<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
or
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- ---------
Commission File Number 0-3021
------
THE ST. PAUL COMPANIES, INC.
---------------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0518860
----------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
385 Washington St., Saint Paul, MN 55102
---------------------------------- --------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (651) 310-7911
-------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
The number of shares of the Registrant's Common Stock, without par
value, outstanding at August 9, 2000, was 216,345,254.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION -------
Consolidated Statements of Operations (Unaudited),
Three Months and Six Months Ended June 30, 2000 and 1999 3
Consolidated Balance Sheets, June 30, 2000
(Unaudited) and December 31, 1999 4
Consolidated Statements of Shareholders' Equity,
Six Months Ended June 30, 2000
(Unaudited) and Twelve Months Ended
December 31, 1999 6
Consolidated Statements of Comprehensive Income
(Unaudited), Six Months Ended June 30, 2000
and 1999 7
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 2000 and 1999 8
Notes to Consolidated Financial Statements
(Unaudited) 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 22
PART II. OTHER INFORMATION
Item 1 through Item 6 38
Signatures 38
EXHIBIT INDEX 39
<PAGE>
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended
(In millions, June 30 June 30
except per share data) ------------------- ------------------
2000 1999 2000 1999
------ ------ ------ ------
Revenues:
Premiums earned $1,497 1,356 2,885 2,701
Net investment income 402 398 808 789
Asset management 84 84 177 166
Realized investment gains 91 67 424 132
Other 31 28 63 54
------ ------ ------ ------
Total revenues 2,105 1,933 4,357 3,842
------ ------ ------ ------
Expenses:
Insurance losses and loss
adjustment expenses 1,026 975 2,054 1,970
Life policy benefits 120 85 193 152
Policy acquisition expenses 353 350 703 686
Operating and administrative 305 236 568 485
------ ------ ------ ------
Total expenses 1,804 1,646 3,518 3,293
------ ------ ------ ------
Income from continuing
operations before income
taxes and cumulative
effect of accounting change 301 287 839 549
Income tax expense 82 68 258 133
------ ------ ------ ------
Income from continuing
operations before cumulative
effect of accounting change 219 219 581 416
Cumulative effect of accounting
change, net of taxes - - - (30)
------ ------ ------ ------
Income from
continuing operations 219 219 581 386
Loss from discontinued
operations, net of taxes (7) (15) (12) (17)
------ ------ ------ ------
Net income $212 204 569 369
====== ====== ====== ======
Basic earnings per common share:
Income from continuing operations
before cumulative effect of
accounting change $1.01 0.96 2.65 1.79
Cumulative effect of accounting
change, net of taxes - - - (0.13)
------ ------ ------ ------
Income from
continuing operations $1.01 0.95 2.65 1.66
Loss from discontinued
operations, net of taxes (0.03) (0.07) (0.06) (0.07)
------ ------ ------ ------
Net income $0.98 0.89 2.59 1.59
====== ====== ====== ======
Diluted earnings per common share:
Income from continuing operations
before cumulative effect of
accounting change $0.95 0.90 2.48 1.69
Cumulative effect of accounting
change, net of taxes - - - (0.12)
------ ------ ------ ------
Income from
continuing operations 0.95 0.90 2.48 1.57
Loss from discontinued
operations, net of taxes (0.03) (0.06) (0.05) (0.07)
------ ------ ------ ------
Net income $0.92 0.84 2.43 1.50
====== ====== ====== ======
Dividends declared on common stock $0.27 0.26 0.54 0.52
====== ====== ====== ======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
June 30, December 31,
ASSETS 2000 1999
------ ----------- ------------
(Unaudited)
Investments:
Fixed maturities, at estimated fair value $20,049 $19,080
Equities, at estimated fair value 1,696 1,617
Real estate and mortgage loans 1,421 1,504
Venture capital, at estimated fair value 1,076 867
Securities lending collateral 1,456 1,216
Other investments 313 298
Short-term investments, at cost 1,193 1,347
-------- -------
Total investments 27,204 25,929
Cash 84 158
Investment banking inventory securities 39 45
Reinsurance recoverables:
Unpaid losses 5,070 4,331
Paid losses 309 191
Ceded unearned premiums 699 639
Receivables:
Underwriting premiums 2,704 2,292
Interest and dividends 365 356
Other 311 223
Deferred policy acquisition expenses 1,069 942
Deferred income taxes 1,236 1,262
Office properties and equipment, at cost less
accumulated depreciation of $451 (1999; $431) 511 499
Goodwill 505 399
Other assets 1,033 1,290
------- -------
Total assets $41,139 $38,556
======= =======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In millions)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
------------------------------------ ---------- -----------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $18,932 $17,720
Future policy benefits 5,080 4,885
Unearned premiums 3,385 3,048
-------- --------
Total insurance reserves 27,397 25,653
Debt 1,593 1,466
Payables:
Reinsurance premiums 858 654
Income taxes 381 311
Accrued expenses and other 1,019 1,138
Securities lending 1,456 1,216
Other liabilities 1,163 1,221
-------- --------
Total liabilities 33,867 31,659
-------- --------
Company-obligated mandatorily redeemable
preferred capital securities of subsidiaries
or trusts holding solely convertible
subordinated debentures of the Company 544 425
-------- --------
Shareholders' equity:
Preferred:
SOP convertible preferred stock;
1.45 shares authorized; 0.8 shares
outstanding (0.9 shares in 1999) 120 129
Guaranteed obligation - SOP (72) (105)
-------- --------
Total preferred shareholders' equity 48 24
-------- --------
Common:
Common stock, 480 shares authorized;
213 shares outstanding (225 shares in 1999) 1,985 2,079
Retained earnings 4,077 3,827
Accumulated other comprehensive income:
Unrealized appreciation 665 568
Unrealized loss on foreign currency translation (47) (26)
-------- --------
Total accumulated other comprehensive income 618 542
-------- --------
Total common shareholders' equity 6,680 6,448
-------- --------
Total shareholders' equity 6,728 6,472
-------- --------
Total liabilities, redeemable preferred
securities and shareholders' equity $41,139 $38,556
======== ========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In millions)
Six Twelve
Months Ended Months Ended
June 30 December 31
------------ ------------
2000 1999
------- -------
(Unaudited)
Preferred shareholders' equity:
Series B SOP convertible preferred stock:
Beginning of period $129 $134
Redemptions during period (9) (5)
------- -------
End of period 120 129
------- -------
Guaranteed obligation - SOP:
Beginning of period (105) (119)
Principal payments 33 14
------- -------
End of period (72) (105)
------- -------
Total preferred shareholders' equity 48 24
------- -------
Common shareholders' equity:
Common stock:
Beginning of period 2,079 2,128
Stock issued under stock incentive plans 18 37
Stock issued for preferred shares redeemed 14 9
Reacquired common shares (126) (102)
Other - 7
------- -------
End of period 1,985 2,079
------- -------
Retained earnings:
Beginning of period 3,827 3,480
Net income 569 834
Dividends declared on common stock (114) (235)
Dividends declared on preferred stock, net of taxes (4) (8)
Reacquired common shares (206) (254)
Tax benefit on employee options, and other charges 10 14
Premium on preferred shares redeemed (5) (4)
------- -------
End of period 4,077 3,827
------- -------
Unrealized appreciation, net of taxes:
Beginning of period 568 1,027
Change during the period 97 (459)
------- -------
End of period 665 568
------- -------
Unrealized gain (loss)loss on foreign currency
translation, net of taxes:
Beginning of period (26) (14)
Change during the period (21) (12)
------- -------
End of period (47) (26)
------- -------
Total common shareholders' equity 6,680 6,448
------- -------
Total shareholders' equity $6,728 $6,472
======= =======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Unaudited
(In millions)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2000 1999 2000 1999
------ ------ ------ ------
Net income $212 $204 $569 $369
------ ------ ------ ------
Other comprehensive income (loss),
net of taxes:
Change in unrealized appreciation (45) (249) 97 (357)
Change in unrealized loss on
foreign currency translation (7) (3) (21) (5)
------ ------ ------ ------
Other comprehensive income (loss) (52) (252) 76 (362)
------ ------ ------ ------
Comprehensive income (loss) $160 $(48) $645 $7
====== ====== ====== ======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In millions)
Six Months Ended
June 30
-----------------------
2000 1999
OPERATING ACTIVITIES ------ ------
Net income $569 $369
Adjustments:
Loss from discontinued operations 12 17
Change in property-liability
insurance reserves 245 149
Change in reinsurance balances (612) (89)
Change in premiums receivable (210) (350)
Provision for federal
deferred income tax expense 118 105
Change in accounts payable
and accrued expenses (202) (103)
Change in asset management balances (17) 16
Depreciation and amortization 52 65
Realized investment gains (424) (132)
Cumulative effect of accounting change - 30
Other 53 (126)
------ ------
Net Cash Used by Continuing Operations (416) (49)
Net Cash Provided (Used)
by Discontinued Operations (8) 14
------ ------
Net Cash Used by Operating Activities (424) (35)
------ ------
INVESTING ACTIVITIES
Purchase of investments (3,449) (3,402)
Proceeds from sales and
maturities of investments 3,703 2,851
Net sales of short-term investments 248 262
Change in open security transactions (54) 54
Purchases of office properties and equipment (60) (124)
Sales of office properties and equipment 7 50
Acquisitions, net of cash acquired (206) -
Proceeds from sale of subsidiaries 201 -
Other 65 (102)
------ ------
Net Cash Provided (Used)
by Continuing Operations 455 (411)
Net Cash Provided (Used) by
Discontinued Operations 44 (6)
------ ------
Net Cash Provided (Used) by
Investing Activities 499 (417)
------ ------
FINANCING ACTIVITIES
Deposits on universal life and
investment contracts 468 602
Withdrawals on universl life and
investment contracts (281) (56)
Dividends paid on common and preferred stock (120) (123)
Proceeds from issuance of debt 498 286
Repayment of debt (415) (41)
Repurchase of common shares (333) (265)
Stock options exercised and other 34 22
------ ------
Net Cash Provided (Used) by
Financing Activities (149) 425
------ ------
Effect of exchange rate changes on cash - 2
------ ------
Decrease in cash (74) (25)
Cash at beginning of period 158 146
------ ------
Cash at end of period $ 84 $121
====== ======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
June 30, 2000
Note 1 - Basis of Presentation
------------------------------
The financial statements include The St. Paul Companies, Inc. and
subsidiaries (The St. Paul or the company), and have been
prepared in conformity with generally accepted accounting
principles.
