1999, when actual discount rates are available.
Any adjustments to the estimate will be reflected as a fourth
quarter adjustment to the gain on sale.
The $32 million pretax disposition costs netted against the gain
represent costs directly associated with the decision to dispose
of the standard personal insurance segment and include $14
million of employee-related costs, $8 million of lease buyout
costs, $7 million of transaction costs, $2 million of record
separation costs and $1 million of equipment charges. The
employee-related costs relate to the expected termination of 385
employees due to the sale of the personal insurance segment.
Actions to take place related to these charges are expected to be
completed by the end of 2000.
The consolidated Sept. 30, 1999 balance sheet reflects the sale
of Economy and the consolidated Dec. 31, 1998 balance sheet has
been reclassified to present the net assets of Economy in other
assets.
The consolidated statements of operations for the quarter and
nine months ended Sept. 30, 1999 exclude the results of standard
personal insurance operations from income from continuing
operations. The following table presents the consolidated
statement of operations for the year ended Dec. 31, 1998 on a
historical basis, and after giving effect to the removal of the
results of standard personal insurance operations from income
from continuing operations:
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(In millions) Historical Reclass to Reclassified
Basis Discontinued Basis
---------- ------------ ------------
Premiums earned $6,945 ($1,149) $5,796
Other revenues 2,163 16 2,179
----- ----- -----
Total revenues 9,108 (1,133) 7,975
----- ----- -----
Insurance losses and loss
adjustment expenses 5,604 (973) 4,631
Other expenses 3,551 (344) 3,207
----- ----- -----
Total expenses 9,155 (1,317) 7,838
----- ----- -----
Income (loss) from continuing
operations before income taxes (47) 184 137
Income tax expense (benefit) (136) 63 (73)
----- ----- -----
Income from
continuing operations 89 121 210
Discontinued operations,
net of taxes - (121) (121)
----- ----- -----
Net income $89 $0 $89
===== ===== =====
Note 10 - Cumulative Effect of Accounting Change
- ------------------------------------------------
Effective Jan. 1, 1999, The St. Paul adopted the provisions of
the American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) No. 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments." The
SOP provides guidance for recognizing and measuring liabilities
for guaranty fund and other insurance-related assessments. The
St. Paul recorded a pretax expense of $46 million ($30 million
after-tax) in the first quarter of 1999 representing the
cumulative effect of adopting the provisions of the SOP. The
majority of the cumulative effect related to assessments for
workers' compensation second-injury funds, with a lesser amount
related to insurance guaranty funds. Second-injury funds provide
reimbursement to insurance carriers or employers for workers'
compensation claims when the cost of a workers' second injury
combined with a prior accident or disability is greater than what
the second injury alone would have produced. Second-injury funds
are established to help ensure that employers are not made to
suffer a greater monetary loss or increased insurance costs
because of hiring previously injured or handicapped employees.
The St. Paul's total accrued pre-tax expense related to insurance
assessments was $74 million at March 31, 1999, which consisted of
the $46 million first quarter cumulative effect of adopting SOP
97-3 and $28 million of previously recorded liabilities. The
accrual was recorded as follows: $53 million in other
liabilities, $16 million in insurance reserves, and $5 million in
other assets as an offset to deferred premium tax recoverable.
The accrued amounts are expected to be disbursed as assessed
during a period of up to 30 years.
During the third quarter of 1999, the state of New York enacted a
law which changed its method of assessment from loss-based to
written premium-based. As a result of this change, The St. Paul
reduced its accrual for second-injury and guaranty fund
assessments by $12 million (pretax) in the third quarter, which
is reflected in Income from Continuing Operations.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 11 - Merger with USF&G Corporation
- ---------------------------------------
On April 24, 1998, The St. Paul issued 66.5 million of its
common shares in exchange for all of the outstanding common
stock of USF&G Corporation, a holding company for property-
liability and life insurance operations.
The St. Paul recorded a pretax charge to earnings of $292 million
in the second quarter of 1998 related to the merger, primarily
consisting of severance and other employee-related costs,
facilities exit costs, asset impairments and transaction costs.
The St. Paul estimated that approximately 2,000 positions would
be eliminated due to the combination of the two organizations,
resulting from efficiencies to be realized by the larger
organization and the elimination of redundant functions. All
levels of employees, from technical staff to senior management,
were affected by the reductions. The number of positions
expected to be reduced by function included approximately 950 in
The St. Paul's property-liability underwriting operation, 350 in
claims and 700 in finance and other administrative positions.
The reductions are occurring throughout the United States.
Through Sept. 30, 1999, approximately 2,200 positions had been
eliminated, and the cost of termination benefits paid was $131
million.
The following table provides information about the components of
the 1998 charge, payments made and the balance of accrued amounts
remaining at Sept. 30, 1999.
Pre-
tax
Charges to earnings: Charge
(in millions) ------
USF&G corporate
headquarters $36
Long-lived assets 23
Software depreciation
acceleration 10
Computer leases and
equipment 9
Other equipment and
furniture 8
----
Subtotal 86
----
Accrued charges subject to
rollforward:
Reserve
Pre- at
tax Sept. 30,
Charge Payments Adjustments 1999
-------- -------- ----------- --------
Executive severance 89 $(84) $(2) $3
Other severance 53 (47) 0 6
Branch lease exit costs 34 (6) 0 28
Transaction costs 30 (30) 0 -
---- ---- ---- ----
Accruals subject to
rollforward 206 $(167) $(2) $37
---- ==== ==== ====
Total $292
====
Footnote 2 of The St. Paul's 1998 Annual Report provides more
information regarding the rationale for and calculation of the
components of the merger-related charge, as updated below.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 11 - Merger with USF&G Corporation (continued)
- ---------------------------------------------------
Long-lived assets
- -----------------
Upon consummation of the merger, The St. Paul determined that
several of USF&G's real estate investments were not consistent
with The St. Paul's real estate investment strategy. A plan was
developed to sell a number of apartment buildings and various
other miscellaneous holdings, with an expected disposal date by
year-end 1999. In applying the provisions of SFAS No. 121, it
was determined that four of these miscellaneous investments
should be written down to fair value, based on The St. Paul's
plan to sell them. Fair value was determined based on a
discounted cash flow analysis, or based on market prices for
similar assets. The four investments were as follows:
1) Description of Percentage rents retained after sale
investment: of a portfolio of stores to a third
party
Carrying $21.6 million prior to writedown of
amount: $16.6 million, for current amount of
$5.0 million, with $4.3 million held
in the property-liability segment
and $0.7 million held in the life
segment
2) Description of 138-acre land parcel in New Jersey,
investment: with farm buildings being rented out
Carrying $4.9 million prior to writedown of
amount: $2.1 million, sold during the third
quarter for a pretax realized loss
of $.7 million
3) Description of Receivable representing cash flow
investment: guarantee payments related to real
estate partnerships
Carrying $4.8 million prior to writedown of
amount: $1.7 million, sold with no further
gain or loss
4) Description of Limited partnership interests in
investment: three citrus groves
Carrying $4.5 million prior to writedown of
amount: $2.4 million. Two of the
partnership interests have been
exchanged for an investment in a new
partnership, with one of the
original citrus grove partnership
interests remaining. This
partnership is carried at a current
balance of $.6 million, held in
"parent company and other"
operations
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 12 - Fourth Quarter 1998 Restructuring Charge
- --------------------------------------------------
In the fourth quarter of 1998, The St. Paul recorded a pretax
restructuring charge of $34 million. The majority of the charge,
$26 million, related to the anticipated termination of
approximately 520 employees in the following operations: Claims,
Commercial Lines Group, Information Systems, Medical Services and
Professional Markets. The remaining charge of $8 million related
to costs to be incurred to exit lease contracts.
As of Sept. 30, 1999, approximately 300 employees had been
terminated under the restructuring plan, and the cost of
termination benefits paid was $19 million. The remaining reserve
related to severance was written down by $2 million for the third
quarter and $5 million year to date, for a balance at Sept. 30,
1999 of $2 million. Less than $1 million had been paid related
to branch leases as of Sept. 30, 1999. The branch lease accrual
has, however, been reduced by $5 million for subleases that have
been entered into related to the vacated space. Actions to take
place under this restructuring plan are expected to be completed
by the end of 1999.
