<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- - -- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- - -- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number 0-3021
THE ST. PAUL COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0518860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
385 Washington St., Saint Paul, MN 55102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (651) 310-7911
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
The number of shares of the Registrant's Common Stock, without par value,
outstanding on November 12, 1998, was 235,733,012.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Consolidated Statements of Operations (Unaudited), Three
Months and Nine Months Ended September 30, 1998 and 1997 3
Consolidated Balance Sheets,
September 30, 1998 (Unaudited) and December 31, 1997 4
Consolidated Statements of Shareholders' Equity,
Nine Months Ended September 30, 1998 (Unaudited) and
Twelve Months Ended December 31, 1997 6
Consolidated Statements of Comprehensive Income
(Unaudited),Three Months and Nine Months Ended
September 30, 1998 and 1997 7
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 1998 and 1997 8
Notes to Consolidated Financial Statements (Unaudited) 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
PART II. OTHER INFORMATION
Item 1 through Item 6 40
Signatures 41
EXHIBIT INDEX 42
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $1,698,787 1,810,402 5,232,511 5,507,374
Net investment income 390,601 392,082 1,185,148 1,172,493
Realized investment gains 24,835 47,478 210,208 314,951
Asset management-
investment banking 76,470 61,939 222,791 180,299
Other 20,564 12,389 64,472 44,526
------------ ------------ ------------ ------------
Total revenues 2,211,257 2,324,290 6,915,130 7,219,643
------------ ------------ ------------ ------------
Expenses:
Insurance losses and loss
adjustment expenses 1,386,905 1,261,322 4,320,777 3,908,363
Life policy benefits 66,080 57,873 187,711 179,509
Policy acquisition expenses 393,812 427,362 1,243,928 1,297,232
Operating and administrative 326,462 303,182 1,284,916 859,825
------------ ------------ ------------ ------------
Total expenses 2,173,259 2,049,739 7,037,332 6,244,929
------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income taxes 37,998 274,551 (122,202) 974,714
Income tax expense (benefit) (29,695) 59,379 (110,770) 233,432
------------ ------------ ------------ ------------
Income (loss) from
continuing operations 67,693 215,172 (11,432) 741,282
Loss on disposal of discontinued
operations, net of taxes - - - (67,750)
------------ ------------ ------------ ------------
Net income (loss) $67,693 215,172 (11,432) 673,532
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic earnings (loss) per common share:
Income (loss) from continuing operations $0.27 0.92 (0.09) 3.18
Loss from discontinued operations - - - (0.30)
------------ ------------ ------------ ------------
Net income (loss) $0.27 0.92 (0.09) 2.88
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $0.27 0.85 (0.09) 2.95
Loss from discontinued operations - - - (0.27)
------------ ------------ ------------ ------------
Net income (loss) $0.27 0.85 (0.09) 2.68
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Dividends declared on common stock $0.25 0.235 0.75 0.71
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
- - ----------- ---------- ----------
(Unaudited)
<S> <C> <C>
Investments:
Fixed maturities, at estimated market value $21,149,340 20,945,219
Equities, at estimated market value 1,064,029 1,052,370
Real estate, at cost less accumulated
depreciation of $105,196 (1997; $93,015) 936,332 985,317
Mortgage loans, at cost 674,125 640,734
Venture capital, at estimated market value 506,968 461,892
Other investments 1,033,193 923,933
Short-term investments, at cost 863,961 970,568
----------- -----------
Total investments 26,227,948 25,980,033
Cash 129,391 113,175
Investment banking inventory securities 52,009 130,203
Reinsurance recoverables:
Unpaid losses 4,000,161 3,839,051
Paid losses 127,804 128,422
Ceded unearned premiums 318,423 376,343
Receivables:
Underwriting premiums 2,250,015 2,213,926
Interest and dividends 376,874 355,970
Other 94,127 104,727
Deferred policy acquisition expenses 876,151 872,460
Deferred income taxes 1,148,038 1,213,790
Office properties and equipment, at cost
less accumulated depreciation
of $408,403 (1997; $369,414) 518,084 602,381
Goodwill 602,075 618,528
Other assets 791,259 809,819
----------- -----------
Total assets $37,512,359 37,358,828
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- - ------------------------------------------------------------ --------------- -----------
(Unaudited)
<S> <C> <C>
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $18,653,723 18,153,080
Future policy benefits 3,959,164 3,816,050
Unearned premiums 3,411,620 3,528,234
-------------- --------------
Total insurance reserves 26,024,507 25,497,364
Debt 1,097,742 1,304,008
Payables:
Income taxes 176,299 303,549
Reinsurance premiums 314,837 258,495
Accrued expenses and other 1,231,881 1,327,549
Other liabilities 1,527,909 1,556,995
-------------- --------------
Total liabilities 30,373,175 30,247,960
-------------- --------------
Company-obligated mandatorily redeemable preferred
capital securities of subsidiaries or trusts holding solely
convertible subordinated debentures of the Company 502,700 502,700
-------------- --------------
Shareholders' equity:
Preferred:
Series B convertible preferred stock;
1,450 shares authorized; 937 shares
outstanding (956 shares in 1997) 135,522 137,892
Guaranteed obligation - PSOP (118,605) (121,167)
-------------- --------------
Total preferred shareholders' equity 16,917 16,725
-------------- --------------
Common:
Common stock, 480,000 shares authorized; 236,872
shares outstanding (233,130 shares in 1997) 2,142,667 2,057,108
Retained earnings 3,540,005 3,720,140
Guaranteed obligation - ESOP - (8,453)
Accumulated other comprehensive income:
Unrealized appreciation 969,904 845,811
Unrealized loss on foreign currency translation (33,009) (23,163)
-------------- --------------
Total accumulated other comprehensive income 936,895 822,648
-------------- --------------
Total common shareholders' equity 6,619,567 6,591,443
-------------- --------------
Total shareholders' equity 6,636,484 6,608,168
-------------- --------------
Total liabilities, redeemable preferred
securities and shareholders' equity $37,512,359 37,358,828
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Nine Twelve
Months Ended Months Ended
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Preferred shareholders' equity: Series B convertible preferred stock:
Beginning of period $ 137,892 142,131
Redemptions during period (2,370) (4,239)
------------- -------------
End of period 135,522 137,892
------------- -------------
Guaranteed obligation - PSOP:
Beginning of period (121,167) (126,068)
Principal payments 2,562 4,901
------------- -------------
End of period (118,605) (121,167)
------------- -------------
Total preferred shareholders' equity 16,917 16,725
------------- -------------
Common shareholders' equity:
Common stock:
Beginning of period 2,057,108 1,895,608
Stock issued under stock incentive plans 66,889 32,421
Stock issued for preferred shares redeemed 5,394 8,708
Stock issued for acquisitions - 113,264
Reacquired common shares - (13,892)
Other 13,276 20,999
------------- -------------
End of period 2,142,667 2,057,108
------------- -------------
Retained earnings:
Beginning of period 3,720,140 3,097,261
Net income (loss) (11,432) 929,292
Dividends declared on common stock (167,793) (186,036)
Dividends declared on preferred stock, net of taxes (6,395) (10,304)
Reacquired common shares (153) (114,232)
Premium on preferred shares converted or redeemed (3,025) (4,052)
Other changes during period 8,663 8,211
------------- -------------
End of period 3,540,005 3,720,140
------------- -------------
Guaranteed obligation - ESOP:
Beginning of period (8,453) (20,353)
Principal payments 8,453 11,900
------------- -------------
End of period - (8,453)
------------- -------------
Unrealized appreciation, net of taxes:
Beginning of period 845,811 679,381
Change during the period 124,093 166,430
------------- -------------
End of period 969,904 845,811
------------- -------------
Unrealized loss on foreign currency translation, net of taxes:
Beginning of period (23,163) (20,500)
Currency translation adjustments (9,846) (2,663)
------------- -------------
End of period (33,009) (23,163)
------------- -------------
Total common shareholders' equity 6,619,567 6,591,443
------------- -------------
Total shareholders' equity $6,636,484 6,608,168
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- ----------------------
1998 1997 1998 1997
------ ------- ------ ------
<S> <C> <C> <C> <C>
Net income (loss), as reported $67,693 215,172 (11,432) 673,532
------- ------- -------- -------
Other comprehensive income, net of taxes:
Change in unrealized appreciation 103,569 212,046 124,093 98,626
Change in unrealized loss on
foreign currency translation (10,501) 533 (9,846) 5,832
------- ------- -------- -------
Other comprehensive income 93,068 212,579 114,247 104,458
------- ------- -------- -------
Comprehensive income $160,761 427,751 102,815 777,990
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (11,432) 673,532
Adjustments:
Change in net property-liability insurance reserves 256,881 (59,818)
Change in insurance premiums receivable (36,371) (69,231)
Change in asset management balances (19,834) 148,549
Realized investment gains (210,208) (314,951)
Provision for loss on disposal of discontinued operations - 67,750
Other 143,510 225,903
----------- ---------
Net cash provided by operating activities 122,546 671,734
----------- ---------
INVESTING ACTIVITIES
Purchase of investments (4,002,198) (4,288,064)
Proceeds from sales and maturities of investments 3,982,566 3,897,736
Change in short-term investments 151,298 (99,363)
Change in open security transactions (7,598) 60,249
Net purchases of office properties and equipment (61,275) (106,680)
Discontinued operations (20,218) (44,776)
Other (5,209) (149,757)
----------- ---------
Net cash provided by (used in) investing activities 37,366 (730,655)
----------- ---------
FINANCING ACTIVITIES
Deposits on universal life and investment contracts 311,365 380,662
Withdrawals on universal life and investment contracts (157,651) (166,076)
Dividends paid on common and preferred stock (164,504) (148,637)
Proceeds from issuance of debt 61,022 196,682
Repayment of debt (205,444) (100,000)
Redemption of preferred shares - (199,484)
Repurchase of common shares (153) (128,030)
Proceeds from issuance of company-obligated mandatorily
redeemable preferred securities of subsidiaries - 197,845
Stock options exercised and other 11,669 20,400
----------- ---------
Net cash provided by (used in) financing activities (143,696) 53,362
----------- ---------
Effect of exchange rate changes on cash - (23)
----------- ---------
Increase (decrease) in cash 16,216 (5,582)
Cash at beginning of period 113,175 109,855
----------- ---------
Cash at end of period $129,391 104,273
----------- ---------
----------- ---------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
September 30, 1998
NOTE 1 BASIS OF PRESENTATION
The financial statements include The St. Paul Companies, Inc. and
subsidiaries (The St. Paul), and have been prepared in conformity with
generally accepted accounting principles.