These consolidated financial statements rely, in part, on
estimates. In the opinion of management, all necessary
adjustments, consisting of normal recurring adjustments, have
been reflected for a fair presentation of the results of
operations, financial position and cash flows in the accompanying
unaudited consolidated financial statements. The results for the
period are not necessarily indicative of the results to be
expected for the entire year.
Reference should be made to the "Notes to Consolidated Financial
Statements" in The St. Paul's annual report to shareholders for
the year ended December 31, 1999. The amounts in those notes
have not changed materially except as a result of transactions in
the ordinary course of business or as otherwise disclosed in
these notes.
Some amounts in the 1999 consolidated financial statements have
been reclassified to conform with the 2000 presentation. These
reclassifications had no effect on net income, comprehensive
income or shareholders' equity, as previously reported.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 2 - Acquisitions
---------------------
In February 2000, we closed on our purchase of Pacific Select
Insurance Holdings, Inc., and its wholly-owned subsidiary Pacific
Select Property Insurance Co. (together, Pacific Select), a
California insurer that sells earthquake coverage to California
homeowners. The transaction was accounted for as a purchase, at
a cost of approximately $37 million. Pacific Select's results of
operations from the date of purchase are included in our
consolidated results for the six months ended June 30, 2000.
In April 2000, we closed on our acquisition of MMI Companies,
Inc. (MMI), a Deerfield, Illinois-based provider of medical
services-related insurance products and consulting services. The
transaction was accounted for as a purchase, with a total
purchase price of approximately $206 million, in addition to the
assumption of $165 million in capital securities and debt. The
purchase price resulted in goodwill of approximately $101
million, which we expect to amortize on a straight-line basis
over 15 years. MMI's results of operations from the date of
purchase are included in our consolidated results for the six
months ended June 30, 2000.
Related to the purchase, we established a reserve of $28 million,
including $4 million in employee-related costs and $24 million in
occupancy-related costs. The employee-related costs represent
severance and related benefits such as outplacement counseling to
be paid to, or incurred on behalf of, terminated employees. We
estimated that approximately 130 employee positions would be
eliminated, at all levels throughout MMI. Through June 30, 2000,
42 employees had been terminated, with payments totaling $1
million. The occupancy-related cost represents excess space
created by the terminations, calculated by determining the
percentage of anticipated excess space, by location, and the
current lease costs over the remaining lease period. The amounts
payable under the existing leases were not discounted, and
sublease income was included in the calculation only for those
locations where sublease agreements were in place. No payments
have been made related to the occupancy-related reserve.
The following table presents the pro forma results of our
operations for the six months ended June 30, 2000 and 1999, as
though we had purchased MMI at the beginning of each of the
periods presented. The pro forma data is provided for
illustrative purposes only, and does not purport to be indicative
of the results that would have actually occurred if the purchase
of MMI had been consummated at the beginning of the periods
presented, or that may be obtained in the future.
(in millions)
----------- 2000 1999
-------- -------
Total revenues $4,461 4,069
Net income 449 374
Fully diluted
earnings per share $1.92 1.52
As disclosed in our March 31, 2000 Form 10-Q, MMI's first
quarter 2000 results included reserve strengthening of $93
million, with $77 million reflected in their domestic operations
and $16 million reflected in their international operations.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 3 - Discontinued Operations
--------------------------------
Standard Personal Insurance Business
------------------------------------
On Sept. 30, 1999, we completed the sale of our standard personal
insurance operations to Metropolitan Property and Casualty
Insurance Company (Metropolitan). As a result, the standard
personal insurance operations have been accounted for as
discontinued operations for all periods presented herein.
Metropolitan purchased Economy Fire & Casualty Company and its
subsidiaries (Economy), as well as the rights and interests in
those non-Economy policies constituting our remaining standard
personal insurance operations. Those rights and interests were
transferred to Metropolitan by way of a reinsurance and facility
agreement (Reinsurance Agreement).
The Reinsurance Agreement relates solely to the non-Economy
standard personal insurance policies, and was entered into solely
as a means of accommodating Metropolitan through a transition
period. The Reinsurance Agreement allows Metropolitan to write
non-Economy business on our policy forms while Metropolitan
obtains the regulatory license, form and rate approvals necessary
to write non-Economy business through their own insurance
subsidiaries. Any business written on our policy forms during
this transition period is then fully ceded to Metropolitan under
the Reinsurance Agreement. We recognized no gain or loss on the
inception of the Reinsurance Agreement and will not incur any net
revenues or expenses related to the Reinsurance Agreement. All
economic risk of post-sale activities related to the Reinsurance
Agreement has been transferred to Metropolitan. We anticipate
that Metropolitan will pay all claims incurred related to this
Reinsurance Agreement. In the event Metropolitan is unable to
honor their obligations to us, we will pay these amounts.
As part of the sale to Metropolitan, we guaranteed the adequacy
of Economy's loss and loss expense reserves. Under that
guarantee, we will pay for any deficiencies in those reserves and
will share in any redundancies that develop by Sept. 30, 2002. We
remain liable for claims on non-Economy policies that result from
losses occurring prior to closing. By agreement, Metropolitan
will adjust those claims and share in redundancies in related
reserves that may develop. Any losses incurred by us under these
agreements will be reflected in discontinued operations in the
period they are incurred. For the first six months of 2000, we
recorded a pretax loss of $8 million in discontinued operations.
We have no other contingent liabilities related to the sale.
Nonstandard Auto Business
-------------------------
On Jan. 4, 2000, we announced an agreement to sell our
nonstandard auto business to The Prudential Insurance Company of
America (Prudential) for $200 million in cash. As a result, the
nonstandard auto business results of operations have been
accounted for as discontinued operations for all periods
presented.
On May 1, 2000, we closed on the sale of our nonstandard auto
business to Prudential, receiving total cash consideration of
approximately $175 million (net of a $25 million dividend paid to
our property-liability operations prior to closing). In the
fourth quarter of 1999, we had recorded an estimated after-tax
loss on disposal of $83 million for our nonstandard auto
operations. We recorded an additional after-tax loss of $7
million through closing.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 4 - Earnings Per Share
---------------------------
Earnings per common share (EPS) amounts were calculated by
dividing net income, as adjusted, by the average common shares
outstanding.
Three Months Ended Six Months Ended
June 30 June 30
------------------- ----------------
2000 1999 2000 1999
------ ------ ------ ------
(In millions, except per share data)
EARNINGS
Basic:
Net income, as reported $212 $204 $569 $369
Dividends on preferred
stock, net of taxes (2) (2) (4) (4)
Premium on preferred shares redeemed (2) (1) (6) (2)
------ ------ ------ ------
Net income available to
common shareholders $208 $201 $559 $363
====== ====== ====== ======
Diluted:
Net income available
to common shareholders $208 $201 $559 $363
Effect of dilutive securities:
Convertible preferred stock 2 2 3 3
Convertible monthly income
preferred securities 2 2 4 4
Zero coupon convertible notes 1 1 1 2
------ ------ ------ ------
Net income available to
common shareholders $213 $206 $567 $372
====== ====== ====== ======
COMMON SHARES
Basic:
Weighted average common
shares outstanding 212 226 216 228
====== ====== ====== ======
Diluted:
Weighted average common
shares outstanding 212 226 216 228
Effect of dilutive securities:
Stock options 2 2 1 2
Convertible preferred stock 7 7 7 7
Convertible monthly income
preferred securities 7 7 7 7
Zero coupon convertible notes 2 3 3 3
------ ------ ------ ------
Total 230 245 234 247
====== ====== ====== ======
EARNINGS PER SHARE
Basic $0.98 $0.89 $2.59 $1.59
====== ====== ====== ======
Diluted $0.92 $0.84 $2.43 $1.50
====== ====== ====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 5 - Investments
--------------------
Investment Activity. A summary of investment transactions is presented
below.
Six Months Ended June 30
------------------------
2000 1999
-------- --------
(In millions)
Purchases:
Fixed maturities $1,905 $2,481
Equities 1,189 654
Real estate and mortgage loans 6 110
Venture capital 299 107
Other investments 50 50
------ ------
Total purchases 3,449 3,402
------ ------
Proceeds from sales and maturities:
Fixed maturities 1,878 1,969
Equities 1,170 673
Real estate and mortgage loans 80 78
Venture capital 532 110
Other investments 43 21
------ ------
Total sales and maturities 3,703 2,851
------ ------
Net purchases (sales) $(254) $ 551
====== ======
Change in Unrealized Appreciation. The increase (decrease) in
unrealized appreciation of investments recorded in common
shareholders' equity was as follows:
Six Months Ended Twelve Months Ended
June 30, 2000 December 31, 1999
---------------- -------------------
(In millions)
Fixed maturities $ 2 $(1,336)
Equities (25) 223
Venture capital 148 255
Life deferred policy acquisition
costs and policy benefits 15 122
Single premium immediate
annuity reserves - 44
Other 8 (13)
------ ------
Total change in pretax
unrealized appreciation 148 (705)
Change in deferred taxes (51) 246
------ ------
Total change in unrealized
appreciation, net of taxes $ 97 $(459)
====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 6 - Income Taxes
---------------------
The components of income tax expense on income from continuing
operations, before the cumulative effect of accounting change,
were as follows :
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2000 1999 2000 1999
------ ------ ------ ------
(In millions)
Federal current tax
expense (benefit) $ (3) $ 1 $ 131 $ 11
Federal deferred
tax expense 85 59 118 105
------- ------- ------- -------
Total federal
income tax expense 82 60 249 116
Foreign income tax
expense (benefit) (5) 6 1 13
State income tax expense 5 2 8 4
------- ------- ------- -------
Total income tax
expense on continuing
operations $82 $68 $258 $133
======= ======= ======= =======
In connection with our purchase of MMI, we established a $30
million valuation allowance for deferred tax assets related to
MMI's non - U.S. operations. This allowance did not impact our
consolidated results of operations for the second quarter or
first six months of 2000.