Note 13 - Third Quarter 1999 Cost Reduction Charge
- --------------------------------------------------
In August 1999, The St. Paul announced a cost reduction program
designed to enhance its efficiency and effectiveness in a highly
competitive industry environment. In the third quarter of 1999,
The St. Paul recorded a pretax charge of $60 million related to
this program, including $25 million in employee-related charges
related to the expected elimination of approximately 700
positions, $33 million in lease buyout charges and $2 million in
equipment charges. This charge is included in "Operating and
Administrative Expenses" in the statement of operations and in
"Property-liability insurance - Other" in the table titled
"Income (Loss) from Continuing Operations Before Income Taxes and
Cumulative Effect of Accounting Change" in Note 7.
As of Sept. 30, 1999, approximately 41 employees had been
terminated under the cost reduction action, but no amounts had
been paid.
Many of these actions will occur during the fourth quarter of
1999 and all actions to take place under this cost reduction
program are expected to be completed by the end of 2000.
Note 14 - Subsequent Event - Share Repurchase Authorization
- -----------------------------------------------------------
On November 2, 1999, The St. Paul's board of directors authorized
management to repurchase up to $500 million of the company's
common stock in the open market or through private transactions.
This repurchase program terminates a prior $500 million
repurchase authorization in November 1998, under which The St.
Paul repurchased 12.1 million common shares for a total cost of
$400 million. The repurchases are expected to be partially
funded by proceeds from the recently completed sale of The St.
Paul's standard personal insurance operations.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 1999
On Sept. 30, 1999, The St. Paul completed the sale of its
standard personal insurance business to Metropolitan Property and
Casualty Insurance Company. The results of the operations sold
have been accounted for as discontinued operations for all
current and prior year periods, and are thus excluded from any
table or discussion of continuing operations.
Consolidated Results
--------------------
The following table summarizes The St. Paul's results for the
third quarter and first nine months of 1999 and 1998.
Three Months Nine Months
(in millions, Ended Sept. 30 Ended Sept. 30
except per share data) -------------- --------------
1999 1998 1999 1998
Pretax income (loss): ----- ----- ----- -----
Property-liability
insurance:
GAAP underwriting result $(111) $(238) $(322) $(704)
Net investment income 321 322 964 985
Realized investment gains 38 7 170 187
Other (77) (7) (97) (224)
---- ---- ---- ----
Total property-
liability insurance 171 84 715 244
Life insurance 21 22 48 9
Asset management 30 26 89 75
Parent and other (42) (41) (117) (260)
---- ---- ---- ----
Income from continuing
operations before income
taxes and cumulative effect
of accounting change 180 91 735 68
Income tax expense (benefit) 39 (12) 173 (46)
---- ---- ---- ----
Income from continuing
operations before
cumulative effect of
accounting change 141 103 562 114
Cumulative effect of
accounting change, net of taxes - - (30) -
---- ---- ---- ----
Income from continuing
operations 141 103 532 114
Discontinued operations, net
of taxes:
Operating loss - (35) (22) (125)
Gain on disposal 186 - 186 -
---- ---- ---- ----
Discontinued operations 186 (35) 164 (125)
---- ---- ---- ----
Net income (loss) $327 $ 68 $696 $(11)
==== ==== ==== ====
Diluted net income
(loss) per common share $1.34 $0.27 $2.84 $(0.09)
==== ==== ==== ====
Consolidated Overview
- ---------------------
The St. Paul's pretax income from continuing operations of $180
million in the third quarter of 1999 was significantly higher
than pretax income of $91 million in the same 1998 period.
Results in the 1999 period include a $141 million net pretax
benefit from two aggregate excess-of-loss reinsurance treaties,
which are discussed in more detail on page 25 of this report.
Third quarter 1999 income from continuing operations in The St.
Paul's property-liability underwriting operations was reduced by
a $60 million pretax charge related to the company's cost
reduction program implemented in the third quarter of 1999.
Excluding these items, third quarter 1999 pretax income from
continuing operations totaled $99 million. This improvement over
1998's third quarter was largely due to an increase in realized
investment gains in The St. Paul's property-liability insurance
operations.
Through the first nine months of 1999, pretax income from
continuing operations of $735 million was significantly higher
than equivalent 1998 income of $68 million. The 1998 total
included a pretax charge of $292 million related to The St.
Paul's merger with USF&G, primarily for severance and other
employee-related costs and facilities exit costs. The 1998 total
also reflected a $215 million provision to reflect the
application of The St. Paul's loss reserving policies to USF&G's
loss and loss adjustment expense reserves subsequent to the April
1998 merger, and a $41 million writedown in the carrying value of
deferred acquisition costs in The St. Paul's life insurance
segment.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Results (continued)
-------------------------------
Merger-Related Savings
- ----------------------
The St Paul has realized efficiencies in the first nine months of
1999 as a result of its 1998 merger with USF&G, primarily
resulting from the elimination of duplicate functions throughout
the combined organization, including the consolidation of
corporate headquarters' functions, and the elimination of
approximately 2,200 employees since the consummation of the
merger. By the end of 1999, The St. Paul expects to realize
pretax annualized expense savings of approximately $260 million
(as measured against the combined 1997 pre-merger expenses of The
St. Paul and USF&G) as a result of the merger and the
restructuring of its Commercial Lines Group and Specialty
Commercial underwriting business segments in late 1998. These
savings are separate from anticipated savings resulting from The
St. Paul's 1999 cost reduction program.
Cost Reduction Program
- ----------------------
In September 1999, The St. Paul implemented a cost reduction
program designed to enhance its efficiency and effectiveness in a
highly competitive industry environment. The $60 million pretax
charge recorded in the third quarter consisted of $25 million in
employee-related costs associated with the anticipated
elimination of approximately 700 positions by the end of 2000;
$33 million for lease buy-out expenses; and $2 million for
equipment charges. As of Sept. 30, 1999, no amounts had been
paid related to these charges. The headcount reductions
anticipated under this program are separate from any reductions
related to The St. Paul's merger with USF&G, or reductions
associated with The St. Paul's sale of its standard personal
insurance operations.
Discontinued Operations
- -----------------------
The St. Paul recorded a pretax gain of $269 million ($186 million
after-tax) resulting from the sale of its standard personal
insurance operations to Metropolitan Property and Casualty
Insurance Company (Metropolitan) in a transaction that closed on
Sept. 30, 1999. Under terms of the sale agreement, Metropolitan
purchased the Economy Fire & Casualty Company (a wholly-owned
subsidiary of The St. Paul) and its wholly-owned subsidiaries, as
well as the rights and interests in those policies constituting
the remaining standard personal insurance operations of The St.
Paul. These rights and interests were transferred to
Metropolitan by way of a reinsurance and facility agreement
pursuant to which The St. Paul transferred assets, representing
the unearned premium on the inforce policies, of approximately
$325 million to Metropolitan. The transfer of these assets,
combined with The St. Paul's gross cash proceeds of $577 million
received upon closing of the sale, resulted in net proceeds to
The St. Paul of $252 million.
The $269 million pretax gain recognized on the sale consisted of
the following components: a gain on proceeds of $138 million; a
pension and postretirement curtailment gain of $27 million;
disposition costs of $32 million; and a $136 million income from
third quarter 1999 discontinued operations, which included a $145
million reduction in insurance loss and loss adjustment expense
reserves, as provided for in the sale agreement. Redundancies or
deficiencies which develop on these reserves will be settled at a
specified point in the future. The $32 million charge represents
costs directly associated with the decision to dispose of the
standard personal insurance business and includes employee-
related costs relating to the expected termination of
approximately 385 employees due to the sale of these operations.
These employees are separate from the 1,700 St. Paul standard
personal employees who are currently being leased to Metropolitan
and who will transfer to Metropolitan effective Dec. 31, 1999.
Cumulative Effect of Accounting Adjustment
- ------------------------------------------
Net income for the first nine months of 1999 included a pretax
expense of $46 million ($30 million after-tax), representing the
cumulative effect of adopting the AICPA's Statement of Position
(SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." The SOP provides guidance for
recognizing and measuring liabilities for guaranty and other
insurance-related assessments. In the third quarter of 1999, the
state of New York enacted a law which changed their assessment
method from a loss-based assessment method to a written premium-
based assessment method. As a result, The St. Paul reduced its
previously recorded accrual by $12 million (pretax) in the third
quarter, which was recorded in income from continuing operations.
Realignment of Primary Insurance Operations
- -------------------------------------------
On October 1, 1999, The St. Paul announced a realignment of its
primary property-liability insurance underwriting operations.
