<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 9, 2000, was 217,689,317.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION --------
Consolidated Statements of Operations (Unaudited),
Three Months and Nine Months Ended
September 30, 2000 and 1999 3
Consolidated Balance Sheets, September 30, 2000
(Unaudited) and December 31, 1999 4
Consolidated Statements of Shareholders' Equity,
Nine Months Ended September 30, 2000
(Unaudited) and Twelve Months Ended December 31, 1999 6
Consolidated Statements of Comprehensive Income
(Unaudited), Nine Months Ended September 30, 2000 and 1999 7
Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 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 40
Signatures 40
EXHIBIT INDEX 41
<PAGE>
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
(In millions, September 30 September 30
except per share data) ------------------ -----------------
2000 1999 2000 1999
Revenues: ----- ----- ----- -----
Premiums earned $1,402 $1,247 $4,287 $3,948
Net investment income 407 387 1,215 1,176
Asset management 88 85 265 251
Realized investment gains 101 41 526 173
Other 33 25 95 79
------ ------ ------ ------
Total revenues 2,031 1,785 6,388 5,627
------ ------ ------ ------
Expenses:
Insurance losses and loss
adjustment expenses 813 850 2,867 2,820
Life policy benefits 121 101 314 253
Policy acquisition expenses 353 337 1,040 1,023
Operating and administrative 413 325 997 810
------ ------ ------ ------
Total expenses 1,700 1,613 5,218 4,906
------ ------ ------ ------
Income from continuing
operations before income
taxes and cumulative
effect of accounting change 331 172 1,170 721
Income tax expense 101 35 359 168
------ ------ ------ ------
Income from continuing
operations before cumulative
effect of accounting change 230 137 811 553
Cumulative effect of
accounting change, net of taxes - - - (30)
------ ------ ------ ------
Income from
continuing operations 230 137 811 523
Gain (loss) from discontinued
operations, net of taxes 1 190 (11) 173
------ ------ ------ ------
Net income $231 $327 $800 $696
====== ====== ====== ======
Basic earnings per common share:
Income from continuing operations
before cumulative effect
of accounting change $1.04 $0.59 $3.69 $2.39
Cumulative effect of
accounting change, net of taxes - - - (0.13)
------ ------ ------ ------
Income from
continuing operations $1.04 $0.59 $3.69 $2.26
Gain (loss) from discontinued
operations, net of taxes - 0.84 (0.06) 0.75
------ ------ ------ ------
Net income $1.04 $1.43 $3.63 $3.01
====== ====== ====== ======
Diluted earnings per common share:
Income from continuing operations
before cumulative effect
of accounting change $0.98 $0.56 $3.47 $2.26
Cumulative effect of accounting
change, net of taxes - - - (0.12)
------ ------ ------ ------
Income from
continuing operations $0.98 $0.56 $3.47 $2.14
Gain (loss) from discontinued
operations, net of taxes - 0.78 (0.05) 0.70
------ ------ ------ ------
Net income $0.98 $1.34 $3.42 $2.84
====== ====== ====== ======
Dividends declared on common stock $0.27 $0.26 $0.81 $0.78
====== ====== ====== ======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
September 30, December 31,
ASSETS 2000 1999
------ ------------ ------------
(Unaudited)
Investments:
Fixed maturities, at estimated fair value $20,198 $19,080
Equities, at estimated fair value 1,634 1,617
Real estate and mortgage loans 1,307 1,504
Venture capital, at estimated fair value 1,101 867
Securities lending collateral 1,484 1,216
Other investments 319 298
Short-term investments, at cost 1,141 1,347
-------- --------
Total investments 27,184 25,929
Cash 81 158
Asset management securities held for sale 29 45
Reinsurance recoverables:
Unpaid losses 5,317 4,331
Paid losses 316 191
Ceded unearned premiums 732 639
Receivables:
Underwriting premiums 2,896 2,292
Interest and dividends 366 356
Other 344 223
Deferred policy acquisition expenses 1,085 942
Deferred income taxes 1,178 1,262
Office properties and equipment, at cost less
accumulated depreciation of $450 (1999; $431) 515 499
Goodwill 510 399
Other assets 1,104 1,290
-------- --------
Total assets $41,657 $38,556
======== ========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In millions)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
------------------------------------ ------------ -----------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $18,647 $17,720
Future policy benefits 5,236 4,885
Unearned premiums 3,567 3,048
-------- --------
Total insurance reserves 27,450 25,653
Debt 1,636 1,466
Payables:
Reinsurance premiums 1,052 654
Income taxes 399 311
Accrued expenses and other 1,093 1,138
Securities lending 1,484 1,216
Other liabilities 1,159 1,221
-------- --------
Total liabilities 34,273 31,659
-------- --------
Company-obligated mandatorily redeemable
preferred capital securities of subsidiaries
or trusts holding solely subordinated
debentures of the Company 337 425
-------- --------
Shareholders' equity:
Preferred:
SOP convertible preferred stock;
1.45 shares authorized; 0.8 shares
outstanding (0.9 shares in 1999) 118 129
Guaranteed obligation - SOP (68) (105)
-------- --------
Total preferred shareholders' equity 50 24
-------- --------
Common:
Common stock, 480 shares authorized;
218 shares outstanding (225 shares in 1999) 2,211 2,079
Retained earnings 4,119 3,827
Accumulated other comprehensive income:
Unrealized appreciation 735 568
Unrealized loss on foreign currency translation (68) (26)
-------- --------
Total accumulated other comprehensive income 667 542
-------- --------
Total common shareholders' equity 6,997 6,448
-------- --------
Total shareholders' equity 7,047 6,472
-------- --------
Total liabilities, redeemable preferred
securities and shareholders' equity $41,657 $38,556
======== ========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In millions)
Nine Twelve
Months Ended Months Ended
September 30 December 31
------------ -----------
2000 1999
---------- ----------
(Unaudited)
Preferred shareholders' equity:
Series B SOP convertible preferred stock:
Beginning of period $129 $134
Redemptions during period (11) (5)
-------- --------
End of period 118 129
-------- --------
Guaranteed obligation - SOP:
Beginning of period (105) (119)
Principal payments 37 14
-------- --------
End of period (68) (105)
-------- --------
Total preferred shareholders' equity 50 24
-------- --------
Common shareholders' equity:
Common stock:
Beginning of period 2,079 2,128
Stock issued under stock incentive plans 69 37
Stock issued for preferred shares redeemed 20 9
Reacquired common shares (164) (102)
Conversion of monthly income
preferred securities 207 -
Other - 7
-------- --------
End of period 2,211 2,079
-------- --------
Retained earnings:
Beginning of period 3,827 3,480
Net income 800 834
Dividends declared on common stock (173) (235)
Dividends declared on preferred stock, net of taxes (6) (8)
Reacquired common shares (348) (254)
Tax benefit on employee options, and other changes 28 14
Premium on preferred shares redeemed (9) (4)
-------- --------
End of period 4,119 3,827
-------- --------
Unrealized appreciation, net of taxes:
Beginning of period 568 1,027
Change during the period 167 (459)
-------- --------
End of period 735 568
-------- --------
Unrealized gain (loss)loss on foreign currency
translation, net of taxes:
Beginning of period (26) (14)
Change during the period (42) (12)