Note 7 - Contingent Liabilities
-------------------------------
In the ordinary course of conducting business, we and some of our
subsidiaries have been named as defendants in various lawsuits.
Some of these lawsuits attempt to establish liability under
insurance contracts issued by our underwriting operations.
Plaintiffs in these lawsuits are asking for money damages or to
have the court direct the activities of the operations in certain
ways. Although it is possible that the settlement of a
contingency may be material to our results of operations and
liquidity in the period in which the settlement occurs, we
believe that the total amounts that we or our subsidiaries will
ultimately have to pay in all of these lawsuits will have no
material effect on our overall financial position.
In some cases, plaintiffs seek to establish coverage for their
liability under environmental protection laws. See
"Environmental and Asbestos Claims" in Management's Discussion
and Analysis for information on these claims.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 8 - Debt
-------------
Debt consists of the following:
June 30, December 31,
2000 1999
------------- -------------
Book Fair Book Fair
Value Value Value Value
----- ----- ----- -----
(In millions)
Medium-term notes $617 $591 $617 $598
7-7/8% senior notes 249 250 - -
8-1/8% senior notes 249 250 - -
8-3/8% senior notes 150 152 150 153
Zero coupon convertible notes 96 93 94 93
7-1/8% senior notes 80 77 80 78
Commercial paper 73 73 400 400
Variable rate borrowings 64 64 64 64
Real estate mortgages 15 15 15 15
Floating rate notes - - 46 46
----- ----- ----- -----
Total debt $1,593 1,565 $1,466 $1,447
===== ===== ===== =====
On April 17, 2000, we issued $250 million of 7.875% senior notes
due April 15, 2005 and $250 million of 8.125% senior notes due
April 15, 2010. Proceeds were used to repay commercial paper
debt and for general corporate purposes.
Note 9 - Segment Information
----------------------------
We have seven reportable business segments in our property-
liability insurance operation, consisting of the Commercial Lines
Group, Global Surety, Global Healthcare, Other Global Specialty,
International, Reinsurance and Investment Operations. We also
have a life insurance segment (primarily Fidelity and Guaranty
Life Insurance Company) and an asset management segment (The John
Nuveen Company). We evaluate the performance of our property-
liability underwriting segments based on GAAP underwriting
results. The property-liability investment operation is
disclosed as a separate reportable segment because that operation
is managed at the corporate level and the invested assets, net
investment income and realized gains are not allocated to
individual underwriting segments. The life insurance and asset
management segments are evaluated based on their respective
pretax operating results, which include investment income.
The reportable underwriting business segments in our property-
liability operation are reported separately because they offer
insurance products to unique customer classes and utilize
different underwriting criteria and marketing strategies. For
example, the Commercial Lines Group provides "commodity-type"
insurance products to the small and medium-sized commercial
markets. By contrast, each of our Global Specialty segments
(Surety, Healthcare and Other Specialty) market specialized
insurance products and services tailored to meet the individual
needs of specific customer groups, such as doctors, lawyers,
officers and directors, as well as technology firms and
government entities. Customers in the Global Specialty segments
generally require specialized underwriting expertise and claim
settlement services.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The tabular information on the following pages provides revenue
and income data for each of our business segments for the three
months and six months ended June 30, 2000 and 1999. In the first
quarter of 2000, we implemented a new segment reporting structure
for our property-liability insurance business following the
fourth-quarter realignment of our primary insurance underwriting
operations into a Global Specialty Practices organization. As
part of that realignment, a portion of our non-U.S. primary
insurance business is now included in the respective business
segment to which it pertains, which differs from our prior
practice of including all non-U.S. business in the International
segment. Our Global Specialty segments are managed on a global
basis. Under our new segment structure, our International segment
includes our operations at Lloyd's and specialty insurance
business that we do not manage on a global basis, including
Unionamerica, MMI's international business. Also, our Global
Healthcare underwriting operation is now reported as a separate
business segment, which differs from its prior classification as
a component of the Specialty Commercial segment. This change
reflects the increasing size of this business, including MMI's
U.S. business, relative to our total underwriting operation.
Finally, we reclassified our Construction business center,
previously included in the Commercial Lines Group segment, to our
Other Global Specialty segment, to reflect the more specialized
nature of this product. Segment information for 1999 has been
restated to be consistent with the 2000 presentation.
Three Months Ended Six Months Ended
June 30 June 30
----------------- ----------------
2000 1999 2000 1999
------ ------ ------ ------
In millions)
Revenues from Continuing Operations
Property-liability Insurance:
Primary Insurance Operations:
Commercial Lines Group $392 $424 $780 $839
Global Surety 107 97 220 189
Global Healthcare 178 148 312 330
Other Global Specialty 348 330 690 658
International 154 78 217 137
------- ------- ------- -------
Total primary insurance
operations 1,179 1,077 2,219 2,153
Reinsurance 242 242 558 483
------- ------- ------- ------
Total property-liability
premiums earned 1,421 1,319 2,777 2,636
------- ------- ------- -------
Investment operations:
Net investment income 312 316 631 634
Realized investment gains 107 71 438 132
------- ------- ------- -------
Total investment operations 419 387 1,069 766
Other 23 24 41 46
------- ------- ------- -------
Total property-liability
insurance 1,863 1,730 3,887 3,448
------- ------- ------- -------
Life insurance 143 110 260 209
------- ------- ------- -------
Asset management 88 86 188 169
------- ------- ------- -------
Total reportable segments 2,094 1,926 4,335 3,826
Parent company, other
operations and consolidating
eliminations 11 7 22 16
------- ------- ------- -------
Total revenues $2,105 $1,933 $4,357 $3,842
======= ======= ======= =======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 10 - Segment Information (continued)
----------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2000 1999 2000 1999
------ ------ ------ ------
(In millions)
Income (Loss) from Continuing Operations
Before Income Taxes and Cumulative Effect
of Accounting Change
Property-liability insurance:
Primary Insurance Operations:
Commercial Lines Group $54 $(56) $32 $(142)
Global Surety 12 11 31 27
Global Healthcare (45) (19) (64) (47)
Other Global Specialty (4) (35) (28) (59)
International (51) (8) (60) (19)
------- ------- ------- -------
Total primary insurance (34) (107) (89) (240)
Reinsurance (33) 6 (78) 29
------- ------- ------- -------
Total GAAP underwriting
result (67) (101) (167) (211)
------- ------- ------- -------
Investment operations:
Net investment income 312 316 631 634
Realized investment gains 107 71 438 132
------- ------- ------- -------
Total investment operations 419 387 1,069 766
Other (33) 1 (64) (18)
------- ------- ------- -------
Total property-
liability insurance 319 287 838 537
------- ------- ------- -------
Life insurance - 9 18 28
------- ------- ------- -------
Asset management:
Pretax income before minority
interest 43 39 86 77
Minority interest (10) (9) (20) (18)
------- ------- ------- -------
Total asset management 33 30 66 59
------- ------- ------- -------
Total reportable segments 352 326 922 624
Parent company,other operations
and consolidating
eliminations (51) (39) (83) (75)
------- ------- ------- -------
Total income before
income taxes and
cumulative effect
of change $301 $287 $839 $549
======= ======= ======= =======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 11 - Reinsurance
---------------------
Our consolidated financial statements reflect the effects of
assumed and ceded reinsurance transactions. Assumed reinsurance
refers to our acceptance of certain insurance risks that other
insurance companies have underwritten. Ceded reinsurance
involves transferring certain insurance risks we have
underwritten to other insurance companies who agree to share
these risks. The primary purpose of ceded reinsurance is to
protect us from potential losses in excess of the amount we are
willing to accept. We expect those to whom we have ceded
reinsurance to honor their obligations. In the event these
companies are unable to honor their obligations, we will pay
these amounts. We have established allowances for possible
nonpayment of reinsurance recoverable amounts due to us.
Our 2000 income from continuing operations benefited from
cessions made under our corporate all-lines, excess-of-loss
reinsurance program (the "corporate program"), and cessions made
under a separate excess-of-loss treaty exclusive to our
Reinsurance segment. Under the corporate program, we ceded
written premiums of $80 million, earned premiums of $70 million,
and insurance losses and loss adjustment expenses of $111
million, resulting in a year-to-date net pretax benefit of $41
million. The losses and loss adjustment expenses ceded and $61
million of the earned premiums ceded under the corporate program
in the first quarter of 2000 were the result of adverse
development on losses originally incurred during the 1999
accident year. Under the separate Reinsurance segment treaty,
during the second quarter of 2000, we ceded written and earned
premiums of $39 million, and insurance losses and loss adjustment
expenses of $88 million, resulting in a net pretax benefit of $49
million. For the six months ended June 30, 2000 under this
treaty, we ceded written and earned premiums of $56 million, and
insurance losses and loss adjustment expenses of $120 million,
resulting in a net pretax benefit of $64 million.
The effect of assumed and ceded reinsurance on premiums written,
premiums earned and insurance losses, loss adjustment expenses
and life policy benefits are as follows:
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
(In millions) 2000 1999 2000 1999
---- ---- ----- -----
Written premiums:
Direct $1,288 $1,122 $2,410 $2,230
Assumed 521 572 1,116 891
Ceded (318) (221) (636) (394)
----- ----- ----- -----
Net premiums written 1,491 1,473 2,890 2,727
===== ===== ===== =====
Earned premiums:
Direct 1,286 1,135 2,447 2,297
Assumed 420 366 918 700
Ceded (285) (182) (588) (361)
----- ----- ----- -----
Net premiums earned 1,421 1,319 2,777 2,636
Life 76 37 108 65
----- ----- ----- -----
Total premiums earned 1,497 1,356 2,885 2,701
===== ===== ===== =====
Insurance losses and loss
adjustment expenses:
Direct 995 967 1,834 1,879
Assumed 463 218 1,036 490
Ceded (432) (210) (816) (399)
----- ----- ----- -----
Net insurance losses and
loss adjustment expenses $1,026 $975 $2,054 $1,970
Life policy benefits 120 85 193 152
----- ----- ----- -----
Total 1,146 1,060 2,247 2,122
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 12 - Restructuring Charges
-------------------------------
Third Quarter 1999 Charge - In August 1999, we announced a cost
reduction program designed to enhance our efficiency and
effectiveness in a highly competitive environment. In the third
quarter of 1999, we recorded a pretax charge of $60 million
related to this program, including $25 million in employee-
related charges, $33 million in occupancy-related charges and $2
million in equipment charges.