The changes are designed to streamline the organization, with an
emphasis on easing access for agents and brokers in the United
States. The St. Paul is currently assessing the impact of the
reorganization on its external segment reporting format. Any
changes to The St. Paul's segment reporting structure will be
reflected in the company's financial statements for the year
ended Dec. 31, 1999. Segment data presented in this report are
presented in a manner consistent with the organizational
structure as it existed on Sept. 30, 1999.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance
----------------------------
The following summarizes key financial results (from continuing
operations) by property-liability underwriting business segment.
Underwriting results are presented on a GAAP basis; combined
ratios are presented on a statutory accounting basis:
% of Three Months Nine Months
1999 Ended Sept. 30 Ended Sept. 30
($ in millions) Written -------------- ---------------
Premiums 1999 1998 1999 1998
-------- ----- ----- ----- -----
Commercial Lines Group:
Written Premiums 35% $424 519 1,431 1,613
Underwriting Result $(69) (157) (241) (584)
Combined Ratio 114.7 128.9 115.9 135.9
Specialty Commercial:
Written Premiums 23% $372 374 949 915
Underwriting Result $(43) (53) (86) (99)
Combined Ratio 111.5 114.0 110.1 111.9
Surety:
Written Premiums 8% $110 91 324 291
Underwriting Result $5 20 33 53
Combined Ratio 84.8 79.2 81.5 79.1
Specialty Auto:
Written Premiums 4% $55 58 180 191
Underwriting Result 4 (2) 4 (3)
Combined Ratio 95.5 108.4 97.6 101.3
---- ----- ----- ----- -----
Total U.S. Underwriting:
Written Premiums 70% $961 1,042 2,884 3,010
Underwriting Result $(103) (192) (290) (633)
Combined Ratio 108.8 118.3 109.7 122.1
International:
Written Premiums 11% $117 119 462 398
Underwriting Result $(23) (25) (76) (66)
Combined Ratio 117.6 120.4 117.5 116.6
---- ----- ----- ----- -----
Total Primary Insurance:
Written Premiums 81% $1,078 1,161 3,346 3,408
Underwriting Result $(126) (217) (366) (699)
Combined Ratio 109.8 118.6 110.5 121.4
Reinsurance:
Written Premiums 19% $199 238 782 833
Underwriting Result $15 (21) 44 (5)
Combined Ratio 98.0 108.1 93.1 99.4
---- ----- ----- ----- -----
Total Property-Liability
Insurance:
Written Premiums 100% $1,277 1,399 4,128 4,241
===== ===== ===== =====
GAAP Underwriting Result $(111) (238) (322) (704)
===== ===== ===== =====
Statutory Combined Ratio:
Loss and Loss Expense Ratio 71.4 82.2 73.5 82.5
Underwriting Expense Ratio 36.4 34.7 34.0 34.9
----- ----- ----- -----
Combined Ratio 107.8 116.9 107.5 117.4
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Overview
- --------
The St. Paul's property-liability insurance results for the third
quarter of 1999 were heavily influenced by the favorable impact of
an all-lines, aggregate excess-of-loss reinsurance treaty that the
company entered into effective Jan. 1, 1999 (the "corporate
treaty"). The reinsurance coverage was triggered when The St.
Paul's insurance losses and loss expenses across all lines of
business reached a certain level as prescribed by terms of the
treaty. The impact of the corporate treaty on The St. Paul's third
quarter 1999 results was as follows: The St. Paul ceded insurance
losses and loss adjustment expenses totaling $235 million, and
ceded written and earned insurance premiums of $129 million, for a
net pretax benefit of $106 million to The St. Paul's income from
continuing operations. Additionally, The St. Paul's Reinsurance
segment benefited from cessions made under a separate aggregate
excess-of-loss reinsurance treaty unrelated to the corporate
treaty. Under this treaty in the third quarter of 1999, the
Reinsurance segment ceded insurance losses and loss adjustment
expenses of $53 million ($109 million year-to-date), and ceded $18
million of written and earned premiums ($43 million year-to-date),
for a net pretax benefit of $35 million ($66 million year-to-date)
to income from continuing operations. The combined impact of the
two treaties on The St. Paul's property-liability underwriting
business segments for the third quarter of 1999 was as follows:
(in millions) Ceded Ceded Pretax
losses premiums benefit
------ -------- -------
Commercial Lines Group $131 $ 72 $ 59
Reinsurance 117 53 64
International 40 22 18
---- ---- ----
Total $288 $147 $141
==== ==== ====
The St. Paul's third-quarter 1999 consolidated written premiums
from continuing operations of $1.28 billion were 9% below
comparable 1998 premiums of $1.40 billion, primarily due to the
premiums ceded under the aforementioned reinsurance treaties.
Excluding the impact of those cessions, premium volume for the
quarter totaled $1.42 billion, slightly higher than the 1998 third
quarter total. On a year-to-date basis excluding the impact of the
reinsurance cessions, consolidated written premiums of $4.30
billion grew 1% over comparable 1998 volume of $4.24 billion,
primarily due to new business in the International segment.
Catastrophe losses, which played a large role in triggering
coverage under the corporate treaty, totaled $126 million on a
pretax basis in the third quarter of 1999, compared with losses of
$113 million in the same 1998 period. The 1999 losses were largely
the result of Hurricane Floyd, which accounted for $62 million of
losses, and earthquakes in Turkey and Taiwan, which together
accounted for $40 million of losses. Catastrophe losses in 1998's
third quarter were primarily the result of Hurricane Georges.
The St. Paul's consolidated loss ratio, measuring insurance losses
and loss adjustment expenses as a percentage of earned premiums,
was 71.4 for the third quarter of 1999, compared with a loss ratio
of 82.2 in the same period of 1998. The 1999 ratio reflects a 13.1
point benefit from the reinsurance treaties. Through the first
nine months of 1999, the loss ratio of 73.5 includes a 5.2 point
benefit from the treaties. The nine-month 1998 loss ratio of 82.5
includes a 5.0 point negative impact of the $215 million provision
to reflect the application of The St. Paul's loss reserving
policies to USF&G's loss and loss adjustment expense reserves
subsequent to the April 1998 merger.
The consolidated expense ratio, measuring underwriting expenses as
a percentage of written premiums, was 36.4 for the 1999 third
quarter, compared with an expense ratio of 34.7 in the same 1998
period. Excluding the 3.8 point negative impact of ceding $147
million written premiums under the reinsurance treaties, the
adjusted ratio of 32.6 was over two points better than the 1998
third-quarter ratio. The year-to-date expense ratio of 32.6 (as
adjusted for ceded premiums) was also over two points better than
last year's comparable ratio of 34.9. The improvement in 1999
reflects cost savings realized as a result of the merger with
USF&G, and efficiencies resulting from the restructuring of the
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Commercial Lines Group and Specialty Commercial segments in late
1998. That restructuring resulted in the elimination of
approximately 300 positions from these segments during the first
nine months of 1999. These positions are separate from those
positions eliminated as a result of the merger with USF&G and those
to be eliminated by the end of 2000 as a result of the additional
expense reduction initiatives announced in August 1999.
Underwriting Results by Segment
- -------------------------------
COMMERCIAL LINES GROUP
The Commercial Lines Group segment includes The St. Paul's Middle
Market and Small Commercial business centers, and several other
business centers providing specialized products and services for
targeted industry groups. Written premiums in the third quarter
and first nine months of 1999 were 18% and 11% lower than the same
periods of 1998, respectively. Excluding the $72 million premium
reduction resulting from the corporate treaty, premium volume was
still down 4% and 7%, respectively, from the third quarter and
first nine months of 1998. The decline was centered in the Middle
Market business center, reflecting the impact of management's
initiatives to improve profitability by refusing to underwrite
inadequately priced business.
This segment's underwriting loss of $69 million in the third
quarter of 1999 included a $59 million net benefit from the
corporate treaty. Excluding that benefit, the underwriting loss
for the third quarter totaled $128 million, a $29 million
improvement over the same 1998 period. Through nine months of
1999, the underwriting loss of $300 million (excluding the $59
million corporate treaty benefit) was significantly improved over
the nine-month 1998 loss of $584 million, which included $197
million of the provision to reflect the application of The St.
Paul's loss reserving policies to USF&G's loss and loss adjustment
expense reserves subsequent to the April 1998 merger. The
improvement in 1999 results reflects the impact of corrective
underwriting and pricing initiatives and ongoing expense
reductions. Excluding the 5.7 point negative impact of the
corporate treaty, the adjusted expense ratio of 33.2 in this
segment was over two points better than last year's third quarter
expense ratio of 35.5.