-------- --------
End of period (68) (26)
-------- --------
Total common shareholders' equity 6,997 6,448
-------- --------
Total shareholders' equity $7,047 $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 Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
Net income $231 $327 $800 $696
------ ------ ------ ------
Other comprehensive income (loss),
net of taxes:
Change in unrealized appreciation 70 (143) 167 (500)
Change in unrealized loss on
foreign currency translation (21) (5) (42) (10)
------ ------ ------ ------
Other comprehensive income (loss) 49 (148) 125 (510)
------ ------ ------ ------
Comprehensive income $280 $179 $925 $186
====== ====== ====== ======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In millions)
Nine Months Ended
September 30
------------------
2000 1999
---- ----
OPERATING ACTIVITIES
Net income $800 $696
Adjustments:
Loss (gain) from discontinued operations 11 (173)
Change in property-liability
insurance reserves 331 106
Change in reinsurance balances (872) (456)
Change in premiums receivable (418) (256)
Provision for federal
deferred income tax expense 166 107
Change in accounts payable
and accrued expenses (96) 170
Change in asset management balances (1) (2)
Depreciation and amortization 79 94
Realized investment gains (526) (173)
Cumulative effect of accounting change - 30
Other 72 (6)
------ ------
Net Cash Provided (Used)
by Continuing Operations (454) 137
Net Cash Provided (Used)
by Discontinued Operations (8) 24
------ ------
Net Cash Provided (Used)
by Operating Activities (462) 161
------ ------
INVESTING ACTIVITIES
Purchase of investments (4,922) (4,547)
Proceeds from sales and
maturities of investments 5,354 4,320
Net sales (purchases)
of short-term investments 285 (354)
Change in open security transactions (35) 61
Purchases of office properties and equipment (84) (100)
Sales of office properties and equipment 8 5
Acquisitions, net of cash acquired (202) -
Proceeds from sale of subsidiaries 201 252
Other (63) 49
------ ------
Net Cash Provided (Used)
by Continuing Operations 542 (314)
Net Cash Provided (Used)
by Discontinued Operations 44 (48)
------ ------
Net Cash Provided (Used)
by Investing Activities 586 (362)
------ ------
FINANCING ACTIVITIES
Deposits on universal life and
investment contracts 747 727
Withdrawals on universal life and
investment contracts (433) (96)
Dividends paid on common and preferred stock (180) (184)
Proceeds from issuance of debt 498 110
Repayment of debt (372) (81)
Repurchase of common shares (512) (265)
Stock options exercised and other 51 15
------ ------
Net Cash Provided (Used) by
Financing Activities (201) 226
------ ------
Increase (decrease) in cash (77) 25
Cash at beginning of period 158 146
------ ------
Cash at end of period $ 81 $171
====== ======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
September 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.
Supplemental Cash Flow Information
----------------------------------
Noncash Financing Activity - In August 2000, we issued 7,006,954
common shares in the conversion of over 99 percent of
the St. Paul Capital L.L.C.'s (our wholly-owned subsidiary) $207
million of 6% Convertible Monthly Income Preferred Securities.
<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 nine months ended Sept. 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 nine
months ended Sept. 30, 2000.
Related to the MMI 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 Sept. 30, 2000, 94 employees had been terminated, with
payments totaling $3 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 nine months ended Sept. 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 $6,492 5,991
Net income 680 634
Fully diluted earnings per share $2.90 2.59
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. During
the third quarter of 1999, we recognized a pretax gain on
proceeds of $138 million and a $136 million pretax gain on
discontinued operations. The third quarter 1999 discontinued
operations included a reserve reduction of $145 million.
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 nine months of 2000, we
recorded a pretax loss of $5 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 Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
(In millions except per share data)
EARNINGS
Basic:
Net income, as reported $231 $327 $800 $696
Dividends on preferred
stock, net of taxes (2) (2) (6) (6)
Premium on preferred shares redeemed (3) (1) (9) (3)
------ ------ ------ ------
Net income available to
common shareholders $226 $324 $785 $687
====== ====== ====== ======
Diluted:
Net income available
to common shareholders $226 $324 $785 $687
Effect of dilutive securities:
Convertible preferred stock 2 2 5 5
Convertible monthly income
preferred securities 1 2 5 6
Zero coupon convertible notes 1 1 2 2
------ ------ ------ ------
Net income available to
common shareholders $230 $329 $797 $700
====== ====== ====== ======
COMMON SHARES
Basic:
Weighted average common
shares outstanding 217 227 216 228
====== ====== ====== ======
Diluted:
Weighted average common
shares outstanding 217 227 216 228
Effect of dilutive securities:
Stock options 4 2 2 2
Convertible preferred stock 6 7 7 7
Convertible monthly income
preferred securites 3 7 6 7
Zero coupon convertible notes 2 2 2 2
------ ------ ------ ------
Total 232 245 233 246
====== ====== ====== ======
EARNINGS PER SHARE
Basic $1.04 $1.43 $3.63 $3.01
====== ====== ====== ======
Diluted $0.98 $1.34 $3.42 $2.84
====== ====== ====== ======
<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.
Nine Months Ended September 30
------------------------------
2000 1999
-------- --------
(In millions)
Purchases:
Fixed maturities $2,813 $3,149
Equities 1,663 1,063
Real estate and mortgage loans 12 123
Venture capital 372 170
Other investments 62 42
-------- -------
Total purchases 4,922 4,547
-------- -------
Proceeds from sales and maturities:
Fixed maturities 2,796 2,920
Equities 1,666 1,085
Real estate and mortgage loans 228 93
Venture capital 613 156
Other investments 51 66
-------- --------
Total sales and maturities 5,354 4,320
-------- --------
Net purchases (sales) $(432) $ 227
======== ========
Change in Unrealized Appreciation. The increase (decrease) in
unrealized appreciation of investments recorded in common
shareholders' equity was as follows:
Nine Months Ended Twelve Months Ended
September 30, 2000 December 31, 1999
------------------ -------------------
(In millions)
Fixed maturities $ 186 $(1,336)
Equities (71) 223
Venture capital 142 255
Life deferred policy acquisition
costs and policy benefits (1) 122
Single premium immediate annuity reserves - 44
Other (2) (13)
------ ------
Total change in pretax
unrealized appreciation 254 (705)
Change in deferred taxes (87) 246
------ ------
Total change in unrealized
appreciation, net of taxes $ 167 $(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 Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
(In millions)
Federal current tax expense $ 48 $24 $ 179 $ 35
Federal deferred tax expense 48 2 166 107
------ ------ ------ ------
Total federal income
tax expense 96 26 345 142
Foreign income tax expense - 7 1 20
State income tax expense 5 2 13 6
------ ------ ------ ------
Total income tax
expense on continuing
operations $101 $35 $359 $168
====== ====== ====== ======
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.