The employee-related charge represents severance and related
benefits such as outplacement counseling, vacation buy-out and
medical coverage to be paid to terminated employees. The charge
relates to the anticipated termination of approximately 700
employees at all levels throughout the Company. As of June 30,
2000, approximately 565 employees had been terminated under this
action.
The occupancy-related charge represents excess space created by
the cost reduction action. The charge was calculated by
determining the percentage of anticipated excess space, by
location, and the current lease costs over the remaining lease
period. The amounts payable under the existing leases were not
discounted, and sublease income was included in the calculation
only for those locations where sublease agreements were in place.
The equipment charges represent the elimination of personal
computers directly related to the number of employees being
severed under this cost reduction action and the elimination of
network servers and other equipment resulting from this action.
The amount was calculated as the book value of this equipment
less estimated sale proceeds. All actions to be taken under this
plan are expected to be complete in 2000.
The following presents a rollforward of activity related to this
charge:
(In millions) Pre-tax Reserve at Reserve at
Charge Dec. 31, 1999 Payments June 30, 2000
------- ------------- -------- -------------
Charges to earnings:
Employee- related $25 $14 $(12) $2
Occupancy-related 33 31 (4) 27
Equipment charges 2 N/A N/A N/A
------ ------ ------ ------
Total $60 $45 $(16) $29
====== ====== ====== ======
Fourth Quarter 1998 Charge - Late in the fourth quarter of 1998,
we recorded a pretax restructuring charge of $34 million. The
majority of the charge, $26 million, related to the anticipated
termination of approximately 520 employees in the following
operations: Claims, Commercial Lines Group, Information Systems,
Global Healthcare, and Financial and Professional Services. The
remaining charge of $8 million related to costs to be incurred to
exit lease obligations.
As of June 30, 2000, approximately 500 employees had been
terminated under the restructuring plan. Termination actions
taking place under this plan have been completed. Since
substantially all payments have been made to terminated
employees, we reduced the employee-related accrual by $2 million.
The table below provides a rollforward of activity related to
this charge:
Reserve
at
(In millions) Pre-tax Reserve at June 30,
charge Dec. 31,1999 Payments Adjustments 2000
------- ------------ -------- ----------- -------
Charges to
earnings:
Employee-related $26 $3 $(1) $(2) $0
Occupancy-related 8 2 - - 2
----- ----- ----- ----- -----
Total $34 $5 $(1) $(2) $2
===== ===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 12 - Restructuring Charges (continued)
------------------------------------------
Second Quarter 1998 Charge - Related to our merger with USF&G, we
recorded a pretax charge to earnings of $292 million in 1998,
primarily consisting of severance and other employee-related
costs, facilities exit costs, asset impairments and transaction
costs. We estimated that approximately 2,000 positions would be
eliminated due to the combination of the two organizations,
resulting from efficiencies to be realized by the larger
organization and the elimination of redundant functions. All
levels of employees, from technical staff to senior management,
were affected by the reductions. The original number of
positions expected to be reduced by function included
approximately 950 in our property-liability underwriting
operation, 350 in claims and 700 in finance and other
administrative positions, throughout the United States. Through
June 30, 2000, approximately 2,200 positions had been eliminated,
and the cost of termination benefits paid was $137 million.
Termination actions taking place under this plan were completed
by Dec. 31, 1999, however, payments were still being made to
terminated employees during the first six months of the year.
Since certain executives remained with the company and are no
longer eligible to receive the amounts accrued, the executive
severance accrual was reduced by $2 million.
The following table provides a rollforward of activity related to
the charge:
(In millions)
Pre-
tax
Charges to earnings: Charge
------------------- ------
USF&G corporate
headquarters $36
Long-lived assets 23
Acceleration of
software depreciation 10
Computer leases and
equipment 10
Other equipment and
furniture 8
-----
Subtotal 87
-----
Accrued charges subject
to rollforward:
-----------------------
Reserve at
Pre-tax Reserve at June 30,
charge Dec. 31, 1999 Payments Adjustments 2000
------- ------------- -------- ----------- --------
Executive severance $89 $3 $(1) $(2) $-
Other severance 52 1 (1) - -
Branch lease exit
costs 34 24 (4) - 20
Transaction costs 30 - - - -
----- ----- ----- ----- -----
Accruals subject
to rollforward 205 28 (6) (2) 20
----- ----- ----- ----- -----
Total $292 $28 $(6) $(2) $20
===== ===== ===== ===== =====
Note 15 in our 1999 Annual Report to Shareholders provides more
information regarding the rationale for and calculation of the
components of the merger-related charge.
Upon consummation of the merger, we determined that several of
USF&G's real estate investments were not consistent with our real
estate investment strategy. A plan was developed to sell a number
of apartment buildings and various other miscellaneous holdings,
with an expected disposal date by year-end 1999. In applying the
provisions of SFAS No. 121, it was determined that four of these
miscellaneous investments should be written down to fair value,
based on our plan to sell them. Fair value was determined based
on a discounted cash flow analysis, or based on market prices for
similar assets. The one remaining investment represents
percentage rents retained after sale of a portfolio of stores to
a third party. The current balance of this investment is $2.4
million held in the property-liability segment and $0.4 million
held in the life segment. This investment is expected to be sold
by year-end 2000.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 13 - Share Repurchase Authorization
----------------------------------------
On May 2, 2000, our board of directors authorized a new $300
million share repurchase program. Under the program, we are
authorized to repurchase up to an additional $300 million of our
common stock in the open market and through private transactions.
The new authorization is in addition to the $76 million remaining
under a $500 million repurchase plan approved in November 1999.
Note 14 - Subsequent Events
---------------------------
On July 14, 2000, St. Paul Capital L.L.C. (a wholly-owned
subsidiary of the company) provided notice to the holders of its
$207 million of 6% Convertible Monthly Income Preferred
Securities that it was exercising its right to cause the
conversion rights of the holders of those securities to expire on
Aug. 14, 2000. Each of the 4,140,000 securities outstanding is
convertible into 1.695 shares of our common stock at a conversion
price of $29.50 per security.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
June 30, 2000
Consolidated Results
--------------------
The following table summarizes The St. Paul's results for the
second quarter and first six months of 2000 and 1999.
Three Months Six Months
Ended June 30 Ended June 30
(In millions, ------------- -------------
except per share data)
2000 1999 2000 1999
Pretax income (loss): ---- ---- ---- ----
Property-liability insurance:
GAAP underwriting result $(67) $(101) $(167) $(211)
Net investment income 312 316 631 634
Realized investment gains 107 71 438 132
Other (33) 1 (64) (18)
---- ---- ---- ----
Total property-
liability insurance 319 287 838 537
Life insurance - 9 18 28
Asset management 33 30 66 59
Parent and other (51) (39) (83) (75)
---- ---- ---- ----
Income from continuing
operations before income taxes
and cumulative effect of
accounting change 301 287 839 549
Income tax expense 82 68 258 133
---- ---- ---- ----
Income from continuing
operations before cumulative
effect of accounting change 219 219 581 416
Cumulative effec of accounting
change, net of taxes - - - (30)
---- ---- ---- ----
Income from continuing
operations 219 219 581 386
Loss from discontinued
operations, net of taxes (7) (15) (12) (17)
---- ---- ---- ----
Net income $212 $204 $569 $369
==== ==== ==== ====
Diluted net income
per common share $0.92 $0.84 $2.43 $1.50
==== ==== ==== ====
Consolidated Results
--------------------
The St. Paul's pretax income from continuing operations of $301
million in the second quarter was 5% ahead of comparable pretax
income of $287 million in the same 1999 period, driven by
improved underwriting results and an increase in realized
investment gains in our property-liability operations. Through
the first half of 2000, pretax income from continuing operations
was $290 million higher than the comparable period of
1999, primarily due to the significant increase in realized
investment gains. Our property-liability insurance pretax
results for the second quarter and first six months of 2000
reflected benefits of $44 million and $105 million, respectively,
from aggregate excess-of-loss reinsurance treaties (discussed in
more detail on page 24 of this report), and the benefit of a $102
million reserve reduction (discussed on page 25 of this report).
Our effective tax rate in 2000 was significantly higher than the
comparable 1999 rate, primarily due to the substantial increase
in realized investment gains, which were taxed at the 35% federal
statutory rate.
In the first half of 1999, our net income included a pretax
expense of $46 million ($30 million after-tax), representing the
cumulative effect of adopting the AICPA's Statement of Position
(SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." The SOP provides guidance for
recognizing and measuring liabilities for guaranty fund and other
insurance-related assessments.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
Elimination of One-Quarter Reporting Lag
----------------------------------------
In the first quarter of 2000, we eliminated the one-quarter
reporting lag for our reinsurance operations based in the United
Kingdom ("St. Paul Re - UK"), and now report the results of those
operations on a current basis. As a result, our consolidated
results for the first six months of 2000 include St. Paul Re -
UK's results for the fourth quarter of 1999 and the first six
months of 2000. The year-to-date incremental impact on our
property-liability operations of eliminating the reporting lag,
which consists of St. Paul Re - UK's results for the three months
ended June 30, 2000, was as follows:
Three Months Ended
(In millions) June 30, 2000
----------- ------------------
Written premiums $ 31
Earned premiums $ 61
GAAP underwriting result $(32)
Net investment income $12
Pretax loss $(23)
Net loss $(17)
Acquisitions
------------
In February 2000, we completed our acquisition of Pacific Select
Insurance Holdings, Inc. (Pacific Select), a California company
that sells earthquake insurance coverages to California
homeowners. The acquisition was accounted for as a purchase, at
a cost of approximately $37 million. Pacific Select's results of
operations are included in the Catastrophe Risk business center
of our Commercial Lines Group segment.