On April 24, 1998, The St. Paul completed its merger with USF&G Corporation
(USF&G) in a tax-free exchange of stock accounted for as a
pooling-of-interests. The consolidated financial statements for all current
year and prior year periods in this report reflect the combined accounts and
results of operations of The St. Paul and USF&G. See Note 8 on page 16 of
this report for further information about the merger.
These consolidated financial statements rely, in part, on estimates. In the
opinion of management, all necessary adjustments, 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.
Some amounts in the 1997 consolidated financial statements have been
reclassified to conform with the 1998 presentation. These reclassifications
had no effect on net income or shareholders' equity, as previously reported.
All references in the consolidated financial statements and related footnotes
to per share amounts and to the number of common shares for both 1998 and
1997 reflect the effect of the 2-for-1 stock split which occurred on May 6,
1998 (See Note 9).
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
NOTE 2 EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share (EPS) amounts were calculated by dividing net
income (loss), as adjusted, by the adjusted average common shares outstanding.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- ----------------------
1998 1997 1998 1997
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
EARNINGS (LOSS)
Basic:
Net income (loss), as reported $67,693 215,172 (11,432) 673,532
Dividends on preferred stock, net of taxes (2,126) (2,163) (6,395) (8,175)
Premium on preferred shares redeemed (820) (1,523) (3,025) (2,434)
---------- ---------- ---------- ----------
Net income (loss) available to common shareholders $64,747 211,486 (20,852) 662,923
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted:
Net income (loss) available to common shareholders $64,747 211,486 (20,852) 662,923
Effect of diluted securities:
Convertible preferred stock 1,562 1,504 - 4,521
Zero coupon convertible notes 826 796 - 2,338
Convertible monthly income preferred securities 2,018 2,018 - 6,055
---------- ---------- ---------- ----------
Net income (loss), as adjusted $69,153 215,804 (20,852) 675,837
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
COMMON SHARES
Basic:
Weighted average common shares outstanding 236,244 229,885 235,214 230,101
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted:
Weighed average common shares outstanding 236,244 229,885 235,214 230,101
Effect of dilutive securities:
Stock options 2,822 4,838 - 4,627
Convertible preferred stock 7,530 7,760 - 7,818
Zero coupon convertible notes 2,914 2,923 - 2,923
Convertible monthly income preferred securities 7,017 7,017 - 7,017
---------- ---------- ---------- ----------
Total 256,527 252,423 235,214 252,486
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS (LOSS) PER SHARE
Basic $0.27 0.92 (0.09) 2.88
Diluted $0.27 0.85 (0.09) 2.68
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The assumed exercise of stock options, and the assumed conversion of preferred
stock, zero coupon notes and monthly income preferred securities are each
anti-dilutive to The St. Paul's net income for the nine months ended Sept. 30,
1998. As a result, the potentially dilutive effect of those securities is not
considered in the calculation of EPS amounts for that period.
NOTE 3 INVESTMENTS
Investment Activity. A summary of investment transactions is presented below.
<TABLE>
<CAPTION>
Nine Months Ended September 30
----------------------------------------
1998 1997
------ ------
(In thousands)
<S> <C> <C>
Purchases:
Fixed maturities $2,536,629 2,717,288
Equities 1,071,175 1,082,038
Real estate 63,152 117,138
Mortgage loans 112,598 197,572
Venture capital 118,727 98,360
Other investments 99,917 75,668
------------ ------------
Total purchases 4,002,198 4,288,064
------------ ------------
Proceeds from sales and maturities:
Fixed maturities:
Sales 1,013,762 1,337,993
Maturities and redemptions 1,471,002 956,025
Equities 1,169,491 1,058,804
Real estate 112,275 228,263
Mortgage loans 83,275 21,550
Venture capital 51,812 241,854
Other investments 80,949 53,247
------------ ------------
Total sales and maturities 3,982,566 3,897,736
------------ ------------
Net purchases $ 19,632 390,328
------------ ------------
------------ ------------
</TABLE>
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Change in Unrealized Appreciation. The increase (decrease) in unrealized
appreciation recorded in common shareholders' equity was as follows:
<TABLE>
<CAPTION>
Nine Months Ended Twelve Months Ended
September 30, 1998 December 31, 1997
-------------------------- ------------------------
(In thousands)
<S> <C> <C>
Fixed maturities $328,176 399,696
Equities (113,318) 61,969
Venture capital 4,798 (154,826)
Life deferred policy acquisition
costs and policy benefits (5,903) (21,171)
Single premium immediate
annuity reserves (9,880) (27,411)
Other (14,143) (1,974)
----------- -----------
Total change in pretax
unrealized appreciation 189,730 256,283
Change in deferred taxes (65,637) (89,853)
----------- -----------
Total change in unrealized
appreciation, net of taxes $124,093 166,430
----------- -----------
----------- -----------
</TABLE>
NOTE 4 INCOME TAXES
The components of income tax expense (benefit) on continuing operations are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
1998 1997 1998 1997
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Federal current tax expense (benefit) $(94,590) 63,289 (50,122) 249,574
Federal deferred tax expense (benefit) 60,758 (11,795) (79,187) (36,373)
--------- --------- --------- ---------
Total federal income tax
expense (benefit) (33,832) 51,494 (129,309) 213,201
Foreign income taxes 2,820 6,383 13,202 15,712
State income taxes 1,317 1,502 5,337 4,519
--------- --------- --------- ---------
Total income tax expense
(benefit) on continuing operations $(29,695) 59,379 (110,770) 233,432
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
NOTE 5 CONTINGENT LIABILITIES
In the ordinary course of conducting business, the company and some of its
subsidiaries have been named as defendants in various lawsuits. Some of these
lawsuits attempt to establish liability under insurance contracts issued by
those companies. Plaintiffs in these lawsuits are asking for money damages or to
have the court direct the activities of The St. Paul's operations in certain
ways. Although it is possible that the settlement of a contingency may be
material to the company's results of operations and liquidity in the period in
which the settlement occurs, the company believes that the total amounts that it
or its subsidiaries will ultimately have to pay in all of these lawsuits will
have no material effect on its overall financial position.
In some cases, plaintiffs seek to establish coverage for their liability under
environmental protection laws. See "Environmental and Asbestos Claims" in
Management's Discussion and Analysis for information on these claims.
NOTE 6 DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------------- -------------------------
Book Fair Book Fair
Value Value Value Value
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Medium-term notes $501,915 566,600 511,920 529,000
Commercial paper 229,373 229,373 168,429 168,429
8 3/8% senior notes 149,679 162,100 149,592 159,060
Zero coupon convertible notes 110,091 113,200 106,838 122,307
7 1/8% senior notes 79,842 87,500 79,824 82,680
Real estate mortgages 19,842 20,500 19,900 20,491
Nuveen debt 7,000 7,000 84,500 84,600
7% senior notes - - 145,225 145,744
Credit facility - - 35,000 35,000
Guaranteed ESOP debt - - 2,780 2,800
---------- ---------- ---------- ----------
Total debt $1,097,742 1,186,273 1,304,008 1,350,111
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
NOTE 7 SEGMENT INFORMATION
In connection with the merger with USF&G, The St. Paul performed a reassessment
of its reportable segments in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Based on the merged
organizational structure and related operating segment manager responsibilities,
The St. Paul has redefined its reportable segments as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES FROM CONTINUING OPERATIONS (In thousands)
Property-liability insurance:
Primary insurance operations $1,445,090 1,491,355 4,364,916 4,478,446
Reinsurance operations 222,937 293,934 786,594 950,508
------------- ------------ ------------- ------------
Total premiums earned 1,668,027 1,785,289 5,151,510 5,428,954
Net investment income 322,094 328,360 984,987 985,694
Realized investment gains 6,573 39,163 186,549 302,106
Other 17,042 8,565 51,494 33,806
------------- ------------- ------------- ------------
Total property-liability insurance 2,013,736 2,161,377 6,374,540 6,750,560
------------- ------------- ------------- ------------
Life insurance 99,763 91,916 283,722 262,781
------------- ------------- ------------- ------------
Asset management-investment banking 76,739 66,062 225,552 187,463
------------- ------------- ------------- ------------
Total reportable segments 2,190,238 2,319,355 6,883,814 7,200,804
Parent company and eliminations 21,019 4,935 31,316 18,839
------------- ------------- ------------- ------------
Total revenues $2,211,257 2,324,290 6,915,130 7,219,643
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</TABLE>
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (In thousands)
Property-liability insurance:
Primary insurance operations $(265,940) (52,540) (877,835) (202,003)
Reinsurance operations (21,199) 5,183 (5,120) 7,127
------------- ------------ ------------ ------------
Total GAAP underwriting result (287,139) (47,357) (882,955) (194,876)
Net investment income 322,094 328,360 984,987 985,694
Realized investment gains 6,573 39,163 186,549 302,106
Other (10,842) (35,661) (234,967) (80,424)
------------- ------------- ------------- -------------
Total property-liability insurance 30,686 284,505 53,614 1,012,500
------------- ------------- ------------ -------------
Life insurance 22,368 20,041 8,631 45,329
------------- ------------- ------------ -------------
Asset management-investment banking:
Pretax income before minority interest 33,889 30,605 98,416 88,665
Minority interest (8,017) (7,456) (23,834) (21,382)
------------- ------------- ------------- -------------
Total asset management-
investment banking 25,872 23,149 74,582 67,283
------------- ------------- ------------- -------------
Total reportable segments 78,926 327,695 136,827 1,125,112
Parent company and eliminations (40,928) (53,144) (259,029) (150,398)
------------- ------------- ------------- -------------
Total income (loss) from continuing
operations before income taxes $ 37,998 274,551 (122,202) 974,714
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The St. Paul recorded a $291.6 million pretax charge in the second quarter of
1998 related to its merger with USF&G (see Note 8). The charge was recorded in
the following captions of the "Income (Loss) from Continuing Operations Before
Income Taxes" section of the foregoing segment table: $142.4 million in
property-liability insurance - other; $14.1 million in property-liability
insurance - realized gains; $9.4 million in life insurance; and $125.7 million
in parent company and eliminations.