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:
September 30, December 31,
2000 1999
------------- ------------
Book Fair Book Fair
Value Value Value Value
----- ----- ----- -----
(In millions)
Medium-term notes $617 $601 $617 $598
7-7/8% senior notes 249 257 - -
8-1/8% senior notes 249 257 - -
8-3/8% senior notes 150 151 150 153
Commercial paper 115 115 400 400
Zero coupon convertible notes 97 94 94 93
7-1/8% senior notes 80 79 80 78
Variable rate borrowing 64 64 64 64
Real estate mortgages 15 15 15 15
Floating rate notes - - 46 46
------ ------ ------ ------
Total debt $1,636 1,633 $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 nine months ended Sept. 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 business. Segment information
for 1999 has been restated to be consistent with the 2000
presentation.
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
(In millions)
Revenues from Continuing Operations
Property-liability insurance:
Primary Insurance Operations:
Commercial Lines Group $394 $325 $1,173 $1,164
Global Surety 96 101 316 291
Global Healthcare 139 148 451 478
Other Global Specialty 322 351 1,012 1,009
International 85 47 303 182
------ ------ ------ ------
Total primary
insurance operations 1,036 972 3,255 3,124
Reinsurance 289 213 847 697
------ ------ ------ ------
Total property-liability
premiums earned 1,325 1,185 4,102 3,821
------ ------ ------ ------
Investment operations:
Net investment income 312 317 943 951
Realized investment gains 104 38 542 170
------ ------ ------ ------
Total investment
operations 416 355 1,485 1,121
Other 25 12 66 58
------ ------ ------ ------
Total property-
liability insurance 1,766 1,552 5,653 5,000
------ ------ ------ ------
Life insurance 162 131 422 340
------ ------ ------ ------
Asset management 92 87 280 256
------ ------ ------ ------
Total reportable
segments 2,020 1,770 6,355 5,596
Parent company, other
operations and
consolidating eliminations 11 15 33 31
------ ------ ------ ------
Total revenues $2,031 $1,785 $6,388 $5,627
====== ====== ====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 9 - Segment Information (continued)
---------------------------------------
Three Months Ended Nine Months Ended
September 30 September 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 $15 $(38) $48 $(179)
Global Surety (2) 6 29 33
Global Healthcare (70) (17) (135) (64)
Other Global Specialty 6 (83) (22) (143)
International - 3 (60) (17)
------ ------ ------ ------
Total primary
insurance (51) (129) (140) (370)
Reinsurance 4 15 (74) 44
------ ------ ------ ------
Total GAAP
underwriting result (47) (114) (214) (326)
------ ------ ------ ------
Investment operations:
Net investment income 312 317 943 951
Realized investment gains 104 38 542 170
------ ------ ------ ------
Total investment
operations 416 355 1,485 1,121
Other (24) (77) (88) (94)
------ ------ ------ ------
Total property-
liability insurance 345 164 1,183 701
------ ------ ------ ------
Life insurance 15 20 32 48
------ ------ ------ ------
Asset management:
Pretax income before
minority interest 43 39 130 116
Minority interest (10) (9) (30) (27)
------ ------ ------ ------
Total asset management 33 30 100 89
------ ------ ------ ------
Total reportable
segments 393 214 1,315 838
Parent company,other
operations and consolidating
eliminations (62) (42) (145) (117)
------ ------ ------ ------
Total income before
income taxes and
cumulative effect of
accounting change $331 $172 $1,170 $721
====== ====== ====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 10 - 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, during the
third quarter of 2000, we ceded written premiums of $183 million,
earned premiums of $193 million and insurance losses and loss
adjustment expenses of $338 million, for a net pretax benefit of
$145 million. For the nine months ended Sept. 30, 2000, we ceded
written and earned premiums of $263 million and insurance losses
and loss adjustment expenses of $449 million, resulting in a year-
to-date net pretax benefit of $186 million. Under the separate
Reinsurance segment treaty, for the nine months ended Sept. 30, 2000,
we ceded written and earned premiums of $64 million, and insurance
losses and loss adjustment expenses of $128 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 Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(In millions) 2000 1999 2000 1999
----- ----- ----- -----
Written premiums:
Direct $1,571 $1,254 $3,981 $3,484
Assumed 451 336 1,567 1,227
Ceded (530) (368) (1,165) (763)
----- ----- ----- -----
Net premiums written 1,492 1,222 4,383 3,948
===== ===== ===== =====
Earned premiums:
Direct 1,297 1,152 3,744 3,449
Assumed 521 364 1,439 1,064
Ceded (493) (331) (1,081) (692)
----- ----- ----- -----
Net premiums earned 1,325 1,185 4,102 3,821
Life 77 62 185 127
----- ----- ----- -----
Total premiums earned 1,402 1,247 4,287 3,948
===== ===== ===== =====
Insurance losses and loss
adjustment expenses:
Direct 1,059 831 2,893 2,710
Assumed 205 289 1,241 779
Ceded (451) (270) (1,267) (669)
----- ----- ----- -----
Net losses and loss
adjustment expenses 813 850 2,867 2,820
Life policy benefits 121 101 314 253
----- ----- ----- -----
Total $ 934 $ 951 $3,181 $3,073
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 11 - 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. Approximately 590
employees were 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 were completed in 2000.
The following presents a rollforward of activity related to this
charge:
(In millions) Pre-tax Reserve at Reserves at
Charge Dec. 31. 1999 Payments Sept. 30, 2000
-------- ------------- --------- ---------------
Charges to
earnings:
Employee-related $25 $14 $(13) $1
Occupancy-related 33 31 (5) 26
Equipment charges 2 N/A N/A N/A
------ ------ ------ ------
Total $60 $45 $(18) $27
====== ====== ====== ======
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.
Approximately 500 employees were 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:
(in millions)
Pre-tax Reserve at Reserves at
Charge Dec. 31, 1999 Payments Adjustments Sept. 30, 2000
------- ------------- -------- ----------- --------------
Charges to
earnings:
Employee-
related $26 $3 $(1) $(2) $-
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 11 - 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.