In April 2000, we completed our acquisition of MMI Companies,
Inc. (MMI), an international health care risk services company
that provides integrated products and services in operational
consulting, clinical risk management, and insurance and
reinsurance in the U.S. and London markets. The acquisition was
accounted for as a purchase for approximately $206 million in
cash plus the assumption of $165 million of MMI debt and capital
securities. The results of MMI's domestic U.S. operations are
reported in our Global Healthcare segment, and the results of
MMI's U.K.-based operations, Unionamerica Insurance Company
Limited (Unionamerica), are included in our International
segment. The acquisition of MMI added the following amounts to
our property-liability results of operations for the second
quarter and first six months of 2000:
(In millions)
-----------
Written premiums $ 43
Earned premiums $ 93
GAAP underwriting result $(56)
Net investment income $ 19
Discontinued Operations
-----------------------
In 1999, we sold our standard personal insurance operations to
Metropolitan Property and Casualty Insurance Company
(Metropolitan). Metropolitan purchased Economy Fire & Casualty
Company and subsidiaries (Economy), and the rights and interests
in those non-Economy policies constituting the remainder of our
standard personal insurance operations. Those rights and
interests were transferred to Metropolitan by way of a
reinsurance and facility agreement. We guaranteed the adequacy
of Economy's loss and loss expense reserves, and we remain liable
for claims on non-Economy policies that result from losses
occurring prior to the Sept. 30, 1999 closing date. Under the
reserve guarantee, we will pay for any deficiencies in those
reserves and will share in any redundancies that develop by Sept.
30, 2002. Any losses incurred by us under these agreements are
reflected in discontinued operations in the period during which
they are incurred. In the first six months of 2000, we recorded
a pretax loss of $8 million in discontinued operations.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
In May 2000, we completed the sale of our nonstandard auto
insurance operations to Prudential Insurance Company of America
(Prudential) for a total cash consideration of approximately $175
million (net of a $25 million dividend paid by these operations
to our property-liability insurance operations prior to closing).
Prudential purchased the nonstandard auto business marketed under
the Victoria Financial and Titan Auto brands. In the first six
months of 2000, we recorded a pretax loss of $12 million in
discontinued operations related to these operations, representing
their operating results for the first half of 2000 plus an
additional loss recorded on closing.
Global Specialty Reporting Structure
------------------------------------
In the first quarter of 2000, we implemented a new segment
reporting structure for our property-liability insurance business
following the fourth-quarter 1999 realignment of our primary
insurance underwriting operations into a Global Specialty
Practices organization. The most significant change from our
previous format involves the inclusion of certain non-U.S.
primary business in the respective business segment to which it
pertains, which differs from our prior practice of including all
non-U.S. business in the International segment. In addition, our
Construction business center was moved from the Commercial Lines
Group segment to the Other Global Specialty segment, and our
Global Healthcare operation is now reported as a separate
business segment. Our new reporting format is more closely
aligned with the global management of the majority of our
specialty insurance products and services. Our International
segment includes our operations at Lloyd's and specialty
insurance business that we do not manage on a global basis,
including MMI's U.K.-based operation, Unionamerica. All prior
year data is presented on a basis consistent with our new
reporting structure.
Property-Liability Insurance
----------------------------
Overview
--------
Consolidated written premiums of $1.49 billion in the second
quarter of 2000 were slightly higher than comparable 1999 premium
volume of $1.47 billion. Premium growth in our Global Healthcare
and International segments (primarily due to the MMI
acquisition), as well as in the Other Global Specialty segment,
was largely offset by a $121 million decline in our Reinsurance
segment's premium volume, which is discussed in more detail on
page 29 of this report.
Our premium volume in 2000 was impacted by cessions made under a
corporate all-lines, aggregate excess-of-loss reinsurance program
(the "corporate program"), and cessions made under a separate
aggregate excess-of-loss treaty exclusive to our Reinsurance
segment (together, the "reinsurance cessions"). The following
table summarizes the impact of the reinsurance cessions on our
2000 results:
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
(In millions) 2000 2000
------ ------
Corporate program:
-----------------
Ceded written premiums $ - $ 80
Ceded earned premiums 5 70
Ceded losses and
loss adjustment expenses - 111
------ ------
Net pretax benefit (loss) (5) 41
------ ------
Reinsurance segment treaty:
--------------------------
Ceded written premiums 39 56
Ceded earned premiums 39 56
Ceded losses and
loss adjustment expenses 88 120
------ ------
Net pretax benefit 49 64
------ ------
Combined total:
--------------
Ceded written premiums $ 39 $136
Ceded earned premiums 44 126
Ceded losses and
loss adjustment expenses 88 231
------ ------
Net pretax benefit $ 44 $105
====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
The combined year-to-date pretax benefit of $105 million was
allocated to our Reinsurance segment ($92 million) and our
International segment ($13 million). The loss and loss
adjustment expense cessions made under the corporate program in
the first quarter of 2000 were the result of adverse development
on losses incurred during the 1999 accident year. No losses were
ceded under the corporate program in the second quarter. In
1999's second quarter, our Reinsurance segment ceded written and
earned premiums of $25 million, and losses and loss adjustment
expenses of $56 million, for a net benefit of $31 million under
the aggregate excess-of-loss reinsurance treaty exclusive to that
segment.
Excluding the impact of the reinsurance cessions in both years,
the elimination of the quarter reporting lag, and the addition of
MMI, our consolidated year to date written premium volume in 2000
totaled $2.95 billion, $200 million higher than the same period
of 1999. The increase was centered in our Reinsurance and
International segments, and, to a lesser extent, in our Other
Global Specialty segment.
Our consolidated loss ratio, which measures insurance losses and
loss adjustment expenses as a percentage of earned premiums, was
72.2 for the second quarter of 2000, compared with a loss ratio
of 73.9 in the same 1999 period. The 2000 ratio includes a 7.2
point benefit resulting from a $102 million reduction in workers'
compensation reserves related to favorable prior year
development. The benefit was recorded in our Commercial Lines
Group segment ($69 million) and the Construction business center
of our Other Global Specialty segment ($33 million).
Our acquisition of MMI, which posted a 124.7 loss ratio for the
second quarter, added 3.7 points to our consolidated second
quarter loss ratio and 1.8 points to our year-to-date loss ratio.
Excluding the impact of MMI, the workers' compensation reserve
reduction, and the reinsurance cessions, our second-quarter
consolidated loss ratio was 80.2, three and a half points worse than
the comparable 1999 ratio. On a year-to-date basis, excluding those
factors and the impact of the elimination of the quarter
reporting lag, our consolidated loss ratio was 79.9, nearly four
points worse than the first six months of 1999. The
deterioration in 2000 was centered in our Reinsurance and
International segments, which masked significant improvement in
our domestic primary insurance operations.
Our domestic primary operations achieved strong improvement in
profitability over the second quarter and first six months of
1999. Over the last two years, we have taken aggressive actions
to improve the quality and profitability of our domestic book of
business. Those actions focused on eliminating unprofitable
business, implementing price increases on new and renewal
business, and reducing expenses. Through the first half of 2000,
we have achieved significant price increases on our standard
commercial insurance business as well as on most specialty
commercial insurance coverages we offer. We expect continued
price increases during the last half of 2000. We have also
achieved significant improvement in the current underwriting year
results for the majority of our primary insurance operations.
Our consolidated expense ratio, measuring underwriting expenses
as a percentage of premiums written, was 32.9 for the second
quarter and 32.3 for the first half of 2000, compared to expense
ratios of 32.0 and 33.0 for the respective periods of 1999.
Excluding all of the factors discussed above which impacted our
2000 results, our consolidated expense ratios for the second
quarter and first six months of 2000 were 31.4 and 30.4,
respectively. The significant improvement over the same periods
of 1999 reflects efficiencies realized as a result of our expense
reduction initiatives over the last two years.
The table on the following page summarizes key financial results
(from continuing operations) by property-liability underwriting
business segment (Underwriting results are presented on a GAAP
basis; combined ratios are presented on a statutory accounting
basis).
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
----------------------------------------
% of Three Months Six Months
2000 Ended June 30 Ended June 30
(Dollars in millions) Written ------------- -------------
------------------- Premiums 2000 1999 2000 1999
Commercial Lines Group: -------- ----- ----- ----- -----
Written Premiums 28% $403 399 795 798
Underwriting Result $54 (56) 32 (142)
Combined Ratio 86.5 114.6 96.4 117.1
Global Surety:
Written Premiums 8% $117 115 240 220
Underwriting Result $12 11 31 27
Combined Ratio 87.7 82.1 83.8 80.4
Global Healthcare:
Written Premiums 8% $127 110 240 245
Underwriting Result $(45) (19) (64) (47)
Combined Ratio 133.2 120.0 125.1 120.0
Other Global Specialty:
Written Premiums 25% $383 339 717 671
Underwriting Result $(4) (35) (28) (59)
Combined Ratio 100.2 108.9 103.5 108.5
International:
Written Premiums 9% $227 155 274 209
Underwriting Result $(51) (8) (60) (19)
Combined Ratio 127.8 105.7 123.6 109.6
--- ----- ----- ----- -----
Total Primary Insurance:
Written Premiums 78% $1,257 1,118 2,266 2,143
Underwriting Result $(34) (107) (89) (240)
Combined Ratio 102.7 109.8 104.2 111.4
Reinsurance:
Written Premiums 22% $234 355 624 584
Underwriting Result $(33) 6 (78) 29
Combined Ratio 116.8 90.1 115.1 91.4
--- ----- ----- ----- -----
Total Property-
Liability Insurance:
Written Premiums 100% $1,491 1,473 2,890 2,727
===
GAAP Underwriting
Result $(67) (101) (167) (211)
Statutory Combined Ratio:
Loss and Loss Expense Ratio 72.2 73.9 74.0 74.7
Underwriting Expense Ratio 32.9 32.0 32.3 33.0
----- ----- ----- -----
Combined Ratio 105.1 105.9 106.3 107.7
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Underwriting Results by Segment
-------------------------------
Commercial Lines Group
----------------------
The Commercial Lines Group segment includes our standard
commercial and catastrophe risk business centers, as well as the
results of our limited involvement in insurance pools. Premium
volume of $403 million in the second quarter of 2000 was slightly
higher than comparable 1999 volume of $399 million. Through the
first half of 2000, written premiums of $795 million were level
with the same period of 1999. We have continued our efforts in
2000 to improve the quality of our standard commercial business
through the nonrenewal of unprofitable business, leading to a
decline in accounts written compared to 1999. Price increases on
new and renewal standard commercial business, however, have
averaged 8.6% through the first half of 2000, offsetting the
impact of that decline. Catastrophe Risk premium volume of $67
million through the first half of 2000 was $29 million higher
than in the same period of 1999, reflecting our February 2000
acquisition of Pacific Select, which underwrites earthquake
coverages in California.