The St. Paul also recorded a $250.0 million pretax charge to increase its loss
reserves in the second quarter of 1998 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 merger. The charge is included in the primary
insurance operations GAAP underwriting result caption of the foregoing table. In
addition, The St. Paul recorded a $41.0 million pretax charge to write down the
carrying value of its life insurance operation's deferred policy acquisition
costs, which is reflected in the life insurance caption in the table. See Note 9
for further discussion of these charges.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
NOTE 8 MERGER WITH USF&G CORPORATION
On April 24, 1998, The St. Paul issued 66,468,572 of its common shares (as
adjusted for the May 6, 1998 two-for-one stock split) in exchange for all of the
outstanding common stock of USF&G Corporation, a holding company for
property-liability and life insurance operations. The transaction was valued at
approximately $3.7 billion, which included the assumption of USF&G's debt and
capital securities. This business combination has been accounted for as a
pooling of interests; accordingly, the consolidated unaudited financial
statements for periods prior to the combination have been restated to include
the accounts and results of operations of USF&G Corporation.
Prior to the merger, USF&G discounted all of its workers' compensation reserves
to present value, whereas The St. Paul did not discount any of its loss
reserves. Subsequent to the merger, The St. Paul and USF&G, on a combined basis,
discount only tabular workers' compensation reserves using an interest rate of
up to 3.5%. Since these reserves have an ultimate cost and payment pattern that
is fixed and determinable in accordance with Staff Accounting Bulletin No. 62,
"Discounting by Property-Casualty Insurance Companies," The St. Paul has
determined that the discounting of such reserves is the preferable accounting
treatment.
The St. Paul recorded a pretax charge to earnings of $291.6 million ($221.0
million after-tax) 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 estimates that
approximately 2,000 positions will 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, will be affected by the
reductions. The number of positions expected to be reduced by function include
approximately 950 in The St. Paul's property-liability underwriting operation,
350 in claims and 700 in finance and other administrative positions. The
reductions will occur throughout the United States. Through Sept. 30, 1998,
approximately 1,100 positions had been eliminated, and the cost of termination
benefits paid was $58.7 million. The St. Paul expects to realize annualized
pretax expense savings of approximately $200 million as a result of its plan to
merge the two organizations, primarily due to a reduction in employee salaries
and benefits.
The merger-related charge was determined in accordance with Emerging Issues Task
Force (EITF) Issue No 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity," Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," SFAS No. 5,
"Accounting for Contingencies," and Accounting Principles Board Opinion No. 16,
"Business Combinations."
The following table provides information about the components of the charge
taken in the second quarter, payments made and the balance of accrued amounts
remaining at Sept. 30, 1998.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
(in thousands)
Pre-tax
CHARGES TO EARNINGS: Charge
------------
<S> <C> <C> <C>
USF&G corporate headquarters $36,400
Long-lived assets 22,835
Software depreciation acceleration 9,678
Computer leases and equipment 9,600
Other equipment and furniture 7,700
-----------
Subtotal 86,213
-----------
Accrued charges subject to rollforward:
Reserve at
Pre-tax Sept. 30,
Charge Payments 1998
------------ ------------- -------------
Executive severance 89,352 $(47,787) $ 41,565
Other severance 52,200 (10,913) 41,287
Branch lease exit costs 34,150 (52) 34,098
Transaction costs 29,676 (29,331) 345
------------ ------------- ------------
Accruals subject to rollforward 205,378 (88,083) 117,295
------------ ------------- ------------
Total $291,591 $117,295
------------ ------------
</TABLE>
On The St. Paul's Consolidated Statement of Operations, $268.8 million of the
merger-related charge was recorded in the "Operating and administrative" expense
caption and $22.8 million was recorded in the "Realized investment gains"
revenue caption.
The following discussion provides more information regarding the rationale for
and calculation of each component of the second-quarter merger-related charge:
USF&G CORPORATE HEADQUARTERS
The Founders Building had been one of USF&G's headquarters buildings in
Baltimore, MD. Upon consummation of the merger, it was determined that the
headquarters for the combined entity would reside in St. Paul, MN, and that a
significant number of personnel working in Baltimore would be terminated, thus
vacating a significant portion of the Founders Building. The St. Paul developed
a plan to lease that space to outside parties and thus categorized it as an
"asset to be held or used" as defined in SFAS No. 121 for purposes of evaluating
the potential impairment of its $64 million carrying value. That evaluation,
based on the anticipated undiscounted future cash flows from potential lessees,
indicated that an impairment in the carrying value had occurred, and the
building was written down by $36 million to its fair value of $28 million. The
writedown is reflected in "parent company and eliminations" results. The
building continues to be depreciated over its estimated remaining useful life.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, 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 in 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
impairment writedown is reflected in the Consolidated Statement of Operations in
the "Realized investment gains" revenue caption. The four investments are as
follows:
<TABLE>
<S> <C>
1) Description of investment:
Percentage rents retained after sale of a portfolio of stores to
a third party
Carrying amount: $21.6 million prior to writedown of $16.6 million, for current
amount of $5.0 million
2) Description of investment:
138-acre land parcel in New Jersey,
with farm buildings being rented out
Carrying amount: $4.9 million prior to writedown of $2.1 million, for current
amount of $2.8 million
3) Description of investment:
Receivable representing cash flow
guarantee payments related to real
estate partnerships.
Carrying amount: $4.8 million prior to writedown of $1.7 million, for a balance
of $3.1 million.
4) Description of
investment: Limited partnership interests in three citrus groves
Carrying amount : $7.4 million prior to writedown of $2.4 million, for current
amount of $5.0 million
</TABLE>
These writedowns are reflected in the following operations: $14.1 million in
property-liability investment operations; $6.2 million in parent company and
eliminations; and $2.5 million in life insurance.
ACCELERATION OF SOFTWARE DEPRECIATION
The St. Paul conducted an extensive technology study upon consummation of the
merger as part of the business plan to merge the two companies. The resulting
strategy to standardize technology throughout the combined entity and maintain
one data center in St. Paul, MN, resulted in the identification of duplicate
software applications. As a result, the estimated useful life for that software
was shortened, resulting in an additional charge to earnings.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
COMPUTER LEASES AND EQUIPMENT
The technology study also identified redundant computer hardware, resulted in
lease buy-out transactions and disposals of computer equipment.
OTHER EQUIPMENT AND FURNITURE
The decision to combine all corporate headquarters in St. Paul, MN created
excess equipment and furniture in Baltimore, MD. The charge was calculated based
on the book value of assets at that location.
EXECUTIVE SEVERANCE
Represents the obligations The St. Paul will be required to pay in accordance
with the USF&G Senior Executive Severance Plan in place at the time of the
merger. The plan provides for payments to participants in the event the
participant is terminated without cause by the company or for good reason by the
participant within two years of the effective date of a transaction covered by
the plan.
OTHER SEVERANCE
Represents severance and related benefits such as out-placement counseling,
vacation buy-out and medical coverage to be paid to terminated employees not
covered under the USF&G Senior Executive Severance Plan.
BRANCH LEASE EXIT COSTS
As a result of the merger, excess space will be created in several locations due
to the anticipated staff reduction in the combined organization. The charge for
branch lease exit costs was calculated by determining the percentage of
anticipated excess space at each site and the current lease costs over the
remaining lease period. In certain locations, the lease is expected to be
terminated. For leases not expected to be terminated, the amount of expense
included in the charge was calculated as the percentage of excess space (20% to
100%) times the net of: remaining rental payments plus capitalized leasehold
improvements less actual sub-lease income. No amounts were discounted to present
value in the calculation.
TRANSACTION COSTS
This amount consists of registration fees, costs of furnishing information to
stockholders, consultant fees, investment banker fees, and legal and accounting
fees.
NOTE 9 CHARGES TO INCREASE LOSS RESERVES AND REDUCE THE CARRYING VALUE OF LIFE
INSURANCE DEFERRED ACQUISITION COSTS
In the second quarter of 1998, The St. Paul recorded pretax loss and loss
adjustment expenses of $250.0 million 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 merger. Prior to the merger, both companies, in
accordance with generally accepted accounting principles, recorded their best
estimate of reserves within a range of estimates bounded by a high point and a
low point.
Subsequent to the consummation of the merger in April 1998, The St. Paul
obtained the raw data underlying, and documentation supporting, USF&G's December
31, 1997 reserve analysis. The St. Paul's actuaries reviewed such information
and concurred with the reasonableness of USF&G's range of estimates for their
reserves. However, applying their
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
judgment and interpretation to the range, The St. Paul's actuaries, who would
be responsible for setting reserve amounts for the combined entity, concluded
that strengthening the reserves would be appropriate, resulting in the $250
million adjustment. The adjustment was allocated to the following
underwriting business centers: General Commercial ($120 million); Specialized
Commercial ($95 million); and Personal Insurance ($35 million).
Also in the second quarter, The St. Paul recorded a $41.0 million pretax charge
to reflect a writedown in the carrying value of deferred policy acquisition
costs (DPAC) in its life insurance segment. The writedown related to universal
life-type and investment-type contracts which are subject to the guidance in
SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments." According to SFAS No. 97, amortization of DPAC is based on the
present value of estimated gross profits expected to be realized over the life
of the contract. Estimates of expected gross profits used as a basis for
amortization are evaluated regularly and the total amortization to date should
be adjusted if actual experience or other evidence suggests that earlier
estimates should be revised.
The $41.0 million DPAC charge had three components. First, the persistency of
certain in-force business, particularly universal life and flexible premium
annuities, sold through some USF&G distribution channels, had begun to
deteriorate after the USF&G merger announcement. To mitigate this, management
decided, in the second quarter, to increase credited rates on certain universal
life business. This change lowered the estimated future profits on this
business, which, as required under SFAS No. 97, triggered $19.1 million in
accelerated DPAC amortization. Second, the low interest rate environment during
the first half of 1998 led to assumption changes as to the future "spread" on
certain interest sensitive products, lowering gross profit expectations and
triggering a $15.6 million DPAC charge. The remaining $6.3 million charge
resulted from a change in annuitization assumptions for certain tax-sheltered
annuity products.
NOTE 10 2-FOR-1 COMMON STOCK SPLIT
The St. Paul's Restated Articles of Incorporation were amended after the vote of
shareholders at the 1998 Annual Meeting of Shareholders on May 5, 1998, to
increase the authorized common shares of the company from 240 million to 480
million. Subsequent to this action, The St. Paul's board of directors approved a
2-for-1 common stock split. One additional share of common stock for each
outstanding share was issued on May 11, 1998, to shareholders of record on May
6, 1998.