Approximately 2,200 positions were 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 2000. 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 Reserve
Pre- at at
tax Dec. 31, Sept. 30,
Charge 1999 Payments Adjustments 2000
------ ------- -------- ----------- --------
Executive severance $89 $3 $(1) $(2) $-
Other severance 52 1 (1) - -
Branch lease exit costs 34 24 (5) - 19
Transaction costs 30 - - - -
---- --- --- --- ---
Accruals subject to
rollforward 205 28 (7) (2) 19
---- --- --- --- ---
Total $292 $28 $(7) $(2) $19
==== === === === ===
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 12 - 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 was in addition to the $76 million
remaining at that time under a $500 million repurchase plan
approved in November 1999. At Sept. 30, 2000, we had
approximately $198 million remaining available for repurchase
under the May 2000 authorization.
Note 13 - Conversion of 6% Convertible Monthly Income Preferred Securities
----------------------------------------------------------------------------
On July 14, 2000, St. Paul Capital L.L.C. (a wholly-owned
subsidiary of the company) provided notice to 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.
Over 99 percent of the 4.14 million securities were
converted into approximately 7 million shares of the St. Paul's
common stock, at a conversion price of $29.50 per security. The
remaining securities were redeemed at $50.00 per security plus
accumulated and unpaid dividends.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 2000
Consolidated Results
--------------------
The following table summarizes The St. Paul's results for the
third quarter and first nine months of 2000 and 1999.
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(In millions except
per share data)
2000 1999 2000 1999
Pretax income (loss): ------ ------ ------ ------
Property-liability insurance:
GAAP underwriting result $(47) $(114) $(214) $(326)
Net investment income 312 317 943 951
Realized investment gains 104 38 542 170
Other (24) (77) (88) (94)
----- ----- ----- -----
Total property-
liability insurance 345 164 1,183 701
Life insurance 15 20 32 48
Asset management 33 30 100 89
Parent and other (62) (42) (145) (117)
----- ----- ----- -----
Income from continuing
operations before
income taxes and cumulative
effect of accounting
change 331 172 1,170 721
Income tax expense 101 35 359 168
----- ----- ----- -----
Income from continuing
operations before cumulative
effect of accounting
change 230 137 811 553
Cumulative effect of accounting
change, net of taxes - - - (30)
----- ----- ----- -----
Income from continuing
operations 230 137 811 523
Discontinued operations,
net of taxes 1 190 (11) 173
----- ----- ----- -----
Net income $ 231 $327 $800 $696
===== ===== ===== =====
Diluted net income per
common share $0.98 $1.34 $3.42 $2.84
===== ===== ===== =====
Consolidated Results
--------------------
Our pretax income from continuing operations of $331 million in
the third quarter was 92% higher than comparable pretax income of
$172 million in the same 1999 period, driven by an increase in
realized investment gains and improved underwriting results in
our property-liability operations. Through the first nine months
of 2000, pretax income from continuing operations was $449
million higher than in the comparable period of 1999, primarily
due to the significant increase in realized investment gains.
Our property-liability insurance pretax results for the third
quarter and first nine months of both 2000 and 1999 included
significant benefits from aggregate excess-of-loss reinsurance
treaties, as detailed on page 25 of this report. Nine-month
results in 2000 also reflect a $102 million reserve reduction, as
discussed on page 26 of this report. Third quarter and nine-
month results of discontinued operations in 1999 reflect the gain
on sale of our standard personal insurance business, as discussed
on page 24 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.
The "cumulative effect of accounting change" of $30 million (net
of taxes) in 1999 represented the 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 nine months of 2000 include St. Paul Re -
UK's results for the fourth quarter of 1999 and the first nine
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 Sept. 30, 2000, was as follows:
(In millions)
-----------
Three Months Ended
September 30, 2000
------------------
Written premiums $40
Earned premiums $59
GAAP underwriting result $4
Net investment income $11
Pretax income $17
Net income $6
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
(excluding the impact of the corporate reinsurance program) to
our property-liability results of operations for the third
quarter and first nine months of 2000:
Three Months Nine Months
(in millions) Ended Sept. 30, 2000 Ended Sept. 30 2000
----------- -------------------- -------------------
Written premiums $97 $139
Earned premiums $89 $182
GAAP underwriting result $(102) $(157)
Net investment income $19 $37
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
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 nine months of 2000, we recorded
a pretax loss of $5 million in discontinued operations.
During the third quarter of 1999, we recognized a pretax gain on
proceeds of $138 million and a $136 million pretax gain on third
quarter discontinued operations. The third quarter discontinued
operations included a reserve reduction of $145 million.
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 nine
months of 2000, we recorded a pretax loss of $13 million in
discontinued operations related to these operations, representing
their operating results for the first nine months 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
--------
Our reported premium volume and underwriting results in both 2000
and 1999 were impacted by cessions made under a corporate all-
lines, aggregate excess-of-loss reinsurance program (the
"corporate reinsurance program"), and cessions made under a separate
aggregate excess-of-loss treaty exclusive to our Reinsurance
segment (together, the "reinsurance treaties"). The table on the
following page summarizes the impact of the reinsurance cessions
on our 2000 and 1999 results:
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(In millions) 2000 1999 2000 1999
----------- ------ ----- ----- -----
Corporate program:
Ceded written premiums $183 $129 $263 $129
Ceded earned premiums 193 129 263 129
Ceded losses and loss
adjustment expenses 338 235 449 235
----- ----- ----- -----
Net pretax benefit 145 106 186 106
----- ----- ----- -----
Reinsurance segment treaty:
Ceded written premiums 8 18 64 43
Ceded earned premiums 8 18 64 43
Ceded losses and loss
adjustment expenses 8 53 128 109
----- ----- ----- -----
Net pretax benefit - 35 64 66
----- ----- ----- -----
Combined total:
Ceded written premiums 191 147 327 172
Ceded earned premiums 201 147 327 172
Ceded losses and loss
adjustment expenses 346 288 577 344
----- ----- ----- -----
Net pretax benefit $145 $141 $250 $172
===== ===== ===== =====
The pretax benefit (detriment) of the reinsurance treaties was
allocated to our business segments as follows:
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(In millions) 2000 1999 2000 1999
------ ------ ------ ------
Commercial Lines Group $ (5) $ 59 $ (5) $ 59
Global Surety 6 - 6 -
Global Healthcare 43 - 43 -
Other Global Specialty 40 - 40 -
International 57 18 70 18
----- ----- ----- -----
Total Primary Insurance 141 77 154 77
Reinsurance 4 64 96 95
----- ----- ----- -----
Total Property-
Liability Insurance $145 $141 $250 $172
===== ===== ===== =====
Under terms of the reinsurance treaties, we pay to our counter-
party the ceded earned premiums related to the ceded losses and
loss adjustment expenses shortly after coverage under the
treaties has been triggered. We recover the ceded loss and loss
adjustment expenses from the counter-party as the related claims
are settled, which may occur over a period of several years. The
loss and loss adjustment expense cessions made under the
corporate program in the third quarter of 2000 were solely the
result of losses incurred in 2000, whereas the cessions made
prior to the third quarter were the result of adverse development
on losses incurred during the 1999 accident year.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Our reported consolidated written premiums totaled $1.49 billion
in the third quarter of 2000, 22% ahead of reported third quarter
1999 premiums of $1.22 billion. Excluding the impact of the
reinsurance cessions in both years and the addition of MMI in
2000, our consolidated third quarter premium volume totaled $1.59
billion, 16% higher than comparable premiums of $1.37 billion in
the same period of 1999. On a year-to-date basis, excluding
those factors and the impact of the quarter reporting lag
elimination, our consolidated written premiums totaled $4.53
billion, an increase of 10% over comparable 1999 premiums of
$4.12 billion. Premium growth in 2000 was spread throughout most
of our business segments but was most prevalent in the
International and Commercial Lines Group segments.