The second quarter 2000 underwriting profit of $54 million in
this segment was largely driven by the $69 million benefit
realized from the favorable prior year development on workers'
compensation reserves. Excluding that benefit, however, the
underwriting loss of $15 million was still greatly improved over
the comparable 1999 loss of $56 million, reflecting the impact of
our ongoing profit improvement initiatives which have resulted in
a 16-point improvement in current accident year loss ratio
results compared to the second quarter of 1999. Through the
first six months of 2000, underwriting results excluding the
workers' compensation benefit improved by $105 million over the
comparable 1999 period. The year-to-date expense ratio in 2000
is a full point better than the 1999 six- month expense ratio.
We anticipate additional improvement throughout the second half
of the year due to further price increases and the continuing
improvement in the quality of our book of standard commercial
business.
Global Surety
-------------
Our Global Surety segment underwrites surety bonds, which
guarantee that third parties will be indemnified against the
nonperformance of contractual obligations. Premium volume of
$117 million in the second quarter of 2000 was slightly higher
than comparable 1999 premiums of $115 million, but year-to-date
premiums of $240 million were 9% ahead of the same 1999 period.
The pace of premium growth slowed in the second quarter,
reflecting the impact of stricter underwriting initiatives
implemented to prepare for a potential slowdown in the economy.
The growth in year-to-date premium volume resulted from increased
business from our existing customer base, as well as from new
customers.
The Global Surety segment continued to generate profitable
results, but its combined ratios for the second quarter and first
half of 2000 deteriorated by 5.6 points and 3.4 points,
respectively, from the same periods of 1999, primarily due to
increased losses in our Mexican operations. We have implemented
corrective underwriting measures designed to improve the results
of our operations in Mexico.
Global Healthcare
-----------------
Our Global Healthcare segment (formerly Medical Services)
provides property-liability insurance throughout the entire
health care delivery system. Written premium volume of $127
million in the second quarter included $13 million of premiums
from MMI's domestic operations. Excluding the MMI impact, second
quarter premium volume was 4% ahead of the same 1999 period,
primarily due to growth in international business. Excluding a
$37 million premium recorded on one three-year policy in the
first half of 1999, Global Healthcare's year-to-date 2000 premium
volume of $240 million was 15% higher than the comparable 1999
total. New business, price increases, higher retention ratios
and the addition of MMI accounted for the increase. Price
increases in the Healthcare Professionals' line of business
averaged 8.6% through the first half of 2000, while price
increases for Major Accounts professional business averaged 13.2%
for the same period.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Underwriting results in the Global Healthcare segment were
heavily influenced by the addition of MMI, which accounted for
$41 million of the $45 million second quarter loss. This
segment's performance excluding MMI continues to improve,
however, as evidenced by a 14-point improvement in the current
accident year loss ratio compared with the first half of 1999.
After the MMI transaction was completed in April, we immediately
launched aggressive efforts to improve MMI's underwriting results
and remove redundant expenses from the newly combined Global
Healthcare operations. As MMI policies renew, we are extensively
reunderwriting the book of business and implementing price
increases designed to achieve our return on equity targets. We
expect the reunderwriting process to result in the elimination of
up to 50% of MMI's book of business.
Other Global Specialty
----------------------
The Other Global Specialty segment includes the following
business centers: Construction, Technology, Ocean Marine,
Financial and Professional Services, Public Sector Services, and
Excess and Surplus Lines. Total second quarter written premiums
of $383 million in this segment grew 13% over the same period of
1999, while year-to-date premium volume of $717 million was 7%
ahead of 1999. The increases were driven by growth in our
Technology business center, where new business, strong retention
rates and price increases averaging 7% led to a premium growth of
52% and 37%, respectively, over the second quarter and first six
months of 1999. Construction premium volume was down 5% in the
second quarter and 3% in the first half of the year compared with
1999, due to a reduction in new business stemming from our
extensive efforts to eliminate unprofitable business. Price
increases in Construction for the first six months of 2000
averaged 14%. Our Financial and Professional Services and Public
Sector Services operations also achieved strong premium growth in
the first half of the year.
Underwriting results in the Other Global Specialty segment for
the second quarter and first half of 2000 benefited from the $33
million favorable prior year development on workers' compensation
reserves in the Construction business center. Excluding that
benefit, Construction's second quarter underwriting loss of $12
million was still $11 million better than the comparable 1999
result, reflecting favorable development on losses incurred in
prior years, particularly for general liability coverages.
Underwriting results in our Financial and Professional Services
business center for the second quarter and first half of 2000
deteriorated from the same 1999 periods, primarily due to adverse
prior year development on international business. Our growing
Technology business center recorded break-even underwriting
results for the second quarter and first half of the year, and
the second quarter Technology expense ratio has fallen below 28
on the strength of the significant increase in written premium
volume.
International
-------------
Under our new Global Specialty reporting structure, our
International segment consists of our operations at Lloyd's, and
specialty business that is not managed on a global basis. In
addition, beginning in the second quarter of 2000, this segment
includes the results of MMI's London-based insurance and
reinsurance operation, Unionamerica. Our international expansion
efforts over the last several years have built a presence in 15
countries representing 85% of the global property-liability
insurance market. Second quarter written premium volume of $227
million was 46% above the comparable 1999 total of $155 million.
On a year-to-date basis, written premiums are 31% higher than
1999 despite the first quarter cession of $23 million of written
premiums under our corporate aggregate excess-of-loss reinsurance
treaty. Although the addition of $30 million of premiums from
Unionamerica accounted for a portion of this growth, our
International premium volume excluding Unionamerica increased 26%
and 17%, respectively, over the second quarter and first six
months of 1999. Our growth in 2000 has been centered in our
Lloyd's operation, through increases in our investment in Lloyd's
syndicates, and the addition of new underwriting teams.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
The second quarter and six-month underwriting losses of $51
million and $60 million, respectively, were significantly worse
than comparable results for the same periods of 1999. To a large
extent, the deterioration is attributable to two of our
syndicates at Lloyd's which underwrite aviation and professional
liability coverages. We have implemented corrective underwriting
initiatives and made management changes in these syndicates in an
effort to improve their results going forward. In addition,
Unionamerica recorded a $15 million underwriting loss in the
second quarter. Year-to-date underwriting results in our
International segment include a net pretax benefit of $11 million
resulting from cessions made under our corporate aggregate excess-
of-loss reinsurance treaty.
Reinsurance
-----------
The St. Paul's Reinsurance segment underwrites treaty and
facultative reinsurance for property, liability, ocean marine,
surety and certain specialty classes of business, and provides
products and services to the alternative risk transfer market.
Second quarter written premium comparisons between 2000 and 1999
were impacted by the elimination of the one-quarter reporting lag
for St. Paul Re - UK. Reported premium volume for this year's
second quarter represents results for the period April 1 through
June 30, 2000, which is historically a low-volume period for St.
Paul Re's UK-based operations. By contrast, the reported premium
volume for last year's second quarter, when the reporting lag was
still in effect, represents results for the period January 1
through March 31, 1999, which is traditionally a high-volume
period for these operations. The Reinsurance segment's year-to-
date written premium total of $624 million includes the $31
million of incremental premiums resulting from the elimination of
the reporting lag, but also reflects a $113 million reduction in
premiums from the reinsurance cessions. This segment's 1999 year-
to-date written premium total of $584 million includes a $25
million reduction from cessions made under its aggregate excess-
of-loss treaty. Excluding these factors for both years, premium
volume through the first six months of 2000 of $706 million was
$97 million, or 16%, ahead of comparable 1999 premiums of $609
million. The increase was primarily due to growth in non-
traditional business, and new business written through our
Discover Re subsidiary, which serves the alternative risk
transfer market. Significant price increases in virtually all
reinsurance lines and in every geographic region also contributed
to the sizeable growth in reinsurance volume in 2000.
The 2000 year-to-date underwriting loss of $78 million in our
Reinsurance segment included the $92 million benefit from the
reinsurance cessions. The 1999 year-to-date underwriting profit
of $29 million included a $31 million benefit from that year's
reinsurance cession. Excluding that benefit for both years, the
year-to-date loss of $170 million was $168 million worse than the
comparable 1999 underwriting loss of $2 million. Results in 2000
were severely impacted by catastrophe losses totaling $110
million, the majority of which were the result of additional loss
development from the severe windstorms that struck Europe at the
end of 1999. Adverse prior year loss development on casualty
reinsurance coverages also contributed to the deterioration from
1999, while the 1999 six-month results included favorable prior
year development. We anticipate improved results during the
remainder of the year and into 2001 as the full impact of
the recent and anticipated price increases take effect.
Investment Operations
---------------------
The St. Paul's property-liability insurance operations produced
pretax investment income of $312 million in the second quarter of
2000, down 1% from income of $316 million in the same period of
1999. Our acquisition of MMI added $19 million of pretax
investment income in the second quarter; excluding that amount,
investment income would have been approximately 6% below the
second quarter of 1999. Our year-to-date pretax investment
income of $631 million was slightly below comparable 1999 income
of $634 million. However, excluding the MMI acquisition, and the
$12 million of incremental pretax investment income resulting
from the elimination of the quarter reporting lag, year-to-date
investment income in 2000 would have been approximately 5% below
the comparable 1999 total. The sale of our standard personal
insurance operations in September 1999 resulted in the transfer
of approximately $325 million of invested assets to Metropolitan,
contributing to the decline in investment
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Investment Operations (continued)
--------------------------------
income compared with the second quarter and first half of 1999.