NOTE 11 DISCONTINUED OPERATIONS
In May 1997, The St. Paul completed the sale of its brokerage operation, Minet,
to Aon Corporation. The St. Paul's gross proceeds from the sale were
approximately equal to its remaining carrying value of Minet. In connection with
the transaction, The St. Paul agreed to indemnify Aon against most preclosing
liabilities of the Minet businesses. The company recorded a net after-tax loss
on disposal of $67.8 million in the first quarter of 1997, which resulted
primarily from The St. Paul's agreement to be responsible for certain severance,
employee benefits, future lease commitments and other costs relating to Minet.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
September 30, 1998
CONSOLIDATED RESULTS
ON APRIL 24, 1998, THE ST. PAUL COMPANIES, INC. (THE ST. PAUL) COMPLETED ITS
MERGER WITH USF&G CORPORATION (USF&G) IN A TAX-FREE EXCHANGE OF STOCK ACCOUNTED
FOR AS A POOLING-OF-INTERESTS. THE COMBINED ORGANIZATION OPERATES UNDER THE ST.
PAUL NAME AND IS HEADQUARTERED IN ST. PAUL, MN. THE FOLLOWING DISCUSSION IS
BASED ON THE COMBINED RESULTS OF THE ST. PAUL AND USF&G FOR ALL PERIODS
PRESENTED.
The St. Paul's pretax income from continuing operations of $38 million in the
third quarter of 1998 fell significantly below income of $275 million in the
corresponding 1997 period. The St. Paul's pretax loss from continuing operations
of $122 million in the first nine months of 1998 included a pretax charge of
$292 million recorded in the second quarter related to the merger with USF&G,
and other charges, totaling $291 million, relating to property-liability loss
reserve strengthening 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 merger, and the writedown of deferred policy acquisition costs
in the life insurance segment. Excluding these charges, nine-month pretax
earnings of $461 million were over $500 million behind comparable 1997 earnings
of $975 million. Results for the third quarter and nine months of 1998 were
negatively impacted by severe catastrophe losses and deterioration in other loss
experience in several property-liability underwriting business centers.
The following table summarizes The St. Paul's results for the third quarter and
year-to-date.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(in millions)
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pretax income (loss):
Property-liability insurance:
GAAP underwriting result $(287) (47) (883) (195)
Net investment income 322 328 985 986
Realized investment gains 7 39 187 302
Other (11) (35) (235) (80)
--- --- ----- -----
Total property-liability insurance 31 285 54 1,013
Life insurance 22 20 9 45
Asset management-investment banking 26 23 75 67
Parent and other (41) (53) (260) (150)
-- --- ---- ----
Income (loss) from continuing
operations before income taxes 38 275 (122) 975
Income tax expense (benefit) (30) 60 (111) 234
--- --- ----- ---
Income (loss) from
continuing operations 68 215 (11) 741
Loss from discontinued
operations, net of taxes - - - (67)
----- ----- ----- -----
Net income (loss) $68 215 (11) 674
----- ----- ----- -----
----- ----- ----- -----
Diluted net income (loss)
per common share $0.27 0.85 (0.09) 2.68
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
<TABLE>
<CAPTION>
REVENUES Three Months Nine Months
Ended September 30 Ended September 30
-------------------- --------------------
(in millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earned premiums $1,699 1,810 5,233 5,507
Net investment income 391 392 1,185 1,172
Realized investment gains 25 47 210 315
Asset management-investment banking 76 62 223 181
Other 20 13 64 45
------- ------- ------- -------
Total revenues $2,211 2,324 6,915 7,220
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Premiums earned in The St. Paul's insurance operations for the third quarter and
first nine months of 1998 declined 6% and 5%, respectively, compared with the
same periods of 1997. The St. Paul's General Commercial and Reinsurance business
centers, where intensely competitive market conditions have negatively impacted
business volume and pricing, accounted for virtually all of the third quarter
and nine-month declines from 1997. Life insurance premiums earned were $6
million ahead of the third quarter of 1997 and $3 million higher for the first
nine months of the year. Realized investment gains for the first nine months of
1998 declined from 1997; however, the 1997 total was unusually large due to the
sale of one venture capital investment which generated a $129 million pretax
gain. The increase in asset management-investment banking revenues in 1998
reflects the impact of an acquisition in September 1997.
MERGER-RELATED CHARGE
As part of the integration plan to merge The St. Paul and USF&G operations,
management performed a comprehensive review of the operations of the separate
companies. The review identified redundant job functions, staffing levels,
geographical locations, leased space and technology platforms. To address these
redundancies and implement its plan of integration, The St. Paul recorded a $292
million pretax merger-related charge in the second quarter, composed of the
following components:
- $141 million of severance and other employee-related costs, representing
$89 million to be paid under the USF&G Senior Executive Severance Plan in
effect at the time of the merger, and $52 million of other severance and
related benefits, such as out-placement counseling, vacation buy-out and
medical coverage, for terminated employees not covered under the Senior
Executive Severance Plan. The St. Paul estimates that approximately 2,000
positions will be eliminated (the majority by the end of 1999) 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, will be affected by the reductions. The total number of
positions expected to be reduced by function include approximately 950 in
the property-liability underwriting operations, 350 in claim and 700 in
finance and other administrative positions. Through Sept. 30, 1998,
approximately 1,100 positions had been eliminated, and $59 million in
severance and other employee-related costs had been paid.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
CONSOLIDATED RESULTS
- $70 million of facilities exit costs, consisting of a $36 million
writedown in the carrying value of a former USF&G headquarters building
in Baltimore, MD and $34 million of expenses related to the consolidation
of redundant branch office locations. The St. Paul determined that the
merger would result in excess space at the Baltimore headquarters
location, and developed a plan to lease that space to outside parties.
Based on an analysis of potential future undiscounted cash flows, The St.
Paul determined that an impairment in the carrying value had occurred and
recorded the $36 million writedown to its estimated fair value.
For certain redundant branch office locations, the lease is expected to
be terminated. For leases not expected to be terminated, the amount of
expense recorded in the second quarter charge was calculated as the
percent of excess space (20% to 100%) times the net of: remaining rental
payments plus capitalized leasehold improvements less actual sub-lease
income. No amounts were discounted to present value in the calculation.
- $30 million of transaction costs, consisting of registration fees, costs
of furnishing information to stockholders, consultant fees, investment
banker fees, and legal and accounting fees.
- $23 million writedown of certain long-lived assets. The St. Paul
determined several of USF&G's real estate investments were not consistent
with The St. Paul's real estate investment strategy, and developed a plan
to sell them, with an expected disposal date in 1999. The St. Paul
determined that four of these investments should be written down to
estimated fair value. The fair value was calculated based on a discounted
cash flow analysis, or market prices for similar assets.
- $10 million of depreciation expense resulting from shortening the
estimated useful life of redundant software.
- $10 million of expense for writedowns and lease buy-outs of redundant
computer equipment.
- $8 million writedown in the carrying value of excess furniture and
equipment in Baltimore, MD created by the merger. The charge was
calculated based on the book value of assets at that location.
On The St. Paul's Consolidated Statement of Operations, $269 million of the
merger-related charge was recorded in the "Operating and administrative" expense
caption and $23 million was recorded in the "Realized investment gains" revenue
caption.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
CONSOLIDATED RESULTS
The integration of the two companies is expected to result in annual expense
savings of approximately $200 million, as measured against the combined 1997
pre-merger expenses of The St. Paul and USF&G. The expense savings will
primarily result from the reduction in employee salaries and benefits after the
elimination of redundant positions from the merged organization. No material
increases in other expenses are expected to offset these expense reductions.
However, the merger may result in the loss of business in the property-liability
underwriting business. The amount of business that may be lost is not reasonably
estimable, but it is not expected to materially affect the results of operations
in future periods. As merger-related costs are paid, it is expected to have a
short-term negative impact on operational cash flows.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
PROPERTY-LIABILITY INSURANCE
The following summarizes key financial results by property-liability
underwriting operation. (Underwriting results are presented on a GAAP basis;
combined ratios are presented on a statutory basis).
<TABLE>
<CAPTION>
% of Three Months Nine Months
1998 Ended Sept. 30 Ended Sept. 30
Written ------------------ ------------------
($ in millions) Premiums 1998 1997 1998 1997
- - -------------- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Specialized Commercial:
Written Premiums 35% $660 682 1,817 1,829
Underwriting Result ($80) 40 (249) 66
Combined Ratio 112.0 93.0 115.5 97.4
General Commercial
Written Premiums 22% $364 434 1,111 1,357
Underwriting Result ($109) (61) (384) (158)
Combined Ratio 128.4 114.4 134.1 112.7
Personal Insurance:
Written Premiums 21% $386 341 1,077 943
Underwriting Result ($55) (18) (193) (74)
Combined Ratio ------- 116.1 104.8 118.7 106.8
----- ----- ----- -----
Total U.S. Underwriting:
Written Premiums 78% $1,410 1,457 4,005 4,129
Underwriting Result ($244) (39) (826) (166)
Combined Ratio 117.5 102.4 121.5 104.7
International Underwriting:
Written Premiums 6% $78 81 289 229
Underwriting Result ($22) (14) (52) (36)
Combined Ratio ------- 127.0 114.1 117.6 115.3
----- ----- ----- -----
Total Primary Insurance Operations:
Written Premiums 84% $1,488 1,538 4,294 4,358
Underwriting Result ($266) (53) (878) (202)
Combined Ratio 118.0 103.0 121.4 105.2
Reinsurance Operations:
Written Premiums 16% $239 288 833 968
Underwriting Result ($21) 6 (5) 7
Combined Ratio ------- 108.1 97.8 99.4 97.6
----- ---- ---- -----
Total Property-Liability Underwriting:
Written Premiums 100% $1,727 1,826 5,127 5,326
Underwriting Result ($287) (47) (883) (195)
Combined Ratio:
Loss and Loss Expense Ratio 83.1 70.7 83.9 72.0
Underwriting Expense Ratio 33.6 31.5 34.1 31.8
----- ----- ----- -----
Combined Ratio 116.7 102.2 118.0 103.8
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
PROPERTY-LIABILITY INSURANCE
OVERVIEW
The year-to-date data in the table on the preceding page reflects the impact of
the $250 million pretax provision for losses and loss adjustment expenses
recorded in the second quarter of 1998 to apply The St. Paul's reserving
policies to USF&G's loss reserves subsequent to the consummation of the merger
(the "USF&G loss reserve provision").