SPECIALTY COMMERCIAL
The Specialty Commercial segment includes the Medical Services,
Custom Markets and Professional Markets business centers, all of
which provide specialized insurance products and services tailored
to meet the needs of specific commercial customer groups. This
segment was not affected by the corporate treaty. Written premiums
for the third quarter of $372 million were virtually level with
premiums of $374 million in the same 1998 period. An increase in
written premiums in the Technology business center of Custom
Markets was offset by a decline in volume in the Public Sector
business center of Professional Markets. Year-to-date premium
volume grew 4% over the first nine months of 1998, primarily due to
premiums on a Medical Services' three-year policy recorded in the
second quarter of 1999.
The underwriting loss of $43 million in this segment for the third
quarter of 1999 improved by $10 million compared with the same
period of 1998. Medical Services posted its fourth consecutive
quarter of improvement with an underwriting loss of $15 million,
compared with a loss of $38 million in the same 1998 period.
Custom Markets' third quarter 1999 underwriting results
deteriorated by $13 million compared with last year's third
quarter, primarily due to an increase in large property losses in
the Technology business center. Through the first nine months of
1999, Specialty Commercial's underwriting loss of $86 million was
$13 million less than the $99 million loss recorded in the same
period of 1998. Last year's nine-month total included an $18
million provision to reflect the application of The St. Paul's loss
reserving policies to USF&G's loss and loss adjustment expense
reserves subsequent to the April 1998 merger.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
SURETY
The St. Paul is the largest underwriter of surety bonds in North
America, based on 1998 written premiums. Written premiums in
1999's third quarter of $110 million grew 20% over third-quarter
1998 volume of $91 million. Through the first nine months of 1999,
written premiums of $324 million were 11% higher than the
comparable 1998 total of $291 million. In both the United States
and Mexico, strong economies have fueled growth in the construction
industry, resulting in a significant increase in the demand for
contract surety business. This segment continues to produce strong
results, posting underwriting profits of $5 million and $33 million
in the third quarter and first nine months of 1999, respectively.
The year-to-date expense ratio in this segment of 49.4 was five
points better than in the same period of 1998.
SPECIALTY AUTO
The Specialty Auto segment provides personal property-liability
insurance products and services to individuals who are unable to
obtain standard coverage due to their inability to meet certain
underwriting criteria. These operations were not included in the
sale of The St. Paul's standard personal insurance business to
Metropolitan. Written premium volume of $55 million in the third
quarter of 1999 was 4% below written premiums in the same 1998
period. Through the first nine months of 1999, premiums of $180
million fell 6% short of comparable 1998 levels. Industry
competition in this market segment has intensified during 1999, as
standard insurance underwriters pursue nonstandard risks through
new product offerings. The St. Paul's disciplined pricing approach
and refined market segmentation resulted in underwriting profits
for the third quarter and first nine months of 1999 despite the
difficult market environment.
INTERNATIONAL
The St. Paul's International segment provides commercial and
personal property-liability insurance products and services in
selected international markets. Premium volume of $117 million in
the third quarter was down slightly from the comparable 1998 total
of $119 million. Excluding the $22 million of written premiums
ceded under the corporate treaty, however, third quarter premiums
grew 17% over the same 1998 period. Premium volume through the
first nine months of 1999 increased 16% over the comparable 1998
period. Growth in 1999 was centered in the Lloyd's of London
operation, where The St. Paul has significantly increased its
underwriting capacity on the syndicates that are managed by the
managing agencies that it owns. New commercial business
opportunities in Europe also contributed to the 1999 growth rate.
The third quarter and nine-month underwriting losses of $23 million
and $76 million, respectively, reflected an $18 million benefit
from the corporate treaty. Excluding that benefit, results for the
third quarter were $15 million worse than the same 1998 period,
primarily due to adverse prior year loss development on several
Lloyd's syndicates. On a year-to-date basis excluding the
corporate treaty benefit, the underwriting loss of $93 million was
$27 million worse than the same 1998 period, due to the increase in
losses at Lloyd's, as well as significant losses in Canada early in
1999 and reserve strengthening in the Global Marine business
center.
REINSURANCE
The St. Paul's Reinsurance segment underwrites treaty and
facultative reinsurance for property, liability, ocean marine,
surety and certain specialty classes of business, and provides
products and services to the alternative risk transfer market.
Premium volume in the third quarter of $199 million was 17% below
comparable 1998 levels, primarily due to the $35 million of
premiums ceded under the corporate treaty and $18 million of
premiums ceded under the separate aggregate excess-of-loss
reinsurance treaty. Year-to-date volume of $782 million was 6%
below the comparable 1998 total, primarily due to the combined
total of $78 million of premiums ceded under the two aggregate
excess-of-loss reinsurance treaties. During 1999, The St. Paul
changed its process for estimating reinsurance premiums that have
been earned, but not yet reported, by ceding insurers. That change
added approximately $11 million and $61 million, respectively, to
third quarter and year-to-date premium volume. Worldwide
reinsurance markets remain highly competitive, driven by excess
capacity in primary insurance markets which has put downward
pressure on the demand for and price of reinsurance coverage. The
Reinsurance segment posted a $15 million underwriting profit in the
third quarter of 1999, pushing the year-to-date profit to $44
million. Underwriting losses in the equivalent periods of 1998
were $21 million and $5 million, respectively. Cessions under the
two reinsurance treaties had a net positive impact on underwriting
results of $64 million and $95 million for the third quarter and
first nine months of 1999, respectively.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Investment Operations
- ---------------------
Third quarter 1999 pretax investment income of $321 million in The
St. Paul's property-liability operations was virtually level with
the comparable 1998 total of $322 million. Year-to-date pretax
investment income of $964 million fell 2% short of the 1998 nine-
month total of $985 million. Negative underwriting cash flows over
the last several quarters (an excess of loss and expense payments
over premium receipts) have resulted in a net reduction in the
underwriting operations' invested assets compared with the same
time in 1998. In addition, merger-related and restructuring
payments totaling $186 million over the last seventeen months have
further reduced opportunities for growth in the investment
portfolio. These factors have resulted in the decline in
investment income compared with 1998. The sale of The St. Paul's
standard personal insurance business resulted in the transfer of
approximately $325 million of net invested assets to Metropolitan
Property and Casualty Insurance Company, which will further reduce
investment income levels going forward. Investment income in
future periods will also be negatively impacted by the combined
$172 million in premiums ceded during 1999 under the two aggregate
excess-of-loss reinsurance treaties.
The St. Paul does not anticipate substantial improvement in its
underwriting cash flow situation during the fourth quarter of 1999.
However, the company believes the corrective pricing and
underwriting initiatives that have been implemented in 1999, along
with continuing expense reduction efforts, will provide the
opportunity for improved cash flows in 2000.
Pretax realized investment gains in The St. Paul's property-
liability insurance operations of $38 million in the third quarter
of 1999 were significantly higher than gains of $7 million in the
same period of 1998. An increase in gains from sales of equity and
venture capital investments accounted for the growth over the 1998
period. Pretax gains for the first nine months of 1999 totaled
$170 million, compared with $187 million through the first nine
months of 1998. In 1998's second quarter, The St. Paul took
advantage of favorable market conditions to restructure its equity
portfolio, which resulted in an unusually high level of realized
gains.
The $16.2 billion carrying value of the property-liability fixed
maturities portfolio on Sept. 30, 1999 included $200 million of
pretax unrealized appreciation in market value. An upward movement
in market interest rates during the first nine months of 1999
resulted in an $816 million pretax decline in the unrealized
appreciation of the bond portfolio since the end of 1998.
Approximately 96% of that portfolio is rated at investment grade
(BBB or above). The weighted average pretax yield on those
investments was 6.8% at Sept. 30, 1999.
Environmental and Asbestos Claims
---------------------------------
The St. Paul continues to receive claims alleging injuries from
environmental pollution or alleging covered property damages for
the cost to clean up polluted sites. The company also receives
asbestos injury and property damage claims arising out of product
liability coverages under general liability policies. The vast
majority of these claims arise from policies written many years
ago. The St. Paul's alleged liability for both environmental and
asbestos claims is complicated by significant legal issues,
primarily pertaining to the scope of coverage. In the company's
opinion, court decisions in certain jurisdictions have tended to
broaden insurance coverage beyond the intent of original insurance
policies.