In addition, negative underwriting cash flows over the last
several quarters have resulted in the net sale of fixed maturity
investments to fund operational cash flow requirements. Included
in the negative underwriting cash flows were $163 million of
premium payments made in 2000 for cessions made under the
corporate reinsurance treaty. We expect our cash flows to
improve throughout the remainder of 2000 due to the impact of
continuing price increases and improving loss experience
throughout our standard and specialty commercial operations.
Pretax realized investment gains in our property-liability
insurance operations totaled $107 million in the second quarter,
pushing the year-to-date 2000 total to $438 million. Both
amounts were significantly higher than the comparable 1999 totals
of $71 million and $132 million, respectively. The six-month
total in 2000 was driven by gains of $366 million from our
venture capital portfolio, with the single largest gain ($117
million) resulting from the sale of our investment in Flycast
Communications Corp., a leading provider of Internet direct
response solutions. We also sold several other direct holdings,
and our investments in various venture capital partnerships also
contributed to our record six-month realized gain total. In
addition, sales of equity investments generated $75 million of
pretax realized gains in the first half of the year.
The market value of our $15.9 billion fixed maturities portfolio
was approximately equal to its cost on June 30, 2000. Our
acquisition of MMI in April 2000 added approximately $1 billion
of high-quality fixed maturity investments to our portfolio.
Approximately 95% of our portfolio is rated at investment graded
(BBB or above), and its weighted average pretax yield at June 30,
2000 was 6.8%. The combined carrying value of our equity and
venture capital investments at June 30, 2000 included pretax
unrealized appreciation of $1.1 billion.
Environmental and Asbestos Claims
---------------------------------
We continue to receive claims alleging injury or damage from
environmental pollution or seeking payment for the cost to clean
up polluted sites. We also receive 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. Our alleged liability for both
environmental and asbestos claims is complicated by significant
legal issues, primarily pertaining to the scope of coverage. In
our opinion, court decisions in certain jurisdictions have tended
to broaden insurance coverage beyond the intent of original
insurance policies.
Our ultimate liability for environmental claims is difficult to
estimate because of these legal issues. Insured parties have
submitted claims for losses not covered in their respective
insurance policies, and the ultimate resolution of these claims
may be subject to lengthy litigation, making it difficult to
estimate our 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 our ultimate liability for asbestos claims is equally
difficult. The primary factors influencing our estimate of the
total cost of these claims are case law and a history of prior
claim development, both of which continue to evolve.
The following table represents a reconciliation of total gross
and net environmental reserve development for the six months
ended June 30, 2000, and the years ended Dec. 31, 1999 and 1998.
Amounts in the "net" column are reduced by reinsurance
recoverables.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Environmental and Asbestos Claims (continued)
--------------------------------------------
2000
Environmental (six months) 1999 1998
------------- ----------- ----------- -----------
(In millions) Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Beginning reserves $698 $599 $783 $645 $867 $677
Incurred losses 20 15 (33) 1 (16) 26
Paid losses (35) (28) (52) (47) (68) (58)
---- ---- ---- ---- ---- ----
Ending reserves $683 $586 $698 $599 $783 $645
==== ==== ==== ==== ==== ====
The following table represents a reconciliation of total gross
and net reserve development for asbestos claims for the six
months ended June 30, 2000, and the years ended Dec. 31, 1999 and
1998.
2000
Asbestos (six months) 1999 1998
-------- ----------- ----------- -----------
(In millions) Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Beginning reserves $398 $298 $402 $277 $397 $279
Incurred losses 31 24 28 51 44 13
Paid losses (23) (17) (32) (30) (39) (15)
---- ---- ---- ---- ---- ----
Ending reserves $406 $305 $398 $298 $402 $277
==== ==== ==== ==== ==== ====
Our reserves for environmental and asbestos losses at June 30,
2000 represent our best estimate of our ultimate liability for
such losses, based on all information currently available.
Because of the inherent difficulty in estimating such losses,
however, we cannot give assurances that our ultimate liability
for environmental and asbestos losses will, in fact, match
current reserves. We continue to evaluate new information and
developing loss patterns, but we believe any future additional
loss provisions for environmental and asbestos claims will not
materially impact our results of operations, liquidity or
financial position.
Total gross environmental and asbestos reserves at June 30, 2000
of $1.09 billion represented approximately 6% of gross
consolidated reserves of $18.93 billion.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Life Insurance
--------------
Our life insurance segment consists primarily of Fidelity and
Guaranty Life Insurance Company and subsidiaries ("F&G Life").
F&G Life's primary products are deferred annuities (including tax-
sheltered annuities and equity indexed annuities), structured
settlement annuities and immediate annuities. F&G Life also
underwrites traditional life and universal life insurance
products.
Highlights of F&G Life's financial performance for the second
quarter and first six months of 2000 and 1999 were as follows:
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
(In millions) 2000 1999 2000 1999
---- ---- ---- ----
Pretax earnings $ - $ 9 $18 $28
Sales (annualized premiums) $260 $312 $487 $616
Premiums and policy charges $76 $37 $108 $65
Policy surrenders $152 $52 $242 $100
Net investment income $85 $82 $172 $153
Life insurance in force $15,062 $11,044
F&G Life's pretax earnings in the second quarter and first six
months of 2000 benefited from growth in assets under management,
driven by continued strong product sales and positive operating
cash flows, offset by realized investment losses of $20 million,
an increase in product development and channel expansion
expenses, and an increase in mortality and surrender costs.
Pretax results in the first half of 2000 also include $1.3
million of interest expense on an intercompany note payable to
The St. Paul's property-liability operations. Excluding realized
investment gains and losses in both years, and the intercompany
interest expense in 2000, pretax earnings of $39 million for the
first six months of 2000 were $2 million higher than comparable
1999 earnings. After-tax earnings on a similar basis also
improved over 1999 levels, reflecting the impact of F&G Life's
adoption of an investment strategy to allocate 1% of its
investment portfolio to tax-favored securities. These
investments, while typically contributing little or no operating
earnings, generated tax credits that lowered F&G Life's effective
tax rate from 28% in 1999 to 25% in 2000.
Sales volume declined in the second quarter and first six months
of 2000 compared with the same 1999 periods, primarily due to
lower equity-indexed annuity (EIA) sales, which was partially
offset by an increase in fixed interest rate annuity sales.
Credited interest rates on the EIA products are tied to the
performance of a leading market index. Fluctuations in equity
markets during the first half of 2000 contributed to a decline in
EIA sales. In addition, sales of these products were unusually
high in the first quarter of 1999 due to the continued popularity
of F&G Life's first-generation portfolio of EIA products that had
been introduced in mid - 1998. Sales of fixed interest rate
annuities in 2000 continued their momentum from late 1999, as the
overall level of market interest rates have continued to
increase. The demand for annuity products is affected by
fluctuating interest rates and the relative attractiveness of
alternative investments, particularly equity-based products.
Traditional life insurance sales in the first half of 2000 were
nearly three times higher than the same period of 1999,
reflecting the continued success of a new term life product line
launched in 1999 targeted at the mortgage protection market.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Life Insurance (continued)
-------------------------
F&G Life hedges its exposure on its EIA products by purchasing
options with terms similar to the market index component to
provide the same return as F&G Life guarantees to the annuity
contract holder, subject to minimums guaranteed in the annuity
contract. At June 30, 2000, F&G Life held options with a
notional amount of $1.08 billion and a market value of $33
million.
Premiums and policy charges increased in the second quarter and
first six months of 2000 compared with the same periods of 2000,
primarily the result of growth in the sale of structured
settlement annuities and life-contingent single premium immediate
annuities (SPIA). Structured settlement annuities are sold
primarily to property-liability insurers to fund the settlement
of insurance claims. The continued expansion of the structured
settlement program into The St. Paul's property-liability claim
organization accounts for the increase in sales volume. The
growth in SPIA sales resulted from an increase in marketing
emphasis on this product. Policy charges from surrenders on tax
sheltered and equity indexed annuities also contributed to the
overall increase in premiums and policy charges.
Sales of structured settlement annuities, annuities with life
contingencies and term life insurance are recognized as premiums
earned under GAAP. However, sales of investment-type contracts,
such as equity-indexed, deferred and tax sheltered annuities and
universal life-type contracts are recorded directly on the
balance sheet on a deposit accounting basis and are not
recognized as premium revenue under GAAP.
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. Several different products
contributed to the increase in surrender activity in the first
six months of 2000. Surrenders on tax-sheltered annuities
increased due to F&G Life's transition from one exclusive
distribution partner to a new network of approximately 15
distributors. EIA surrenders have increased naturally, as a
result of the significant growth in the size of the EIA book of
business. F&G Life has written over $1 billion in EIA business
since the products were introduced in mid - 1998. Surrender
activity in 2000 also reflects an internal policy change this
year, whereby the replacement of an existing F&G Life policy with
another F&G Life policy is now reported as a surrender.
Net investment income grew 12% in 2000 as a result of an
increasing asset base generated by positive cash flow. The 36%
increase in life insurance in force over the same time a year ago
reflects the sales of the new term life product line introduced
in mid - 1999.
Asset Management
----------------
Our asset management segment consists of our 78% majority
ownership interest in The John Nuveen Company (Nuveen). Nuveen
provides customized individual accounts, mutual funds, exchange-
traded funds and defined portfolios to help financial advisors
serve their affluent and high net worth clients. Highlights of
Nuveen's performance for the second quarter and first six months
of 2000 and 1999 were as follows:
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
(In millions) 2000 1999 2000 1999
---- ---- ---- ----
Revenues $88 $86 $188 $169
Expenses 45 47 102 92
---- ---- ---- ----
Pretax earnings 43 39 86 77
Minority interest (10) (9) (20) (18)
---- ---- ---- ----
The St. Paul's share of
pretax earnings $33 $30 $66 $59
==== ==== ==== ====
Assets under management $60,299 $59,538
====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Asset Management (continued)
---------------------------
Nuveen's revenues for the first six months of 2000 grew 11% over
the same period of 1999, primarily due to an increase in defined
portfolio products sold. The high quality of its diverse range
of products enabled Nuveen to post strong earnings in a quarter
which saw most market indices decline. Nuveen had positive net
flows (equal to the sum of sales, reinvestments and exchanges,
less redemptions) in the second quarter of 2000, specifically in
managed accounts, as investors shifted their portfolios from
high technology concentrations earlier in the year to a more
balanced investing approach as the quarter progressed. Demand
for Nuveen's defined portfolio also remained high, with one newly-
introduced trust alone garnering new sales of over $400 million
in the second quarter.