Prior to the merger, both companies, in accordance with generally accepted
accounting principles, recorded their best estimate of reserves within a range
of estimates bounded by a high point and a low point. Subsequent to the
consummation of the merger in April 1998, The St. Paul obtained the raw data
underlying, and documentation supporting, USF&G's December 31, 1997 reserve
analysis. The St. Paul's actuaries reviewed such information and concurred with
the reasonableness of USF&G's range of estimates for their reserves. However,
applying their judgment and interpretation to the range, The St. Paul's
actuaries, who would be responsible for setting reserve amounts for the combined
entity, concluded that strengthening the reserves would be appropriate,
resulting in the $250 million adjustment. The adjustment was allocated to the
following business centers in the foregoing table: General Commercial - $120
million; Specialized Commercial - $95 million; and Personal Insurance - $35
million.
The following table isolated the impact of catastrophe losses on The St. Paul's
GAAP underwriting results.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
------------------ -------------------
($ in millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
GAAP underwriting result ($287) (47) (883) (195)
Statutory combined ratio 116.7 102.2 118.0 103.8
Pretax catastrophe losses $173 36 381 120
Impact on combined ratio 10.4 2.0 7.4 2.2
----- ------ ------ ------
Excluding catastrophes:
GAAP underwriting result ($114) (11) (502) (75)
Statutory combined ratio 106.3 100.2 110.6 101.6
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Hurricane Georges, which struck the Caribbean region and the Gulf Coast of the
United States in September, accounted for $102 million of catastrophe losses in
1998's third quarter. The remainder of third quarter losses primarily resulted
from several summer storms throughout the United States. Numerous storms in
several of The St. Paul's largest markets in the first half of 1998 contributed
to the nine-month catastrophe total of $381 million. The $250 million USF&G loss
reserve provision accounted for 4.9 points of the combined ratio for the nine
months ended Sept. 30, 1998. The deterioration in underwriting results excluding
the USF&G loss reserve provision and catastrophes was largely due to intensely
competitive conditions in several markets, particularly the midsized commercial
sector, and accelerating loss costs in the Medical Services business center.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
PROPERTY-LIABILITY INSURANCE
The consolidated expense ratio of 33.6 for the third quarter reflects the impact
of declining written premium volume and an increase in commission expenses
resulting from efforts to retain USF&G business during the integration of The
St. Paul and USF&G into one organization.
UNDERWRITING RESULTS BY BUSINESS CENTER
SPECIALIZED COMMERCIAL
This category includes The St. Paul's business centers which serve specific
commercial customer segments and provide specialized products and services for
targeted industry groups. Written premiums totaled $660 million in the third
quarter, down 3% from comparable 1997 premiums of $682 million. The St. Paul's
Medical Services operation recorded premiums of $174 million for the quarter,
down 10% from last year's third quarter total of $192 million. Competitive
conditions in the medical liability insurance market have negatively impacted
pricing levels and new business opportunities in 1998. Medical Services' third
quarter and year-to-date underwriting losses of $38 million and $91 million,
respectively, reflect the impact of accelerating loss costs and the poor pricing
environment. However, The St. Paul began implementing price increases on
selected physicians and surgeons' policy renewals in 1998, and intends to pursue
additional pricing actions in 1999.
For the remainder of Specialized Commercial, premium volume in the third quarter
and first nine months of 1998 was virtually level with the same periods of 1997.
Underwriting results for both periods, however, were significantly worse than
1997, primarily due to deteriorating loss experience in several operations,
particularly the Construction business center. The second quarter USF&G loss
reserve provision increased Specialized Commercial's nine-month underwriting
loss by $95 million, adding 5.0 points to the combined ratio. Catastrophe losses
were also a factor in Specialized Commercial's results for the third quarter and
nine months of 1998. The St. Paul's Surety underwriting operation, now the
largest in the United States as a result of the USF&G merger, recorded a 21%
increase in net premium volume and a $53 million underwriting profit through the
first nine months of 1998, representing a 23% increase over the same 1997
period.
GENERAL COMMERCIAL
The St. Paul's General Commercial business center provides insurance products
and services for a broad range of small to midsized commercial enterprises.
Premium volume declined 16% for the quarter and 18% for the first nine months of
the year. Prices continue to decline in this operation, particularly in the
commercial middle-market sector, reflecting the continuing intense competition
for business. In response to these difficult conditions, The St. Paul intends to
adhere to strict underwriting standards with regard to new and renewal business
going forward, which may result in a reduction of up to $200 million in annual
premium volume in this business center. The third quarter underwriting loss of
$109 million, which included $31 million of catastrophe losses, primarily
resulted from a general deterioration in noncatastrophe prior year loss
development across the book of business. On a year-to-date basis, the
underwriting loss of $384 million was $226 million worse than 1997, with $120
million of the second quarter USF&G loss reserve provision and catastrophe
losses of $112 million playing a large role in the deterioration. Catastrophe
losses in the first nine months of 1997 totaled $46 million.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
PROPERTY-LIABILITY INSURANCE
PERSONAL INSURANCE
Personal Insurance provides property-liability insurance products and
services to individuals. Third quarter and year-to-date written premium
volume grew 13% and 14%, respectively, over the same periods of 1997,
primarily due to The St. Paul's acquisition in December 1997 of Titan
Holdings, Inc., a property-liability company which has a substantial book of
nonstandard automobile business. Underwriting results in the Personal
Insurance segment were severely impacted by catastrophe losses of $60 million
in the third quarter and $147 million for the nine months. Numerous storms
throughout the United States, including two May storms in Minnesota which
generated over 11,000 claims and nearly $50 million of losses, were the
primary contributors to this business center's catastrophe total through the
first nine months of 1998. The year-to-date underwriting loss of $193 million
also included $35 million of the second quarter USF&G loss reserve provision.
The nonstandard auto business center provides automobile coverage for
individuals who are unable to obtain standard coverage due to their inability to
meet certain underwriting criteria. Premiums generated by this business center
totaled $191 million in the first nine months of 1998, compared with $57 million
in the same period of 1997. The increase was primarily the result of the
acquisition of Titan Holdings, Inc.
INTERNATIONAL
This operation provides commercial and personal property-liability insurance
products and services in selected international markets. Premium volume for the
third quarter of 1998 declined 4% compared to the same period of 1998, but
year-to-date premiums were 26% higher than the first nine months of 1997. New
commercial business in Europe, and growth in business generated through The St.
Paul's involvement with Lloyd's of London, were the primary factors contributing
to the year-to-date premium increase in 1998. The Emerging Markets sector of the
International business center also provided premium growth over 1997, due to new
business in Botswana and South Africa. Underwriting results for the third
quarter and first nine months of 1998 deteriorated from comparable 1997 results,
primarily due to severe ice storms in Canada during the first quarter and
adverse prior year development on Canadian loss reserves.
REINSURANCE
The St. Paul's Reinsurance business center consists of St. Paul Re, F&G Re and
Discover Re. St. Paul Re and F&G Re underwrite both treaty and facultative
reinsurance for property, liability, ocean marine, surety and certain specialty
classes of business. Discover Re provides products and services to the
alternative risk transfer market, and provides products for self-insured
companies and insurance pools, as well as ceding to and reinsuring captive
insurers.
Written premiums of $239 million in the third quarter were down 17% from the
same period of 1997. Premium volume of $833 million through the first nine
months of 1998 declined 14% from the first nine months of 1997. The significant
declines in 1998 reflect soft global market conditions for this segment,
resulting from excess capacity in primary reinsurance markets.
The Reinsurance business center recorded a $21 million underwriting loss in the
third quarter, compared with a profit of $6 million in 1997's third quarter.
Third quarter catastrophe losses totaled $53 million, virtually all of which
resulted from Hurricane Georges. Catastrophe losses in last year's third quarter
were negligible. The year-to-date underwriting loss of $5 million in 1998
includes a catastrophe impact of $58 million.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
PROPERTY-LIABILITY INSURANCE
INVESTMENT OPERATIONS
Third quarter pretax investment income of $322 million in The St. Paul's
property-liability operations declined 2% from the same period of 1997.
Year-to-date income of $985 million was virtually level with 1997. A 4%
decline in written premiums and 4% increase in insurance losses paid through
the first nine months of 1998 have resulted in a significant decline in new
funds available for investment. In addition, market yields on new investments
have continued to decline in 1998. As a result, The St. Paul does not
anticipate investment income growth for the remainder of 1998.
The fixed maturities portfolio on Sept. 30, 1998 of $18.0 billion included
$1.1 billion of pretax unrealized appreciation. Approximately 95% of those
investments were rated at investment grade (BBB or above). The weighted
average pretax yield on the fixed maturities portfolio was 6.8% at September
30, 1998.
Pretax realized investment gains totaled $7 million in the third quarter,
compared with gains of $39 million in last year's third quarter. Year-to-date
pretax gains in 1998 of $187 million were down from last year's nine-month gains
of $302 million. Sales of equity security investments accounted for the majority
of 1998's gains. The sale of a single venture capital investment generated a
pretax gain of $129 million in 1997.
ENVIRONMENTAL AND ASBESTOS CLAIMS
The St. Paul's property-liability underwriting operations continue to receive
claims alleging injuries from environmental pollution or alleging covered
property damages for the cost to clean up polluted sites. The St. Paul also
receives asbestos injury claims arising out of product liability coverages under
general liability policies. The vast majority of these claims arise from
policies written many years ago. The St. Paul's alleged liability for both
environmental and asbestos claims is complicated by significant legal issues,
primarily pertaining to the scope of coverage. In the company's opinion, court
decisions in certain jurisdictions have tended to broaden insurance coverage
beyond the intent of the original policies.
The St. Paul's ultimate liability for environmental claims is difficult to
estimate because of these issues. Insured parties have submitted claims for
losses not covered in the insurance policy, and the ultimate resolution of these
claims may be subject to lengthy litigation, making it difficult to estimate The
St. Paul's potential liability. In addition, variables, such as the length of
time necessary to clean up a polluted site and controversies surrounding the
identity of the responsible party and the degree of remediation deemed
necessary, make it difficult to estimate the total cost of an environmental
claim.
Estimating the ultimate liability for asbestos claims is equally difficult. The
primary factors influencing the estimate of the total cost of these claims are
case law and a history of prior claims experience, both of which are still
developing.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
ENVIRONMENTAL AND ASBESTOS CLAIMS
The following table represents a reconciliation of total gross and net
environmental reserve development for the nine months ended September 30, 1998
(unaudited), and the years ended Dec. 31, 1997 and 1996. Amounts in the "net"
column are reduced by reinsurance recoverables.