The St. Paul's ultimate liability for environmental claims is
difficult to estimate because of these legal issues. Insured
parties have submitted claims for losses not covered in their
respective insurance policies, and the ultimate resolution of these
claims may be subject to lengthy litigation, making it difficult to
estimate The St. Paul's potential liability. In addition,
variables, such as the length of time necessary to clean up a
polluted site and controversies surrounding the identity of the
responsible party and the degree of remediation deemed necessary,
make it difficult to estimate the total cost of an environmental
claim.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Environmental and Asbestos Claims (continued)
--------------------------------------------
Estimating the ultimate liability for asbestos claims is equally
difficult. The primary factors influencing the estimate of the
total cost of these claims are case law and a history of prior
claim development.
The following table represents a reconciliation of total gross and
net environmental reserve development for the nine months ended
September 30, 1999, and the years ended Dec. 31, 1998 and 1997.
Amounts in the "net" column are reduced by reinsurance
recoverables.
1999
Environmental (nine 1998 1997
- ------------- months) ---- ----
(in millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Beginning reserves $783 $645 $867 $677 $889 $676
Incurred losses (41) (5) (16) 26 44 58
Paid losses (35) (33) (68) (58) (66) (57)
---- ---- ---- ---- ---- ----
Ending reserves $707 $607 $783 $645 $867 $677
==== ==== ==== ==== ==== ====
The following table represents a reconciliation of total gross and
net reserve development for asbestos claims for the nine months
ended September 30, 1999, and the years ended Dec. 31, 1998 and
1997.
1999
Asbestos (nine 1998 1997
- -------- months) ---- ----
(in millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Beginning reserves $402 $277 $397 $279 $413 $304
Incurred losses 13 45 44 13 22 (5)
Paid losses (19) (17) (39) (15) (38) (20)
---- ---- ---- ---- ---- ----
Ending reserves $396 $305 $402 $277 $397 $279
==== ==== ==== ==== ==== ====
The St. Paul's reserves for environmental and asbestos losses at
September 30, 1999 represent its best estimate of its ultimate
liability for such losses, based on all information currently
available. Because of the inherent difficulty in estimating such
losses, however, The St. Paul cannot give assurances that its
ultimate liability for environmental and asbestos losses will, in
fact, match current reserves. The St. Paul continues to evaluate
new information and developing loss patterns, but it believes any
future additional loss provisions for environmental and asbestos
claims will not materially impact The St. Paul's results of
operations, liquidity or financial position.
Total gross environmental and asbestos reserves at September 30,
1999 of $1.10 billion represented approximately 6% of gross
consolidated reserves of $18.12 billion.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Life Insurance
--------------
The St. Paul's life insurance segment consists of Fidelity and
Guaranty Life Insurance Company and subsidiaries ("F&G Life"). F&G
Life's primary products are deferred annuities (including tax-
sheltered annuities and equity indexed annuities), structured
settlement annuities and immediate annuities. F&G Life also
underwrites traditional life insurance products.
Highlights of F&G Life's financial performance for the third
quarter and first nine months of 1999 and 1998 were as follows:
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
(in millions) 1999 1998 1999 1998
---- ---- ---- ----
Pretax income $21 $22 $48 $9
Sales (annualized premiums) $145 $131 $761 $282
Premiums and policy charges $62 $31 $127 $81
Policy surrenders $55 $48 $155 $162
Net investment income $68 $66 $221 $198
Life insurance in force $11,672 $10,693
F&G Life's pretax earnings for the first nine months of 1999
reflect a growing spread from increased assets under management and
strong product sales, offset by increased product development and
channel expansion expenses and realized investment losses of $8
million. Pretax income of $9 million for the nine months ended
Sept. 30, 1998 included a $41 million writedown in the carrying
value of deferred acquisition costs, and $9 million of charges
(primarily for severance and writedowns in the carrying value of
investments) related to The St. Paul's merger with USF&G.
Excluding realized investment gains and losses in both years and
earnings charges in 1998, pretax earnings of $56 million for the
first nine months of 1999 were slightly ahead of earnings of $54
million in the same period of 1998. After-tax earnings, however,
grew at a stronger pace, reflecting the impact of F&G Life's
adoption of an investment strategy to allocate 1% of its investment
portfolio to tax-favored investments. These investments generate
tax credits that have lowered F&G Life's effective tax rate.
The increase in sales volume in the third quarter and first nine
months of 1999 compared with the same periods of 1998 resulted from
sales of an equity-indexed annuity product introduced in June 1998.
Sales of that product accounted for $80 million, or 55%, of total
sales in the third quarter, and $565 million, or 74%, of total year-
to-date sales. Credited interest rates on this product are tied to
the performance of the S&P 500 equity index. Sales of fixed
interest rate annuities in 1999 declined due to the negative impact
of continued low levels of market interest rates on F&G Life's
fixed rate products. The demand for annuity products is affected
by fluctuating interest rates and the relative attractiveness of
alternative investments, particularly equity-based products.
Sales of traditional life insurance rose to $7 million during the
third quarter of 1999, more than double the equivalent sales total
in the same 1998 period. The increase reflects the successful
launch of a new term life product line targeted at the mortgage
protection market.
In July 1999, F&G Life announced that it will begin to provide its
products to banks and broker-dealers that specialize in offering
annuities and life insurance directly to consumers. The entry into
the institutional marketplace, which will complement existing
distribution channels, is expected to enable F&G Life to distribute
its products in markets to which it has previously had limited
access.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Life Insurance (continued)
-------------------------
The increase in premiums and policy charges over the third quarter
and first nine months of 1998 resulted from an increase in sales of
structured settlement annuities and life-contingent single premium
immediate annuities ("SPIA"). Structured settlement annuities are
sold primarily to property-liability insurers to settle insurance
claims. Sales of structured settlement annuities, annuities with
life contingencies and term life insurance are recognized as
premiums earned under GAAP. However, sales of investment-type
contracts, such as equity-indexed, deferred and tax sheltered
annuities and universal life-type contracts are recorded directly
on the balance sheet and are not recognized as premium revenue
under GAAP. The expansion of the structured settlement program
into The St. Paul's property-liability claim organization led to
the increase in structured settlement sales. The growth in SPIA
sales resulted from an increased emphasis on this product in 1999.
Deferred annuities and universal life products are subject to
surrender by policyholders. Nearly all of F&G Life's surrenderable
annuity policies allow a refund of the cash value balance less a
surrender charge. Surrender activity in the third quarter of 1999
increased over the same 1998 period due to an increase in tax-
sheltered annuity surrenders. Through the first nine months of
1999, surrenders were 5% lower than the same period of 1998.
Policy surrenders in 1998 reflected surrenders on a block of single
premium deferred annuities ("SPDA") policies sold through a
distributor that ceased doing business with F&G Life in 1997.
Net investment income in the third quarter and first nine months of
1999 grew 3% and 12%, respectively, over the same periods of 1998
as a result of an increasing asset base generated by positive cash
flow.
Asset Management
----------------
The St. Paul's portion of pretax earnings from The John Nuveen
Company (Nuveen) was $30 million in the third quarter of 1999,
compared with $26 million in 1998's third quarter. For the first
nine months of 1999, The St. Paul's $89 million portion of Nuveen's
pretax earnings was 20% higher than comparable earnings of $75
million in 1998. The company holds a 78% interest in Nuveen.
Nuveen's asset management revenues totaled $77 million in the third
quarter of 1999, a 12% increase over revenues of $69 million in the
same 1998 period. Nine-month asset management revenues grew 13%
over the same period of 1998. Total managed assets grew to $58.5
billion at Sept. 30, 1999, a $3.2 billion increase over year-end
1998 and $6.0 billion higher than at the same time a year ago. The
increase in assets under management was due to new product sales,
particularly managed accounts sold through Rittenhouse Financial
Services, Inc., a Nuveen subsidiary. Gross product sales totaled
$2.9 billion in the third quarter of 1999, a 45% increase over
sales of $2.0 billion in the same 1998 period. Sales of both
equity and fixed-income products have been strong in 1999, with
equity-based products accounting for 54% of third quarter gross
sales. Through nine months of 1999, gross product sales totaled
$11.0 billion, compared with sales of $5.6 billion in the same
period of 1998. During the third quarter, Nuveen completed the
sale of its investment banking division to U.S. Bancorp Piper
Jaffray. The divestiture will enable Nuveen to focus on its asset
management business.