Our reported loss ratio, which measures insurance losses and loss
adjustment expenses as a percentage of earned premiums, was 61.3
for the third quarter of 2000, compared with a reported loss
ratio of 71.8 in the same 1999 period. The reported loss ratios
in both years were impacted by the reinsurance treaties, and the
2000 ratio also reflects the effect of the MMI acquisition and a
reduction of our estimate of ultimate losses on certain non-
traditional reinsurance contracts, totaling $56 million, in our
Reinsurance segment (discussed on page 32 of this report).
Excluding these factors in both years, the 2000 third quarter
loss ratio was 72.7, compared with 85.4 in the same period of
1999. On a year-to-date basis, excluding all of these factors in
both years and the impact of the quarter reporting lag
elimination in 2000, our consolidated loss ratio was 76.0,
compared with 79.2 in 1999. The year-to-date 2000 ratio includes
a 2.5 point benefit from a $102 million reduction in workers'
compensation reserves in the second quarter related to favorable
prior year development.
With the exception of our Global Healthcare segment, our domestic
primary operations achieved strong improvement in profitability
in the first nine months of 2000. Over the last two years, we
have taken aggressive actions to improve the quality and
profitability of our domestic book of business, particularly in
the Commercial Lines Group and Other Global Specialty segments.
Those actions focused on eliminating unprofitable business,
implementing price increases on new and renewal business, and
reducing expenses. Through the first nine months 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 have also achieved
significant improvement in the current underwriting year results
for the majority of our primary insurance operations.
Catastrophe losses totaled $17 million in the third quarter of
2000, the lowest quarterly total in over two years. Catastrophe
losses in last year's third quarter totaled $126 million.
Through the first nine months of 2000, catastrophe losses totaled
$140 million, over half of which were the result of additional
loss development arising from severe storms that struck Europe in
late 1999.
Our reported expense ratio, measuring underwriting expenses as a
percentage of premiums written, was 39.0 for the third quarter
and 34.6 for the first nine months of 2000, compared with
reported expense ratios of 36.6 and 34.1 for the respective
periods of 1999. The reported expense ratios in both years were
impacted by the reinsurance treaties, and the 2000 ratio also
reflects the effect of the MMI acquisition and the $66 million
increase in our estimate of the reserves for contingent
commissions on certain non-traditional reinsurance business
(discussed on page 32 of this report). Excluding
these factors in both years, our consolidated expense
ratios for the third quarter and first nine months of 2000 were
31.3 and 30.7, respectively, compared with expense ratios of 32.7
for the same 1999 periods. The improvement over the same periods
of 1999 reflects the significant growth in written premium volume
in 2000 and the 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). Results in the table include the impact of the
reinsurance treaties described previously.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
% of Three Months Ended Nine Months Ended
2000 September 30 September 30
(Dollars in millions) Written ------------------ ------------------
------------------- Premiums 2000 1999 2000 1999
Commercial Lines Group: -------- ------ ------ ------ ------
Written Premiums 29% $457 319 1,252 1,117
Underwriting Result $15 (38) 48 (179)
Combined Ratio 94.6 110.0 95.7 115.2
Global Surety:
Written Premiums 8% $102 111 342 332
Underwriting Result $(2) 6 29 33
Combined Ratio 98.5 84.3 88.2 81.7
Global Healthcare:
Written Premiums 9% $179 173 419 418
Underwriting Result $(70) (17) (135) (64)
Combined Ratio 146.1 110.6 131.2 116.7
Other Global Specialty:
Written Premiums 25% $391 377 1,107 1,048
Underwriting Result $6 (83) (22) (143)
Combined Ratio 94.4 121.9 100.7 113.1
International:
Written Premiums 8% $87 43 362 251
Underwriting Result $ - 3 (60) (17)
Combined Ratio 93.8 99.1 114.4 103.7
--- ----- ----- ----- -----
Total Primary
Insurance:
Written Premiums 79% $1,216 1,023 3,482 3,166
Underwriting Result $(51) (129) (140) (370)
Combined Ratio 101.2 110.7 103.3 111.3
Reinsurance:
Written Premiums 21% $276 199 901 782
Underwriting Result $4 15 (74) 44
Combined Ratio 100.3 98.1 109.0 93.1
--- ----- ----- ----- -----
Total Property-
Liability Insurance:
Written Premiums 100% $1,492 1,222 4,383 3,948
===
GAAP Underwriting Result $(47) (114) (214) (326)
Statutory Combined Ratio:
Loss and Loss Expense Ratio 61.3 71.8 69.9 73.8
Underwriting Expense Ratio 39.0 36.6 34.6 34.1
----- ----- ----- -----
Combined Ratio 100.3 108.4 104.5 107.9
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Underwriting Results by Segment
-------------------------------
The following discussion of our underwriting segments will focus
on results excluding the impact of the reinsurance treaties,
discussed previously, in both 2000 and 1999.
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. The
following table summarizes results for this segment excluding the
impact of the corporate reinsurance program in both years.
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(Dollars in millions) 2000 1999 2000 1999
------------------- ----- ----- ----- -----
Net written premiums $463 $392 $1,258 $1,189
Percentage increase over 1999 18% 6%
GAAP underwriting result $21 $(97) $53 $(238)
Loss and loss adjustment
expense ratio 62.8 88.6 62.7 84.4
Underwriting expense ratio 30.6 34.3 32.6 34.5
----- ----- ----- -----
Combined ratio 93.4 122.9 95.3 118.9
===== ===== ===== =====
Premium growth in the third quarter and first nine months of 2000
was driven by price increases on renewal business in our standard
commercial operation. Our business retention levels on those
policies targeted for renewal have remained steady in 2000
despite sizeable price increases. Year-to-date catastrophe risk
written premiums of $99 million were $42 million higher than the
same period of 1999, primarily due to our acquisition of Pacific
Select, which underwrites earthquake coverages in California.