<TABLE>
<CAPTION>
1998
Environmental (nine months) 1997 1996
- - ------------- ----------- ---- ----
(in millions) Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Beginning reserves $867 677 889 676 840 631
Reserves acquired - - - - 18 7
Incurred losses 23 25 44 58 87 92
Paid losses (53) (45) (66) (57) (56) (54)
--- --- --- --- --- ---
Ending reserves $837 657 867 677 889 676
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
Many significant environmental claims currently being brought against insurance
companies arise out of contamination that occurred 25 to 35 years ago. Since
1970, The St. Paul's commercial general liability policy form has included a
specific pollution exclusion, and, since 1986, an industry standard absolute
pollution exclusion for policies underwritten in the United States.
The following table represents a reconciliation of total gross and net reserve
development for asbestos claims for the nine months ended September 30, 1998
(unaudited), and the years ended Dec. 31, 1997 and 1996:
<TABLE>
<CAPTION>
1998
Asbestos (nine months) 1997 1996
- - -------- ----------- ---- ----
(in millions) Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Beginning reserves $397 279 413 304 421 294
Reserves acquired - - - - 6 6
Incurred losses 29 10 22 (5) 18 25
Paid losses (27) (8) (38) (20) (32) (21)
--- --- --- --- --- ---
Ending reserves $399 281 397 279 413 304
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
Most of the asbestos claims the company has received pertain to policies written
prior to 1986. Since 1986, for policies underwritten in the United States, The
St. Paul's commercial general liability policy has included the industry
standard absolute pollution exclusion, which the company believes applies to
asbestos claims.
The St. Paul's reserves for environmental and asbestos losses at September 30,
1998 represent its best estimate of its ultimate liability for such losses,
based on all information currently available. Because of the difficulty inherent
in estimating such losses, however, the company cannot give assurances that its
ultimate liability for environmental and asbestos losses will, in fact, match
current reserves. The St. Paul continues to evaluate new information and
developing loss patterns, but it believes any future additional loss provisions
for environmental and asbestos claims will not materially impact its results of
operations, liquidity or financial position.
Total gross environmental and asbestos reserves at September 30, 1998 of $1.24
billion represented approximately 7% of gross consolidated property-liability
reserves of $18.65 billion.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
LIFE INSURANCE
The St. Paul's life insurance segment is comprised of Fidelity and Guaranty Life
Insurance Company and subsidiaries ("F&G Life"), acquired in the USF&G merger.
F&G Life underwrites traditional life insurance and annuities, which are sold
throughout the United States through independent agents, managing general agents
and specialty brokerage firms.
F&G Life's pretax income of $9 million for the nine months ended Sept. 30, 1998
reflected a $41 million charge in the second quarter to reflect a writedown of
the carrying value of deferred policy acquisition expenses (DPAC) relating to
universal life-type and investment-type contracts. According to generally
accepted accounting principles, DPAC amortization is based on the present value
of estimated gross profits expected to be realized over the life of the
contract. Estimates of expected gross profits used as a basis for amortization
are evaluated regularly and the total amortization to date should be adjusted if
actual experience or other evidences suggests that earlier estimates should be
revised.
The $41 million DPAC charge had three components. First, the persistency of
certain in-force business, particularly universal life and flexible premium
annuities, sold through some USF&G distribution channels, began to deteriorate
after the USF&G merger announcement in April 1998. To mitigate this, management
decided, in the second quarter, to increase credited rates on certain universal
life business. This change lowered the estimated future profits on this
business, which, as required under SFAS No. 97, triggered $19 million in
accelerated DPAC amortization. Second, the low interest rate environment during
the first half of 1998 led to assumption changes as to the future "spread" on
certain interest sensitive products, lowering gross profit expectations and
triggering a $16 million DPAC charge. The remaining $6 million charge resulted
from a change in annuitization assumptions for certain tax-sheltered annuity
products.
F&G Life also recorded a $9 million pretax merger-related charge in the second
quarter of 1998, primarily related to severance and facilities exit costs.
Highlights of F&G Life's financial performance for the third quarter and nine
months of 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
(in millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales (annualized premiums) $131 109 282 344
Premiums earned $31 25 81 78
Policy surrenders $48 44 162 125
Net investment income $66 64 198 185
Pretax earnings (including realized gains) $22 20 9 45
</TABLE>
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
LIFE INSURANCE
The increase in sales for the third quarter was driven by sales of a new
equity indexed annuity product introduced in June 1998. Credited interest
rates on this product are tied to the performance of the S&P 500 index. The
overall decline in sales through the first nine months of 1998 was primarily
due to the significantly lower level of interest rates and its negative
impact on fixed interest rate annuities. Fluctuating interest rates and the
relative attractiveness of alternative investment, annuity or insurance
products affect the demand for annuity products.
The increase in premiums earned in the third quarter of 1998 was largely due
to an increase in sales of structured settlement annuities, which are sold
primarily to property-liability insurers to settle insurance claims.
Expansion of the structured settlement program into The St. Paul's claim
organization is expected to result in a continued increase in sales.
Deferred annuities and universal life products are subject to surrender by
policyholders. Nearly all of F&G Life's surrenderable annuity policies allow
a refund of the cash value balance less a surrender charge. Surrender
activity increased in 1998 due to an increase in the size and maturity of the
annuity book of business and from competition from alternative investments,
primarily equity-based products.
Net investment income grew in 1998 as a result of an increasing asset base
generated by positive cash flow. Pretax earnings for the first nine months of
1998 excluding the DPAC charge and the merger-related charge were higher than
the same period of 1997 due to improved investment spread management on
annuity and universal life products and strong expense controls.
Total life insurance in force at September 30, 1998 was $10.69 billion,
compared with $10.62 billion at September 30, 1997.
ASSET MANAGEMENT-INVESTMENT BANKING
The St. Paul's portion of The John Nuveen Company's third quarter 1998 pretax
earnings was $26 million, $3 million higher than the same period of 1997. For
the first nine months of 1998, the company's portion of such earnings was $75
million, compared with $67 million for the first nine months of 1997. At
September 30, 1998, The St. Paul owned 78% of Nuveen.
Nuveen's asset management fee revenue of $69 million for the third quarter
was $13 million, or 22%, higher than in the same period of 1997. The increase
was primarily due to Nuveen's acquisition of Rittenhouse Financial Services,
Inc., which manages individual equity and balanced accounts for affluent
investors, in September 1997. Year-to-date management fee revenues totaled
$201 million in 1998, compared with $158 million through the first nine
months of 1997.
Nuveen's assets under management grew to $52.5 billion at Sept. 30, 1998, an
increase of 6% since year-end 1997.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
CAPITAL RESOURCES
The St. Paul's capitalization (debt, redeemable preferred securities and
equity) stood at $8.24 billion at Sept. 30, 1998, down 2% from the year-end
1997 total of $8.41 billion. Common shareholders' equity at the end of the
third quarter was slightly higher than year-end 1997.
Total debt outstanding at the end of September was $1.10 billion, a decline
of $206 million, or 16%, from the Dec. 31, 1997 total of $1.30 billion. The
reduction was driven by the maturity of $145 million of 7% senior notes in
May 1998, which was funded with a combination of internal funds and the
issuance of commercial paper. In addition, Nuveen's short-term debt
outstanding declined by $78 million from year-end 1997. Medium-term notes
with varying maturities accounted for 46% of The St. Paul's debt outstanding
at Sept. 30, 1998. These notes bear a weighted-average interest rate of 7.0%.
Commercial paper comprised 21% of The St. Paul's total debt at the end of the
third quarter. Debt (excluding capital securities) as a percentage of total
capitalization at Sept. 30, 1998, was 13%, down from 15% at year-end 1997.
Including capital securities as a component of debt, the ratios were 19% at
Sept. 30, 1998 and 21% at year-end 1997.
The merger with USF&G Corporation consummated on April 24, 1998 was a
tax-free exchange of stock accounted for as a pooling-of-interests. The St.
Paul issued 66.5 million shares of its common stock in exchange for all of
the outstanding common stock of USF&G. The transaction was valued at
approximately $3.7 billion, which included the assumption of USF&G's debt and
capital securities.
On November 3, 1998, The St. Paul's board of directors authorized the company
to repurchase up to $500 million of its common stock in the open market or
through private transactions. The repurchases will be primarily financed
through the issuance of debt securities. Through November 12, 1998, The St.
Paul had repurchased 1.6 million shares for a total cost of $57 million under
this program.
The St. Paul's year-to-date pretax loss from continuing operations was
inadequate to cover "fixed charges" by $122 million and "combined fixed
charges and preferred stock dividends" by $163 million. For the first nine
months of 1997, The St. Paul's ratio of earnings to fixed charges was 11.98,
and the ratio of earnings to combined fixed charges and preferred stock
dividends was 8.46. Fixed charges consist of interest expense before
reduction for capitalized interest and one-third of rental expense, which is
considered to be representative of an interest factor.
LIQUIDITY
Liquidity refers to The St. Paul's ability to generate sufficient funds to
meet the cash requirements of its business operations. Net cash provided by
operations was $123 million in the first nine months of 1998, compared with
$672 million for the same period of 1997. The significant decline in
operational cash flows compared with 1997 resulted from an increase in
insurance loss payments due to deteriorating loss experience and severe
catastrophes, a decline in property-liability written premiums, and expenses
paid relating to the merger with USF&G. Despite the decline in operational
cash flows in 1998, The St. Paul's ability to meet its short-term and
long-term liquidity requirements remains intact due to the high level of
readily marketable investment securities in its portfolio which generate
strong levels of investment income, and the prospects for future profitable
growth.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
YEAR 2000 READINESS DISCLOSURE
Many computer systems in the world have the potential of being disrupted at
the turn of the century due to programming limitations that may cause the
two-digit year code of "00" to be recognized as the year 1900, instead of
2000. The St. Paul is heavily dependent on its many computer systems, and
those of its independent agents and brokers (The St. Paul "distribution
network") and its vendors, for virtually every aspect of its operations,
including underwriting, claims, investments and financial reporting. Thus,
the "Year 2000" issue involves potential serious operational risks for the
Company.
For several years, The St. Paul has been evaluating its computer systems to
determine the impact of the Year 2000 issue on their operation. With the
completion of the merger with USF&G Corporation on April 24, 1998, The St.
Paul has also been evaluating USF&G's activities to become "Year 2000"
compliant. As compliance evaluation of the St. Paul and USF&G systems has
progressed to an advanced stage, a shift of emphasis from evaluation to
correction and compliance testing has taken place. The St. Paul has also been
working with vendors and members of its distribution network in an effort to
address Year 2000 issues that such relationships involve. Finally, The St.