Capital Resources
-----------------
Common shareholders' equity totaled $6.40 billion at Sept. 30,
1999, down $224 million from the year-end 1998 total of $6.62
billion, primarily due to a $682 million decline in the after-tax
unrealized appreciation of the consolidated fixed maturity
investment portfolio and significant common share repurchases,
which more than offset The St. Paul's nine-month net income of $696
million. The St. Paul repurchased 8.3 million of its common shares
for a total cost of $265 million during the first half of 1999, for
an average cost of $32.03 per share. No shares were repurchased in
the third quarter of 1999. An increase in market interest rates
during the first nine months of 1999 led to the decline in the
unrealized appreciation of The St. Paul's bond holdings compared
with year-end 1998.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Capital Resources (continued)
----------------------------
Total debt outstanding at Sept. 30, 1999 of $1.32 billion grew $56
million over the year-end 1998 total of $1.26 billion. The increase
was primarily due to $64 million of variable rate borrowings
entered into by a number of The St. Paul's real estate entities,
and the February 1999 issuance of $46 million of floating rate
notes by a special purpose offshore entity that is providing
reinsurance to a property-liability subsidiary of The St. Paul. In
March 1999, The St. Paul purchased $33.5 million face amount of its
$1,000 principal amount zero coupon convertible notes from note
holders for a total cash consideration of $21 million, which
represented the original issue price plus the original issue
discount accrued to the date of purchase. The St. Paul purchased
the notes at the option of the note holders.
Approximately 47% of The St. Paul's consolidated debt outstanding
at Sept. 30, 1999 consisted of medium-term notes bearing a weighted-
average interest rate of 6.9%. The ratio of total debt to total
capitalization of 16% at the end of the third quarter increased
slightly over the year-end 1998 ratio of 15%.
In the third quarter of 1999, The St. Paul repurchased and retired
$25.9 million (principal amount) of its company-obligated
mandatorily redeemable preferred securities of subsidiaries
("capital securities") in open market transactions. The St. Paul
may continue to repurchase these securities from time to time if it
determines that such repurchases are a prudent use of capital.
The company anticipates that any capital expenditures during the
remainder of 1999 would involve further repurchases of its common
shares and capital securities, or acquisitions of existing
businesses. The net proceeds from the sale of The St. Paul's
standard personal insurance business of $252 million are expected
to be used for general corporate purposes, which may include
strategic acquisitions to augment The St. Paul's existing specialty
insurance and general commercial lines, expansion of its specialty
product offerings, and continuation of The St. Paul's common share
repurchase program. On November 2, 1999, The St. Paul's board of
directors authorized management to repurchase up to $500 million of
the company's common stock in the open market or through private
transactions. This repurchase program terminates a prior $500
million repurchase authorization, under which The St. Paul
repurchased 12.1 million common shares for a total cost of $400
million. The St. Paul has no plans for major capital improvements
during the remainder of 1999.
For the first nine months of 1999, The St. Paul's ratio of earnings
to fixed charges was 6.45, and the ratio of earnings to combined
fixed charges and preferred stock dividend requirements was 5.91.
For the first nine months of 1998, The St. Paul's ratio of earnings
to fixed charges was 1.56, and the ratio of earnings to combined
fixed charges and preferred stock dividend requirements was 1.41.
Fixed charges consist of interest expense, distributions on capital
securities and that portion of rental expense deemed to be
representative of an interest factor.
Liquidity
---------
Liquidity is a measure of The St. Paul's ability to generate
sufficient cash flows to meet the short- and long-term cash
requirements of its business operations. Net cash flows from
operating activities totaled $161 million in the first nine months
of 1999, compared with net cash flows from operating activities of
$221 million in the same period of 1998. Operational cash flows in
both 1999 and 1998 were negatively impacted by the decline in
premium volume and investment receipts in The St. Paul's property-
liability insurance operations, as well as cash disbursements
associated with The St. Paul's merger with USF&G and the
restructuring of the company's commercial insurance operations.
The St. Paul does not anticipate significant improvement in
operational cash flows during the final three months of 1999 due to
the expected continuation of the decline in premium volume,
severance payments associated with the previously-discussed
position eliminations, and a further reduction in investment
income. On a long-term basis, The St. Paul believes its
operational cash flows will benefit from the corrective pricing and
underwriting actions under way in its property-liability operations
as well as expense control initiatives. The St. Paul's financial
strength and conservative level of debt provide it with the
flexibility and capacity to obtain funds externally through debt or
equity financings on both a short-term and long-term basis should
the need arise.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Market Risk
-----------
Upward movement in market interest rates during the first nine
months of 1999 resulted in a significant decline in the unrealized
appreciation of the bond portfolio since the end of 1998, as
discussed in Property-Liability Insurance - Investment Operations.
However, The St. Paul's portfolio mix, and therefore its exposure
to market risk, has not changed materially from its position at
December 31, 1998.
Year 2000 Readiness Disclosure
------------------------------
Many computer systems in the world have the potential of being
disrupted at the turn of the century due to programming limitations
that may cause the two-digit year code of "00" to be recognized as
the year 1900, instead of 2000. The St. Paul is heavily dependent
on its many computer systems, and those of its independent agents
and brokers (The St. Paul "distribution network") and its vendors,
for virtually every aspect of its operations, including
underwriting, claims, investments and financial reporting. Thus,
the "Year 2000" issue involves potentially serious operational
risks for the company.
For several years, The St. Paul has been evaluating its computer
systems to determine the impact of the Year 2000 issue on its
operations. As compliance evaluation of 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 it has also been seeking to reduce
the company's Year 2000-related exposures through the development
of contingency plans.
The following discussion describes The St. Paul's efforts to date
and future plans to deal with the Year 2000 issue. These plans
have been and continue to be updated and revised as additional
information becomes available.
State of Readiness
- ------------------
The St. Paul established a Review Board in the third quarter of
1997 to review the remediation and testing methodology applied to
the hundreds of internally developed and externally sourced systems
used in the company's corporate headquarters in St. Paul, MN. To
coordinate the Year 2000 remediation efforts, The St. Paul created
the Year 2000 Project Office, which is responsible for the
oversight, coordination and monitoring of Year 2000 efforts
including, among other things, reviewing the compliance status of
information systems in all operating units and subsidiaries, both
foreign and domestic, directing the Year 2000 coordinators assigned
to operating units, and formulating company-wide contingency plans.
Prior to The St. Paul's merger with USF&G in April 1998, 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 the company's
Information Services Division (ISD), the oversight and monitoring
of which is the responsibility of the Year 2000 Project Office.
Insofar as internal systems maintained in St. Paul, MN. are
concerned, with few exceptions, Year 2000 compliance was achieved
by December 31, 1998. With few exceptions, initial compliance
validation of all such systems was completed by March 31, 1999.
All subsidiaries not headquartered in Saint Paul, MN or Baltimore,
MD completed initial validation testing of their application
systems before June 30, 1999.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Year 2000 Readiness Disclosure (continued)
-----------------------------------------
The Year 2000 Project Office's plan for remediation and validation
of externally sourced systems provides for the company to work with
the vendors of those systems to ensure that those systems become
Year 2000 compliant at the earliest practicable date. Compliance
testing in accordance with ISD standards takes place as and when
compliant versions and/or affirmations of compliance from vendors
are received. The St. Paul has identified what it believes to be
all of its third-party supplied mission critical systems, and, with
few exceptions, has received Year 2000 compliant versions and/or
affirmations of compliance for each of them, and has completed the
validation process.
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 accounts and other services, its independent
agents and brokers, and other entities with which it does business,
to identify and resolve Year 2000 issues and to determine the
potential impact, where relevant, of the possible failure of
certain of such persons to achieve Year 2000 compliance on a timely
basis. Results of this process are expected to be used in The St.
Paul's contingency planning efforts discussed below.
Nuveen Systems
- --------------
Having started the development and implementation of internal four-
digit date code software and system standards in the early 1980s,
Nuveen's Year 2000 program consists primarily of Year 2000
compliance examination and testing of the software packages and
hardware provided by third parties and of the systems and software
of its service providers. Certification of Year 2000 compliance
and testing of critical third-party hardware and software systems
used in trade processing at Nuveen was completed by the end of the
first quarter of 1999. The remaining certification and testing was
completed in the second quarter of 1999. Nuveen is in the process
of developing contingency plans based upon its examination of the
Year 2000 readiness of its third-party supplied systems and its
service providers. Nuveen believes that the costs associated with
its Year 2000 efforts will not be material to its operations and
financial position.