The significant improvement in this segment's third quarter and
year-to-date underwriting result reflect the combined impact of
price increases and our profit improvement initiatives over the
last several years. The current accident year loss ratio in 2000
improved 17.5 points over the first nine months of 1999. Over
the last two years, we have taken aggressive steps to improve our
book of standard commercial business through the nonrenewal of
unprofitable business and the implementation of significant price
increases. The year-to-date underwriting result included a $69
million benefit from the favorable prior year development on
workers' compensation reserves. We expect continued improvement
in this segment during the final quarter of the year.
Global Surety
-------------
Our Global Surety segment underwrites surety bonds, which
guarantee that third parties will be indemnified against the
nonperformance of contractual obligations. The following table
summarizes results for this segment excluding the impact of the
corporate reinsurance program.
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(Dollars in millions) 2000 1999 2000 1999
------------------- ----- ----- ----- -----
Net written premiums $113 $111 $353 $332
Percentage increase over 1999 1% 6%
GAAP underwriting result $(8) $6 $23 $33
Loss and loss adjustment
expense ratio 54.0 35.3 41.6 32.9
Underwriting expense ratio 50.7 49.0 49.0 48.8
----- ----- ----- -----
Combined ratio 104.7 84.3 90.6 81.7
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
The pace of premium growth in the Global Surety segment slowed in
the third quarter of 2000, reflecting tightened underwriting
standards implemented in recent quarters due to the potential for
slower economic growth. Also impacting our premium growth was a
slowdown in the rate of public construction spending in the
United States. The 6% increase in year-to-date premium volume
resulted from additional business from our existing customer
base, as well as from new customers. Underwriting results in the
third quarter of 2000 were adversely impacted by losses in our
Mexican operations, where we have implemented corrective
underwriting and claim-handling initiatives designed to mitigate
our exposure to losses.
Global Healthcare
-----------------
Our Global Healthcare segment (formerly Medical Services)
provides property-liability insurance throughout the entire
health care delivery system. The following table summarizes
results excluding the impact of the corporate reinsurance
program.
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(Dollars in millions) 2000 1999 2000 1999
------------------- ----- ----- ----- -----
Net written premiums $234 $173 $474 $418
Percentage increase over 1999 36% 14%
GAAP underwriting result $(113) $(17) $(178) $(64)
Loss and loss adjustment
expense ratio 135.2 86.7 110.1 91.1
Underwriting expense ratio 21.2 23.9 26.0 25.6
----- ----- ----- -----
Combined ratio 156.4 110.6 136.1 116.7
===== ===== ===== =====
Global Healthcare written premium volume for the third quarter
and first nine months of the year included premiums of $48
million and $61 million, respectively, from MMI's domestic
operations. Excluding MMI, third quarter premium volume
increased 8% over the same 1999 period. Premium volume in the
first nine months of 1999 included a $37 million premium recorded
on one three-year policy; excluding that premium and MMI's
incremental contribution in 2000, year-to-date premium volume in
2000 was 8% ahead of the same period of 1999. The premium growth
in 2000 resulted from a combination of price increases and higher
business retention ratios on accounts targeted for renewal.
Underwriting results in this segment deteriorated markedly from
1999, concentrated primarily in two lines of business - nursing
home facilities and major accounts. MMI's domestic operations
accounted for $90 million and $130 million, respectively, of the
third quarter and nine-month underwriting loss in 2000. These
losses reflect the impact of reserve strengthening subsequent to
our acquisition of MMI in April of this year. As MMI policies
renew, we continue to re-underwrite the book of business by not
renewing unprofitable business and implementing significant price
increases. The remainder of our Global Healthcare segment
excluding MMI improved over the first nine months of 1999,
posting a combined ratio of 111.5, over five points lower than
the comparable 1999 ratio.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
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. The following table summarizes results
excluding the impact of the corporate reinsurance program.
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(Dollars in millions) 2000 1999 2000 1999
------------------- ----- ----- ----- -----
Net written premiums $451 $377 $1,168 $1,048
Percentage increase over 1999 20% 11%
GAAP underwriting result $(34) $(83) $(62) $(143)
Loss and loss adjustment
expense ratio 78.2 91.7 75.1 82.2
Underwriting expense ratio 28.4 30.2 29.5 30.9
----- ----- ----- -----
Combined ratio 106.6 121.9 104.6 113.1
===== ===== ===== =====
Premium growth in the third quarter and first nine months of 2000
was centered in our Technology business center, due to
significant new business, strong business retention rates and
price increases. Technology written premiums of $89 million in
the third quarter increased 67% over the same period of 1999, and
year-to-date premium volume of $229 million was 47% ahead of
1999. Construction premium volume increased by only 1% in the
first nine months of 2000, reflecting our continuing efforts to
improve the quality of this book of business through the
nonrenewal of unprofitable and inadequately priced business.
Financial and Professional Services, and Public Sector Services
recorded strong premium growth in 2000, primarily the result of
price increases. Premium volume in Ocean Marine and Excess and
Surplus Lines declined, however, reflecting our efforts to
eliminate unprofitable business from these operations.
The significant improvement in underwriting results in this
segment in 2000 was centered in the Construction and Ocean
Marine business centers. In Construction, the third quarter
underwriting loss of $22 million was $11 million less than the
comparable 1999 loss, primarily due to improvement in the current
accident year loss ratio, which reflects the impact of corrective
underwriting and pricing actions implemented in this operation
over the last two years. Year-to-date results in Construction
also include a $33 million benefit from the reduction in workers'
compensation reserves recorded in the second quarter. The
improvement in Ocean Marine results in 2000 resulted primarily
from our late-1999 withdrawal from underwriting Midwest river
transportation business, which had generated poor results. The
Technology business center recorded a third quarter underwriting
profit of $15 million, driven by favorable current and prior year
loss experience.
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. The following table
summarizes results excluding the impact of the corporate
reinsurance program.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(Dollars in millions) 2000 1999 2000 1999
------------------- ----- ----- ----- -----
Net written premiums $150 $65 $448 $273
Percentage increase over 1999 133% 64%
GAAP underwriting result $(57) $(15) $(130) $(34)
Loss and loss adjustment
expense ratio 105.8 81.1 101.0 81.4
Underwriting expense ratio 29.8 43.2 29.2 31.6
----- ----- ----- -----
Combined ratio 135.6 124.3 130.2 113.0
===== ===== ===== =====
Unionamerica accounted for $50 million of written premiums in the
third quarter and $80 million through the first nine months of
2000. Excluding Unionamerica, our International segment's
written premium growth rates for the third quarter and first nine
months of 2000 were 55% and 35%, respectively. The majority of
that growth occurred in our Lloyd's operation as a result of
additional investment in Lloyd's syndicates, and the addition of
new underwriting teams.