Managed assets at the halfway point of 2000 consisted of $27.3
billion of exchange-traded funds, $21.3 billion of managed
accounts, $11.2 billion of mutual funds and $499 million of money
market funds. Equity securities now account for approximately
35% of Nuveen's assets under management. Including defined
portfolios, Nuveen managed or oversaw approximately $72 billion
in assets at June 30, 2000.
Capital Resources
-----------------
Common shareholders' equity totaled $6.68 billion at June 30,
2000, an increase of $232 million over the year-end 1999 total of
$6.45 billion which resulted from our strong net income through
the first six months of the year, and an increase in the
unrealized appreciation of our equity and venture capital
investment portfolios. Through the first six months of 2000, we
repurchased 13.6 million of our common shares for a total cost of
$333 million, for an average cost of $24.45 per share. Virtually
all of the repurchases occurred in the first quarter of the year,
and were financed through a combination of internally-generated
funds and commercial paper borrowings. Since November 1998, we
have repurchased and retired 28.6 million of our common shares
for a total cost of $824 million, or an average cost of $28.85
per share.
Total debt outstanding at June 30, 2000 of $1.59 billion was $127
million higher than the year-end 1999 total of $1.47 billion. In
April 2000, we issued $500 million of senior debt, the proceeds
of which were used to repay commercial paper borrowings and for
general corporate purposes. Of the debt issued, $250 million is
due in April 2005 and bears an interest rate of 7.875%, and $250
million is due in 2010 and bears an interest rate of 8.125%. In
February 2000, we repaid $46 million of floating rate notes that
had been issued by a special purpose offshore entity that
provided reinsurance to one of our subsidiaries. In April 2000,
we assumed $45 million of short-term borrowings as part of our
acquisition of MMI; that debt was paid off in its entirety
shortly after the acquisition was completed. We also assumed
MMI's obligations on $125 million of capital securities
bearing an annual dividend rate of 7.625%. Those
securities are classified as "Company-obligated mandatorily
redeemable preferred securities of subsidiaries" on our
consolidated balance sheet as of June 30, 2000. The ratio of
total debt to total capitalization of 18% at June 30, 2000 was
unchanged from the year-end 1999 ratio.
In July 2000, St. Paul Capital LLC, a wholly-owned subsidiary of
The St. Paul, provided notice to the holders of its $207 million,
6% Convertible Monthly Income Preferred Securities (MIPS) that
St. Paul Capital LLC is exercising its right to cause the
conversion rights of the owners of the MIPS to expire on August
14, 2000. Each of the 4,140,000 MIPS outstanding is convertible
into 1.695 shares of our common stock. We expect the owners to
convert their MIPS prior to the conversion expiration date, which
would result in the issuance of 7,017,300 of our common shares.
These shares are currently considered common stock equivalents
for purposes of our diluted earnings per share calculation.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Capital Resources (continued)
----------------------------
We anticipate that any major capital expenditures during the
remainder of 2000 would involve further repurchases of our common
shares or acquisitions of existing businesses. At June 30, 2000,
we had approximately $376 million of capacity to repurchase
additional common shares under a repurchase program authorized by
the company's board of directors in May 2000. We repurchase our
shares in the open market and through private transactions when
we deem such repurchases to be a prudent use of capital. We have
no major capital improvements planned for the remainder of 2000.
For the first six months of 2000, our ratio of earnings to fixed
charges was 10.68, compared with 7.97 for the same period of
1999. Our ratio of earnings to combined fixed charges and
preferred stock dividend requirements was 9.82, compared with
7.22 for the same period of 1999. Fixed charges consist of
interest expense, dividends on preferred capital securities and
that portion of rental expense deemed to be representative of an
interest factor.
Liquidity
---------
Liquidity is a measure of our ability to generate sufficient cash
flows to meet the short- and long-term cash requirements of our
business operations. Net cash flows used by continuing
operations totaled $416 million in the first six months of 2000,
compared with cash used by continuing operations of $49 million
in the same period of 1999. The deterioration in 2000 was
primarily due to significant loss payments in our Reinsurance
segment, and premium payments of $163 million related to our
corporate reinsurance program. The operational cash flow
shortfall was partially funded by investment sales generating net
proceeds of $254 million. We expect our operational cash flows
to improve during the remainder of 2000 as the full impacts of
continuing price increases and improvements in the quality of our
book of business are realized. On a long-term basis, we believe
our operational cash flows will benefit from the corrective
pricing and underwriting actions under way in our property-
liability operations. Our financial strength and conservative
level of debt provide us with the flexibility and capacity to
obtain funds externally through debt or equity financings on both
a short-term and long-term basis should the need arise.
Year 2000 Claims
----------------
The "Year 2000" issue refers to computer programming limitations
that had the potential to cause information technology systems to
incorrectly process certain dates and date-related information,
including the incorrect interpretation of the two-digit year code
of "00" as the year 1900, instead of the year 2000, at the turn
of the century.
We have received some Year 2000-related claims and we could face
additional Year 2000 claims under coverages provided by insurance
or reinsurance policies sold to insured parties who have
incurred, or have taken action claimed to prevent, losses as a
result of the failure of such parties, or the customers or
vendors of such parties, to be Year 2000 compliant. For example,
like other property-liability insurers, we have received claims
for reimbursement of expenses incurred by policyholders in
connection with their Year 2000 compliance efforts. Because
coverage determinations depend on unique factual situations,
specific policy language and other variables, it is not possible
to determine at this time whether and to what extent insured
parties have incurred losses, the amount of the losses or whether
any such losses will be covered under our insurance or
reinsurance policies. With respect to Year 2000-related claims
in general, in some instances, coverage is not provided under the
insurance policies or reinsurance policies, while in other
instances, coverage may be provided under certain circumstances.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Year 2000 Claims (continued)
---------------------------
Our 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 were not unforeseen, and that we
expect that such losses did not, in most if not all cases, cause
direct physical loss or damage, we have concluded that our
property and inland marine policies do not generally provide
coverage for losses relating to Year 2000 issues. To reinforce
our view on coverage afforded by such policies, we have developed
and continue to implement a specific Year 2000 exclusion
endorsement.
We do not believe that Year 2000-related insurance or reinsurance
coverage claims will have a material adverse effect on our
earnings, cash flows or financial position. However, the
uncertainties of litigation are such that unexpected policy
interpretations could compel claim payments substantially beyond
our coverage intentions, possibly resulting in a material adverse
effect on our results of operations and/or cash flows and a
material adverse effect on our consolidated financial position.
Impact of Accounting Pronouncements to be Adopted in the Future
---------------------------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet,
and measure those instruments at fair value. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which amended SFAS No. 133 to make it
effective for all quarters of fiscal years beginning after June
15, 2000, and prohibits retroactive application to financial
statements of prior periods. In June 2000, the FASB issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," as an additional amendment to SFAS
No. 133, to address a limited number of issues causing
implementation difficulties. We intend to implement the
provisions of SFAS No. 133, as amended, in the first quarter of
2001. Our property-liability operations currently have limited
involvement with derivative instruments, primarily for purposes
of hedging against fluctuations in market indices, foreign
currency exchange rates and interest rates. Our life insurance
operation purchases options to hedge its obligation to pay
credited rates on equity-indexed annuity products. We cannot at
this time reasonably estimate the potential impact of this
adoption on our 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: market and other conditions and their effect on
future premiums, revenues, earnings, cash flow and investment
income; price increases, improved loss experience, and expense
savings resulting from the restructuring actions announced in
recent years.
In light of the risks and uncertainties inherent in future
projections, many of which are beyond our 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: competitive considerations, including the
ability to implement price increases; general economic conditions
including changes in interest rates and the performance of
financial markets; changes in domestic and foreign laws,
regulations and taxes; changes in the demand for, pricing of, or
supply of insurance or reinsurance; catastrophic events of
unanticipated frequency or severity; loss of significant
customers; judicial decisions and rulings; the pace and
effectiveness of the transfer of the standard personal insurance
business to Metropolitan; the pace and effectiveness of the
transfer of the nonstandard auto operations to Prudential; the
pace and effectiveness of our integration of MMI Companies, Inc.;
and various other matters. 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 unanticipated
judicial interpretations of the scope of the insurance or
reinsurance coverage provided by our policies. We undertake no
obligation to release publicly the results of any future
revisions we may make to forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note 5 to the consolidated
financial statements is incorporated herein by
reference.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. An Exhibit Index is set forth as the last
page in this document.
(b) Reports on Form 8-K.
1) The St. Paul filed a Form 8-K Current Report
dated April 12, 2000, relating to its issuance of
$500 million of Senior Notes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE ST. PAUL COMPANIES, INC.
(Registrant)
Date: August 14, 2000 By /s/ Bruce A. Backberg
---------------------
Bruce A. Backberg
Senior Vice President - Legal Services
(Authorized Signatory)
Date: August 14, 2000 By /s/ Thomas A. Bradley
---------------------
Thomas A. Bradley
Senior Vice President - Finance
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
-------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession*...............................
(3) (i) Articles of incorporation*..............................
(ii) By-laws*...............................................
(4) Instruments defining the rights of security holders,
including indentures*....................................
(10) Material contracts*.........................................
(11) Statement re computation of per share earnings**............(1)
(12) Statement re computation of ratios**........................(1)
(15) Letter re unaudited interim financial information*..........
(18) Letter re change in accounting principles*..................
(19) Report furnished to security holders*.......................
(22) Published report regarding matters submitted to
vote of security holders*................................
(23) Consents of experts and counsel*............................
(24) Power of attorney*..........................................
(27) Financial data schedule**...................................(1)
(99) Additional exhibits*........................................
* These items are not applicable.
** This exhibit is included only with the copies of this
report that are filed with the Securities and Exchange
Commission. However, a copy of the exhibit may be obtained
from the Registrant for a reasonable fee by writing to The St.
Paul Companies, Inc., 385 Washington Street, Saint Paul, MN
55102, Attention: Corporate Secretary.
(1) Filed herewith.