Embedded Chip Issues
- --------------------
Given the nature of its business, and that of its vendors and the
members of its distribution network, The St. Paul believes that its
exposure to embedded chip Year 2000 issues is minimal (other than
its exposure to possible disruptions in electricity,
telecommunications and other essential services provided by public
utilities that are subject to embedded chip-related disruption).
The St. Paul is, where deemed appropriate, coordinating with
vendors to obtain certificates of Year 2000 compliance for the
embedded computer technology equipment that it uses.
Year 2000 Compliance Program Costs
- ----------------------------------
The St. Paul has developed and implemented plans to address the
system modifications required to prepare for the Year 2000, and
does not expect the planning and implementation costs associated
with Year 2000 efforts to be material to its results of operations,
cash flows or consolidated financial position. Through December
31, 1997, the costs of Year 2000 remediation measures incurred,
including costs incurred by USF&G prior to the merger, totaled
approximately $8.7 million. The St. Paul incurred costs of
approximately $11.3 million in 1998, and it anticipates additional
costs of approximately $6.6 million in 1999.
Contingency Planning
- --------------------
During the first half of 1999, contingency plans were developed by
business and staff units, field offices and subsidiary location
teams in accordance with a model that focused first on restoring
and maintaining infrastructure, and secondly on business
resumption. Individual teams identified their critical processes
and then identified pre-emptive actions to mitigate the potential
impact of a Year 2000 disruption. Teams also developed plans for
reacting to potential threat and duration scenarios. Following a
detailed review of the submitted plans by the Year 2000 Project
Office, each team was advised of required plan modifications, and
all modifications were completed by the end of July.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Year 2000 Readiness Disclosure (continued)
-----------------------------------------
On-site validation and testing of plans were conducted in core-
critical U.S. domestic field offices in mid-September. Subsidiary
validation testing is being conducted in October and November 1999.
An integral part of this testing effort addresses how field
offices, subsidiaries and business units within corporate
headquarters interface with the corporate "command center" during
the millennium transition period. Planning for the corporate
command center was completed in time for the operation to commence
"ready-mode" status on Oct. 1, 1999.
The St. Paul believes that its most significant Year 2000 exposure
is the potential business disruptions that would be caused by
widespread failure of public utility systems, particularly in the
power generation/distribution and the telecommunication industries.
While the contingency plans The St. Paul is developing will provide
alternative procedures to lessen the impact of short duration
disruptions, prolonged failure of power and telecommunications
systems could have a material adverse effect on the company's
results of operations, cash flows and consolidated financial
position.
As noted above, The St. Paul indirectly relies on the information
systems of the many components of its distribution network, which
includes thousands of independent agents and brokers. The St. Paul
is aware that some of its independent agents and brokers are
currently Year 2000 non-compliant and expects that a small
percentage, consisting primarily of smaller agents, will be non-
compliant on January 1, 2000. The St. Paul believes that Year 2000-
related difficulties experienced by members of its distribution
network have the potential to materially disrupt its business and
that such potential disruptions constitute its second greatest area
of potential exposure to the Year 2000 problem. As part of its
contingency planning effort, The St. Paul has been providing
information to members of its distribution network intended to
sensitize them to the Year 2000 issue and to encourage them to take
appropriate steps to become Year 2000 compliant. Although the
company's distribution network consists of thousands of agents and
brokers, the number of different systems used by the constituent
members is far less. For example, the company believes that fewer
than 20 different types of agency management systems are used by
its property-liability insurance agents in the United States.
Contingency arrangements are being discussed with distribution
network members pursuant to which the company may, among other
provisional steps, provide data in alternative formats and
institute temporary direct billing services in the event of a
disruption in their individual systems.
The company notes that the Year 2000 issue by its nature carries
the risk of unforeseen and potentially very serious problems of
internal or external origin. Some commentators believe that the
Year 2000 issue has the potential of destabilizing the global
economy or causing a global recession, either of which could
adversely affect the company. While The St. Paul believes it is
taking appropriate action with respect to third parties on whose
systems and services it relies to a significant extent, there can
be no assurance that the systems of such third parties will be Year
2000 compliant or that any third party's failure to have Year 2000
compliant systems would not have a material adverse effect on The
St. Paul's earnings, cash flows or financial condition.
Insurance Coverage
- ------------------
The St. Paul has received some Year 2000-related claims and faces
additional potential Year 2000 claims under coverages provided by
insurance or reinsurance policies sold to insured parties who may
incur, or take action claimed to prevent, losses as a result of the
failure of such parties, or the customers or vendors of such
parties, to be Year 2000 compliant. For example, the company, like
other property-liability insurers, has received claims for
reimbursement of expenses incurred by policyholders in connection
with their Year 2000 compliance efforts. Because coverage
determinations depend on unique factual situations, specific policy
language and other variables, it is not possible to determine at
this time whether and to what extent insured parties will incur
losses, the amount of the losses or whether the losses will be
covered under The St. Paul's insurance policies. With respect to
Year 2000-related claims in general, 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.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Year 2000 Readiness Disclosure (continued)
-----------------------------------------
The St. Paul's standard property and inland marine policies
require, among other things, direct physical loss or damage from a
covered cause of loss as a condition of coverage. In addition, it
is a fundamental principle of all insurance that a loss must be
fortuitous to be considered potentially covered. Given the fact
that Year 2000-related losses are not unforeseen, and that The St.
Paul expects that such losses will not, in most if not all cases,
cause direct physical loss or damage, The St. Paul has concluded
that its property and inland marine policies do not generally
provide coverage for losses relating to Year 2000 issues. To
reinforce its view on coverage afforded by such policies, The St.
Paul has developed and continues to implement a specific Year 2000
exclusion endorsement. 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. As with
insurance policies in general, because surety claims depend on
particular factual situations, specific bond language and other
variables, it is not possible to determine in advance whether and
to what extent Year 2000-related claims will arise under surety
bonds issued by The St. Paul, the amount of any such claims or
whether any such claims will by payable under surety bonds issued
by The St. Paul.
The St. Paul is taking a number of actions to address its exposure
to insurance claims arising from its liability coverages, 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 St. Paul does not believe that Year
2000-related insurance or reinsurance coverage claims will have a
material adverse effect on its earnings, cash flows or financial
position. However, the uncertainties of litigation are such that
unexpected policy interpretations could compel claim payments
substantially beyond the company's coverage intentions, possibly
resulting in a material adverse effect on its results of operations
and/or cash flows and a material adverse effect on its consolidated
financial position.
Impact of Accounting Pronouncements to be Adopted in the Future
- ---------------------------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet,
and measure those instruments at fair value. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which amended SFAS No. 133 to make it effective
for all quarters of fiscal years beginning after June 15, 2000, and
prohibits retroactive application to financial statements of prior
periods. The St. Paul intends to implement the provisions of SFAS
No. 133 in the first quarter of 2001. The St. Paul currently has
limited involvement with derivative instruments, primarily for
purposes of hedging against fluctuations in market indices, foreign
currency exchange rates and interest rates. The company cannot at
this time reasonably estimate the potential impact of this adoption
on its financial position or results of operations for future
periods.
In October 1998, the AICPA issued SOP No. 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That
Do Not Transfer Insurance Risk," which provides guidance for
accounting for such contracts. The SOP specifies that insurance
and reinsurance contracts for which the deposit method of
accounting is appropriate should be classified in one of four
categories, and further specifies the accounting treatment for each
of these categories. The SOP is effective for fiscal years
beginning after June 15, 1999. The St. Paul currently intends to
implement the provisions of the SOP in the first quarter of the
year 2000. The company cannot at this time reasonably estimate the
potential impact of this adoption on its financial position or
results of operations for future periods.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Forward-looking Statement Disclosure
------------------------------------
This report contains certain forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995. Forward-
looking statements are statements other than historical information
or statements of current condition. Words such as expects,
anticipates, intends, plans, believes, seeks or estimates, or
variations of such words, and similar expressions are also intended
to identify forward-looking statements. Examples of these forward-
looking statements include statements about The St. Paul's
expectations concerning: market conditions and their effect on
future premiums, revenues, cash flow and investment income; expense
savings resulting from the USF&G merger and the restructuring
actions announced in 1998 and 1999; and Year 2000 issues and the
company's efforts to address them.