Paul has been reviewing and taking action to address non-systems related
issues that may arise as a result of the Year 2000 problem, including
insurance and reinsurance coverage issues, and has been seeking to reduce the
Company's Year 2000 related exposures through the development of contingency
plans.
The following discussion describes The St. Paul's efforts to date and future
plans to deal with the Year 2000 issue. These plans have been and continue to
be updated and revised as additional information becomes available.
STATE OF READINESS
Since the late 1980's, The St. Paul has required that all of the internal
computer systems supported by The St. Paul's Information Systems Division
("ISD") use a four-digit date field. Early implementation of this design
standard has limited the number of systems requiring remediation.
A Review Board was established by The St. Paul in the third quarter of 1997
to review and certify the remediation of the hundreds of internally developed
and externally sourced systems used by the Company through rigorous testing.
To coordinate the Year 2000 remediation efforts, The St. Paul has created the
Year 2000 Project Office, which is responsible for the oversight,
coordination and monitoring of the Company's Year 2000 efforts including,
among other things, reviewing the compliance status of the Company's
information systems in all operating units and subsidiaries, both foreign and
domestic, directing the Year 2000 coordinators assigned to the Company's
operating units, and formulating Company-wide contingency plans.
Prior to the merger with USF&G, a separate "Y2K Action Committee" was
maintained by USF&G, and a comprehensive program to address each of three
identified aspects to the Year 2000 issue (readying USF&G's systems,
coordinating with agents and other third parties with whom USF&G interacts,
and managing the risk of claims from insured parties) had been established.
The Year 2000 program developed by USF&G's Y2K Action Committee has now been
integrated into The St. Paul's overall Year 2000 response.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
YEAR 2000 READINESS DISCLOSURE
INFORMATION TECHNOLOGY SYSTEMS
All of The St. Paul's systems, whether internally developed or externally
sourced, are subject to the Company-wide comprehensive testing and compliance
standards promulgated by ISD, the oversight and monitoring of which is the
responsibility of the Year 2000 Project Office. Insofar as internal systems are
concerned, Year 2000 compliance is scheduled to be achieved by December 31,
1998. Compliance validation of all such systems is scheduled to be completed by
March 31, 1999.
The Year 2000 Project Office's plan for remediation and validation of
externally sourced systems provides for the Company to work with the vendors
of such systems to ensure that such systems become Year 2000 compliant at the
earliest practicable date. Compliance testing in accordance with ISD
standards takes place as and when compliant versions and/or affirmations of
compliance from vendors are received. The St. Paul has identified what it
believes to be all of its third-party supplied mission critical systems, and
expects to receive Year 2000 compliant versions and/or affirmations of
compliance for each of them, and to complete the validation process, before
September 30, 1999.
THIRD-PARTY SERVICE PROVIDERS AND DISTRIBUTION NETWORK
The St. Paul relies indirectly on the information technology systems of its
service providers and those of its distribution network. The Year 2000 Project
Office is communicating with the Company's service providers, including
financial institutions providing custody and other services, its independent
agents and brokers, and other entities with which The St. Paul does business, to
identify and resolve Year 2000 issues and to determine the potential impact,
where relevant, of the possible failure of certain of such persons to achieve
Year 2000 compliance on a timely basis. Results of this process are expected to
be used in The St. Paul's contingency planning efforts discussed below.
NUVEEN SYSTEMS
Having started the development and implementation of internal four-digit date
code software and system standards in the early 1980's, Nuveen's Year 2000
program consists primarily of Year 2000 compliance examination and testing of
the software packages and hardware provided by third parties and of the systems
and software of its service providers. Certification of Year 2000 compliance of
third-party hardware and software systems used in processing at Nuveen is
expected to be complete by the end of the first quarter of 1999. Nuveen is in
the process of developing contingency plans based upon its examination of the
Year 2000 readiness of its third-party supplied systems and its service
providers. Nuveen believes that the costs associated with its Year 2000 efforts
will not be material to its operations and financial position.
EMBEDDED CHIP ISSUES
Given the nature of its business, and that of its vendors and the members of its
distribution network, the St. Paul believes that its exposure to embedded chip
Year 2000 issues is minimal (other than its exposure to possible disruptions in
electricity, telecommunications and other essential services provided by public
utilities that are subject to embedded chip-related disruption). The St. Paul
is, where appropriate, coordinating with vendors to obtain certificates of Year
2000 compliance for the embedded computer technology equipment that it uses.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
YEAR 2000 READINESS DISCLOSURE
YEAR 2000 COMPLIANCE PROGRAM COSTS
The St. Paul has developed and implemented plans to address the system
modifications required to prepare for the Year 2000, and does not expect the
planning and implementation costs associated with Year 2000 efforts to be
material to its results of operations, cash flows or consolidated financial
position. Through December 31, 1997, the costs of Year 2000 remediation measures
incurred by the Company, including USF&G prior to the merger, totaled
approximately $6 million. The St. Paul expects such costs to be approximately
$12 million in 1998, and approximately $5 million in 1999.
CONTINGENCY PLANNING
The Year 2000 Project Office's contingency planning team is currently developing
a master contingency plan comprised of seven matrices, each matrix covering one
of seven identified core sectors, setting potential risk exposure against three
possible disruption duration scenarios. For each sector of activity and duration
of disruption, the plan will provide an alternative work-around designed to
permit continued operations and to minimize risk exposure. The overall plan is
scheduled to be complete by March 31, 1999. The plan template and design model
for each matrix will be distributed to all field office locations upon
completion in order to permit the construction of plans specific to each
office's operations.
The St. Paul believes that its most significant Year 2000 exposure is the
potential business disruptions that would be caused by widespread failure of
public utility systems, particularly in the power generation/distribution and
the telecommunication industries. While the contingency plans being developed by
The St. Paul will provide work-arounds to lessen the impact of short duration
disruptions, prolonged failure of power and telecommunications systems could
have a material adverse effect on the Company's results of operations, cash
flows and consolidated financial position.
As noted above, The St. Paul indirectly relies on the information systems of
the many components of its distribution network, which includes thousands of
independent agents and brokers. The St. Paul is aware that some of its
independent agents and brokers are currently Year 2000 non-compliant and
expects that a much lesser number, unknown at this time and expected to
consist primarily of smaller agents, will be non-compliant on January 1,
2000. The Company believes that Year 2000 related difficulties experienced by
members of its distribution network have the potential to materially disrupt
its business and that such potential disruptions constitute its second
greatest area of potential exposure to the Year 2000 problem. As part of its
contingency planning effort, The St. Paul has been providing information to
members of its distribution network intended to sensitize them to the Year
2000 issue and to encourage them to take appropriate steps to become Year
2000 compliant. Although the Company's distribution network consists of
thousands of agents and brokers, the number of different systems used by the
constituent members is far less. For example, the Company believes that fewer
than 20 different types of agency management systems are used by its
property-liability insurance agents in the United States. Contingency
arrangements are being discussed with distribution network members pursuant
to which the Company may, among other provisional steps, provide data in
alternative formats and offer temporary direct billing services in the event
of a disruption in their individual systems.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
YEAR 2000 READINESS DISCLOSURE
The Company notes that the Year 2000 issue by its nature carries the risk of
unforeseen and potentially very serious problems of internal or external origin.
Some commentators believe that the Year 2000 issue has the potential of
destabilizing the global economy or causing a global recession, either of which
could adversely affect the Company. While The St. Paul believes it is taking
appropriate action with respect to third parties on whose systems and services
The St. Paul relies to a significant extent, there can be no assurance that the
systems of such third parties will be Year 2000 compliant or that any third
party's failure to have Year 2000 compliant systems would not have a material
adverse effect on The St. Paul's earnings, cash flows or financial condition.
INSURANCE COVERAGE
The St. Paul also faces potential "Year 2000" claims under coverages provided by
its reinsurance and insurance policies sold to insured parties who may incur
losses as a result of the failure of such parties, or the customers or vendors
of such parties, to be Year 2000 compliant. Because coverage determinations
depend on unique factual situations, specific policy language and other
variables, it is not possible to determine in advance whether and to what extent
insured parties will incur losses, the amount of the losses or whether any such
losses would be covered under The St. Paul's insurance policies. In some
instances, coverage is not provided under the insurance policies or reinsurance
contracts, while in other instances, coverage may be provided under certain
circumstances.
The St. Paul's standard property and inland marine policies require, among other
things, direct physical loss or damage from a covered cause of loss as a
condition of coverage. In addition, it is a fundamental principle of all
insurance that a loss must be fortuitous to be considered potentially covered.
Given the fact that Year 2000 related losses are not unforeseen, and that the
Company expects that such losses will not, in most if not all cases, cause
direct physical loss or damage, The St. Paul has concluded that its property and
inland marine policies do not generally provide coverage for losses relating to
Year 2000 issues. To reinforce its view on coverage afforded by such policies,
The St. Paul has developed and is implementing a specific Year 2000 exclusion
endorsement.
The St. Paul continues to assess its exposure to insurance claims arising from
its liability coverages, and it is taking a number of actions to address that
exposure, including individual risk evaluation, communications with insured
parties, the use of exclusions in certain types of policies, and classification
of high hazard exposures that in the Company's view present unacceptable risk.
The Company may also face claims from the beneficiaries of its surety bonds
resulting from Year 2000 related performance failures by the purchasers of the
bonds. The St. Paul is assessing its exposure to such potential claims.
The St. Paul does not believe that Year 2000-related insurance or reinsurance
coverage claims will have a material adverse effect on its earnings, cash flows
or financial position. However, the uncertainties of litigation are such that
unexpected policy interpretations could compel claim payments substantially
beyond the Company's coverage intentions, possibly resulting in a material
adverse effect on The St. Paul's results of operations and/or cash flows and a
material adverse effect on its consolidated financial position.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
IMPACT OF ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED IN THE FUTURE
In December 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) No. 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments." The SOP provides guidance for
determining when a liability should be recognized for guaranty fund and other
insurance-related assessments and on the measurement of that liability. It also
provides guidance on when an asset should be recognized for a portion or all of
the liability or paid assessment that can be recovered through premium tax
offsets of policy surcharges. The SOP is effective for fiscal years beginning
after December 31, 1998. The St. Paul currently intends to adopt the provisions
of the SOP in the first quarter of 1999. The cumulative effect of adopting the
SOP may be material to The St. Paul's results of operations in the period it is
adopted; however, The St. Paul cannot at this time reasonably estimate the
amount of that cumulative effect.