Underwriting results for the third quarter and first nine months
of 2000 included losses of $24 million and $39 million,
respectively, incurred by Unionamerica, which resulted primarily
from provisions to strengthen prior accident year reserves.
Although the majority of our Lloyd's syndicates have performed
well in 2000, several other syndicates, which underwrite aviation
and professional liability coverages, accounted for the bulk of
our remaining losses in the International segment in 2000. We
have implemented corrective underwriting initiatives and made
management changes in these syndicates in an effort to improve
results.
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.
The following table summarizes this segment's results excluding
the impact of the reinsurance treaties.
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(Dollars in millions) 2000 1999 2000 1999
------------------- ----- ----- ----- -----
Net written premiums $265 $234 $946 $817
Percentage increase over 1999 13% 16%
GAAP underwriting result $- $(14) $(106) $15
Loss and loss adjustment
expense ratio 42.7 77.2 76.8 66.1
Underwriting expense ratio 60.6 32.3 35.5 31.4
----- ----- ----- -----
Combined ratio 103.3 109.5 112.3 97.5
===== ===== ===== =====
The increase in premium volume for the third quarter and first
nine months of 2000 was driven by significant price increases
across virtually all lines of business, as well as new business
in the non-traditional reinsurance marketplace. Year-to-date
written premiums include the $40 million incremental impact of
eliminating the one-quarter reporting lag for St. Paul Re - UK.
Excluding that adjustment, written premiums of $906 million were
11% higher than the first nine months of 1999.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
This segment's breakeven underwriting result for the third
quarter was driven by the lack of significant catastrophe losses,
and the absence of further loss development from severe European
wind storms at the end of 1999. During the third quarter, we
reduced our estimate of ultimate losses on certain non-
traditional reinsurance business by $56 million and made a
corresponding increase in our estimate of the reserves for
contingent commissions by $66 million. These changes in estimate
distorted the components of the third quarter combined ratio.
Excluding those changes in estimate and the impact of the
reinsurance treaties, the loss and loss adjustment expense
ratio for the third quarter would have been 62.4, and the
underwriting expense ratio would have been 35.6. Underwriting
results for the first nine months of 2000 were severely impacted
by catastrophe losses totaling $121 million, the majority of
which resulted from additional loss development from the 1999
European storms.
Investment Operations
---------------------
The St. Paul's property-liability insurance operations generated
pretax investment income of $312 million in the third quarter of
2000, down 2% from income of $317 million in the same period of
1999. Our acquisition of MMI added $19 million of pretax
investment income in the third quarter; excluding that amount,
investment income would have been approximately 6% below the
third quarter of 1999. Our year-to-date pretax investment income
of $943 million was 1% below comparable 1999 income of $951
million. However, excluding the MMI acquisition, and the $11
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 income compared with
the third quarter and first nine months 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 year-to-
date negative underwriting cash flows were $163 million of
premium payments made in 2000 for cessions made under the
corporate reinsurance program.
Pretax realized investment gains in our property-liability
insurance operations totaled $104 million in the third quarter,
pushing the year-to-date 2000 total to $542 million. Both
amounts were significantly higher than the comparable 1999 totals
of $38 million and $170 million, respectively. The year-to-date
total in 2000 was driven by gains of $447 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 nine-month realized gain total. In
addition, sales of equity investments generated $107 million of
pretax realized gains in the first nine months of the year.
The market value of our $15.8 billion fixed maturities portfolio
on Sept. 30, 2000 included $133 million of pretax unrealized
appreciation. 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 grade (BBB or above), and its weighted
average pretax yield at Sept. 30, 2000 was 6.8%. The combined
$2.6 billion carrying value of our equity and venture capital
investments at Sept. 30, 2000 included pretax unrealized
appreciation of $1.0 billion.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
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 nine months
ended Sept. 30, 2000, and the years ended Dec. 31, 1999 and 1998.
Amounts in the "net" column are reduced by reinsurance
recoverables.
2000
Environmental (nine months) 1999 1998
------------- ----------- ------------ ------------
(In millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Beginning reserves $698 $599 $783 $645 $867 $677
Incurred losses 14 11 (33) 1 (16) 26
Paid losses (45) (38) (52) (47) (68) (58)
----- ----- ----- ----- ----- -----
Ending reserves $667 $572 $698 $599 $783 $645
===== ===== ===== ===== ===== =====
The following table represents a reconciliation of total gross
and net reserve development for asbestos claims for the nine
months ended Sept. 30, 2000, and the years ended Dec. 31, 1999
and 1998.
2000
Asbestos (nine months) 1999 1998
-------- ------------ ------------ ------------
(In millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Beginning reserves $398 $298 $402 $277 $397 $279
Incurred losses 35 22 28 51 44 13
Paid losses (31) (22) (32) (30) (39) (15)
----- ----- ----- ----- ----- -----
Ending reserves $402 $298 $398 $298 $402 $277
===== ===== ===== ===== ===== =====
Our reserves for environmental and asbestos losses at Sept. 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 Sept. 30,
2000 of $1.07 billion represented approximately 6% of gross
consolidated reserves of $18.65 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 third
quarter and first nine months of 2000 and 1999 were as follows:
Three Months NineMonths
Ended Sept. 30 Ended Sept. 30
-------------- --------------
(In millions) 2000 1999 2000 1999
---- ----- ----- -----
Pretax earnings $15 $20 $32 $48
Sales (annualized premiums) $306 $145 $793 $761
Premiums and policy charges $77 $62 $185 $127
Policy surrenders $83 $55 $325 $155
Net investment income $88 $68 $260 $221
Life insurance in force $16,297 $11,672
F&G Life's pretax earnings in the third quarter and first nine
months of 2000 benefited from growth in assets under management,
driven by continued strong product sales and positive operating
cash flows, offset by an increase in product development and
channel expansion expenses, and an increase in mortality and
surrender costs. Pretax earnings for the first nine months of
2000 and 1999 include realized investment losses of $25 million
and $8 million, respectively. Pretax results in the first nine
months of 2000 also include $1.9 million of interest expense on
an intercompany note payable to The St. Paul's property-liability
operations. Excluding realized investment losses in both years,
and the intercompany interest expense in 2000, pretax earnings of
$59 million for the first nine months of 2000 were $3 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.