In light of the risks and uncertainties inherent in future
projections, many of which are beyond The St. Paul's control,
actual results could differ materially from those in forward-
looking statements. These statements should not be regarded as a
representation that anticipated events will occur or that expected
objectives will be achieved. Risks and uncertainties include, but
are not limited to, the following: general economic conditions
including changes in interest rates and the performance of
financial markets; changes in domestic and foreign laws,
regulations and taxes; changes in the demand for, pricing of, or
supply of insurance or reinsurance; catastrophic events of
unanticipated frequency or severity; loss of significant customers;
judicial decisions and rulings; the pace and effectiveness of the
transfer of the standard personal insurance business from The St.
Paul to Metropolitan; and various other matters, including the
effects of the merger with USF&G. Actual results and experience
relating to Year 2000 issues could differ materially from
anticipated results or other expectations as a result of a variety
of risks and uncertainties, including the impact of system faults,
the failure to successfully remediate material systems, the time it
may take to remediate system failures once they occur, the failure
of third parties (including public utilities, agents and brokers)
to properly remediate material Year 2000 problems, and
unanticipated judicial interpretations of the scope of the
insurance or reinsurance coverage provided by The St. Paul's
policies. The St. Paul undertakes no obligation to release
publicly the results of any future revisions we may make to forward-
looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
<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.
The pro forma financial information required under
Item 7. (b) (2) of The St. Paul's Form 8-K Current
Report dated September 30, 1999 is set forth in Note
9 to the consolidated financial statements and is
incorporated herein by reference.
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 12, 1999 relating to the
announcement of The St. Paul's sale of its
standard personal insurance underwriting
operations to Metropolitan Property and
Casualty Insurance Company.
2) The St. Paul filed a Form 8-K Current
Report dated September 30, 1999 related to the
completion of The St. Paul's sale of its
standard personal insurance underwriting
operations to Metropolitan Property and
Casualty Insurance Company.
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 15, 1999 By /s/ Bruce A. Backberg
---------------------
Bruce A. Backberg
Senior Vice President - Legal Services
(Authorized Signatory)
Date: November 15, 1999 By /s/ Thomas A. Bradley
---------------------
Thomas A. Bradley
Senior Vice President - Finance
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
- -------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession*.............................
(3) (i) Articles of incorporation*............................
(ii) By-laws*.............................................
(4) Instruments defining the rights of security holders,
including indentures*..................................
(10) Material contracts........................................
(i) Key Executive Special Incentive Arrangement**.........(1)
(11) Statement re computation of per share earnings** .........(1)
(12) Statement re computation of ratios**......................(1)
(15) Letter re unaudited interim financial information*........
(18) Letter re change in accounting principles*................
(19) Report furnished to security holders*.....................
(22) Published report regarding matters submitted to
vote of security holders*..............................
(23) Consents of experts and counsel*..........................
(24) Power of attorney*........................................
(27) Financial data schedule**.................................(1)
(99) Additional exhibits*......................................
* These items are not applicable.
** This exhibit is included only with the copies of this
report that are filed with the Securities and Exchange
Commission. However, a copy of the exhibit may be obtained
from the Registrant for a reasonable fee by writing to The
St. Paul Companies, Inc., 385 Washington Street, Saint
Paul, MN 55102, Attention: Corporate Secretary.
(1) Filed herewith.
<PAGE>
Key Executive Special Incentive Arrangement
-------------------------------------------
In August 1999, a key executive special incentive arrangement was
implemented that could result in the payment of up to a maximum of $1.5
million to the Company's Chairman and Chief Executive Officer, Douglas W.
Leatherdale; $750,000 to its President and Chief Operating Officer,
James E. Gustafson; and $375,000 to its Executive Vice President and
Chief Financial Officer, Paul J. Liska, over the 18-month period ending
December 31, 2000, with the possibility of a partial interim payment
being made by December 31, 1999.
The amount of incentive payments, if any, to be made under this
arrangement will depend on the extent to which certain components
of the company's strategic business plan are successfully implemented.
Certain payments would not be made under this arrangement unless
specific business goals are met within specified time and financial
parameters.
Any incentive payouts under this arrangement would be included in
the calculation of each participating executive's benefits under the
Executive Retirement Plan.
<PAGE>
Exhibit 11
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Share
Three Months Ended Nine Months Ended
September 30 September 30
------------------- ------------------
1999 1998 1999 1998
------ ------ ------ ------
(In millions, except per share data)
EARNINGS
Basic:
Net income (loss), as reported $327 $68 $696 $(11)
Dividends on preferred stock,
net of taxes (2) (2) (6) (7)
Premium on preferred shares redeemed (1) (1) (3) (3)
------ ------ ------ ------
Net income (loss) available
to common shareholders $324 $65 $687 $(21)
====== ====== ====== ======
Diluted:
Net income (loss) available
to common shareholders $324 $65 $687 $(21)
Effect of dilutive securities:
Convertible preferred stock 2 1 5 -
Convertible monthly income
preferred securities 2 2 6 -
Zero coupon convertible notes 1 1 2 -
------ ------ ------ ------
Net income (loss) available
to common shareholders $329 $69 $700 $(21)
====== ====== ====== ======
COMMON SHARES
Basic:
Weighted average common shares
outstanding 227 236 228 235
====== ====== ====== ======
Diluted:
Weighted average common shares
outstanding 227 236 228 235
Effect of dilutive securities:
Stock options 2 3 2 4
Convertible preferred stock 7 8 7 -
Convertible monthly income
preferred securities 7 7 7 -
Zero coupon convertible notes 2 3 2 -
------ ------ ------ ------
Total 245 257 246 239
====== ====== ====== ======
EARNINGS (LOSS) PER SHARE
Basic $1.43 $0.27 $3.01 ($0.09)
====== ====== ====== ======
Diluted $1.34 $0.27 $2.84 ($0.09)
====== ====== ====== ======
<PAGE>
Exhibit 12
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Ratios
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -----------------
1999 1998 1999 1998
------ ------ ----- -----
(In millions, except ratios)
EARNINGS:
Income from continuing operations
before income taxes and cumulative
effect of accounting change $180 $91 $735 $68
Add: fixed charges 55 35 135 122
----- ----- ----- -----
Income as adjusted $235 $126 $870 $190
===== ===== ===== =====
FIXED CHARGES:
Interest expense and amortization $26 $19 $75 $60
Dividends on redeemable
preferred securities 9 9 28 28
Rental expense (1) 20 7 32 34
----- ----- ----- -----
Total fixed charges 55 35 135 122
Preferred stock
dividend requirements 4 4 12 13
----- ----- ----- -----
Total fixed charges and preferred
stock dividend requirements $59 $39 $147 $135
===== ===== ===== =====
Ratio of earnings to fixed charges 4.26 3.57 6.45 1.56
===== ===== ===== =====
Ratio of earnings to
combined fixed charges and preferred
stock dividend requirements 3.97 3.19 5.91 1.41
===== ===== ===== =====
(1)Interest portion deemed implicit in total rent expense. Amounts for
the three months and nine months ended Sept. 30, 1999 include an $11
million provision representative of interest included in charge for
future lease buy-outs recorded in the third quarter of 1999 as a result
of The St. Paul's cost reduction program. Amount for the nine months
ended Sept. 30, 1998 includes an $11 million provision representative
of interest included in 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.
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<DEBT-HELD-FOR-SALE> 19,875 20,505
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 1,359 1,064
<MORTGAGE> 603 674
<REAL-ESTATE> 930 936
<TOTAL-INVEST> 26,783 25,573
<CASH> 176 164
<RECOVER-REINSURE> 162 128
<DEFERRED-ACQUISITION> 939 876
<TOTAL-ASSETS> 39,203 37,038
<POLICY-LOSSES> 22,803 22,323
<UNEARNED-PREMIUMS> 3,222 3,241
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 1,316 1,098
477 503
26 17
<COMMON> 2,085 2,143
<OTHER-SE> 4,338 4,477
<TOTAL-LIABILITY-AND-EQUITY> 39,203 37,038
4,124 4,375
<INVESTMENT-INCOME> 1,188 1,185
<INVESTMENT-GAINS> 173 210
<OTHER-INCOME> 343 299
<BENEFITS> 3,191 3,729
<UNDERWRITING-AMORTIZATION> 1,057 1,110
<UNDERWRITING-OTHER> 845 1,162
<INCOME-PRETAX> 735 68
<INCOME-TAX> 173 (46)
<INCOME-CONTINUING> 562 114
<DISCONTINUED> 164 (125)
<EXTRAORDINARY> 0 0
<CHANGES> (30) 0
<NET-INCOME> 696 (11)
<EPS-BASIC> 3.01 (0.09)
<EPS-DILUTED> 2.84 (0.09)
<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>