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in benefits obligations and fair values of plan assets, and eliminates certain
disclosures currently required. SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997. The St. Paul will adopt the provisions of
SFAS No. 132 for its 1998 annual financial statements. This adoption is not
expected to materially change The St. Paul's current pension and postretirement
disclosures, and will have no impact on net income in 1998 and succeeding years.
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which provides
guidance for determining when computer software developed or obtained for
internal use should be capitalized. It also provides guidance on the
amortization of capitalized costs and the recognition of impairment. The SOP is
effective for fiscal years beginning after December 31, 1998. The St. Paul
intends to adopt the provisions of the SOP in the first quarter of 1999. The St.
Paul believes the effect of adopting this SOP will not be material to its
results of operations or financial position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet, and measure those instruments at fair value. SFAS No. 133 is effective
for all quarters of fiscal years beginning after June 15, 1999, and prohibits
retroactive application to financial statements of prior periods. The St. Paul
currently intends to implement the provisions of SFAS No. 133 in the first
quarter of the year 2000. The St. Paul currently has limited involvement with
derivative instruments, primarily for purposes of hedging against fluctuations
in interest rates. The St. Paul cannot at this time reasonably estimate the
potential impact of this adoption on its financial position or results of
operations for future periods.
<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 concerning the effects of
competition on premiums and revenues, expectations regarding Year 2000 issues
and the company's efforts to address them.
In light of the risks and uncertainties inherent in future projections, many of
which are beyond The St. Paul's control, actual results could differ materially
from those in forward-looking statements. These statements should not be
regarded as a representation that anticipated events will occur or that expected
objectives will be achieved. Risks and uncertainties include, but are not
limited to, the following: general economic conditions including changes in
interest rates and the performance of financial markets; changes in domestic and
foreign laws, regulations and taxes; changes in the demand for, pricing of, or
supply of reinsurance or insurance; catastrophic events of unanticipated
frequency or severity; loss of significant customers; judicial decisions and
rulings; and various other matters, including the effects of the merger with
USF&G Corporation. Actual results and experience relating to Year 2000 issues
could differ materially from anticipated results or other expectations as a
result of a variety of risks and uncertainties, including the impact of systems
faults, the failure to successfully remediate material systems of The St. Paul,
the time to remediate system failures once they occur, the failure of third
parties (including public utilities, agents and brokers) to properly remediate
material Year 2000 problems, and unanticipated judicial interpretations of the
scope of its reinsurance or the insurance coverage provided by The St. Paul's
policies. The St. Paul undertakes no obligation to release publicly the results
of any future revisions it may make to forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note 5 to the consolidated
financial statements is incorporated herein by reference.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. An Exhibit Index is set forth as the last page in
this document.
(b) Reports on Form 8-K.
1) The St. Paul filed a Form 8-K Current Report dated
July 8, 1998, relating to the anticipated total of
approximately $155 million in pretax catastrophe
losses for the second quarter of 1998.
2) The St. Paul filed a Form 8-K Current Report dated
August 3, 1998, relating to the announcement of its
financial results for the quarter ended June 30,
1998.
3) The St. Paul filed a Form 8-K Current Report dated
August 20, 1998, relating to the announcement of
several changes in its senior management.
4) The St. Paul filed a Form 8-K Current Report dated
October 6, 1998, containing audited financial
statements and related notes for The St. Paul and
USF&G on a combined basis as of December 31, 1997 and
1996, and for the years ended December 31, 1997, 1996
and 1995.
5) The St. Paul filed a Form 8-K Current Report dated
October 12, 1998, relating to the announcement of the
anticipated total of approximately $175 million in
pretax catastrophe losses for the third quarter of
1998, and the anticipated impact of difficult market
conditions on its results for the third and fourth
quarters of 1998.
6) The St. Paul filed a Form 8-K Current Report dated
November 3, 1998, relating to the announcement of its
financial results for the quarter ended September 30,
1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ST. PAUL COMPANIES, INC.
(Registrant)
Date: March 29, 1999 By /s/ Bruce A. Backberg
---------------------
Bruce A. Backberg
Senior Vice President
and Chief Legal Counsel
(Authorized Signatory)
Date: March 29, 1999 By /s/ Thomas A. Bradley
---------------------
Thomas A. Bradley
Senior Vice President
and Corporate Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
----------------------
<TABLE>
<CAPTION>
Method of
Exhibit Filing
- - ------- -----------
<C> <S> <C>
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession*..........................................................
(3) Articles of incorporation and by-laws*....................................................
(4) Instruments defining the rights of security holders,
including indentures*...............................................................
(10) Material contracts*.......................................................................
(11) Statement re computation of per share earnings**.......................................... (1)
(12) Statement re computation of ratios**...................................................... (1)
(15) Letter re unaudited interim financial information*........................................
(18) Letter re change in accounting principles*................................................
(19) Report furnished to security holders*.....................................................
(22) Published report regarding matters submitted to
vote of security holders*...........................................................
(23) Consents of experts and counsel*..........................................................
(24) Power of attorney*........................................................................
(27) Financial data schedule**................................................................. (1)
(99) Additional exhibits*......................................................................
</TABLE>
* These items are not applicable.
**This exhibit is included only with the copies of this report that are filed
with the Securities and Exchange Commission. However, a copy of the exhibit may
be obtained from the Registrant for a reasonable fee by writing to Legal
Services, The St. Paul Companies, 385 Washington Street, Saint Paul, MN 55102.
(1) Filed electronically herewith.
<PAGE>
Exhibit 11
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Share
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- --------------------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
EARNINGS (LOSS):
Basic:
Net income (loss), as reported $67,693 215,172 (11,432) 673,532
Dividends on preferred stock, net of taxes (2,126) (2,163) (6,395) (8,175)
Premium on preferred shares redeemed (820) (1,523) (3,025) (2,434)
-------------- -------------- -------------- --------------
Net income (loss) available to common shareholders $64,747 211,486 (20,852) 662,923
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Diluted:
Net income (loss) available to common shares $64,747 211,486 (20,852) 662,923
Effect of dilutive securities: - -
Convertible preferred stock 1,562 1,504 - 4,521
Zero coupon convertible notes 826 796 2,338
Convertible monthly income preferred securities 2,018 2,018 - 6,055
-------------- -------------- -------------- --------------
Net income (loss) available to common shareholders $69,153 215,804 (20,852) 675,837
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
COMMON SHARES:
Basic:
Weighted average common shares outstanding 236,244 229,885 235,214 230,101
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Diluted:
Weighted average common shares outstanding 236,244 229,885 235,214 230,101
Effect of dilutive securities:
Stock options 2,822 4,838 - 4,627
Convertible preferred stock 7,530 7,760 - 7,818
Zero coupon convertible notes 2,914 2,923 - 2,923
Convertible monthly income preferred securities 7,017 7,017 - 7,017
-------------- -------------- -------------- --------------
Weighted average, as adjusted 256,527 252,423 235,214 252,486
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
EARNINGS (LOSS) PER COMMON SHARE:
Basic $0.27 0.92 (0.09) 2.88
Diluted $0.27 0.85 (0.09) 2.68
</TABLE>
The assumed exercise of stock options, and the assumed conversion of preferred
stock, zero coupon notes and monthly income preferred securities are each
anti-dilutive to The St. Paul's net income for the nine months ended Sept. 30,
1998. As a result, the potentially dilutive effect of those securities is not
considered in the calculation of EPS amounts for those periods.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Exhibit 12
Computation of Ratios
(In thousands, except ratios)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- --------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
EARNINGS:
Income (loss) before income taxes $37,998 274,551 (122,202) 974,714
Add: fixed charges 25,061 29,743 92,028 88,783
----------- ----------- ----------- -----------
Income (loss), as adjusted $63,059 304,294 (30,174) 1,063,497
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
FIXED CHARGES:
Interest costs $18,994 22,228 58,627 65,697
Rental expense (1) 6,067 7,515 33,401 23,086
----------- ----------- ----------- -----------
Total fixed charges $25,061 29,743 92,028 88,783
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS:
Fixed charges $25,061 29,743 92,028 88,783
PSOP preferred stock dividends 4,225 4,352 12,771 13,168
Dividends on redeemable
preferred securities 9,356 9,332 28,207 23,818
----------- ----------- ----------- -----------
Total fixed charges and preferred
stock dividends $38,642 43,427 133,006 125,769
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Ratio of earnings to fixed charges (2) 2.52 10.23 - 11.98
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Ratio of earnings to combined fixed charges
and preferred stock dividends (2) 1.63 7.01 - 8.46
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
(1) Interest portion deemed implicit in total rent expense. Total for nine
months ended Sept. 30, 1998 includes an $11.4 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 USS&G Corporation.
(2) The year-to-date 1998 loss is inadequate to cover "fixed charges" by $122.2
million and "combined fixed charges and preferred stock dividends" by $163.2
million.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<DEBT-HELD-FOR-SALE> 21,149,340 20,773,959
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 1,064,029 1,061,405
<MORTGAGE> 674,125 581,980
<REAL-ESTATE> 936,332 1,135,320
<TOTAL-INVEST> 26,227,948 25,220,389
<CASH> 129,391 104,273
<RECOVER-REINSURE> 127,804 53,473
<DEFERRED-ACQUISITION> 876,151 867,594
<TOTAL-ASSETS> 37,512,359 36,240,470
<POLICY-LOSSES> 22,612,887 21,795,267
<UNEARNED-PREMIUMS> 3,411,620 3,613,921
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 1,097,742 1,267,421
502,700 502,700
16,917 18,408
<COMMON> 2,142,667 1,913,238
<OTHER-SE> 4,476,900 4,268,354
<TOTAL-LIABILITY-AND-EQUITY> 37,512,359 36,240,470
5,232,511 5,507,374
<INVESTMENT-INCOME> 1,185,148 1,172,493
<INVESTMENT-GAINS> 210,208 314,951
<OTHER-INCOME> 287,263 224,825
<BENEFITS> 4,508,488 4,087,872
<UNDERWRITING-AMORTIZATION> 1,243,928 1,297,232
<UNDERWRITING-OTHER> 1,284,916 859,825
<INCOME-PRETAX> (122,202) 974,714
<INCOME-TAX> (110,770) 233,432
<INCOME-CONTINUING> (11,432) 741,282
<DISCONTINUED> 0 (67,750)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,432) 673,532
<EPS-PRIMARY> (0.09) 2.88
<EPS-DILUTED> (0.09) 2.68
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