The increase in sales volume in the third quarter and first nine
months of 2000 compared with the same periods of 1999 was the
result of growth in fixed interest rate annuity sales. This
increase was partially offset by a decline in equity-indexed
annuity (EIA) sales in 2000. Sales of fixed interest rate
annuities in 2000 continued their momentum from late 1999, as the
overall level of market interest rates increased and fluctuations
in equity markets resulted in a shift away from EIA sales.
Credited interest rates on the EIA products are tied to the
performance of leading market indices. Sales of EIA 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. 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 nine months of 2000 were 41% 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 Sept. 30, 2000, F&G Life held options with a
notional amount of $1.13 billion and a market value of $23
million.
Premiums and policy charges increased in the third quarter and
first nine 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
nine 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. Surrenders
have increased on fixed interest rate annuities as a larger
amount of these annuity policies have reached the end of their
interest rate gaurantee period.
Net investment income grew 18% in the first nine months of 2000
as a result of an increasing asset base generated by positive
cash flow. The 40% 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 third quarter and first nine months
of 2000 and 1999 were as follows:
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------- --------------
(In millions) 2000 1999 2000 1999
----------- ---- ---- ---- ----
Revenues $92 $87 $280 $256
Expenses 49 48 150 140
---- ---- ---- ----
Pretax earnings 43 39 130 116
Minority interest (10) (9) (30) (27)
---- ---- ---- ----
The St. Paul's share
of pretax earnings $33 $30 $100 $89
==== ==== ==== ====
Assets under management $61,003 $58,252
====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Asset Management (continued)
---------------------------
Earnings growth in 2000 was driven by continuing strong sales of
Nuveen's increasingly diverse range of investment products.
Nuveen's core equity and fixed income products have become
increasingly attractive in 2000 as investors continued to balance
their portfolios in a volatile market environment. This has
enabled Nuveen to achieve earnings growth in a period during
which most leading market indices have declined. Nuveen had
positive net flows (equal to the sum of sales, reinvestments and
exchanges, less redemptions) of $1.1 billion in the third quarter
of 2000. Sales of retail managed accounts, where Nuveen's focus
is on blue-chip equities and fixed income products, were strong
in the third quarter. Demand for Nuveen's defined portfolio
products also remained high, with one newly-introduced trust
alone generating new sales of over $570 million in the first
nine months of the year.
Managed assets at Sept. 30, 2000 consisted of $27.6 billion of
exchange-traded funds, $21.7 billion of managed accounts, $11.3
billion of mutual funds and $476 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 $73 billion in assets at Sept.
30, 2000.
Capital Resources
-----------------
Common shareholders' equity totaled $7.0 billion at Sept. 30,
2000, an increase of $550 million over the year-end 1999 total of
$6.45 billion. The growth in equity resulted from our strong net
income through nine months and the conversion of securities into
common stock (as described below), offset in part by year-to-date
common share repurchases in excess of $500 million.
In July 2000, St. Paul Capital LLC, our wholly-owned subsidiary,
provided notice to the holders of its $207 million, 6%
Convertible Monthly Income Preferred Securities (MIPS) that it
was exercising it 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 was convertible into 1.695 shares of
our common stock. Prior to the expiration date, holders of
virtually all (4,133,914) of the MIPS exercised their conversion
rights, resulting in the issuance of 7,006,954 of our common
shares. The remaining MIPS were redeemed for cash at $50 per
security, plus accumulated dividends. Prior to their conversion,
the MIPS had been considered common stock equivalents for
purposes of our diluted earnings per share calculation.
In the third quarter, we repurchased 3.8 million of our common
shares for a total cost of $180 million, or an average of $47.51
per share. Through the first nine months of 2000, we repurchased
17.4 million common shares for a total cost of $512 million, or
an average cost of $29.46 per share. Our share repurchases were
financed through a combination of internally-generated funds and
the issuance of debt. Since November 1998, we have repurchased
and retired 32.3 million of our common shares for a total cost of
$1 billion.
Total debt outstanding at Sept. 30, 2000 of $1.64 billion was
$170 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 a portion of our
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 capital securities of subsidiaries or trusts
holding solely subordinated debentures of the company" on our
consolidated balance sheet at Sept. 30, 2000. The ratio of total
debt to total capitalization of 18% at Sept. 30, 2000 was
unchanged from the year-end 1999 ratio.
<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 Sept. 30,
2000, we had approximately $198 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 nine months of 2000, our ratio of earnings to fixed
charges was 9.79, compared with 6.35 for the same period of 1999.
Our ratio of earnings to combined fixed charges and preferred
stock dividend requirements was 9.03, compared with 5.82 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 $454 million in the first nine months of 2000,
compared with cash provided by continuing operations of $137
million in the same period of 1999. The deterioration in 2000
was primarily due to significant loss payments in our Reinsurance
and Global Healthcare segments, 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 $432 million. We
expect our operational cash flows to improve in 2001 as the full
impacts of 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 implemented 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 expect the
impact of adoption to be immaterial to our financial position and
results of operations for the period of adoption.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities - a replacement of FASB Statement No. 125." It
revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires
certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. The Statement is effective
for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001,
with the collateral and disclosure requirements effective for
fiscal years ending after Dec. 15, 2000. We intend to implement
SFAS No. 140 in the periods during which its provisions become
effective, and expect the impact of adoption to be immaterial to
our financial position and 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 and possible actions by
competitors; 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 7 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 August
28, 2000, relating to the completion of a $1 billion shelf
registration with the Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE ST. PAUL COMPANIES, INC.
(Registrant)
Date: November 14, 2000 By /s/ Bruce A. Backberg
----------------- ---------------------
Bruce A. Backberg
Senior Vice President - Legal Services
(Authorized Signatory)
Date: November 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
(a) Amendment to the Amended and Restated 1994
Stock Incentive Plan**................................(1)
(b) Amendment to the 1988 Stock Option Plan**..............(1)
(11) Statement re computation of per share earnings**...........(1)
(12) Statement re computation of ratios**.......................(1)
(15) Letter re unaudited interim financial information*.........
(18) Letter re change in accounting principles*.................
(19) Report furnished to security holders*......................
(22) Published report regarding matters submitted to
vote of security holders*...............................
(23) Consents of experts and counsel*...........................
(24) Power of attorney*.........................................
(27) Financial data schedule**.................................(1)
(99) Additional exhibits*......................................
* These items are not applicable.
** This exhibit is included only with the copies of this
report that are filed with the Securities and Exchange
Commission. However, a copy of the exhibit may be obtained
from the Registrant for a reasonable fee by writing to The St.
Paul Companies, Inc., 385 Washington Street, Saint Paul, MN
55102, Attention: Corporate Secretary.
(1) Filed herewith.
